KARACHI: Banks are aggressively ramping up credit disbursement to the private sector, driven by a pressing need to meet regulatory targets and avoid a hefty additional tax burden.
In an unprecedented surge, credit to the private sector soared to Rs 880 billion during the initial months of the current fiscal year (FY25), marking a sharp turnaround from previous trends.
A healthy competition has emerged among banks in Pakistan as they are trying to increase lending to the private sector, driven by a critical regulatory target to meet the 50 percent Advance-to-Deposit Ratio (ADR) by December 31, 2024.
Banks start scrapping monthly fee on large deposits
According to the latest statistics released by the State Bank of Pakistan (SBP), credit to the private sector soared to Rs 880.36 billion between July 1 and November 15, of this fiscal year - a remarkable turnaround, compared to the Rs 82.4 billion net retirement recorded during the same period last fiscal year.
Out of total disbursement, an amount of Rs 647 billion was disbursed by the conventional bank branches and Rs 258 billion by Islamic banks. While, Islamic banking branches of conventional banks witnessed a decline of Rs 25 billion.
The growth in credit to the private sector stems from new measures announced by the government, tying tax penalties to banks’ failure to achieve the ADR threshold. While banks celebrated a significant rise in profits during 2023, doubling their earnings, the prospect of a substantial incremental tax has jolted the sector into action. The pressure is mounting as banks are required to extend an additional near about Rs 1.5 trillion in loans over the next one month to hit the ADR target by the December deadline.
Banks have two paths to meet the ADR target, first significantly increase loans to the private sector or reduce the deposits. Therefore, the banks are offering credit to diverse sectors, ranging from agriculture to manufacturing, in a bid to meet regulatory requirements.
This rapid surge in private-sector lending has broader implications as while it opens opportunities for businesses to access much-needed financing, the abrupt spike may also increase risks, including loan quality concerns and inflationary pressures.
Last week, some banks imposed 5 percent monthly fee on deposits of above Rs 1 billion to discourage the large deposits aimed to achieve ADR target by end of December, however, banks on Tuesday have announced to withdraw this additional fee as SBP has removed Minimum Profit Rate (MPR) requirement for all conventional banks on deposits from financial institutions, public sector enterprises, and public limited companies.
Copyright Business Recorder, 2024