Gross ADR rises to 47pc

KARACHI: Pakistan’s banks’ gross advance-to-deposit ratio (ADR) hits a 17-month high of 47 per cent as of November 15, indicating they are getting closer to reaching the mandatory 50 per cent level before the December 31 deadline.

In October, the ADR stood at 44.3 per cent, an increase from 39.3 per cent in the previous month. In November 2023, the ADR was 44.6 per cent.

Data from the State Bank of Pakistan showed that bank deposits decreased by 1.2 per cent, totalling Rs30.7 trillion, while advances increased by 4.7 per cent to reach Rs14.4 trillion by mid-November. Investments fell by 0.2 per cent from October, amounting to Rs28.9 trillion as of November 15. Consequently, the investment-to-deposit ratio (IDR) rose to 93.9 per cent during this period.

If banks’ ADR falls below 50 per cent by December 31, they will incur additional taxes of up to 15 per cent on profits from government securities. As a result, banks are actively lending to private-sector businesses and consumers to meet the required loan-to-deposit ratio target and avoid higher taxes.

According to a note from JS Global, the absolute loan disbursements since September 2024 have amounted to Rs2.3 trillion.Mustafa Mustansir, head of research at Taurus Securities, believes it is highly likely that banks will achieve the mandated ADR target of 50 per cent before the end of this month.

“We have an example from last year. However, this year the situation is slightly worse due to the sector’s low appetite for credit risk given the macroeconomic conditions as well as the high yields on offer in the government securities,” Mustansir said.

Not to forget the liquidity pumped into the system by the SBP through OMOs [open market operations], inviting them to lend the funds to the government and earning an arbitrage spread on T-bills, he said.

“Nevertheless, they [banks] are likely to meet the ADR threshold by tapping into some big-ticket loan disbursements even if the same is significantly below Kibor [Karachi Interbank offered rate]. As long as the banks can cover up the differential through savings on ADR tax, etc, this scheme works,” Mustansir noted.

According to him, another avenue is lending to microfinance institutions. Some banks have their own microfinance institutions/banks, which they disburse the money to meet the threshold at the year-end and then have it back after the year-end.

“In this case, no funds flow to any productive sectors of the economy like SMEs, etc. Therefore, it is also anticipated that next year onward ADR tax may be levied on average balances,” he said. Lower interest rates and a steady rise in economic activity might have helped banks increase their lending to private companies in addition to the ADR tax push.

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

At a recent event, Zafar Masud, chairperson of the Pakistan Banks’ Association, expressed concerns about the effects of the ADR tax on deposit growth. He noted that this tax discourages deposits due to a lack of lending opportunities. Currently, Pakistan’s deposit-to-GDP ratio hovers around 32 per cent, which is significantly lower than India’s 72.9 per cent and Bangladesh’s 41 per cent.

Masud mentioned that the State Bank of Pakistan has recognised the serious negative impacts of the MDR and has taken steps to rationalise it. This adjustment could discourage large, liquid businesses and corporations from depositing their

money in banks for rent-seeking returns, encouraging them to reinvest in their operations or diversify into related businesses, boosting economic activity and creating jobs.

“For their excess liquidity in the normal course of business, they have their own professional treasuries to invest in government securities directly, thus saving the extra money that the government has to pay to banks as a conduit for mopping up liquidity generated through open market operation,” Masud said.

“The recent move by the State Bank on MDR will protect individual and small depositors and surely encourage them to continue to place their savings with the banks,” he added. However, according to Masud, there are still some issues that need to be clarified by the central bank, such as how the policy applies to Islamic banks, private entities, and federal and provincial government deposits that are not part of the treasury single account (TSA). “We intend to continue our engagement with them to take care of these distortions,” he said.