Credit to non-government sector reaches Rs2.7tr in July-December FY25

KARACHI: Bank credit to the non-government sector, including private businesses and non-bank financial institutions (NBFIs), reached Rs2.793 trillion between July 1 and December 13, 2024, according to the latest data from the State Bank of Pakistan.

Analysts indicate that banks are lending more to meet the 50 per cent advance-to-deposit ratio (ADR) threshold by December 31. Banks are extending half of the incremental lending to NBFIs to maintain the quality of their advances’ portfolio while achieving the ADR target.

Banks must achieve a gross ADR target of 50 per cent 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 drops below 40 per cent, a higher additional tax of 16 per cent will apply to their income from government securities.

From July 1 to December 13 , bank credit to the non-government sector amounted to Rs2.793 trillion. However, it repaid Rs58.181 billion during the same period last year. Banks lent Rs1.470 trillion to the private sector, significantly up from only Rs141.3 billion last year. Additionally, banks extended Rs1.360 trillion in credit to NBFIs, contrasting with a net repayment of Rs93.288 billion last year. It is noteworthy that the total stock of credits to NBFIs by the end of June 2024 stood at Rs485 billion.

The State Bank’s data shows that banks have nearly met the ADR target, reaching 49.7 per cent as of December 6, up from 47.8 per cent the previous month. Banks’ advances climbed to Rs15.1 trillion as of December 6, up from Rs14.9 trillion in November. Conversely, deposits decreased to Rs30.3 trillion, down from Rs31.1 trillion a month earlier, while investments remained steady at Rs29 trillion. The investment-to-deposit ratio increased to 95.7 per cent from 93.2 per cent in November.

Lower interest rates and a consistent rise in economic activity may have contributed to banks’ increased lending to private businesses and consumers.A recent report by AKD Securities titled ‘Pakistan Strategy 2025’ predicts that monetary easing could lower the policy rate to single digits next year.

Stronger external stability under the International Monetary Fund’s oversight is expected to allow the SBP to continue monetary easing, with inflation projected to remain in the range of 5-7 percent in the medium term, according to the report.

“Consequently, we anticipate the SBP will further lower rates into single digits next year, with the majority of the easing being front-loaded,” it said. A slow recovery in domestic demand following policy rate cuts of 900 basis points (bps) since June, a significant increase in remittances, and double-digit growth in exports amid a weak outlook for commodity prices further support our outlook. “However, we expect the SBP to maintain positive real interest rates of 2-3 per cent to prevent another boom-bust cycle,” it added.

The report expects the money supply to grow at a slower pace in FY25 given banks’ reluctance to go aggressive for deposits that remain a major driver for money supply growth to comply with ADR and a significant reduction in policy rate.

Meanwhile, higher revenue generation by the central government through robust growth in tax streams and higher SBP receipts has allowed the government to reduce borrowing from the banking system. The same is reflected by a decline in outstanding stocks of open market operations and buybacks of outstanding debts by the government. Moreover, the channelisation of credit to public-sector enterprises for commodity purchases by commercial banks at cheaper rates would help sustain food inflation at lower levels, the report noted.