KARACHI: Due to a liquidity glut, banks are currently compelled to lend money at throwaway rates as low as 3% annually in order to avoid having to pay taxes on the Advance-to-Deposit Ratio (ADR), which will become due at the conclusion of the 2024 calendar year.
Pakistani banking has radically transformed as a result of the government’s and the banks’ abundant liquidity. The government used to be the biggest borrower from banks, but it suddenly stopped taking out loans and turned down all offers for short-term Treasury bills.
Simultaneously, in order to save Rs11.5 billion and lessen the burden of repaying almost Rs4 trillion in maturity by December of this year, the government bought back Rs351 billion from the market at a 16 percent interest rate. Bankers clarified that the banks have excess cash and are eager to lend it out because the government has not borrowed as much.
The government would levy an additional 15% tax on banks if they were to fall short of the minimum ADR requirement of 50%.
Against the 17.5pc policy rate, lending at 3pc to avoid tax on the low ADR ratio
In addition to retiring their earlier, more expensive loans, many borrowers are also taking out cheaper loans from banks at the same time. This indicates that banks still have liquidity. Since the majority of banks fall well short of the 50% ADR, they must make huge loan extensions in order to avoid paying the 15% tax.
Bankers claim that certain banks are attempting to determine which of the two options—a 15% tax or lower loan costs—is preferable, and that the superior alternative will be chosen.
According to a banker, banks were unable to predict the recent monetary expansion and the fact that seasoned banker Mohammad Aurangzeb, the current finance minister, was in charge of government policy.
“Banks are making efforts to secure relatively less riskier short-term loans in order to avoid higher taxes and meet the gross ADR requirement of at least 50% by CY2024 end, which is currently at 38%,” stated Samiuallah Tariq, head of research and development at Pak-Kuwat Investment Company.
Lending for a short-term loan was calculated at KIBOR minus 6% up until last week. The lending rate for the loans was 10% at the time due to the 16.2% KIBOR (Karachi Inter Bank Offered Rate), he stated.
Banks have been lending at KIBOR minus rate, according to experts. This implies that the actual loan rate is 4% if KIBOR is 15% and banks are lending at KIBOR minus 1%.
The Trading Corporation of Pakistan (TCP) received Rs360 billion in bank funding on Monday at KIBOR minus 11.9 percent, according to Tahir Abbas, head of research at Arif Habib. Given that the KIBOR was approximately sixteen percent on Monday, the TCP raised finance at four percent of the total amount.
“Well-thought out plan”
In a similar vein, the Pakistan Agricultural Storage and Services Corporation (Passco) borrowed Rs. 500 billion at nearly the same interest rate last week, he continued.
According to Tahir Abbas, head of research at Arif Habib, “the government adopted a good strategy as it will reduce its debt burden, increase longer tenure debts, and reduce fiscal deficit significantly.”
But the current state of affairs is not sustainable, he believed, since the government will eventually need to return to the banks for bank loans.
He claimed that although the government must spend a colossal amount to service its debt (almost all tax money is allocated to this purpose), it would decrease this time.
Since banks only lend to the government and no longer to the private sector, we may conclude that banking has transformed. It has now changed for the better and will benefit the government and the economy as well, he said.
The policy interest rate, which is currently 17.5%, was deemed unfeasible for business by trade and industry, leading to nearly zero private sector borrowing during the past two years. Cheaper money can now stimulate the nation’s economy.
