Bank credit to private sector soars to Rs1.4tr

KARACHI: Bank lending to the private sector surged to Rs1.398 trillion between July 1, 2024 and January 17, 2025, compared with Rs152.8 billion during the same period last year, reflecting a staggering 815 per cent rise, the central bank data showed on Friday.

The private sector has significantly increased its borrowing from banks due to several factors. Banks were trying to improve their advance-to-deposit (ADR) ratio to avoid higher taxation on government securities. Additionally, there are factors like a pickup in economic activity, falling inflation and reduced interest rates, which have all contributed to the rise in bank loans.

“The data depicts banks’ efforts to not take deposits while go aggressively on increasing advances to meet ADR requirement in order to avoid an incremental tax on government securities. However, this trend is growing to reverse going forward given the abolishment of the ADR-related tax,” said Awais Ashraf, the director of research at AKD Securities Limited.

“Moreover, government borrowing has been significantly reduced due to higher tax collection along with a record dividend of Rs2.5 trillion received from the State Bank of Pakistan (SBP) while keeping expenses under control. The government reduced its direct borrowing from SBP by Rs988 billion while from schedule banks by Rs719 billion,” Ashraf added. With the ongoing monetary easing amid a persistent slowdown in price pressures, demand for bank credit from businesses and consumers is expected to increase further in the coming months. Analysts predict that the trend of sharp disinflation will continue, with the consumer price index (CPI) for January likely to decrease to between 2.0 per cent and 2.8 per cent primarily due to a high base effect.

Most analysts anticipate a 100 basis point (bps) cut in rates at the SBP upcoming policy review scheduled for Monday. Last month, the SBP reduced the policy rate by 200bps to 13 per cent, marking the fifth consecutive rate cut since June. This brings the total reductions for 2024 to 900bps.

AKD Securities has said in a note that the SBP is likely to maintain its stance on monetary easing, given that inflation remains below the central bank’s target range, quarterly GDP growth is falling short of expectations, the money supply is contracting, and the current account surplus is at a two-decade high.

The firm expects the SBP to reduce interest rates by 200bps to 11 per cent, with an additional 150bps cut anticipated during the remainder of 2025. These elevated real interest rates should sufficiently address any potential upward risks to inflation stemming from a possible increase in tax rates to cover the Federal Board of Revenue’s (FBR) revenue shortfall. Meanwhile, the stability of global oil prices at current levels would further support the inflation outlook, it said.