KARACHI: In order to avoid additional taxes in the event that the advance-to-deposit ratio (ADR) is not reached at 50% by the end of 2024, banks have invested a record amount of more than Rs1 trillion in non-bank financial institutions (NBFIs).
According to the State Bank’s most recent report, the massive inflow of liquidity was 1300 percent greater than the whole stock of credits to NBFIs.
Financial firms that offer specific financial services but lack a banking license are known as NBFIs.
Banks have been finding it difficult to dodge the additional tax that will be imposed if they don’t raise the ADR to 50% by December 31, 2024. By expanding lending and decreasing deposit sizes, the banks have been attempting to get rid of their excess liquidity.
Large account holders with balances ranging from Rs1 billion to Rs5 billion have received notices from banks requesting that they pay a 5 percent tax on their deposits.
Using the same approach, record bank lending to NBFIs reached Rs1,015.38 billion between July 1 and November 15 compared to net debt retirement of Rs55.8 billion during the same time last fiscal year. As of June 30, the credit amount is 130 percent greater than the total stock of Rs441.6 billion.
While the industry received a net credit of Rs144.7 billion in FY23, a net debt retirement of Rs70.9 billion was recorded in FY24.
According to several bankers in April, a lack of bank lending could force the closure of numerous NBFIs because of the harm caused by excessive interest rates. All sectors of the economy suffered during FY24 when the SBP policy rate stayed at 22 percent, but banks were safe because the government borrowed a lot of money from them.
The majority of banks decided to park their liquidity in risk-free government bonds rather than finance the private sector.
NBFIs retired Rs93 billion in net debt at the end of the third quarter of FY24, compared to Rs140 billion borrowed during the same period the previous year.
However, the lending environment was altered by the decreased government borrowings following the SBP’s Rs2.7 trillion in profits. This compelled banks to lend to the private sector and take steps to lower deposits in order to reach the 50 percent ADR limit and prevent an additional tax.
In Pakistan’s bank-centric financial system, NBFIs still make up a small portion of the total and have a relatively small role in financial intermediation.
According to bankers, Pakistan lags behind its neighbors and other developing nations in terms of financial depth, inclusiveness, and debt-to-GDP ratio. According to bankers, there is a great deal of room for the financial services industry to grow in order to raise domestic funds and provide fixed investment loans to private companies.
