The Advance-to-Deposit Ratio (ADR) of Pakistan’s banking sector reached a significant 47% as of November 15, 2024, reflecting a robust increase as banks ramped up lending to meet regulatory requirements. This upward trend is attributed to aggressive strategies adopted by banks to avoid additional taxes imposed on falling short of the stipulated ADR threshold.
According to data from Topline Securities, the gross ADR climbed steadily from 39% on September 27, 2024, to 47% by mid-November. A substantial Rs. 603 billion increase in advances was recorded during the first two weeks of November, with the sector’s total gross advances rising by 4% to Rs. 14.419 trillion, compared to Rs. 13.816 trillion at the end of October.
Conversely, the banking sector’s deposits experienced a slight decline of Rs. 47 billion, dropping to Rs. 30.744 trillion as of mid-November, down from Rs. 30.791 trillion at the end of October 2024. Despite this, analysts project that the ADR will likely reach the mandated 50% threshold by the end of December 2024, enabling banks to avoid incremental taxes.
Government Tax Measures Driving Lending Surge
The federal government has announced an incremental tax of up to 15% on banks whose ADR remains below 50% by December 31, 2024. This tax measure, after a year-long deferment, is set to take effect in the current fiscal year (FY25). As a result, banks are actively disbursing loans to private-sector clients to meet the target, while introducing policies to discourage large deposits.
In early November, some commercial banks implemented a 5-6% monthly fee on checking accounts with balances ranging from Rs. 1 billion to Rs. 5 billion on the last day of the month. This fee aimed to curb large deposits but was later rescinded following interventions by the State Bank of Pakistan (SBP).
Regulatory Relief and Challenges
To support banks in achieving the ADR target, the SBP provided certain relaxations, including exemptions from the Minimum Profit Rate requirement on deposits held by financial institutions, public sector enterprises, and public limited companies. Conventional banks are no longer required to offer competitive profit rates to these sectors, easing their financial obligations. However, Islamic banks continue to await similar relief measures.
This strategic push to increase ADR highlights the banking sector’s adaptability in navigating regulatory pressures while maintaining profitability. The coming weeks will determine whether banks can meet the 50% ADR target by the year’s end and avoid additional taxation.
As Pakistan’s banking sector recalibrates its focus toward lending, the implications of these shifts on the broader economy remain to be seen. The sector’s ability to balance regulatory compliance with sustainable growth will be crucial in the months ahead.