ADR rises to 48pc in November

KARACHI: The banking sector’s advance-to-deposit ratio (ADR) continued to rise, reaching 47.8 per cent as of November 29, compared with 44.3 per cent in the previous month.

“The ADR had previously bottomed out at 38.4 per cent in August. Since then, the ratio has increased by 944 bps [basis points] to reach its current level of 47.8 per cent,” said Arif Habib Limited, citing data from the State Bank of Pakistan (SBP).

Banks’ advances rose to Rs14.9 trillion by the end of November, up from Rs13.8 trillion in October. Deposits remained flat at Rs31.1 trillion, compared with the previous month. Investments slightly increased to Rs29 trillion in November from Rs28.9 trillion a month ago. The investment-to-deposit ratio increased to 93.3 per cent from 93 per cent in October.

Banks are actively lending to private sector businesses and consumers to meet the ADR threshold of 50 per cent by the end of December by tapping into some big-ticket loan disbursements, even if the same is significantly below the Karachi interbank offered rate.

“A government committee is currently deliberating on the ADR tax matter, while banks have legally challenged its validity,” Chase Securities said in a note on Monday. “With the ADR tax set to be implemented by the end of the month, it remains to be seen whether any actions taken by the government committee after the calendar year-end will be applied retrospectively,” it added.

Last week, the prime minister established a committee to address the ADR issue. The committee is expected to submit its report within one week and will also recommend any necessary legal amendments and regulatory changes for legislation.

Currently, banks are required to achieve a 50 per cent gross ADR target by the end of the year to avoid incurring additional taxes on income from government securities. If banks maintain an ADR between 40 and 50 per cent, they will face an additional tax of 10 per cent. If the ADR falls below 40 per cent, they will be subjected to a higher additional tax of 16 per cent on their income from government securities.

Analysts expect the committee to change the formula for additional tax on the low ADR from a year-end date of December 31, 2024 to an average calculation for the year. There is a possibility that the SBP could introduce a revised formula for calculating the ADR by excluding certain advances and including all deposits in the calculation. These changes are anticipated as the government intensifies its efforts to increase tax collection from banks based on income generated from government securities.