Tag: banks

  • Banks play cat-and-mouse with Islamabad, cutting deposits over boosting loans

    Banks play cat-and-mouse with Islamabad, cutting deposits over boosting loans

    Bank owners breathed a sigh of relief as they found a way to potentially overcome the additional taxes that Islamabad was keen to extract from them. These additional taxes were levied as the Advance-to-Deposit ratio (ADR) was too low.

    In simple terms, a low ADR demonstrates that banks have shown reluctance while extending credit to non-government organisations. While banks have made a herculean effort to boost lending levels by increasing loans by 1.1 trillion dollars in just the last 25 days, they now have stumbled upon an easier way to increase their ADR.

    Since a low ADR is a consequence of lending too little money from the deposits that a bank holds, banks have realised that they can just shrink their deposits instead to improve the ratio. It seems as if this strategy will prove to be successful for banks, too, as they are sitting shy of the legal ratio of just six per cent.

    Commercial banks are aiming to reduce deposits by imposing fees as high as six per cent on large deposits. This may deter many depositors from parking their funds in banks to avoid the exorbitant fees on deposits.

    Moreover, as per Dawn News, banks are also imposing credit limits so that their deposits do not rise significantly. This includes large commercial banks such as Meezan, which have notified their customers regarding these changes.

    If banks are able to achieve this, their profit margins are expected to grow as they will avoid 197 billion rupees in taxes. But what does this mean for businesses exactly?

    For businesses, this spells great news, as when bank deposits shrink, that money is likely to get injected back into the economy – most probably in the form of investments. As such, businesses can expect to find more interest from individual investors who might be eager to use their money to buy up business equity instead of keeping it in banks.

    This will allow businesses to expand the scope of their operations without having to worry about the interest payments that come with debt-fueled business growth. Additionally, the excess funds in the economy, due to banks making a conscious effort to reduce deposit levels, may find their way into the Pakistan Stock Exchange (PSX).

    For businesses registered on the PSX, this likely means another wave of investments flowing in to continue the strong growth the exchange has witnessed. Currently, the benchmark of the PSX, the KSE-100, sits at just under 98000.

    If banks continue to shrink deposits, the potential increase in investment levels may help the KSE-100 index cross the 98000-point level and, perhaps, help propel the PSX even further.

    This is a huge possibility as banks such as Allied, Al-Falah, Al-Habib and Faysal Bank, among many others, are listed on the PSX. If their profit margins rise, they are expected to attract more investments, causing their stock value to grow, which will ultimately drive the PSX to do well, too.

    It will be interesting to see if banks can cross the legal ADR threshold level of 50 per cent. It will also be interesting to note how Islamabad’s policy will serve business interests. These pertinent questions will be answered in due time, but for now, the economy must watch and wait.

  • Banks rush to lend ahead of private loan deadline

    Banks rush to lend ahead of private loan deadline

    The government has decided to finally increase lending levels amid the threat of an additional tax of 15 per cent looming over banks due to low private lending. Banks were able to sidestep these additional taxes last year by negotiating with the government; however, Islamabad refused to budge this year.

    This led to banks taking the matter up with Islamabad High Court (IHC), which granted them a temporary moratorium on the additional tax payments. The reason why banks are facing an ‘additional’ tax being levied on their earnings is due to their low Advance-to-Deposit Ratio (ADR) figures.

    For reference, ADR refers to the percentage of a bank’s deposits that are being lent out to satisfy non-government sector needs – such as those of businesses, individuals, and other private entities.

    Since the ruling of the IHC in their favour, banks have increased their ADR to avoid any further run-ins with the law. However, they have still not surpassed the legal threshold level of 50 per cent, shying away from the legal ratio by six per cent. The economy is likely to see increased lending to non-government sectors now, as banks will have to face the additional tax if the ADR requirement is not met by the end of 2024.

    At first glance, this spells great news for businesses as they will now be able to expand the scope of their operations using loans from banks. However, this might not end up being the case as Pakistani banks have traditionally favoured risk-free investments in government securities.

    If banks continue to exhibit this behaviour of lending to businesses that are considered safer investments, credit might get extended to companies that work with the government. As such, the aforementioned benefits to businesses could be reaped by those linked to the government via contracts.

    Since working with the government might signal to banks that businesses possess a safe stream of income, banks may feel more comfortable lending to them. As such, these businesses will be able to grow operations and secure more government contracts.

