With tax obligations tied to the advance-to-deposit ratio (ADR) on the horizon, banks in Pakistan are under pressure to lower deposits and boost lending as 2024 draws to a close. Analysts estimate that banks need to issue an additional Rs 1.85 trillion in loans or reduce deposits by Rs 3.6 trillion during the final months of the year to avoid this taxation.
State Bank of Pakistan (SBP) data from June 2024 highlights that 327 accounts hold balances exceeding Rs 5 billion. These include accounts belonging to the government, private sector, public enterprises, financial institutions, and others, with total balances amounting to Rs 4 trillion.
As of October 25, banks’ total advances rose by 11 percent to Rs 13.4 trillion, while deposits declined by 1 percent to Rs 30.5 trillion. This trend reflects banks’ efforts to raise private-sector lending while cutting deposits. Consequently, the banking industry’s ADR improved from 39 percent to 44 percent.
The challenging economic environment and limited lending opportunities have intensified competition among banks, prompting them to focus on reducing high-value deposits. Many banks now impose monthly charges on large deposits, targeting accounts with balances above Rs 5 billion or, in some cases, Rs 1 billion. These charges range from 5 to 6 percent, aiming to discourage large deposits and mitigate the tax impact on banks with lower ADRs .
Approximately Rs 4.1 trillion is held in institutional high-value accounts, with the government controlling Rs 1.2 trillion. Analysts warn that failing to address these balances could lead to significant losses for the national exchequer.
Regulatory pressure has led major banks like HBL, Bank Alfalah, MCB, Meezan, and Bank of Punjab to adopt this strategy. Smaller banks have followed suit with adjusted thresholds for deposit charges.
These measures are expected to temporarily redirect liquidity to alternative asset classes like equities and real estate as banks lower returns on deposits.
If banks fail to meet the ADR threshold of 50 percent or 40 percent by December 31, they face additional taxes of 10 percent and 16 percent on profits from government securities. While this policy encourages private-sector lending, it primarily seeks to boost government revenue amid the ongoing $7 billion IMF loan programme.
The government is reportedly planning to challenge a stay order issued by the Islamabad High Court against this tax in the Supreme Court. Analysts are closely monitoring whether the tax will apply to the entire year’s ADR average or year-end figures, with the outcome of this case likely to provide clarity.
