Bank owners breathed a major sigh of relief as the Islamabad High Court (IHC) ruled in their favour by providing temporary relief from a tax they were set to pay. While this was a major win for banks, the same can’t be said for the government and other businesses.
While the government had set the (advance deposit ratio of 50 per cent, it was discovered that the average ADR was actually resting 12 per cent below that threshold. In simple terms, banks have been extending too little credit to the private sector for business activities.
The formal financial system has shown a tendency to direct their loans to Islamabad, as handing out loans to the government is considered safer. However, this has come with its own set of problems for the government.
Islamabad had been eying the 197-billion-rupee tax revenue that banks would need to pay, especially given their low levels of lending to the private sector. With courts stepping in to protect banks, the government is likely to miss out on billions of rupees, which is a major issue for the cash-strapped nation.
It is interesting to note that this is not the first time that banks have been able to sidestep these taxes. In 2023, Islamabad gave the green light to suspend the additional taxes that were levied upon banks.
With this year being no different than the last, it seems as if banks will continue to not lend money to private businesses. If the precedence is set that banks can just sidestep government regulations, this will detrimentally impact businesses.
This is because apprehension about lending money to the private sector will result in limited growth of businesses. With loans being slashed by the State Bank of Pakistan (SBP), to 15 per cent, businesses have shown greater interest in utilising debt to fuel their expansion plans. However, they can’t scale up the scope of their operations with banks exercising stringent lending practices.
Moreover, experts are predicting that the lending practices witnessed in the past few years is likely to result in a serious drop in business confidence. This is because when businesses realise that the formal credit market exists to serve not them but the government only, their faith in lending institutions will most likely be irreparably damaged.
While this is a victory for private banks, it is undoubtedly going to sow the seeds of discontentment within businesses. This distaste for credit-fueled growth may result in businesses seeking investments that require them to give up equity.
It will be interesting to note now if the next gavel strike will serve businesses in their hour of need or if It will serve the interests of banks.