    The companies most frequently contracted by the government are primarily construction companies. As such, banks could see a disproportionate flow of credit towards construction companies. However, even though loans might be preferential, it does not mean that growth may not be seen.

    This is because if the construction sector witnesses growth, it will also propel more than 42 other ancillary sectors, such as steel, cables and cement, to name a few.

    It will be interesting to note how the lending patterns of banks have changed with the legal system breathing down their necks. Will satisfying ADR requirements boost business growth? Only time will tell.

  • Islamabad High Court shields banks from a 15 per cent tax on low private lending

    Islamabad High Court shields banks from a 15 per cent tax on low private lending

    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.

  • Taxed for holding back: Banks face 197 billion rupee bill for avoiding private sector loans

    Taxed for holding back: Banks face 197 billion rupee bill for avoiding private sector loans

    Bankers across Pakistan grow uneasy as their pleas to get tax exemptions fall on deaf ears.

    The government, as per the conditions attached to the IMF loan, can not exempt banks from the “additional” tax of PKR 197 billion.

    The reason why banks find themselves in this situation is because of their excessive lending to the government. As per lending regulations, banks are not supposed to withhold loans from the private sector while extending credit to the government.

    To discourage this practice, the government introduced a tax rule in 2022 to encourage banks to increase the number of loans to the private sector. Three major banks alone face a staggering PKR 71 billion tax bill alongside other banks that did not comply with this rule.

    While lawmakers in Islamabad have expressed interest to relieve banks of these additional taxes, IMF rules have their hands tied. Earlier in the year, tax exemptions were in the works. However, Prime Minister Shehbaz Sharif scrapped the idea.

    Following the glaring silence and lack of action regarding the exemption of additional taxes, banks might now scramble to give out billions in loans to the private sector to avoid the tax.

    This spells great news for businesses who are seeking loans as the current situation will likely ease borrowing. With the two per cent State bank slash in interest rates last month and the possibility of future decreases, it seems like high time for businesses to start expanding using debt.

    The primary beneficiaries of the potential loans will most likely be small businesses. The reason behind this is their lack of assets to pledge as collateral to secure funding alongside the lack of good will that currently exists as a result of a non-existent credit history.

    Ultimately, though, through paying taxes or extending loans, the banks will have to contribute. Either way, the economy is likely to benefit – whether by reducing the federal budget deficit or by fueling business activity.

    The choice may not favour the banks, but the country is likely to benefit regardless.

  • PIA flight operation resumed after deal with PSO

    PIA flight operation resumed after deal with PSO

    Update: After intense deliberation, PIA has cracked a deal with PSO due to which flight operations are slowly restarting. The delay in reaching an agreement caused the cancellation of more than 19 flights and delayed more than 20 others. 

    According to the deal, PIA is to pay Rs.100 million to the PSO on a daily basis. Flight operations have resumed since then. 

    Previously, the feud between Pakistan International Airlines (PIA) and Pakistan State Oil (PSO) continues while the passengers bear the brunt.

    Flight operations were adversely affected with 14 flights being cancelled and four others being delayed due to a halt in the supply of fuel to the airline, over the issue of non-payment of dues.

    The domestic cancelled flights were from Islamabad to Gilgit, one from Islamabad to Quetta, one from Karachi to Sukkur, one from Islamabad to Multan and one from Karachi to Faisalabad.

    Pk 304 from Karachi to Lahore, Pk308 from Karachi to Islamabad and Pk 309 from Islamabad to Karachi were delayed due to fuel unavailability. Pk 305 from Lahore to Karachi was delayed after its delayed arrival in Lahore.

    Hundreds of people, including passengers and flight crew, are facing inconvenience in the face of these partial suspension and delays in flight operations.

    To mitigate the severe issues of PIA’s flight operations, the Airline company has already requested the Aviation Division in a letter to arrange for them a loan of over Rs 7.5 billion from banks to keep itself afloat. The letter further states that fuel supply in Jeddah and Dubai was halted due to PSO’s refusal of fuel supply. This letter has been sent by the General Manager Funds Management to the Deputy Director Division and is now directed to the Ministry of Finance, urging them to intervene.

    Interestingly, no bank has shown any interest in providing loan to the loss-making national flag carrier.

    Earlier, in the mid of September, caretaker PM Anwarul Haq Kakar had aimed to sell-off the airline but the Interim Minister of Finance Dr. Shamshad Akhtar had said that the Government would support PIA to keep it in the skies. This was followed by the Caretaker Privatization Minister Fawad Hasan Fawad announcing later on that the government would not ground the PIA. He claimed to have already worked out a plan in a press conference.

