The private sector repaid Rs440 billion to banks in just two weeks after a surge in liquidity inflows during the first six and a half months of the current fiscal year. State Bank data showed that credit to the private sector declined from Rs1.398 trillion to Rs958 billion between January 17 and 31.
This reversal follows the government’s decision to impose an incremental tax of up to 15 percent on banks with an advance-to-deposit ratio (ADR) below 50% by December 31, 2024. The fear of this tax had earlier driven a sharp increase in private-sector borrowing, which is now unwinding as the requirement has been met.
Conventional banks’ lending to the private sector dropped from Rs722.6 billion on January 17 to Rs325 billion by the end of the month.Â
Islamic banks saw their lending decline from Rs625.5 billion to Rs559.5 billion during the same period, while Islamic branches of conventional banks slightly increased their lending by Rs23.5 billion to Rs73.5 billion.
Some banking experts had attributed the rise in credit flows to a sharp reduction in the policy rate, which fell by 1,000 basis points from 22% in June 2024 to 12%.Â
However, the decline in private sector credit outflows has challenged the assumption that lower interest rates alone would stimulate borrowing.
