“Real power comes not from the barrel of a gun, but from those who control the narrative. Building narratives and sustaining them is part of the effort to control storylines, which in turn help control the world. Narratives are not the truth, rather they nudge you to understand the truth in a particular way. They are never neutral or innocent, they are always strategic.” – Vikram Sood
The Banking Sector’s Advances-to-Deposit Ratio (ADR) continued to rise, reaching 47% in mid-November, up from 39% in late September. In the first two weeks of November, gross advances increased by 4%, while deposits declined by Rs 47 billion compared to the end of October. Ergo distorting the overall financial milieu astronomically.
This shift has brought attention to the critique of ADR taxation, which imposes an additional tax of up to 16% on income from government securities for banks with an ADR below 50%. Critics generally focus on two main concerns, inter alia:
- Regulatory Mashup: Critics argue that this tax creates a regulatory mishmash between the State Bank of Pakistan (SBP) and the Federal Board of Revenue (FBR). Banks are regulated by the SBP under the Banking Companies Ordinance (1962) and the SBP Act, and so FBR’s involvement is seen as transgressing into the SBP's domain. Moreover, critics contend that FBR is taxing based on balance sheets rather than income.
- Impact on Banks’ Liquidity: Banks must offer Minimum Deposit Rates (MDR) at 1.5% below the policy rate, which causes financial strain when banks need to repay depositors. Fortunately, SBP recently reversed this requirement.
While these are genuine concerns, let’s assume SBP, instead of FBR, were to impose such a requirement. Would this not encourage banks to resort to window dressing? Would undoing this regulatory tangle not distort monetary policy? Banks are currently offering loans at a 3-5% discount to the KIBOR to NBFIs, private companies, and others. This arbitrage results in high demand for T-bills, as investors seek risk-free returns, which in turn causes a fall in T-bill yields below the policy rate, rendering monetary policy infructuous. The answer to this may already be known.
Though Banks flaunts to be the savior of governmental machinery from incessant fiscal deficits. Rather another purview can be: Banks and the government have a symbiotic relationship. Banks and the government both profit: banks earn returns on investment, while the government uses the funds for rent-seeking and consolidating power structures, exacerbating the plight of the masses. This happens while extractive revenue mobilisation benefits elites by deploying indirect taxes, whose burden disproportionately falls on the poor. Sectors like retail and agriculture remain under-exploited.
Banks play an indispensable role in society, one that extends far beyond their immediate function of providing financial services. They are the lifeblood of the economy, enabling the flow of money, credit, and investments. In times of economic uncertainty or crisis, banks are often seen as stabilisers, offering liquidity and maintaining market confidence. But beyond their economic role, banks have a profound impact on social and political structures.
Rather than taxing based on ADR, FBR may consider imposing higher tax rates on institutions better able to absorb such a burden, ensuring that financial benefits are distributed more equitably
In a functioning democracy, the financial system — and banks, in particular — act as a check on power. They allocate resources, influence economic growth, and shape the distribution of wealth. In this sense, the role of banks goes beyond serving their shareholders. They must also consider their societal responsibility, ensuring that credit is made available to all sectors of the economy, especially those that are under-served, such as small businesses, farmers, and low-income individuals.
Moreover, banks are pivotal in the process of financial inclusion. By providing loans, savings products, and access to digital financial services, they empower individuals and businesses to participate in the formal economy. They help reduce income inequality by enabling the poor to invest in education, health, and entrepreneurship. However, when banks focus only on serving the wealthy and well-connected, they perpetuate inequality, allowing the elite to consolidate their power and influence.
Unfortunately, here banks often prioritise their own interests over the broader needs of society. Their focus is frequently on maximising profits, serving only the wealthy and well-connected, and minimising risks, rather than addressing the needs of underserved populations or contributing to long-term economic stability.
Given all this, rather than taxing based on ADR, FBR may consider imposing higher tax rates on institutions better able to absorb such a burden, ensuring that financial benefits are distributed more equitably. Simultaneously, the SBP must ensure that lending is directed toward critical sectors, such as agriculture and small businesses, without distorting the broader financial market.
For the banking sector and government to effectively foster inclusive growth, they must work together to ensure that financial benefits are more widely shared, especially among underserved populations. This requires a shift away from short-term profit maximisation toward sustainable, inclusive growth models. Policies should prioritise fairness and ensure that both the rich and poor can prosper together.
Ultimately, it is crucial to critique the pathological morality in both the public and private sectors. This critique will help move toward a more equitable financial system and foster long-term prosperity for all, rather than consolidating wealth and power in the hands of a few.