Banks lend Rs2.2tr to avoid incremental tax under ADR target

Private sector receives Rs997bn; NBFIs secure Rs1.1tr in 5 months

Banks disbursed Rs2.2 trillion to the non-government sector, including the private sector and Non-Bank Financial Institutions (NBFIs), during the first five months of FY25, as they aimed to meet the Advance-to-Deposit Ratio (ADR) target set by the government.

Under the 2024-25 budget, banks failing to raise their ADR to 50% by December 31 will face up to 15% incremental tax. The ADR of banks stood at 38% in June, prompting large-scale lending activities to meet the target.

The SBP’s decision to cut its policy rate by 700 basis points since June, bringing it down from 22% to 15%, has also further encouraged lending activities. 

According to the State Bank of Pakistan (SBP) data, credit to the non-government sector reached Rs2.207 trillion during July-November, compared to a net retirement of Rs142.8 billion in the same period last year. 

NBFIs were the largest beneficiaries, receiving Rs1.142 trillion in credit, compared to a net retirement of Rs55.4 billion during the same period last year. The stock of credits to NBFIs stood at Rs441.6 billion by the end of June 2024.

The private sector received Rs997 billion during the period, with conventional banks contributing Rs698 billion, compared to a net retirement of Rs48.6 billion in the same period last year. 

Islamic banks extended Rs324.9 billion in credit, against a net debt retirement of Rs28.3 billion during the same period last year. However, conventional banks’ Islamic windows showed a net retirement of Rs25.7 billion during the five months.

Banking experts noted that the surge in lending has helped banks improve their ADR to 47%, close to the 50% target required to avoid incremental tax. Banks achieving an ADR of 40-50% would face a reduced tax rate of up to 6%, while those below 40% would pay higher rates.

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