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Private sector demand for credit picking up after growing economy, CPEC activities

Investing in risk-free treasury bills will be lessened. Banks should now explore other sectors. Credit to private sector is vital for economic growth. Stern regulatory regime has assisted Pakistan’s banking industry to live in adverse conditions despite domestic and international challenges. Banks would be forced to look out for other investment avenues also, besides traditional reliance on the government securities, treasury bills etc.

In the current condition of depressed inflation, the discount rate has also reached a historical low, which has affected the profitability of the banks.

Last 8 to 9 years ago banking was very easy as banks used to take deposits and invest in treasury papers and earn without taking any risk. The current balance sheets of big banks, shows that they have invested 65 to 70 percent of their funds in treasury bills and other government securities, leaving less funds for private sector.

Currently almost all banks are climbing into consumer banking trade and are giving loans. So far oil prices and State Bank of Pakistan (SBP) policies have helped them to do so smoothly. Now Banks will be forced to extend loans to small and medium enterprises (SMEs) and individual consumers. In this way the whole economy will benefit.

Greater opportunities are opening up for banks. Private sector demand for credit is picking up due to growing economy and the China-Pakistan Economic Corridor (CPEC) related activities. Top bankers with knowledge of the CPEC related projects say their banks have started positioning themselves to exploit the additional private sector demand.

Construction sector activity is not just rising due to the higher demand from those conventional builders that are engaged in housing and commercial projects. Activity in this sector is also growing in anticipation of the start of work on physical infrastructure projects associated with the CPEC. Some of these projects, including several related to Gwadar, are in an approach stage.

The construction sector’s conventional demand has gradually picked up in the last two years and so has bank credit flow.

Banks’ lending to the construction sector rose from a negative Rs1 billion to Rs13.7 billion in fiscal year 2015 and then shot up to Rs31.5 billion in fiscal year 2016. The activity in physical infrastructure construction has risen in the private sector is that despite a net decline seen in July-October in construction loans, financing of infrastructure rather raised by more than Rs1.2 billion.

In fiscal year 2015, about 88 percent of its total external borrowing from banks. The opening and closing balance of the stock of corporate loans remained almost unchanged due to a bit faster credit retirement.

The very fact that the corporate sector met 88 percent of its external borrowing requirement from banks is healthy.

On net basis, bank loans rose from Rs224 billion to the private sector in fiscal year 2015 to Rs460.6 billion in fiscal year 2016.

Bankers now generally talk about the high credit demand being not only intact but growing rapidly in some areas.

Since July-November is usually credit retirement period in the country, the total volume of private sector lending is still negative on net basis.

The SBP data showed that between July 1 and November 18, banks rather witnessed net private sector credit retirement of Rs7.6 billion. Private sector lending of banks has been on the rise in almost all those areas where increased business activity is taking place.

In the retail trade, for example, banks made fresh loans of a about Rs13 billion in fiscal year 2016. In first four months of this fiscal year, this sector consumed another Rs4.5 billion in bank loans.

Despite a rise in demand, conventional banks as well as Islamic banking institutions or IBIs (comprising Islamic banks and Islamic banking windows of commercial banks) have not been lending aggressively to the private sector.

For the past few years, the advances to deposit ratio (ADR) of conventional banks and financing to deposit ratio (FDR) of IBIs has remained low. Banks’ ADR was as low as 45.5 percent at end-September 2016.

Conventional banks’ excessive investment in government debt securities and Islamic banks’ high investment in fixed assets of all sorts and Shariah-compliant bonds and funds are the factors responsible for this situation.

Loans to private-sector businesses increased 8.8 percent over the preceding 12-month period, according to the State Bank of Pakistan (SBP).

An increase in loans acquired by private-sector businesses shows they are positive about economic growth. With more money to buy inventory and expand operations, businesses create new jobs and contribute towards GDP growth.

Loans to private sector rise 9.8 percent; amount to Rs3.2 trillion. There is awareness among some people that the growing level of outstanding loans in Pakistan is reflective of a ‘credit bubble’.

Latest statistics on credit distribution in the economy show that outstanding loans to private-sector enterprises amounted to Rs3.27 trillion at the end of April after adding Rs264.7 billion over the preceding 12 months.

In contrast, the net credit of scheduled banks to the government sector shot up 17.5 percent to Rs5.8 trillion over the same period.

Banks’ loans to the government already constitute nearly 47 percent of the total outstanding credit in the economy.

The largest borrower within private-sector businesses is the manufacturing sector whose outstanding loans amounted to almost Rs1.9 trillion, up 9.7 percent from a year ago.

