Commercial Banks - Budget impat

Commercial Banks – Budget


Tax on cash withdrawals

The previous 0.2% With Holding Tax (WHT) on cash withdrawals of PKR25,000 or more has been raised to 0.3%.


Agri-Credit

Budget FY09 has focussed on the agriculture sector especially in light of spiralling food prices & supply shortages. Accordingly, agri-credit target has been set at PKR160bn for FY09. In addition, the government is also revamping ZTBL in an attempt to broaden its outreach.


NSS rates & Govt. Commercial Paper

Given the huge fiscal deficit and domestic revenue constraints, the government has announced a raise in the return on National Saving Schemes (NSS) by 200bps. Further, the Central Directorate of National Savings has also been directed to launch 3-, 6- and 12- month papers --- Government Commercial Papers ---, rates of which would be market competitive. The rates on NSS schemes would now be revised quarterly instead of biannually so as to minimise the gap between NSS and market rates.


Accumulated loss in case of amalgamating companies

To encourage amalgamation of banking companies, modarabas and insurance companies the facility of carry forward of “accumulated loss” is proposed to be allowed for a period of six years in the case of amalgamated or amalgamating companies.


CVT on Power of Attorney

In the case of bank no CVT is proposed to be charged on General Power of Attorney unless it is used into force the mortgage of property offered as collateral against a loan.


Imposition of tax on profit transfer

Profit transferred by a branch of foreign company out of Pakistan are proposed to be treated as dividend and chargeable to tax @ 10% as final tax.


Thin capitalization

Thin capitalization rule is proposed to be made applicable to branches of foreign companies operating in Pakistan.


Elimination of provisions of 7th Schedule

The provisions of 7th Schedule allowing deduction on account of non-performing loans as per prudential regulation issued by the SBP are proposed to be deleted. From the next financial year such deductions would be allowed under sections 29 and 29A of the Income Tax Ordinance, 2001.


Rate of FED raise on franchise

In order to meet the revenue requirements, FED rate has been enhanced from 5% to 10% on banking, insurance and franchise services.



Microfinance

The government will strive to increase the outreach of microfinance services to 3 million borrowers by 2010 including increase in rural microfinance.
Bank
FEDERAL BUDGET 2008-09

Impact – Neutral

• We believe tax on cash withdrawal is unlikely to have any significant effect since banks will transfer the relevant costs on to their customers.

• In addition, the decision to increase agri-credit and SMEs’ financing will help boost banks’ advances since both – agricultural sector and SMEs – are the untapped segments of the economy.

• Further, the current upward revision in NSS rates and the launch of new short-term savings schemes could expedite a shift of deposits from low cost current and saving accounts to these papers. However, what one needs to appreciate is the fact that banks in Pakistan are used for transactional and safety purposes. They also offer a high level of flexibility and service quality. Further, there is a segment of depositors who avoid interest due to religious reasons. A quick analysis of the depositors’ profile indicates that banks drive most of their large deposits from corporate depositors who in most cases fetch market returns and will therefore remain unaffected by the current surge in NSS rates. Accordingly, we feel that the net impact of a raise in NSS rates on banks would be mutted.

• The facility of carryforward of accumulated loss should help encourage amalgamation in the banking sector.

• U/S 29A of Income Tax Ordinance, 2001 3% of total income for consumer loans may be deducted against the said income to banking companies for creation of a reserve for the purpose of setting off any future bad debts pertaining to consumer banking loans. However if the bad debts arising on consumer loans actually written off exceeds the said reserves, it will not be adjustable against any other income of the bank but shall be carried forward for adjsutemnst against such reserves for the next year. The decision to allow deductions on account of NPLs under the above clause implies classification of debts as doubtful for tax purposes. This shall bode negatively for banks in future.

• The decision to increase the outreach of micro-finance is bound to augur positively for NBP in particular.