Banks struggle to boost private lending as ADR stays at 39.3%

Banks in Pakistan continue to fall short of the 50% advance-to-deposit ratio (ADR) target, hovering at 39.3% in September, which leaves them subject to an incremental 15% tax imposed by the government to drive private-sector lending. 

While the ADR rose by 0.9% month-on-month, it remains significantly lower than the previous year’s figure, declining by 5.79% year-on-year. This low lending rate persists despite record profits in the banking sector, which saw gains of up to 100% in 2023, primarily through government lending. 

However, with the State Bank’s historic Rs3.4 trillion profit and Rs2.7 trillion transferred into government accounts, banks are increasingly limited in options, lending large sums to state entities like the Trading Corporation of Pakistan and Pakistan Agricultural Storage and Services Corporation.

Although advances increased to Rs12.3 trillion in September, showing a 4.2% rise month-on-month, the private sector has largely steered away from bank borrowing, focusing on short-term, working capital loans only. 

The State Bank’s recent interest rate cuts from 22% to 17.5% are seen as insufficient to attract more private-sector borrowers, though an anticipated further reduction to 15.5% could help draw in more domestic investment.

Banks’ investment-to-deposit ratio (IDR) also saw a drop of 2.88% month-on-month to 97.9% after a substantial T-bill rejection by the government, though year-on-year, the IDR rose sharply by 11.99% as banks previously allocated excess liquidity to government papers. 

Bank deposits grew 19.1% year-on-year to Rs31.3 trillion, reflecting cautious deposit growth amid shifting investment dynamics.