BANKING SECTOR AND CREDIT CONTRACTION
SHAMSUL GHANI (firstname.lastname@example.org)
Aug 24 - 30, 2009
The recent 100 bps cut in the SBP interest rate has hardly given a sigh of relief to the country's business and industrial circles. A lot more is left to be done to restore the flow of credit to the starved sectors of economy. This becomes readily evident from the following comparative view of global interest rates:
COUNTRY INTEREST RATE Pakistan 13% India 4.75% China 5.31% Hong Kong 0.5% Japan 0.1% Taiwan 1.25% Korea, Republic of 3% Australia 3% New Zealand 2.5% Egypt 9% South Africa 7.5% U.S 0.25% England 0.5% Switzerland 0.25% Canada 0.25% European Central Bank 1%
A great deal of emphasis has been laid, in our latest trade policy, on product competitiveness. We cannot achieve this objective unless cost of doing business is reduced drastically. And in the presence of an abnormally high interest rate, we cannot expect any radical change in the cost pattern. Leave alone the developed economies where interest rate is flirting with the zero zone, our regional competitors (mainly China and India) have interest rates as low as 5%. Japan, Hong Kong, Taiwan, and Korea have still lower interest rates ñ ranging from 0.5 to 3 per cent. In this scenario, the idea of product competitiveness is a sure non-starter.
One can easily suggest that our interest rate should swiftly come down to 7 per cent. But, is it the sure panacea for our economic woes? In the wake of a falling SBP policy rate, Pakistan's banking sector minted huge money by short-changing its customers. Ironically, the ill-gotten profits provided the banking sector dubious strength to stand tall amidst the global financial meltdown. A few bruises here and there were all that this sector got during the global free-for-all. However, why did our industrial sector did not grow with the same pace when cheap credit was being made available at their doorsteps. This is no secret that the business and industrial circles misused cheap and abundant credit. The much-needed hefty cut in the interest rate is to be supported by stringent measures to ensure rightful and productive use of the credit.
In the fast improving bank liquidity scenario - courtesy the $11 billion IMF assistance program and the ever-improving foreign remittance inflow - the contracting credit off-take might appear paradoxical. Yet, the high interest rate and growing size of non-performing loans provide sufficient clue to understand this enigmatic situation. While business and industry are long crying under the burden of high debt servicing, the banks have started to lay stress on asset quality to stem the rot of portfolio infection. The abrupt fall and rise of interest rate have disturbed the equilibrium of saving and investment as well. While investment has slowed down, savings have improved with the increase in NSS rates. However, this narrowing down of gap is not something to sing about until and unless both investment and savings start showing improvement.
To compete with NSS, the banks have had to price their loans at 20 (or about) percent which in turn heavily increases the cost of doing business for the industry. This stifles the already struggling industrial and commercial sectors besides making the economic slowdown almost a certainty. This vicious circle seems to have sucked in the banking sector, the industry, and the economy in one go. However, during the last few months some positives have emerged namely the improvement of bank liquidity, interest rate cuts, sustained foreign remittance flow, somewhat better position on terrorism front and Moody's upgrading of our rating from B3 negative to B3 stable.
The table showing scheduled banks data reveals that the advances to deposits ratio, as against an industry average of 79 per cent, went up to 82.6 per cent during December 2008, and abruptly came down to 76.1 per cent during July, 2009. The reason could be traced to a higher interest rate, bank liquidity crisis, investment slowdown and global economic recession. With the emergence of certain positives described above, the economy can be expected to take to the revival course, albeit any major turnaround is not on the cards.
SCHEDULED BANKS DATA
. Dec-2004 Dec-2005 Dec-2006 Dec-2007 Dec-2008 Jul-2009 Aug-2009 Total Deposits 2,161,098 2,661,697 2,999,895 3,565,537 3,801,411 4,136,735 4,114,222 Total Advances 1,589,870 2,043,982 2,409,478 2,651,173 3,141,028 3,147,848 3,132,655 Total Investment 626,046 730,067 775,546 1,210,920 980,984 1,375,253 1,389,841 Total Assets 3,003,025 3,624,387 3,884,057 4,785,167 5,102,867 - 5,597,849 Advances to Deposit Ratio 73.6% 76.8% 80.3% 74.3% 82.6% 76.1% 76.1% SBP Interest Rate 7.5% 9% 9.5% 10% 15% 14% 13%
What is required is further periodic interest cuts and planned credit expansion targeting the priority economic sectors with measures to ensure its productive use. Banks will have to up the ante on asset quality management.