Private sector lending dips 50 percent in July-May

KARACHI: Lending to private sector plunged by 50 percent during the first eleven months of the current fiscal year of 2014/15 as demand for business failed to find momentum despite record low interest rates, data from the State Bank of Pakistan (SBP) showed on Thursday.
The banks lent Rs166 billion to companies in July to May FY15, compared with Rs329 billion during the same period of last fiscal year, monetary aggregates issued by the central bank showed.
Analysts said a steep fall in bank’s corporate lending is defying the central bank efforts to spur private sector credit through cutting interest rate to multi decade’s low of 7 percent.
Last month, the central bank cut interest rate for the fourth straight time to a 42-year low of 7 percent from 8 percent in a bid to spur economic growth.
Analysts cast doubts on gross domestic growth target of 5.5 percent in the upcoming fiscal year, saying the economy will struggle if credit to the private sector remains week.
“As much demand comes from the manufacturing sector, so the government should give maximum incentives to the exporters,” said an analyst.
However, some bankers said there is a little sign of improvement in private lending activity, as banks have good liquidity conditions as SBP’s financing improved liquidity in the banking system.
“There is a loan appetite from the working capital, fixed investments and trade financing,” said a banker at a local commercial bank.
However, analysts said banks were putting low efforts to increase private sector credit offtake “as they are making profits and shore up their balance sheets through risk-free investments in government treasuries and bonds.”
“And, at the same time they keep clean their loan books by avoiding risky lending,” another analyst said.
The treasury bills were oversubscribed at the auction held on June 10 where the central bank sold Rs71 billion, higher than the target of Rs50 billion. It shows reoccurrence of the bank appetite to park money into the low-yielding short-term government papers. Earlier, the commercial banks were not too keen to invest in treasury bills.
Analysts said low interest rates help stimulate economic growth, but other conditions – like security, energy and water supplies and low cost of doing business – are also essential to provide stimulus to growth.
“The government is a major beneficiary of reduction in the interest rates, as its interest payments on domestic debt will reduce and lead to re-rolling and re-pricing of the debt,” the analyst said.