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Thursday March 28, 2024

Private sector loans reach all-time high of Rs4.89trln in Feb

By Erum Zaidi
March 23, 2018

KARACHI: Lending to private sector, including loans to consumers and companies, hit an all-time high of Rs4.893 trillion in February, up around 18 percent as compared to the same month a year earlier, the central bank data showed on Thursday, as decades-low interest rate cut the borrowing costs.

The State Bank of Pakistan (SBP) data showed that aggregate private sector loans stood at Rs4.13 trillion.

“Credit to private sector has reached an all-time high of Rs4,893 billion in February 2018, growing at a five-year compound aggregate growth rate of 10.54 percent due to the low interest rate scenario,” Ahsan Arshad, an analyst at Taurus Research said in report. “Manufacturing sector contributed the most in private sector credit uptick, while consumer financing growth also remained upbeat.”

The policy rate was kept at 5.75 percent since May 2016. SBP raised policy rate by 25 basis points to six percent in January this year. The monetary policy had started softening since fiscal year 2015/16. Analysts said a strong growth in industrial output supported by soft interest rates is a primary factor for the acceleration in the private sector credit.

Bank advances to consumers and corporate borrowers were 18.47 percent higher in February 2018 than a year earlier—the fastest growth since June 2006. Loans to the companies stood at Rs1.856 trillion in June 2006.

Analysts, however, said the tight monetary policy that is end of interest rates stimulus would cause slowdown in credit demand growth and rising consumer spending.

Arshad of Taurus said SBP is scheduled to announce its bi-monthly monetary policy later this month “where we anticipate another interest rate hike of 50 basis points, taking policy rate to 6.50 percent”.

“The hike would balance the depreciating rupee, while lessening growing consumer demand,” he added.

The central bank said private sector advances usually follow seasonal moderation in the first quarter of last year. However, weekly data on advances— for the first two months of 2018— suggested a surprise pick-up.

“Therefore, advances to private sector in the first quarter of this year are likely to rise,” the SBP said in its latest quarterly review on the banking sector. “The recent increase in SBP policy rate will take sometimes to influence the demand for advances.”

Given the likely higher cost of production due to rising oil prices and exchange rate depreciation, the central bank said “the working capital needs of the firms may rise, however”.

International Monetary Fund, in its first post program monitoring report, expects credit growth to expand at 16.5 percent in FY18.

SBP’s data showed advances by manufacturing sector increased to Rs2.505 trillion in February from Rs2.122 trillion a year ago.

Large-scale manufacturing sector posted a 6.33 percent growth in July-January FY2018 compared with the corresponding period of the last fiscal year.

Private sector loans to textile sector continued to witness expansion. Banks extended Rs818.582 billion loans to the textile companies in February compared with Rs697.131 billion a year earlier.

The central bank said rising exports to Europe and North America were the main factor behind the higher demand for advances by the textile sector. Moreover, the government has recently announced incentive package for the textile sector, which is likely to further facilitate textile exports. Consumer financing rose to Rs437.3 billion in February 2018 as opposed to Rs361 billion in February 2017. The surge in consumer financing was due to auto and consumer durable loans.