Credit takeoff slow in Pakistan private sector

Pakistani bank deposits are rising but credit takeoff for the private sector and spreads are down. The banks plan to raise credit volume to the private sector in the short term. But there are two challenges.
One, the growing budget deficits has forced the government to continue to borrow heavily from commercial banks, which leaves much less credit for the private sector. At the same time, bankers are happy to lend to the government as it carries a sovereign guarantee and the lending rate is quite high.
Two, the volume of non-performing loans (NPLs), which were once coming under control, has started rising again.
Despite the profit rates paid to savers dipping to five per cent, one of the indicators of banks' financial health is that deposits are rising. This is in line with the declining benchmark discount rate (DR), which is down 3.5 per cent since November last year to 6.5 per cent. Under the present monetary policy of the State Bank of Pakistan (SBP), the current DR is 6.5 per cent and policy rate is six per cent.
The banking spread or the difference between the lending rate charged to borrowers and the profit paid to depositors is marginally down.
"During the first 10 months - January to October of the calendar year 2015 - it averaged 5.62 per cent. It was down 38 basis points from the same period in CY-2014 when the average was six per cent," said Rohit Kumar, an analyst with Taurus Securities.
"The weighted average banking spread stood at an 11-year-low in October 2015 at 5.33 per cent, down five basis points from September, according to the SBP report," he said.
The declining profits are attributable to several reasons. These include the SBP's continuing trend in easing monetary policy and the benchmark discount rate. It reduced the interest rate by 350 basis points and adjustment in the interest rate corridor to cut banking sector spreads. The banking sector view is that these spreads and the monetary policy may have bottomed out by now.
"In addition, monetary policy tightening can be expected from the latter half of the calendar year 2016, which will likely lead to some improvement in spreads," Kumar said.
The present easy monetary policy, introduced more than three years ago, is seen as having failed to push bank credit takeoff by private businesses and industries. Credit received by the private sector rose to only Rs19 billion, taking the total outstanding credit to Rs3.3 trillion. The key reason for this low credit takeoff was that banks felt a squeeze in liquidity as the government continued to borrow heavily.
Extensive power outages, leading to reduced industrial production, was another reason. The output was also slow because exports stagnated for last three years to around $24 billion annually as consumer demand was down in foreign markets, including US and the European Union for Pakistani products.
The Federation of Pakistan Chambers of Commerce and Industry has been demanding that the government should help it reduce the cost of doing business, but Islamabad has failed to do so. Pakistani products are facing tougher competition from China, India and Bangladesh. The competition hit key Pakistani export products such as textiles, clothing, fashion wear and textile home products.
Key constraints
"The major drag for credit and the economy has been the industry. Dampened domestic and international demand and falling output prices have been some of the key constraints for major industries such as textiles. Power sector has remained under pressure due to lower utilisation of capacity amid build-up of trade debt," said Tariq Saud, chairman of All Pakistan Textile Mills Association.
Bank lending to the private sector in the first four months - July to October of fiscal 2016 - declined by 63.23 per cent despite the SBP's efforts to raise this volume. The offtake declined to Rs21.46 billion in this period, compared to Rs58.37 billion in the same period of last year, according to the SBP.
Commercial banks, on the other hand, continue to prefer lending to the government.
Bilal Khan, economist with Standard Chartered Bank, said: "I think the whole discussion on private sector credit is focused exclusively on its nominal growth - and ignores that over the past year, prices of a wide range of commodities have declined significantly."
The NPLs of banks rose to Rs645.19 billion in September 2015 from Rs629.866 billion in December 2014. "Bankers say although the rise in NPLs is small, but after starting an optimistic trend in calendar year 2014, the rise in NPLs is creating new challenges."
The SBP recently issued a report which indicated the historic record of various sections of the commercial banking for the last 15 years. It showed bank deposits rose seven-fold from Rs1.1276 trillion in June 2001 to Rs7.876 trillion in June 2015. It happened alongside the growth in money supply. At the same time, the SBP said: "The central bank encouraged deposit mobilisation which helped the growth in deposits."
Views expressed by the author are his own and do not reflect the newspaper's policy.