CREDITS AND THE ECONOMY
FOZIA AROOJ (Fozia.Arooj@Hotmail.Com)
Oct 26 - Nov 01, 2009
Pakistan is entering a challenging phase of growth where economic situation is awfully uncertain and grim. We are in fact lagging far behind other countries in Asia which undergo the same circumstances and hindrances that Pakistan does. Multi headed monster of terrorism has also grabbed the whole system in its deadly tentacles and paralyzed the economic and social activity. No sector of the trade, commerce, and industry is immune from these ruthless conditions.
Banking system is no less vulnerable and it is in the clutches of high rate of non-performing loans thereby leading to controlled credit circulation in all portfolios from corporate credit to agriculture credit to consumer finance.
According to un-audited balance sheet of the banks, profits fell 31% between January and June 2009 as non-performing loans swelled from Rs313 billion to Rs398 billion, depicting an increase of 27%.
The State Bank of Pakistan slashed interest rates by 100 basis points in August 2009 to gear up the economic activity but business circles were not satisfied with this nominal cut in discount rate. As a matter of fact, there has been a negative credit growth during 2008 which resulted in a very low economic growth of 2%. SBP is now encouraging banks to enhance lending to private sector to provide necessary stimulus to the economy. The core issue has been the high interest rate, which made the business costliest in the region. Banks were also willing to see a big cut, as they were unable to increase credit to the private sector.
The demand has been low while the risk remains high because of mounting NPLs. Overall private sector credit (PSC) after recording a growth of 16.5% during FY08 registered an increase of only 0.7% during FY09, mainly due to slowdown in economic activity, coupled with the global recession and rising non-performing loans, etc.
On cumulative basis, credit for export finance has registered a disbursement of Rs15.4 billion as compared to Rs19 billion last year. Credit is the lifeblood of every business and dearth of liquidity has led to closing down of small as well as large units thereby causing damage to a wide cross section of the society.
A good deal of work force from textile as well as manufacturing sector became jobless in the aftermath of this crisis. Industrialists are of the view that the interest rate should be cut down to below 10 percent, since one percent reduction could not spur any positive change in the economy. High rates not only increase the cost of doing business but also affect the competitiveness of industrial producers on industrial scale and global markets.
All the sectors of the industry have been hit hard by exorbitantly high credit cost. Manufacturing, mainly in the textile sector has declined, with a related drop in exports.
The textile industry of Pakistan is almost exclusively export-oriented unlike those of regional competitors that export an exportable surplus. It has the inherent capacity to bring about meaningful improvement to the economy. In order to compete in the international textile market, where the competition is cutthroat and operating margins minimal, the textile industry has to remain internationally competitive.
The repercussions of a setback to the manufacturing sector particularly the textile have been varied and diverse. At stake are more than 3 million direct jobs and 15 million family members are subject to suffering. Further, the ramifications of the regressive affects of non-availability of loans and high financial cost that has impeded the progress of the textile industry extend to the agricultural sector as a result of the highly compromised capacity of the principal cotton purchaser that the textile industry is, to lift and utilize cotton, the principal cash crop. The high financial cost to the textile industry has therefore brought insidious results to the whole economy with negative effects on employment, exports, agriculture all of which are intertwined and integrated in the economic mesh of the nation.
Consumer credit has also seen the same fate in car loans, credit cards, mortgages, as well as personal finances. Unlike other categories of consumer loans, mortgage or housing loans did not show a decline last year and their overall stock rose modestly from Rs63.6 billion in 2007 to Rs64.6 billion in 2008. But, in the first half of 2009 the loans fell 5% to Rs61.2 billion. Aggressive disbursements of consumer financing loans has been detrimental to the social system as it gave boost to inflation and instead of gearing up real growth it induced people to spend more than their means.
The business of credit cards has also suffered badly. Overall credit card portfolio slumped 13% to Rs40.5 billion in 2008 and fell another 12% to Rs35.5 billion in June 2009. The squeeze in credit card business has eroded banks' profits by a higher margin than their share in incomes from overall advances because banks charge a very high interest rate from 30% to 32% on them.
Banks need to devise ways and amendments in the rules on non-performing loans to find ways for asking prudent lending to the private sector. They need to speed up recovery of stuck up loans and should also cater to new loan seekers at the same time. Taking a futuristic view, they must also consider a cut in prohibitively high interest rates on consumer loans. This would help them expand their business and contribute to their sustained profitability.
There are signs of improvement as instability on external front has been addressed while inflation sharply fell to 11.2%. However, the challenge is to revive the falling private sector credit and economic activity given the relatively tight liquidity position of the system and increased risk aversion of banks. Higher government borrowing requirements for budgetary support and commodity financing preempted a large share of available resources.
Rising NPLs affected the credit supply while large government borrowing for budgetary support and commodity operations provided banks opportunity to avoid highly risky private sector lending. The revival of private sector credit is critical for facilitating investments in the economy.