IHC provides temporary relief to banks

KARACHI:

A court has temporarily barred the government from collecting an additional tax of up to 15% from banks, after a dozen financial institutions approached the court to suspend the tax they had to pay after failing to comply to the mandatory targets for lending to the private sector. in the outgoing year 2024.

Citing the Pakistan Banks’ Association, global media outlet Bloomberg reported on Thursday: “Around a dozen banks in Pakistan have been granted temporary relief by the Islamabad High Court from a government tax on lenders if their loans to the private sector were below target. .”

The court will hear the case from December 3, although it is unclear when the final order will be issued.

“Till the next date of hearing, no coercive action will be taken against the petitioner on the basis of calculations made by the tax authorities,” said an order of Justice Babar Sattar dated November 13 in relation to an application by Meezan Bank Limited, available on the court’s website .

MCB Bank Limited, Askari Bank Limited, Citigroup Incorporated’s Pakistan unit, Standard Chartered Bank Pakistan Limited and Habib Metropolitan Bank Limited are among other lenders that have received similar relief in separate orders, the media added.

Speaking to The Express Tribune, Arif Habib Limited economist Sana Tawfik reminded that the government, through the 2025 federal budget, has imposed an additional tax of up to 15% on the banks that fail to collect at least 50% of their respective deposits to the private sector at the end of the year on December 31, 2024.

The average advance-to-deposit (ADR) ratio of banks operating in Pakistan recently stood at 38%, significantly lower than the mandatory 50%. Accordingly, banks were expected to pay additional taxes amounting to about Rs197 billion this year.

Tawfik said the banks’ move was not surprising. She said they convinced the government to suspend the tax in the previous year, 2023, as well.

She recalled that some banks had started considering the potential impact of the additional tax on their quarterly financial activities. However, many banks have been in court for several days to have the tax suspended for this year as well.

She said it is not feasible for banks to increase their lending to the private sector amid the current economic slowdown. The majority of companies are unwilling to secure bank financing due to high inflation and high interest rates on loans.

Moreover, banks are also reluctant to lend to the private sector as there is a high probability that banks will take on additional non-performing loans (NPLs), which would lead to serious losses for financial institutions.

Some banks have already recorded private sector NPLs in recent quarters, she said.

However, banks’ lending to the private sector is expected to increase from next year, given the expected return of stability to the economy.

In addition, the government has indicated that from next year it will change its strategy to calculate the ADR based on an annual average instead of a one-day snapshot on December 31. This adjustment is expected to encourage lending to banks. private sector in the future.