Banks edge closer to 50% ADR target to avoid tax penalty

Banks are nearing the mandatory 50% advance-to-deposit ratio (ADR) target to escape the incremental tax imposed by the government.

The State Bank of Pakistan (SBP) reported a record Rs1.35 trillion in private sector lending from July 1 to December 6, exceeding the average for the last three years. Banks also allocated Rs1.33 trillion to non-bank financial institutions (NBFIs) during the same period to enhance their ADR.

According to a report by Arif Habib Ltd, the banking sector’s ADR had improved to 49.7% as of December 6, up from 47.8% in November. 

Since August, the ADR has increased by 11.4 percentage points from its low of 38.4%, with advances rising 27.6% and deposits decreasing by 1.6%.

Over the past four months, advances grew by 27%, enabling the banks to approach compliance until deadline of December 31, despite challenges posed by the high policy rate earlier this year. 

When the tax requirement was introduced in the FY25 budget, the policy rate stood at 22%, and the average ADR hovered just above 38%. 

Bankers have expressed concerns about potential government plans to implement taxation based on an annual average ADR, which could face resistance, particularly from foreign-owned banks. 

From July 1 to December 6, the government retired Rs1.7 trillion in net domestic debt, contrasting with net borrowing of Rs3.584 trillion during the same period last year. 

This unexpected liquidity surge forced banks to lend below the Karachi interbank offered rate (Kibor) to meet the ADR target, potentially impacting profitability.

In 2023, banks saw record profits due to investments in risk-free government securities at rates exceeding the 22% policy rate. With Kibor now at 12% and the policy rate at 13%, further monetary easing may continue if inflation remains under control.