Bank lending to private sector jumps by record Rs931bn in October

KARACHI: Bank lending to the private sector increased by a record Rs931 billion month-on-month in October as banks attempted to improve their advance-to-deposit (ADR) ratio to avoid incremental taxation on government securities.

A pickup in economic activity and reduced interest rates spurred consumers and businesses to take out bank loans.In October, bank credit to the private sector increased to Rs9.53 trillion from Rs8.6 trillion the month before and Rs8.297 trillion the same month the year earlier, data released by the State Bank of Pakistan showed. The data is based on the loans’ outstanding position at the end of the month.

According to a note from AKD Securities Limited, the Rs931 billion increase in commercial banks’ lending to the private sector represents the largest growth in loans for any given month in terms of both quantity and percentage.

Bank loans to the private sector increased by 10.9 per cent month-on-month (MoM) and 15.2 per cent year-on-year (YoY) to Rs9.332 trillion in October, according to SBP data. At Rs8.101 trillion, loans to private sector businesses grew by 11.9 per cent MoM and 16.4 per cent YoY.

In October, auto financing reached Rs236 billion, up 3.7 per cent month over month from Rs228 billion in September. On a year-over-year basis, it decreased by 10.7 per cent.

Two primary factors are responsible for a notable increase in private sector loans, according to Saad Hanif, head of research at Ismail Iqbal Securities.

“First, banks are actively lending to meet the 50 per cent [ADR] threshold, avoiding additional tax. Second, the reduction in interest rates has encouraged businesses to borrow, coinciding with a gradual pickup in economic activity,” Hanif added.

The SBP cut its key interest rate by 250 basis points (bps) to 15 per cent at its fourth straight meeting this month. The SBP has reduced interest rates four times in a row since June, totalling 700bps.

If banks’ ADR drops below 50 per cent or 40 per cent by December 31, they will be subject to an additional tax at rates of 10 per cent and 16 per cent on profits from government securities.

The SBP’s most recent weekly data shows that as of October 25, banks’ total advances increased 11 per cent to Rs13.4 trillion while deposits decreased 1.0 per cent to Rs30.5 trillion, makes it clear that banks are already stepping up their efforts to increase private sector loans and decrease deposits. As a result, the ADR for the banking industry rose to 44 per cent from 39 per cent a week ago. The latest bank credit to the private sector numbers came after the SBP removed minimum deposit rate (MDR) requirements from commercial banks for corporate and government deposits and applied MDR requirements on retail deposits for Islamic banks.

“This will ensure that there is a real monetary policy transmission effect on the depositors of the Islamic banks as well,” said Chase Securities in a note.

“As a result of this development, banks have started calling off circulars implementing fees on large deposits effective this week. This development is moderately negative for Islamic banks and positive for conventional banks, as now all banks are at par with regards to the minimum deposit rate requirements,” it added.