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Banks play cat-and-mouse with Islamabad, cutting deposits over boosting loans

Ibraheem Sohail

Nov 22

Bank owners breathed a sigh of relief as they found a way to potentially overcome the additional taxes that Islamabad was keen to extract from them. These additional taxes were levied as the Advance-to-Deposit ratio (ADR) was too low.

 

In simple terms, a low ADR demonstrates that banks have shown reluctance while extending credit to non-government organisations. While banks have made a herculean effort to boost lending levels by increasing loans by 1.1 trillion dollars in just the last 25 days, they now have stumbled upon an easier way to increase their ADR.

 

Since a low ADR is a consequence of lending too little money from the deposits that a bank holds, banks have realised that they can just shrink their deposits instead to improve the ratio. It seems as if this strategy will prove to be successful for banks, too, as they are sitting shy of the legal ratio of just six per cent.

 

Commercial banks are aiming to reduce deposits by imposing fees as high as six per cent on large deposits. This may deter many depositors from parking their funds in banks to avoid the exorbitant fees on deposits.

 

Moreover, as per Dawn News, banks are also imposing credit limits so that their deposits do not rise significantly. This includes large commercial banks such as Meezan, which have notified their customers regarding these changes.

 

If banks are able to achieve this, their profit margins are expected to grow as they will avoid 197 billion rupees in taxes. But what does this mean for businesses exactly?

 

For businesses, this spells great news, as when bank deposits shrink, that money is likely to get injected back into the economy – most probably in the form of investments. As such, businesses can expect to find more interest from individual investors who might be eager to use their money to buy up business equity instead of keeping it in banks.

 

This will allow businesses to expand the scope of their operations without having to worry about the interest payments that come with debt-fueled business growth. Additionally, the excess funds in the economy, due to banks making a conscious effort to reduce deposit levels, may find their way into the Pakistan Stock Exchange (PSX).

 

For businesses registered on the PSX, this likely means another wave of investments flowing in to continue the strong growth the exchange has witnessed. Currently, the benchmark of the PSX, the KSE-100, sits at just under 98000.

 

If banks continue to shrink deposits, the potential increase in investment levels may help the KSE-100 index cross the 98000-point level and, perhaps, help propel the PSX even further.

 

This is a huge possibility as banks such as Allied, Al-Falah, Al-Habib and Faysal Bank, among many others, are listed on the PSX. If their profit margins rise, they are expected to attract more investments, causing their stock value to grow, which will ultimately drive the PSX to do well, too.

 

It will be interesting to see if banks can cross the legal ADR threshold level of 50 per cent. It will also be interesting to note how Islamabad’s policy will serve business interests. These pertinent questions will be answered in due time, but for now, the economy must watch and wait.

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