Banks trapped in surplus liquidity

Banks find themselves trapped in liquidity surplus these days, forcing them to start lending at throwaway rates as low as three per cent per annum to avoid paying tax on Advance-to-Deposit Ratio (ADR) applicable at the end of calendar year 2024. Banking has completely changed in Pakistan as both the government and the banks are flush with liquidity. For years the government has been the largest borrower from banks, but it stopped borrowing recently and rejected all bids for short-term treasury bills. At the same time, the government repurchased (buyback) Rs351 billion from the market at 16 per cent to save Rs11.5bn and reduce the burden on repayment of about Rs4 trillion maturity expected by December this year. Bankers explained that due to little borrowing from the government, the banks are surplus with cash and are willing to use the money as loans. If the banks fail to meet the minimum requirement of ADR no less than 50 per cent, the government would impose a 15 per cent incremental tax on banks.