Private sector Q1 credit offtake turns negative

KARACHI: Bank lending to private businesses turned negative in the first quarter of the current fiscal year, showing that companies were paying off lenders more than borrowing from them to fund investment and working capital needs, the central bank’s latest data showed.

Net private sector credit amounted to negative Rs59.72 billion in the first three months compared to Rs123.1 billion in the corresponding period a year earlier, the State Bank of Pakistan’s (SBP) data showed.

Saad Hashemy, an executive director at BMA Capital said this was because of both high interest rates and low economic growth.

SBP’s data showed that credit to private sector from conventional banking branches amounted to negative Rs39.798 billion between July 1 to 27 September, 2019 compared to borrowing of Rs114.879 billion in the comparable period a year earlier. Private sector retired Rs31.621 billion to Islamic banks during the period as opposed to borrowing of Rs2.847 billion. Private sector credit offtake from Islamic banking branches of conventional banks, however, almost doubled to Rs11.694 billion during the period compared to Rs5.459 billion in the corresponding period a year earlier.

Businesses are reluctant to take fresh debt or make fresh investments due to increased cost of borrowings. Interest rate has peaked to an eight-year high of 13.25 percent following monetary tightening stance adopted since January 2018.

“Private sector demand may improve if interest rates soften,” Hashemy added. “But as long growth remains below 4 percent credit demand will likely remain subdued.”

The government’s complete dependence on the commercial banks’ financing to finance budget deficit amid zero borrowing from the central bank also diverted lenders from private sector. Banks are parking their money in risk-free domestic government bonds instead of lending it to businesses.

The federal government borrowed a hefty Rs1.681 trillion from commercial banks for budgetary support in the first quarter of this fiscal year. The government repaid Rs1.452 trillion debt to the banks in the corresponding period last year.

The contraction in the credit and the money supply growth points to weak economy that could be a concern for the central bank ahead of its policy meeting next month. The money supply growth was zero percent in July-September FY2020. M2 growth was 0.12 percent in the first quarter of last year.

Analysts expect the SBP’s monetary policy committee to step up policy easing to support the economy. They, however, don’t expect the central bank to cut the policy rate in the next policy review due in November. Rate cut is expected earlier this year, they believed.