Private sector borrowing from Pakistani banks reaches PKR 880 billion

Private sector borrowings from Pakistani banks have reached PKR 880 billion ($3.2 billion) as of November 15, mainly because of their move to save themselves from higher taxes in case they fail to have an adequate advance-to-deposits (ADR) ratio.

According to the latest data from the State Bank of Pakistan, private sector borrowing from July 1 to Nov 15 amounted to PKR 880 billion compared to PKR 83 billion retirement of loans during the same period last year.

Borrowings from conventional banks amounted to PKR 647 billion, while those from Islamic banks totaled PKR 258 billion. During the same period last year, retirement from both was around PKR 45 billion and PKR 35 billion, respectively.

A month back, the private sector borrowing was in the minus zone. However, it has spun off mainly because of banks' stance to lend more money to private entities to qualify for the condition set by the central bank to reach 50% ADR.

The banks will be charged additional tax of 10% and 16% if they fail to meet the ADR condition of 50% and 40%, respectively.

The banks came up with a way to avoid the additional tax by imposing additional fees on deposits above PKR 5 billion. However, they took it back after the central bank’s recent decision introducing changes in profit calculation on savings accounts for conventional and Islamic banks, effective January 1, 2025.

For conventional banks, the minimum profit rate requirement will no longer apply to deposits held by financial institutions, public sector enterprises, and public limited companies.

In contrast, the minimum deposit rate on savings accounts held by Islamic Banking Institutions (IBIs) has been imposed in a level-playing field approach, mandating that IBIs must pay at least 75% of the weighted average gross yield of all their investment pools.

Following this, the banks abolished the tax to be charged on the bank accounts. In October, banks had imposed tax rate in the range of 5% to 6% on depositors balance exceeding PKR 5 billion. Last month, average ADR was around 43.5% and banks need to reduce deposits by PKR 3.9 trillion to reach a target of PKR 26.5 trillion from the current PKR 30.4 trillion, an analyst from AKD Securities said.

An analysis of deposit composition reveals that the largest depositors — those with balances exceeding PKR 5 billion — are the Pakistani government and state-run enterprises, accounting for 30% to 20% of total amount, respectively.