The government will now charge an additional 10-16 percent tax scheme on banks if lending to the private sector falls below 50 percent of total deposits.
This move aims to encourage banks to increase financing for businesses, especially with expectations of reduced borrowing costs.
This stems from the State Bank of Pakistan’s (SBP) record high policy rate of 22 percent in 2023, which resulted in many businesses and households defaulting on loan repayments. Just like that, banks saw a significant increase in bad loans, reaching a 14-year high at Rs. 62 billion.
According to Topline Securities, banks with an advance-to-deposit ratio (ADR) below 40 percent will be levied a 16 percent tax on income generated from investments in government debt securities such as treasury bills and Pakistan Investment Bonds.
For banks with an ADR between 40-50 percent, the tax rate will be 10 percent, while banks maintaining an ADR of more than 50 percent will not be subject to this tax.
It bears mentioning that in 2023, just three listed banks i.e. Samba Bank, Faysal Bank, and The Bank of Punjab had an ADR above 50 percent.
The reintroduction of this tax may prompt banks to avoid accepting high deposits from clients in order to meet ADR requirements. Interestingly, low deposits in December 2023 pushed banks’ private sector advances higher, ensuring compliance with ADR requirements and exempting them from the tax for 2022.
Govt want banks to lend to private sector to encourage business activity. Nothing wrong in it. Banks will also like to lend to private sector to enhance their portfolio.
Govt. must not take any decision unilaterally. It will be interesting to know that how many banks loans default cases are pending in court of law for how many decades. Banks want to have the verdict from courts as they have taken provisions against these loans. They incurring additional expenses against these defaulted loans. Defaulters paying hefty fees to big lawyers to delay verdict. Any positive decision on such cases will directly add to bottom line of bank. Governor SBP/ finance minister consider this aspect and do the needful for the betterment of country.