Banks levy fees on large deposits to offset cash glut

KARACHI: In a bid to avoid a government levied tax, commercial banks have imposed a fee on deposits higher than their designated threshold, and set lower deposit targets in the range of Rs1 billion to Rs5bn.

All major commercial banks, including Bank Alfalah, MCB, Meezan, HBL and Standard Chartered have sent notices to clients who have large deposits ranging from Rs1bn to Rs5bn, with each bank setting its own maximum threshold.

According to the schedule of charges, which came into effect from Thursday, Nov 21, any account holder whose balance on the last day of the month is above the designated threshold, would now have to pay a five per cent monthly fee.

This applies to both rupee and foreign currency accounts.

Commercial banks set upper limit for deposits between Rs1bn and Rs5bn; daily limits also put in place

In addition, some banks, like Meezan, have also applied maximum daily credit balance limits on checking accounts. “The bank has the right to refuse and/or to return the amount over and above said limit,” according to notices received by customers.

However, some bankers maintain that the amount of cash deposits could be further reduced in case the advance-to-deposit ratio (ADR) remains below 50pc at the end of the calendar year.

Meanwhile, consumers are apprehensive that banks may charge them further fees if they fail to achieve their target of 50pc ADR.

A senior banker told Dawn on condition of anonymity that it was not clear whether any banks had imposed an upper limit that was lower than Rs1bn, but said this was possible, especially for those banks who have a large number of smaller deposits, as compared to a handful of large corporate accounts, which would have a high balance.

Banks are doing this to ensure that they do not have to pay a chunk of their profits to the government in the shape of incremental tax, which is due at the end of the year.

Banks confident of bringing ADR to 50pc

At the same time, banks seem confident that their ADR would reach 50pc by end-December, and have adopted a unified strategy to charge fee on big deposits aimed at discouraging depositors.

Industry sources say individual banks have devised their own strategies to impose fees ranging from 4pc to 6pc on large deposits.

The government decided in the budget FY25 to impose incremental tax up to 15pc on banks if the ADR remains below 50pc on Dec 31, 2024. This came as a big threat for banks despite the fact that they doubled their profits in CY2023.

“Banks must be congratulated that they adopted successful strategy to avoid incremental tax levied by the federal government,” said S.S. Iqbal, a senior banker and financial expert.

He said there would be no negative impact on banks’ earning with this strategy; rather they would save what they have earned earlier.

Within the last 25 days, bank lending has jumped by Rs1.1 trillion, thus reducing their deposits, which were already down by one per cent during the same period.

R.M. Alam, another senior banker, said banks still have 40 days to rationalise their ADR situation, which already stands at around 44pc. At the time of the budget, the average ADR of banks was 38pc, making them liable to pay 15pc incremental tax at this percentage below 40pc.

However, the incremental tax has already come down to 6pc as the ADR is now between 40pc and 50pc. Insiders say the move against large deposits would not affect smaller deposit holders, but rates of returns on savings accounts will decline with the fall in the policy interest rate.

Once its projected revenue from the incremental tax fails to materialise, the government may start borrowing from banks on a large scale, as it did in FY24, which would mean bigger risk-free profits from government debt.

The FBR is short of its target by Rs180bn during the first four months of the current fiscal year. However, independent economists claim the revenue shortfall is more than Rs400bn.

Published in Dawn, November 22th, 2024