Friday June 14, 2024

Private sector credit swells to Rs106.3 billion in 11 months

By Erum Zaidi
June 05, 2024
A foreign currency dealer counts US dollars at a shop in Karachi on March 2, 2023. — Online
A foreign currency dealer counts US dollars at a shop in Karachi on March 2, 2023. — Online

KARACHI: Bank lending to the private sector increased by 47 per cent during the 11 months of fiscal year 2024, and analysts expect an uptick in demand for loans from businesses due to potential interest rate cuts.

According to data from the State Bank of Pakistan (SBP) released on Tuesday, bank credit to the private sector increased to Rs106.3 billion between July 1, 2023, and May 27, 2024. This reflects a rise from Rs72.2 billion in the corresponding period of the previous fiscal year.

Although the figure increased year-on-year, analysts noted that it was still much less than the typical increase in borrowing by the private sector.“Private sector credit growth continues to languish due to high interest rates and subdued economic activity. Nevertheless, the substantial decline in commodity prices has reduced the working capital demands of businesses, consequently reducing their credit needs as well,” said Awais Ashraf, director of research at Akseer Research.

“On year on year the number recorded growth but it is significantly lower than the average increase in borrowing of the private sector,” Ashraf added.“The start of monetary easing even by a small percentage would encourage businesses to borrow more as it indicates adoption of expansionary policy by the Central followed by multiple rate cuts,” Ashraf noted.

Due to decreasing price pressures, markets and analysts anticipate an interest rate drop of 100–200 basis points (bps) at the monetary policy meeting on June 10. As a result, the real rate will drop to 8.2-9.2 percentage points, which is far higher than the historical average to account for any inflation shocks brought on by changes in food prices, budgetary constraints, or revenue measures recommended by the International Monetary Fund.

“We expect the policy rate to decline by 600-700 bps by June 2025 to 15-16 percent with real interest assumption of 300-400 bps as we expect inflation to average 13-13.5 percent in FY25,” said an analyst at Topline Securities.

Pakistan's economy is still expected to grow slowly. The gross domestic product growth has moderately recovered to 2.4 per cent in FY24 after contracting by 0.2 per cent in FY23, largely due to strong growth in the agriculture sector.

Due to stringent monetary and fiscal policies as well as unfavourable investor sentiment, GDP growth in FY25 is probably going to stay in the 2-3 per cent range.Private credit showing signs of stress. “While the stock of banking credit to the private sector has remained stagnant over the past two years, loan infection has started to creep up with aggregate gross non-performing loans (NPLs) of banks/development finance institutions increasing by 7.5 percent in 2023,” said Optimus Capital Management in the latest report. “However, with strong corporate balance sheets in general and prolonged risk aversion in the banking sector, NPL formation is likely to remain manageable,” it said.