Honeymoon Between Banks and Govt will Soon be Over

By M Yasir · Wednesday, May 9, 2012 7 Comments

The honeymoon between Pakistani banks and govt  is likely to be end after government decided to slap a 15 percent incremental tax on banks’ returns of T-Bills in the upcoming budget. 

It is a heart-broken news for the bankers heavily invested in government papers for their handsome and soft-earned easy profits having poured their depositors’ money and continued to show thumbs down towards private sector for lending loans.

But what is going to be happened actually with banks? The government attracted banks against handsome returns on Treasury Bills and heavily borrowed money from them to meet their budgetary expenses.

On the other hands, bankers are quite happy with the government’s T-Bills auction (read action) series so the government also, after all, commercial banks are their only partners who could support it at times when central bank is stick to its rude attitude for maintaining inflation and discount rates.

T-Bills Auctions have become fashion in the banking industry particularly in the present political setup but the government seems to stab at the back of banking industry with a new budget.

In July 2011 to April 26, the government borrowed Rs 602,788 billion from commercial banks. It also planned to auction more T-Bills to generate extra revenue for upcoming “peoples’ friendly political” budget. But will the bank participate in the auctions and buy government papers to support it after such taxes? A difficult situation might be emerging for both.

Impact on Banks

Banks having larger contribution from T-bills earnings to their Gross Interest Income (GII) are expected to be affected significantly that are ranked in Mid-tier and Lower-tier as their earnings would see a decline by 9.1% and 9.8%, respectively, Khurram Schehzad, Head of Research,  InvestCap Research said.

However, it is expected that any extra tax on T-bills’ returns would yield a marginal Rs 8.7 billion for the government or total Rs16.8 billion along with a potential 5 percent incremental corporate tax if imposed on banks’ earnings in addition to 15 percent incremental tax on T-bills, while such inadequate measures would only hurt further the already depressed investment climate in the country.

The actual impact that the banks on their earnings may see an average attrition of 7 percent, while ex-SLR investments and returns on T-bills and overall banks’ earnings only get affected by a marginal 3 percent on average.

In a series of actions taken by the central bank chained with threats looming in the form of higher taxation to hammer banks into their core banking business ranged from raising bar on minimum deposit rates twice, allowing individuals to invest directly into government papers (through an IPS account). And now the government  intimidating banks
through imposition of incremental taxes either on banks’ subsidiaries operating as mutual funds (to prevent tax arbitrage) or face higher corporate tax or incremental tax on T-bills returns.

For bankers dealing T-Bills auctions at various banks may get infuriated with the new development and they may start calling names to President Asif Ali Zardari and Pakistan Peoples Party (PPP), don’t lose hopes the decision has not been taken yet but the Pandora’s Box could be opened with such take measures, which has been believed to have designed by Finance Minister Hafeez Shaikh.

Please wait and see, what is next?

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