KARACHI: Banks in Pakistan are scrambling to meet the required 50% gross advance-to-deposit ratio (ADR) by the end of 2024 to avoid hefty tax rates, analysts said on Saturday. Failure to meet the target would trigger an additional 16% tax on investment income, a financial blow that many banks are eager to sidestep.
As of July 2024, the gross ADR of the banking sector had fallen to 39%, well below the 50% threshold. This shortfall has created urgency within the banking industry, as institutions now race against the clock to increase their loan portfolios and reduce their reliance on deposits before the year-end deadline.
“Banks are racing to meet the gross ADR of 50% by December 2024 to avoid additional taxes,” said Topline Securities in a brief note. The report pointed out that, as of June 30, 2024, only three banks—Samba Bank (SBL), Faysal Bank (FABL), and Askari Bank (AKBL)—had successfully surpassed the 50% ADR mark.
In corporate briefings, many banks expressed confidence in achieving the 50% target by year-end. However, the scale of the challenge is significant. According to a report from JS Global, the banking sector would need to expand its loan portfolio by Rs3.4 trillion—an increase of 29%—between August and December 2024 to hit the required ADR level, assuming deposits remain at current levels.
This projected growth far exceeds the historical average of 8%, making it an ambitious target. As a result, banks may have to adopt alternative strategies, including limiting deposit growth, a tactic that was employed in 2022. “A 10% deposit contraction from August to December would require 16% loan growth to achieve the 50% ADR,” JS Global noted.
The current deposit growth rate underscores the challenge. As of July 2024, deposits at banks had increased by 19.1% year-on-year, reaching Rs30.6 trillion. However, advances—the loans extended by banks—stood at Rs11.9 trillion, down 4.5% from the previous year. In contrast, banks’ investments surged, with a 41.8% year-on-year increase, reaching Rs30.4 trillion.
The coming months are crucial for banks as they navigate a delicate balancing act of growing their loan books and managing deposit growth. The outcome will determine whether they can avoid the higher tax rate that looms on the horizon.
