Plugging the ADR loop-hole

Banks in Pakistan get a lot of bad rep for their lack of innovation, but honestly, the criticism is entirely baseless. You just need to look at the last few months of 2024 and how the industry came up with new ways to window-dress its advances-to-deposits (ADR) in a bid to avoid additional taxes from the government. As of August, the ratio stood at a historic low of 38.4 per cent, translating into an almost Rs4 trillion gap in loans to be plugged in four months. But you know, where there’s a will, there’s a way.

To pump the ADR, the boys of Chundrigarh turned to, well, other boys of Chundrigarh with smaller window offices and gave them more money than they had ever set their eyes on. By November-end 2024, the outstanding loans to non-banking finance companies had reached Rs1.46tr, almost six times compared to where it was in June, according to analysis by Data Darbar. However, some funds also found their way to private sector businesses, which reached Rs8.9tr in November 2024 — Rs1.6tr higher compared to August’s trough.

Unsurprisingly, the big businesses were the biggest beneficiaries of fresh loans. In the non-small and medium enterprise (SME) category, lending was heavily concentrated in manufacturing at Rs1.1tr — making up almost 71pc of private sector businesses’ gross disbursements during the three months ending in November. But that was obviously expected since it happens to be the most financially included sector in the country, even if that may mean very little.

Attempts to encourage SME lending backfires as banks’ advances-to-deposits surge benefitted larger businesses the most

True to form, textiles came out as the biggest net borrower with incremental advances of Rs0.4tr during the period, which was up 23pc over the August level. Once again, it is hardly a surprise as the sector dominates all credit activity by the banks, especially the cheap, subsidised loans. Another Rs45.8 billion went to wearing apparel companies.

In relative terms, the pharmaceutical sector hit the jackpot as outstanding loans to the sector jumped 208.6pc, or Rs0.21tr, to reach Rs0.32tr by November, compared to August-end levels. Put another way, there happened to be more demand for credit in three months than there ever was, in the sector’s long history. Not at all unusual, right?

Food producers also got Rs0.15tr, with rice processing units securing almost Rs61.0bn and manufacturers of bakery items Rs76.9bn, with net loans up 126.3pc compared to August end. Meanwhile, chemical makers got Rs64.9bn and non-metallic mineral products (like cement) Rs99.3bn, as per Data Darbar’s analysis.

What happened in the services sector was more interesting, probably because it’s not really the sector you think of whenever bank financing is mentioned. Here, wholesale and retail trade received net financing of Rs56.1bn and hotel and accommodation Rs39.5bn during the period, with the latter up 180.8pc over August. Information & communication was also a prominent borrower, where the presence of large, credit-worthy players on mobile and the internet likely made things easier.

However, the biggest surprise was education, with net loans of Rs0.149tr. For context, the industry’s outstanding borrowings now mirror the likes of rice processors, manufacturers of coke and refined petroleum products, and construction. Meanwhile, agri wasn’t lucky and only managed to obtain just Rs39.8bn, representing an increase of 11.6pc over the end of August value compared to the overall private sector lending increase of 22.5pc.

When it rains, it pours — with a few drops even sprayed on small and medium enterprises. By November, loans to SMEs reached a record Rs0.62tr — up 12.1pc, or Rs67.3bn, compared to the August-end level. However, this growth was 10 percentage points lower than non-SMEs. The list of major beneficiaries was pretty similar, with manufacturing receiving 61.7pc, or Rs 41.5bn, of the total financing while agri actually saw net retirements.

Relative to overall fresh loans, SMEs only got just over 4pc, lower than their share of 7pc in outstanding financing. However, beneath the big numbers, you see glimpses of hope, albeit marred by window dressing. In terms of absolute values, small grain mill producers received Rs21.3bn, or almost 26pc of the marginal loans to the sector during the period. Small wholesale and retail players got Rs17.2bn, just under a quarter of the sector’s total new financing. In third place were textile SMEs at Rs12.7bn, though their sectoral share was a dismal 3pc.

In the end, all the acrobatics didn’t really matter as the government finally agreed to remove the ADR tax, though the victory was bittersweet as the industry now faces a higher flat rate of 44pc on profits. But these are just unimportant details; the biggest takeaway from the entire episode is that our bankers apparently have the ability to move fast. Remember that when you go to a branch to get something done, curse yourself for visiting in the first place.

Mutaher Khan is the co-founder and Muhammad Hamza is an analyst at Data Darbar

Published in Dawn, The Business and Finance Weekly, January 6th, 2025