Government Proposes New Tax Policy to Boost Bank Lending: What You Need to Know

government proposes new tax policy to boost bank lending what you need to know

The government is thinking about a new tax plan that might affect banks. They might add 10% to 16% more tax on banks that don’t lend enough to private businesses. This is to encourage banks to give more loans to businesses. It could help businesses, especially when borrowing money becomes cheaper.

The State Bank of Pakistan (SBP) made a big decision. They set the policy rate at a record high of 22%. This caused more businesses and families to not pay back loans in 2023. Because of this, banks had a lot of loans that were not paid back, reaching a 14-year high at Rs62 billion.

Now, if banks lend less than 50% of what they have in deposits, they might have to pay more tax. But banks that lend more than 50% won’t have to pay this extra tax.

Most banks in Pakistan didn’t lend enough in 2023. But some did, like Samba Bank, Faysal Bank, and The Bank of Punjab.

An economist, Sana Tawfik, said banks faced this tax in 2022 but didn’t in 2023. Now, it might come back in 2024. But some banks are not sure and are waiting for the government to explain more in the upcoming budget.

Some banks might try to avoid this tax by not taking in more deposits. This happened in December 2023. Tawfik thinks if banks check their lending more often, they might start giving more real loans to businesses.

But some banks are scared. They think giving more loans might cause more problems, especially with high-interest rates. Amreen Soorani from JS Global said increasing the policy rate to 22% over three years made banks worry about their money and expenses.

In 2023, when banks didn’t have to pay this extra tax, they gave fewer loans. This made their lending ratio lower.

Soorani said different sectors like textiles, individual customers, farming, and energy saw different growth. But farming was doing better than the others.