The private sector has returned a colossal 440 billion rupees to banks in just two weeks. This has reversed the liquidity inflows seen earlier in the fiscal year (FY) when commercial bank lending surged beyond one trillion rupees in late 2024 - to avoid paying additional taxes to the government for their low levels of lending to the private sector. 

 

As per data released by the State Bank of Pakistan (SBP) on Wednesday, funds borrowed at the tail end of 2024 began flowing back to banks after bankers realised that the 15 percent incremental tax on the advance-to-deposit ratio (ADR) had been averted because of higher lending levels.

 

Between January 17 and 31, private sector credit plummeted from a liberal 1.398 trillion rupees to just 958 billion rupees, which translates into a staggering decline of 440 billion rupees over the period.

 

According to reports, banks extended large sums of money to private businesses to close out the first half of FY 2024-25. Banks did this to meet Islamabad’s requirement of maintaining an ADR of over 50 percent before January 2025 – A feat they were able to achieve.

 

Despite banks successfully meeting this threshold, authorities have raised the ADR to 55 percent to ensure the flow of additional funds to businesses. Businesses could use these funds to expand the scope of their operations and scale up to boost profit margins.

 

Banking experts had initially expected that the sharp drop in interest rates would encourage more borrowing, which is in line with the inverse relationship between interest rates and borrowing levels. However, instead of lower interest rates boosting credit demand, borrowing from banks dwindled instead. According to business owners, more factors boost business growth than low interest rates, as high taxes and elevated borrowing costs hinder industrial expansion and commercial activity.

 

Economic analysts have outlined how agriculture and large-scale manufacturing are witnessing negative growth - which, according to reports, is reducing demand for bank financing.

 

Data from the SBP shows a steep decline in credit extended by the conventional, which dropped from a respectable 722.6 billion rupees on January 17 to a measly 325 billion rupees by the end of the month. Islamic banks also witnessed a sharp fall, with their loan disbursements shrinking by a whopping 66 billion rupees to 559.5 billion rupees over the same period.

 

Reports suggest that the surge in lending last year was a strategic attempt by commercial banks to avoid additional taxes. Many feel that the creation of new loans by banks was more of a ploy to meet ADR requirements rather than an attempt to fuel business expansion. Analysts remain sceptical regarding the economy’s recovery because of the aforementioned circumstances.