Jan 28 - Feb 03, 2008

Monetary tightening policies being pursued by the State Bank of Pakistan coupled with a slow down in the industrial sector has resulted in sharp decline in the credit off take to the private sector from the scheduled banks in the current financial year. On the contrary government borrowing from banks has increased significantly. Banks liquidity is thus fully utilized.

During the first six months (July - Dec) banks provided Rs 134 billion credit to the private sector against Rs 148 billion credit provided in the corresponding period last year. As against the government borrowing rose to Rs 241 billion from Rs 163 billion in the corresponding six months last year.

The SBP latest profile of monetary assets indicates that during FY07, loans to private sector amounted to Rs 365.71 billion against 408.40 billion during the preceding financial year. SBP Government Dr. Shamshad Akhtar has said that disbursement of credit to the private sector has gained momentum significantly in October-November, 2007 and is likely to pick up further in the second-half of the current fiscal year 2007-08.

During FY07, the credit growth supported effectively the growth in real economic activity. It is expected that private sector credit disbursement this year will continue to support economic growth as SBP has continued to efficiently managed liquidity. Private sector credit is expected to pick up in second half of FY08 as investors launch the pending projects and various IPP (Independent Power Producers) projects are also in pipeline involving investment of around Rs 100-120billion. The business circles, however, do not share this optimism.

Impact of Private Sector: It has been agreed by SBP, bankers and private sector manufactures and industrialists that the private sector credit has impacted, among others by banks adopting cautious lending stance given the experience with loan defaults in some sector; and mergers and acquisitions have required banks to focus on restructuring, while adjusting their portfolios and rationalizing their branch network. However, banks after their restructuring and upgradation of their credit policies and risk of their credit policies and risk management systems are expected to be positioned better for credit delivery in the coming year.

SBP is further trying to resolve issues in the growth of credit in respective areas such as agricultural finance, SMEs finance, consumer finance, and infrastructure & housing finance, microfinance and Islamic banking finance.

Business community, however, do not subscribe to this view. They do not see any possibility of any significant increase in the demand for credit from industrial sector ìwe are keeping the bank credit to base minimum because of the rising interestî a representative Islamabad Chamber of Commerce told PAGE. Business leaders say the appetite for private sector credit is low primarily because the textile sectorís borrowing from banks has fallen sharply. They claim that many yarn processing mills have closed down and even those operating are working below capacity as this sector fights for survival amidst growing international competition and rising input cost. Senior bankers say this happened as banks tightened credit disbursement after bad loans ballooned during January-June 2007.

Non Performing Loans: NPLs of all commercial and specialized banks rose to Rs 187.3 billion at end-June 2007 from Rs 173 billion at end-December 2006, showing an increase of Rs 14.3 billion.

Financial observers point out that in the first quarter of FY08 banks did not bother much about lending to the private sector because the government borrowing from banks was at its peak. In Q1 FY08 the government borrowed Rs 88 billion from banks to fill in the gap between budgetary income and expenses.

On the one hand, heavy government borrowing from banks has led to a situation where banks are not much concerned about a negative growth in private sector credit. But on the other hand, the government policy to borrow from banks and not from the central banks has helped keeping core inflation in check. Small wonder than that in July-August 2007 CPI inflation accelerated 6.4 per cent against 8.3 per cent in July-August 2007. The government has agreed to keep its borrowing from the central bank at bare minimum from this fiscal year to help the State Bank in its fight against inflation.

The government has increased the produce index value-a tool that determines the borrowing requirement of farmers-from Rs 400 to Rs 1200,î says Syed Qamar-uz-Zaman Shah, president of Sindh Chamber of Agriculture. This means a farmer can now borrow up to three times his previous borrowing limit. This would boost banksí agricultural lending.

In the first two months of this fiscal year, agricultural lending increased 18 percent to Rs 25.8 billion and bankers say it would increase faster once the notification about calamity-affected areas is issued.

After heavy monsoon rains and flooding earlier this year, the government had eased the terms for farm loans recovery-and even waived parts of outstanding loans in certain parts of the countryside. But bankers say they have not received notification of this and insist on recovering previous loans before making new ones.

The FY08 growth target for agricultural sector is 4.8 per cent. But lower-than-expected cotton production, concern about rice output and increase in the prices of agricultural inputs including fertilizer might prices of agricultural inputs including fertilizer might let the target slip by. Agriculturists, however, believe that agricultural lending this fiscal year would reach the targeted level of Rs 200 billion-not only because of an increase in PIU but also because over the past two year Zarai Taraqiati Bank has improved its financials and commercial banks have learnt the art of farm lending. In the last fiscal year banks lending to agricultural sector rose to Rs 168 billion against the target of Rs 160 billion.

More importantly, as National Insurance Corporation has just facilitated crop and crop loans insurance by banks, agriculturists think this would go a long way in boosting agricultural credit. But they point out that there is very little awareness about this among farmers.

But, on the other hands the present trend of government increased borrowing from banks, is thwarting State Bank efforts to control inflation through tightening monetary policies

DISCOUNT RATE ADJUSTMENTS: The most important function of a central bank is to ensure price stability which it seeks through regulating money and credit in the economy. While it could influence the level of private credit through a variety of instruments at its disposal like the adjustment in discount rate and cash reserve requirements, the flow of credit to the government sector is some times harder to control because of fiscal imperatives of the country and the fact that the government is in a better position to dictate its terms to the monetary authority. These tow important variables, it may be noted, are principal determinants of the level of money supply/liquidity in the economy which has a pervasive impact on the rate of inflation in the country. The difficulty of containing inflation within reasonable limits in Pakistan in the recent past can better be understood against this background/phenomenon. Monetary expansion amounted to 18.64 percent in FY03, 19.58 percent in FY04, 19.12 percent in FY05, 15.07 percent in FY06 and 19.321 percent in FY07, which was generally higher than the nominal growth in GDP or the target fixed by the State Bank at the beginning of the year. One of the major factors causing excessive growth in liquidity was budgetary support provided by the banking system which was not amenable to normal credit control management of the State Bank. During FY07for example, budgetary support of over Rs. 102 billion contributed to about 15 percent of the total increase of Rs 658.2 billion in money supply. Lately, the State Bankís ability to control inflation has been further undermined by increasing reliance of the government to finance its budget deficit from the State Bank. As is well known, financing of fiscal deficit from the central bank is more inflationary than that from the scheduled banks, because while the former is a source of reserve money growth, government borrowings from the scheduled banks reduces their ability to extend credit to the private sector. Government borrowings from other domestic sources are least inflationary and, therefore, usually a preferable mode of financing the budget deficit.