KARACHI: Higher cost of borrowing has virtually shooed away private sector from banking channel sitting on a mound of deposits, with slowdown in demand further repressing its fund appetite, industrialists and bankers said on Wednesday.
Bank lending to the private sector turned negative in more than four months of the current fiscal year, putting pressure on policymakers to support businesses hurt by high interest rates and lower growth amid economic stabilisation.
The State Bank of Pakistan’s (SBP) data showed that private sector credit was negative Rs4.1 billion during July 1 and November 1, 2019 compared with borrowing of Rs223 billion in the corresponding period a year ago. “Borrowing is a function of need and cost,” Ehsan Malik, CEO of Pakistan Business Council (PBC) said. “Whilst some businesses need to borrow as their tax refunds are stuck, the general slowdown of the economy is affecting the level of borrowing. The cost of borrowing is another deterrent with rates of 14-16 percent per annum.” The continued tightening of the monetary policy along with the regulatory measures relating to import duties taken during the last fiscal year hurt the economic activities. Businessmen and traders are following wait-and-see policy due to steep movement in exchange rate and interest rates. The central bank pushed up its key benchmark interest rate by a cumulative 750 basis points to 13.25 percent in a series of tightening steps since January last year.
Bankers expect the private sector credit to remain muted unless the economic growth shifts to higher gear and monetary policy softens. “Private sector credit off-take is away from turning positive,” a chief executive officer of a large bank said, requesting anonymity. “The next 12-18 months are going to be tough. Don’t expect a quick recovery unless the central bank provides a stimulus to prop up growth and corporate credit demand.” For him, the recovery process would take three to four years with GDP growth and interest rate be normalised. “Therefore, banks should be supportive for the real sector along with the SMEs (small and medium enterprises) and agriculture sector,” he added.
Private sector credit fell to Rs693 billion in FY2019 from Rs775 billion in the preceding fiscal year. Credit-to-GDP ratio remained stagnant at 17.3 percent in the last fiscal year. While the central bank sees the economy to grow three to four percent in the current fiscal year, the International Monetary Fund expects the growth to fall at 2.4 percent compared to 3.3 percent a year earlier.
Analysts believe the dim economic outlook convinced businessmen, industrialists and traders in various sectors to reduce bank borrowing. In July-September 2019, textile firms took Rs848.2 billion from banks compared with Rs853 billion a year earlier. Loans to the manufacturing sector fell 1.3 percent year-on-year to Rs2.964 trillion during the period.
Jawed Bilwani, patron-in-chief of SITE Association of Trade and Industry, said the industrial units are closing down and “no one is considering expansion. “Obviously, private sector credit is declining.” “Businessmen expand only when they see growth prospects and reasonable returns,” Bilwani said. “Now, with exporters facing severe liquidity crunch, higher taxes and even higher interest rates, the industrial units are shutting down.”
Khurram Schehzad, CEO of financial advisory firm Alpha Beta Core, said the private sector credit is declining primarily because of higher interest rates. “Increased taxation and demand compression also discouraged private sector’s borrowing,” Schehzad said. “It’s about time to think of economic growth that should be driven by indigenous factors through encouraging export-oriented investments by reducing cost of doing business, starting with a reduction in interest rates from this upcoming monetary policy.”
Malik advocated needs for an uptick in economic activity, reduction in borrowing from banks by the government and cuts in the policy rates. “I hope it (SBP) realises that inflation, which appears to be the ostensible reason for maintaining the current high rate, is of a cost-push nature, triggered by higher energy tariffs and devaluation and not due to demand,” he said, referring to upcoming monetary policy committee meeting this Friday (tomorrow). “Hence the need to curb demand through higher borrowing cost does not exist. Pursuing foreign investment in presently 3-12 month treasury bills comes at a high cost to the domestic economy – both the private sector and the government.”
Lenders prefer to park cash in risk-free government papers rather than extending loans to businesses and consumers. Rising interest rates make business loans expensive hence leading to an increased risk of default by the borrower.
A senior banker said the banking industry saw a slight increase in non-performing loans (NPLs) on economic slowdown and rising rates. However, there are some sectors which continue to expand. “We don’t see a significant accumulation of NPLs in the long term, but banks should be knowing of the risks of the financing of some risky sectors,” the banker said.
Ikhtiyar Baig, Senior Vice Chairman of the Federation of Pakistan Chambers of Commerce and Industry, said businessmen could not service the principal and the mark-up on loans at the prevailing interest rates. “The businesses are only availing credit from commercial banks to meet their working capital requirements, while the financing for plant and machinery, capital goods and expansion is negligible.”
Baig added that the business community had curtailed their financial requirement as they could not service the financing at 16-17 percent interest rates. “Since sales tax refunds in excess of Rs250 billion were stuck-up with the government, industrialists and exporters are facing liquidity crunch and availing financing from commercial banks to meet their working capital requirements. But, there is no business expansion.”
Arif Jeeva, former chairman of Association of Builders and Developers said the construction industry is observing negative growth due to higher cost of doing business as well as demand contraction. “Builders and developers are not taking any loans from the commercial banks as the interest rates are too high to be feasible,” Jeeva said. “Investment in construction and real estate sector has almost stopped as the investors are parking their funds into bank deposits, which are paying higher returns.”
Jeeva further said the Federal Board of Revenue also tightened regulations in the name of documentation, which also discourages businessmen from expansions. “Construction is the mother of industries, and when this sector is slow the entire industrial goes slow,” he said.