Banks see economic steps paving way for expansion

KARACHI: The second supplementary budget of this fiscal drew a positive initial response from the financial institutions with banks expressing intentions to expand lending to agriculture, small and medium enterprises (SMEs), and housing sectors as helpful to facilitate clients and boost economic growth.

Finance Minister Asad Umar, in his mini-budget speech before the parliament, announced the abolition of withholding tax on bank transactions for tax filers to encourage deposits.

Umar also unveiled tax breaks for the banks on income earned from providing loans to farmers, small businesses, and housing for low-income segments.

The banks will be charged 20 percent in tax instead of the current rate of 39 percent in case they extend credit to agriculture, SMEs and low-cost housing.

A banker said the tax incentives seem optimistic for the banks as they are looking for new avenues to maximise their profits.

Banks will be keen to participate in the government-supported Rs5 million project to build five million low-cost houses under Naya Pakistan Housing Program across the country as part of a strategy to expand mortgage lending.

However, a senior banker on the condition of anonymity said waiving withholding tax on banking transactions would encourage deposit inflows but not much.

“These are non-implementable measures. The problem is with the credit risk in SMEs and agri financing, not income or taxation. No fruits expected,” the banker said adding, “On housing financing for that matter, the issue is legal support.”

He also said that there was nothing material in the budget. “If they had to announce the interim budget then that should have been something substantial,” he said and added that they were all trial measures and would not help the economy at all.

Bank deposits in 2018 rose in single digits at 8 percent, the lowest in a decade, from an average 12 percent in last five years.

The slowdown in deposits is surprising in the wake of huge rises in interest rates since January last year.

Deposits at banks increased to Rs13.354 trillion in 2018 from Rs12.362 trillion in previous year.

Bank loans grew by 21 percent which is the highest in 13 years. The sector’s advance to deposit ratio stood at 59 percent, highest since 2012.

On the other hand, investments decreased by 11 percent YoY. This is the first time in a decade that the sector has shown negative growth in investments. The investment to deposit ratio was 57 percent at the end of December 2018.

The State Bank of Pakistan (SBP), in its FY2018 annual report, had already stated that deposit-to-M2 ratio had continued to slide during FY2017 and FY2018, which indicated that the impact of withholding tax was still hindering the movement of cash back into the banking system.

“Measures should be taken to encourage savers to place their funds with banks. In this regard, while SBP has repeatedly advised banks to increase their deposits taking efforts and has also put in place floors on deposit rates, it is extremely important to reconsider the taxation regime,” it noted.

The removal of withholding tax on non-cash transactions will be particularly helpful, the central bank report recommended.

Banks, instead of increasing their deposit base, continued to invest in government securities.

The Pakistan Investment Bonds to deposit ratio is expected to increase to 30 percent in December 2019 from 15 percent in September 2018, translating into Rs2.2 trillion of additional PIBs.

Moreover, approximately Rs720 billion worth of PIBs are also maturing in 2019, which would take the total PIB participation of Pakistan listed banks to Rs2.9 trillion.