KARACHI: Banks reported an increase in loan payments in the first four months of the current fiscal year of 2016/17 and more inflows are likely in months ahead despite interest rates are touching historic lows.
Bankers said businesses and consumers are reluctant to borrow and the central bank data on Tuesday showed companies paid off Rs22 billion debts to banks in July to November 11
“Low interest rates, reduction in banks’ funding cost, improved energy supplies and conducive business environment failed to attract private sector to borrow so far this fiscal,” one banker said.
The State Bank of Pakistan (SBP) policy rate witnessed two separate cuts of 50 and 25 basis points (bps) during the last fiscal year on top of a cumulative reduction of 300 bps in FY15. Moreover, the weighted average lending rate on fresh loans saw a decline of 237 bps in FY16 on average to reach 7.8 percent for the year. Presently, the policy rate hovers at 5.75 percent.
Bankers said low demand discouraged banks from fresh lending. Surprisingly, the China-Pakistan Economic Corridor’s (CPEC) stimulus didn’t increase bank’s borrowing appetite during the period under review.
“The assumption is wrong that banks are not eager for lending as banks are flushed with liquidity and they want to lend. They are under cut each of them in pricing,” said a senior banker. “Banks are hungry for assets but the number of loan customers is small. It means companies aren’t on investment strike. So, they didn’t avail loans for the working capital requirement.”
Some bankers believe they don’t make money in low interest rates environment without lending to the private sector.
“Earlier, the yield on long-term government paper was 12 percent and cost of deposit was 5-6 percent it was huge spread thereby lenders used to mobilise new accounts and deposited into Pakistan Investment Bonds,” another banker said.
“Now interest rates are low and spreads are compressed. A reasonable return on equity of 14 percent don’t get unless making private sector lending.”
Banks park deposits in the government securities as they consider it as safe lending.
“All banks are commercial beings and they must make commercial decisions. The government issued bonds is perceived as zero risk investment in the financial industry. If don’t do then can’t make returns to the depositors or shareholders,” the banker added.
However, some bankers said retirement of debt from the private sector is a seasonal phenomenon. The private sector credit offtake is likely to gain momentum from the next week.
The SBP’s separate data on advances classified by private sector borrowers issued on the same day revealed that loans outstanding at banks inched up to Rs3.257 billion as of October 31 from Rs3.193 billion in previous month.
The cumulative flows of private sector loans expanded by Rs461 billion during last fiscal year against Rs225 billion in FY15.