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.