Loans to electricity, gas and water supply businesses in the private sector increased 18.2 percent year on year to clock up at almost Rs337 billion at the end of April.

The year-on-year rise in loans to the construction industry was far greater (51.2 percent) over the same period, although the outstanding amount was smaller in absolute terms (Rs96.4 billion).

Credit to businesses that belong to the commerce and trade sector amounted to Rs242.3 billion, up 1.9 percent from a year ago.

Loans extended under the ‘personal’ category amounted to almost Rs403.3 billion at the end of April after rising 11.7 percent over the preceding 12 months.

Banks have extended almost one-quarter of total loans under the personal category to their own employees.

Credit to bank employees amounted to Rs97.5 billion at the end of April, which was 24.1 percent of total personal loans.

Consumer financing amounted to Rs299.1 billion at the end of April, which was 15.5 percent higher than outstanding consumer financing recorded at the end of the fourth month of 2015.

Within the consumer financing category, the largest year-on-year expansion was recorded in car financing in absolute terms. Car financing clocked up at Rs106.1 billion at the end of April, up 32.6 percent from a year ago.

Home financing amounted to Rs46.4 billion at the end of the last month, up 18.2 percent from April 2015.

Banks’ lending to the private sector has jumped 70 percent since the beginning of this fiscal year. It rose to Rs133 billion from Rs78 billion during the comparable period of last year, according to a latest State Bank report.

The shift in the trend, which came after mid-November, shows availability of cheaper money has finally started to attract back the private sector, which initially did not pay much attention to interest rate cuts.

Since the beginning of fiscal year 2016 to the middle of November, the private sector credit off-take was significantly lower than previous year.

The government was still hopeful that the private sector will finally come out to benefit from the much lower interest rate in the wake of falling inflation.

For more than seven years the government has been struggling to get private-sector support to achieve a better economic growth rate. But the sector has shown little interest and most of the borrowings it made were for the working capital.

A GDP growth of 4.2 percent in fiscal year 2015 was the highest since 2008. It may rise further if the private sector increases its participation like it showed in case of banks borrowing.

The country’s credit-to-GDP has been on the decline for seven years, dropping from 27 percent in 2007-08 to 13 percent in 2014-15.

Economists and analysts accuse the government of using maximum liquidity of banks; the government has found itself unable to resist the easy money.

Banking in the country has witnessed a strange phenomenon as the government has emerged as the single largest borrower for the entire industry.

But at the same time, it protected banks and kept the industry profitable during the global financial crisis that began in 2007-08.

The financial crisis led to closure of thousands of banks across the world, while dozens of giant banks closed their operations in many countries like Pakistan. Local banks, however, remained unhurt. Due to extremely low bank lending to the private sector, domestic investment fell sharply in the last eight years causing large-scale unemployment and poverty.

Banks said the private sector borrowing for fixed investment has increased which suggests expansion and setting up of new ventures in the sector.

Private sector credit off-take surged 89 percent to Rs310.56 billion in the seven months of the current fiscal year as soft interest rate encouraged businesses to seek bank loans.

The State Bank of Pakistan (SBP) data showed that lending of banks to private sector amounted to Rs164.29 billion between July 1 and January 29 of the last fiscal year.

The lending rates cumulatively fell 142 basis points to 9.63 percent from 11.05 percent in 2015.

In December last year, banking spreads shrank nine basis points on month on month basis to 5.19 percent from 5.28 percent a month earlier.

Analysts hoped that the materialization of the China-Pakistan Economic Corridor (CPEC) projects will stimulate demand for bank credits.

Lower oil prices, planned improvements in energy supply, investment related to CPEC, buoyant construction activity and increased credit growth will bode well for the country’s economic growth.

The SBP, in its recently quarterly review, mentioned that the government estimated disbursements of Rs207 billion from China in the current fiscal year.

Power and construction sectors will be the prime recipients. In the past years, the credit to private sector witnessed a declining trend due to substantial government borrowing from the commercial banks.

The private sector credit off-take was Rs371.37 billion in the fiscal year of 2013- 14 and it fell to Rs208.72 billion in the following fiscal year.

The ease in government borrowing from banks also provided room to private sector to take loan for their working capital as well as for expansion in businesses.

The government borrowing from the banks fell 13 percent in July-Jan of the current fiscal year.

As per the central bank’s data, the federal government borrowed Rs751 billion during the first seven months of 2015-16 for budgetary financing as compared to Rs872.36 billion in the corresponding months of the last year.

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