    On the contrary, a plan is currently lying on his table as shared by the PIA which involves a debt restructuring program (which has reached 260 billion), blocking tax payment to the FBR and not paying fees and charges of the Civil Aviation Authority but does not address the mammoth of issues in administrative affairs.

    Dr. Shamshad has vowed to support the airline as the government has 92% stakes in it implying the saga of PIA going downhill seems to linger on for it has also announced bonuses of 915 million for its employees amidst all of this.

    Read more on this: https://thecurrent.pk/loss-making-pia-announced-bonuses-for-employees-on-their-good-performance/

  • Banks will now pay 10% super tax if their earnings exceed Rs30 crore

    Banks will now pay 10% super tax if their earnings exceed Rs30 crore

    The Federal Board of Revenue (FBR) has announced important amendments to the Income Tax Ordinance, 2001 through Finance Act 2023, bringing significant changes to the Super Tax structure. According to the latest income tax circular (2 of 2023), banks will now be required to pay a 10 per cent Super Tax if their income exceeds Rs300 million.

    The Super Tax was initially introduced through the Finance Act of 2022, imposing graduated tax rates ranging from 1 per cent to 4 per cent on income slabs starting from Rs150 million to Rs300 million and above. Certain specified business sectors were subject to a higher Super Tax rate of 10 per cent if their income surpassed Rs300 million.

    New Super Tax slabs

    To enhance the scope of the Super Tax and ensure progressivity and uniformity in the tax rate structure, the Finance Act 2023 has introduced additional income slabs. These new slabs are as follows: Rs350 million to Rs400 million, Rs400 million to Rs500 million, and Rs500 million and above, with corresponding Super Tax rates of 6 per cent, 8 per cent, and 10 per cent, respectively. These new Super Tax rates will apply to all taxpayers across the board for the Tax Year 2023 and beyond.

    Addressing a significant concern, the Finance Act 2023 has also clarified the payment procedure for the Super Tax. The ambiguity surrounding whether the Super Tax under section 4C of the Ordinance should be paid as a lump sum at the time of filing income tax returns or in monthly/quarterly installments of advance tax under section 147 of the Ordinance has been resolved.

    The introduction of a new sub-section (5A) in section 4C now requires Super Tax liability to be paid in conjunction with monthly/quarterly advance tax installments, depending on the taxpayer’s circumstances. Corresponding amendments have been made in section 147 of the Ordinance to facilitate this process.

    This move is aimed at broadening the scope of the Super Tax and making it a more progressive and comprehensive tax measure. The FBR expects these changes to contribute significantly to the country’s revenue collection efforts while ensuring a fair and equitable tax system for all taxpayers.

  • Commercial importers forced to suspend food and drink imports due to dollar shortage

    Commercial importers forced to suspend food and drink imports due to dollar shortage

    In a significant development impacting the country’s economy, commercial importers in Pakistan have announced their decision to suspend the import of all eatables and beverages starting from June 25. The move comes as a result of the unavailability of dollars, with banks refusing to provide the necessary foreign currency to importers.

    The decision was taken following a comprehensive discussion among members of the Karachi Wholesale Grocers Association, represented by Secretary Farhat Siddique. In a statement issued by the association, it was revealed that all importers have been instructed to inform their indenters not to dispatch any shipments after June 25. Importers will only be responsible for the clearance of goods that have either arrived at the port or are en route. No shipments dispatched after June 25 will be cleared for entry.

    According to Geo, one of the major concerns highlighted by the association is the mounting number of containers stranded at the port due to the lack of foreign currency. Importers are currently facing fines and other charges as a result. The statement further criticised the State Bank of Pakistan (SBP) for its failure to provide the much-needed foreign exchange, citing its policies as detrimental to the country’s economy.

    This recent development comes at a time when the coalition government is grappling with a balance of payments crisis and striving to combat soaring inflation, which reached a record high of nearly 38 per cent last month. With foreign exchange reserves barely enough to cover a month’s worth of imports, the situation has prompted restrictions on imports and delays in opening letters of credit, severely impacting various sectors across the country. As a result, none of these sectors have been able to meet the growth targets set for the fiscal year 2022-23.

