16pc increase in FED likely to affect banks customer base

KARACHI - The proposed 16 percent increase in Federal Excise Duty (FED) on banking services and fee income announced in federal budget 2009-10, is expected to affect the customer base of the banking industry of Pakistan.
The aforementioned development, on the other hand, is stated to be hampered the already depleting pace of personal loans and consumer financing to a certain level on account of becoming consumer sectors product and services more inflated than earlier.
Banking and financial experts have termed this said raise in FED a new form of value added tax (GST) which would pay soon by the customers on availing bankscustomer services.
According to experts, the federal government has made this announcement with a view to bring Sales Tax and Federal Excise Laws in conformity.
This move may discourage the documentation of money and in turn would affect the banking and insurance transactions in the days ahead, said experts.
The customers will prefer to use cash mode of transactions rather pay orders and other documents in order to save them from paying extra money in the name of using banks documents, experts added.
A banker, when contacted, told that commercial banks branches had not issued any instruction from the head offices for the customers so far.
Banks branches are waiting for the Schedule of Charges, a document usually issued by the banks head offices to respective branches just before staring of the new financial year. This document carries banks instructions related to fee structure and charges of customer services ranging from cash transaction to deposit keeping to be paid by the customers.
It is important to mention that the excise duty on banking and insurance services has been increased to 16 per cent from 10 per cent earlier aiming to increase tax collection from the services sector while Withholding Tax (WHT) on the cash withdrawal of Rs25,000 has kept unchanged.
Increase in FED is a completely pass-on item which will be paid by the consumers and would not cause any decline in the banks' customer base.
In contrast, increase in FED to 16 per cent is a negative development especially in the current economic downturn. Hence it remains to be seen, whether the banks would pass on the impact to end consumers or absorb the differential themselves.
Analysts see no major surprise for banking sector in the announced budget. They say restoration of the facility to claim deduction on account of provisions for NPLs (restricted to 1pc of classified advances) while having no impact on reported earnings and banks bottom-line it will, however, prevent the creation of deferred tax assets by affecting the cash flow of the banks.
It must be recalled that the provisions of the seventh schedule with regards to deduction on account of Non Performing Loans (NPLs) have been restored. However, deduction has now been restricted to 1pc of classified advances.
The government has targeted the agriculture growth at 3.0 per cent for FY10. The government has announced various incentives for this sector, which directly or indirectly are anticipated to facilitate the sector. Thus, it will further increase the banks lending in this area.
Moreover, in order to retire circular debt outstanding, the government intends to clear the remaining debt for which negotiations are underway with ADB and World Bank. Clearance of circular debt would result in retirement of public sector advance. Therefore, in the wake of slowdown in economy and retirement of circular debt, a muted advances growth of 3-4 percent is predicted to achieve in 2009.
Above than that, NPLs will be the prime concern for the sector which will continue to hurt the underlying profits of the banks. Spread of the sector is likely to decline due to possible downward revisions in interest rates while the growth in both net interest income and non interest income is expected to remain stagnant in coming quarters.