In an effort to comply with the State Bank of Pakistan’s (SBP) regulatory requirements, banks have injected a record amount of over Rs1 trillion into non-bank financial institutions (NBFIs). This move is aimed at avoiding the incremental tax that would apply if they fail to meet the advance-to-deposit ratio (ADR) target of 50% by the end of 2024.
According to the latest report from the SBP, the massive liquidity influx into NBFIs exceeded the total credit stock to these institutions by 130%. NBFIs are financial entities that offer a range of financial services but do not hold a banking license.
To comply with the ADR requirements, banks have been striving to dispose of their excess liquidity by increasing their lending activities and reducing the size of deposits. As part of this strategy, banks have issued notices to large account holders, with deposits ranging from Rs1 billion to Rs5 billion, asking them to pay a 5% fee on their deposits.
From July 1 to November 15, banks provided a record Rs1,015.38 billion in loans to NBFIs, compared to a net debt retirement of Rs55.8 billion in the same period of the previous fiscal year. This figure represents a 130% increase over the total credit stock of Rs441.6 billion as of June 30. In FY24, there was a net debt retirement of Rs70.9 billion, whereas in FY23, net credit to NBFIs amounted to Rs144.7 billion.
Earlier this year, some bankers had raised concerns that the high interest rates and limited bank lending could lead to the closure of many NBFIs. The SBP’s policy rate remained at 22% during FY24, which significantly impacted all sectors of the economy. However, banks remained relatively secure due to extensive borrowing by the government.
Most banks were initially hesitant to finance the private sector, opting instead to park their liquidity in low-risk government bonds. However, after the SBP’s injection of Rs2.7 trillion in profits, banks were pushed to increase their lending to the private sector. This, in turn, led them to adopt strategies that would minimize deposits and meet the 50% ADR requirement to avoid incremental taxes.
Pakistan’s financial system remains largely bank-centric, with NBFIs making up a small portion of financial intermediation. Bankers argue that there is significant potential for growth in the financial services sector, which could enhance financial inclusion, deepen the financial system, and improve the country’s debt-to-GDP ratio. They believe that expanding this sector could increase domestic resources and facilitate lending to private businesses for fixed investment.