    The implications of the shortage of dollars and the subsequent halt in food and beverage imports are far-reaching, potentially affecting the availability and affordability of essential commodities for consumers. The government and relevant authorities will need to address the foreign currency shortage promptly and implement measures to stabilise the economy, restore confidence, and mitigate the impact on businesses and consumers alike.

    As the situation unfolds, stakeholders and policymakers will be closely monitoring the developments and seeking viable solutions to tackle the ongoing challenges faced by the country’s economy.

  • Supreme Court directs FBR to collect 50% super tax from big companies within seven days

    The Supreme Court of Pakistan has ordered organisations earning more than Rs150 million to submit 50 per cent of the super tax imposed on them to the Federal Board of Revenue (FBR) within seven days.

    A two-member bench consisting of Chief Justice of Pakistan Umar Ata Bandial and Justice Athar Minallah heard the plea filed by the FBR against an interim order issued by the Lahore High Court (LHC). The FBR’s counsel, Salman Akram Raja, informed the bench that the LHC had temporarily prohibited the FBR from collecting the tax pending a final decision.

    However, counsel for the respondents argued that the government’s super tax on corporations was unconstitutional. The Supreme Court suspended the interim order of the high court and allowed the FBR to collect 50 per cent of the super tax from these industries within seven days.

    Last year, Prime Minister Shehbaz Sharif announced the implementation of a 10 per cent super tax, also referred to as the “poverty alleviation tax,” on 13 key industries to increase tax collection. The government stated that the “tough decisions” were made to safeguard the economy.

    According to Geo, the sectors subject to the tax included cement, steel, banking, airlines, textile, automobile assembly, sugar mills, beverages, oil and gas, fertilizer, cigarettes, chemicals, and LNG terminals.

  • Mobile banking grows by 100% during FY22 in Pakistan

    Mobile banking grows by 100% during FY22 in Pakistan

    According to the State Bank of Pakistan’s (SBP) Annual Payment Systems Review, the size of the digital payments ecosystem witnessed massive increase over the previous fiscal year. The report reveals that internet banking expanded by 51.7 per cent to 141.7 million users in FY22, while mobile phone banking increased by 100.4 per cent to 387.5 million.

    There were 15 million P2P (Person-to-Person) Raast users registered, who carried out 7.9 million transactions worth Rs102.1 billion.

    The report also notes that during FY22, there were 8.4 million and 12.3 million users of mobile phones and internet banking, respectively.

    In terms of transactions, mobile phone banking increased by 100.4 per cent to 387.5m, while internet banking grew by 51.7 per cent to 141.7m during the year.

    In 2021–2022, internet banking transactions had a value of Rs10.2 trillion, increasing 81.1 per cent. The volume of e-commerce transactions increased by 107.4 per cent to 45.5 million, and the value increased by 74.9 per cent to Rs106 billion.

    A total of 32,958 point-of-sale devices were installed during FY22, which caused the network to grow by 45.8 per cent to 104,865. The number of online retailers registered with the banks increased over this time from 3,003 to 4,887. The nation’s ATM network expanded by 4.8 per cent during the course of the year, totaling 17,133 machines.

  • Pakistani rupee gains Rs2 to close at Rs221.94

    Pakistani rupee gains Rs2 to close at Rs221.94

    On Thursday, the Pakistani rupee (PKR) strengthened by Rs2 or 0.90 per cent against the dollar to close at Rs221.94.

    According to the Forex Association of Pakistan (FPA), the local currency was trading at Rs221.75 per $1 at 9:46 am, up 0.98 per cent from yesterday’s close of Rs223.94.

    The rupee has been strengthening since September 22, when it nearly hit an all-time low of Rs239.71. In the last nine sessions, it has increased by Rs15.77 or 6.58 per cent.

    The State Bank of Pakistan’s (SBP) and finance ministry’s joint investigation into banks making obscene profits from their dollar sales, according to Mettis Global Director Saad bin Naseer, has calmed the interbank market.

    SBP On Tuesday, Governor Jameel Ahmad told a National Assembly committee that eight banks were under investigation for the initial round of currency rate manipulation. In the following stage, the other banks would be looked into.

    He said that a smaller trade deficit in September and the Asian Development Bank’s (ADB) pledge of approximately $2.3–2.5 billion in aid were the key reasons for the rupee’s recovery on the open market.

    FAP Chairman Malik Bostan listed the ADB announcement and hopes of a sustained drop in imports as the factors that contributed to the rupee’s rise.