Private sector credit off-take shrinks 45pc in July-April

KARACHI: Banks’ lending to private sector contracted 44.8 percent in the first 10 months of the current 2014/15 fiscal year, the central bank figures showed on Wednesday, despite the three cuts in the policy rates during the period.
Banks lent Rs162 billion to private businesses between July 1, 2014 and May 8, 2015, compared with Rs293 billion during the same period last fiscal.
“The biggest competitor for the private sector is the government, as lending to government is safe, and requires no collateral and guarantee,” said Ibrahim Kasumbi, senior vice president at Karachi Chamber of Commerce and Industry.
The State Bank of Pakistan (SBP) has cut the policy rates thrice by 200 basis points to eight percent since November last year. It hoped that the lowering borrowing cost will improve credit flows and increase investments and spending by companies and consumers.
The State Bank is likely to further trim the interest rates by at least 50 basis points in its next monetary policy review meeting scheduled for May 23.
Analysts foresee a moderate expansion in the private sector credit during the next fiscal year given the regulatory [declining interest rates] and market trends.
Presently, “Industries are not utilising their (production) capacity due to energy shortages and rising cost of doing business. Resultantly there is a slowdown in working capital loans,” Kasumbi added.
Soft commodity prices, persistent energy shortages and healthy corporate profitability also curtailed the demand for bank credit.
A continuous spike in government borrowing from commercial banks and subdued growth in banks deposit reduced available funds for the private sector.
The government borrowed Rs1.154 trillion from commercial banks through treasury and bonds during July-May, compared with only Rs274 billion during the same period last year.
“While the government is switching its borrowing away from the SBP to banks in a bid to meet the IMF’s (International Monetary Fund) targets and meet the limit on its borrowing from the central bank under the SBP Act 1956, the banks are also aggressively participating in auctions of government papers to lock in their funds at higher returns in anticipation of a cut in the policy rate,” said an analyst.
Banks’ frequent investment in the government treasury bills and bonds brought the investment-to-deposit ratio at 66 percent during the first quarter of this year.
KCCI official urged the SBP to take actions to boost credit to private sector to restore businessmen confidence.
Analysts said banks are reluctant to lend money to companies due to weak legal enforcement, especially with regard to foreclosure laws. This loophole sometimes increases bank exposure to toxic assets and non-performing loans.