Liquidity exodus hits non-bank financial sector as Rs340 billion in debt is retired in five months

The growth of non-bank financial institutions (NBFIs) has reversed in the first five months of the current fiscal year, as recent data from the SBP shows that from July to November, the sector saw no new lending, resulting in a net debt retirement of Rs340 billion, as reported by Dawn. 

Despite encouragement from the SBP and the government last year, banks have pulled back liquidity from NBFIs, which had previously received substantial funds towards the end of 2024 to meet tax-related conditions. 

In late 2024, banks had injected over Rs1 trillion into NBFIs to avoid an incremental tax that would have been levied for not meeting the required 50% advance-to-deposit ratio (ADR) by the year-end. This influx of liquidity exceeded the total stock of credit to NBFIs by 130%, according to the SBP’s report.

While the Financial Stability Review 2024 recognized significant growth in the NBFI sector in 2024, driven by improving macroeconomic conditions and easing financial constraints, the SBP’s report suggests that the surge in liquidity was a temporary phase. The growth was particularly evident in the asset management and lending segments, with the ADR-related liquidity boost acting as a key contributor to the uptick.

However, the latest figures show that the higher liquidity observed in 2024 was largely driven by short-term measures by banks to avoid tax penalties. The SBP has continued urging banks to increase lending to small and medium enterprises (SMEs) and NBFIs to support the country’s sluggish economy, but the current liquidity situation poses challenges for long-term stability.

Mutual funds within the NBFI sector saw impressive growth, with assets rising by 98.9% in 2024, compared to 41.8% the year before. As a result, mutual funds now account for 71.5% of NBFIs’ total assets, up from 64.7% in 2023. 

However, the majority of this growth was concentrated in conventional money market funds and Islamic income funds, with 88.6% of the total increase attributed to asset management companies (AMCs) associated with banks.

As the sector grapples with liquidity constraints, the future of NBFI growth will depend on the continued involvement of banks and further government support to ensure long-term sustainability and economic contribution.