Encouraging Banks to Boost Lending to Private Sector
In a recent report, it was highlighted that banks in Pakistan are struggling to meet the government’s target for advance-to-deposit ratio (ADR) as it remains below the desired 50% mark. Any bank falling short of this benchmark is subject to a 15% incremental tax.
The government’s move to impose this tax was aimed at pushing banks to increase lending to the private sector which has been facing a shortage of funds due to high interest rates and political uncertainty. However, banks have been primarily focused on lending to the government, resulting in record profits but limited private sector lending.
Despite efforts to boost lending, the private sector is still hesitating to take on more debt. The State Bank’s M2 data shows that private sector borrowing remains limited and focused on short-term and working capital needs.
With frequent cuts in interest rates failing to attract private sector borrowers, the market is anticipating further rate cuts to stimulate borrowing. This could potentially open up opportunities for domestic investors to explore the banking sector.
Overall, the banking industry is facing challenges in striking a balance between government investments and private sector lending, with the hope that future policy measures will create a conducive environment for increased lending to the private sector.
Published in Dawn, October 25th, 2024