Commercial Banks Urged to Boost Lending by 31% to Sidestep Tax Hike

Karachi: Commercial banks in Pakistan are under pressure to significantly increase their lending in the final quarter of the year. They must raise their Advance to Deposit Ratio (ADR) above 50% by December 2024 to circumvent an increased tax burden. This urgency comes as banks with an ADR below 50% face an additional tax impact of PkR137 billion if they fail to meet the target.

According to AKD Securities Limited, as of September 2024, these banks need to boost their lending by an additional PkR3.6 trillion, a 31% increase, to exceed the 50% ADR threshold and avoid higher ADR-based taxation. This is particularly challenging as bank advances have slightly declined by 0.4% during the first nine months of 2024.

The ADR-based additional income tax rule from the Government of Pakistan stipulates that banks with an ADR above 50% are taxed at the standard rate of 39%. Conversely, if a commercial bank’s ADR falls below 40% or 50%, the income tax rate on government securities increases to 55% and 49%, respectively. This tax structure is designed to incentivize banks to maintain a healthy balance between their deposits and advances, ensuring more dynamic participation in the lending market.

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