The banking sector’s Advance-to-Deposit Ratio (ADR) improved to 47.8%, as of November 29, 2024, up from 44.3% in October and recovering from a low of 38.4% in August.
According to a news report, banks have adopted various strategies to secure 944 basis points rise within three months and achieve the 50% ADR threshold by December end set by the State Bank of Pakistan (SBP). These efforts include offering short-term loans to affiliated companies and reliable corporate clients.
Failing to meet the 50% ADR target will incur additional taxes: a 10% tax on income from government securities for ADRs between 40% and 50% and a 16% tax for ratios below 40%.
The improvement in the ADR suggests that banks are increasingly directing deposits into loans, which may indicate enhanced credit activity in the economy, according to Arif Habib Limited (AHL).
However, market observers have raised concerns about the measures some banks are using to meet the target, such as short-term loans to affiliated companies and trusted clients, with an understanding that the funds will be reclaimed after the deadline.
Meanwhile, private-sector borrowing has been limited by high interest rates of around 15%, causing an increase in defaults, particularly in the textile, cement, and steel sectors.
Non-performing loans (NPLs) are also an increasing concern, complicating the banking sector’s efforts to expand credit. To address these issues, the government plans to introduce a regulation requiring banks to maintain an average ADR throughout the year, rather than just on December 31.
Since September 2024, the banking sector’s gross advances have increased by 23% to Rs14.9 trillion, while deposits have risen by just 1% to Rs31.1 trillion, according to Topline Securities.
Last month, Prime Minister Shehbaz Sharif established a committee chaired by Deputy Prime Minister Ishaq Dar to address ADR-related issues. The committee will review the legal framework surrounding the ADR tax and propose alternative fiscal measures to ensure compliance without stifling lending activity. It will also consider non-fiscal regulatory changes to boost private sector credit and develop a consensus on solutions to maximize government revenue.
