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Uptick in Pak economy lifts bank credit to private sector

Recent months have seen that the commercial bank lending to the private sector has gone up 10 per cent supported by lowest interest rates and an uptick in Pakistan's economy.
The overall credit lending to the private business, went up 54 per cent during 10 months (July-February in FY-17), State Bank of Pakistan (SBP) reported this week.
While the business is good, the 5-Big Banks - National Bank, United Bank, Habib Bank, MCB Bank and Allied Bank - saw their profits down by 4 per cent on the back of the continued low interest rate and "easy money policy" which has reduced the banks' interest income. The interest rates are down to a record low of 5.75 per cent in 43 years. The Big-5 have the capitalisation of 70 per cent of the listed banks' market.
An analysis of the financial operations of the banks indicate that National Bank with 4 per cent positive earnings growth and MCB Bank with 2 per cent were better than the other three during the quarter. United Bank's earnings stayed flat at the old level of the last fiscal. Allied Bank's profit was down 7 per cent and Habib Bank's was down 5 per cent.
"Earnings of these banks were largely hit by shrinking core margins, low interest rates and high operating expenses," says Chandar Kumar of Sherman Securities.
The overall provisioning and big capital gains came up with some help to the banks which were under strain.
At the end of Q1of FY-17 on March 31, the Big-5 reported their cumulated profits which were down 4 per cent totalled Rs29.3 billion down from Rs30.6 billion in the like period of FY-16. "Lower interest earnings and higher operating expenses were the key causes of the decline in profits. But help for the banks at the same time, originated from higher fee income, capital gains and lower interest rates paid to the depositors," Fawad Basir, analyst at Arif Habib Ltd, says.
However, some big business is on the way for the bankers in the government sector in the coming days. The government has set a borrowing target of Rs2.85 trillion. The borrowing will be chiefly in the form of T-bills totalling Rs2.65 trillion. In addition, it will borrow Rs200 billion through Pakistan Investment Bonds (PIBs).
The government and the central bank had years ago deliberately decided to reduce interest rates from a record 16-17 per cent to 5.75 per cent in order to help revive the industry, business and trade. The government's reason was to keep the inflation rate low to help the people. The other reason was to make Pakistani exports competitive in the international market. The inflationary pressure have been softened but it still goes on at around 4.8 per cent. But the exports continue to stagnate at $20.5 per cent annually, down from $25 billion five years ago.
"International competition is growing and lower energy supplies to the industry has reduced the industrial output, high taxation and higher cost of doing business are the key causes of lower exports," according to Federation of Pakistan Chambers of Commerce and Industry (FPCC&I).  
But what is more heartening is the fact that bank credit to the private sector went up 54 per cent and reached a high level of Rs457.7 billion in the first 10 months to March 31 in FY-17. At the same time the economy is looking up. Rising imports are putting a pressure on the current account deficit but they included a large quantity of machinery, capital goods and industrial raw materials. These larger imports will increase the production of industrial goods which are likely to be exported.
The SBP said this week that "lending to businesses and households increased to Rs457.7 billion between Ju1y 1, 2016 and April 21, 2017, compared to Rs296.8 billion in the like period of FY-16."
It also said: "The data showed that lending conditions in the country have been improving, providing one of the biggest stimulus to a more convincing upward economic trajectory. The projections are that higher development spending and investment in China-Pakistan Economic Corridor (CPEC) related projects, increased appetite for bank financing in construction and transport sectors will mean more business.
The SBP is also of the view that the banks, as of now, have adequate resources to meet the growing funding requirements of the private sector due to the increase in deposits. It means that with an increased number of transactions, the banks will earn more and their profits will rise further.
 
The writer is based in Islamabad. Views expressed are his own and do not reflect the newspaper's policy.
 

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