Bank outstanding loans to private sector edge up 1.6pc in 1Q

KARACHI: Banks’ outstanding loans to private sector businesses slightly decreased 1.57 percent to Rs5.090 trillion over the last three months, the central bank’s data showed.

These loans amounted to Rs5.171 trillion at the end of June 2019, the State Bank of Pakistan (SBP) data showed.

The decline in the private sector financing was driven by weak demand for the working capital and fixed investment loans from the major sectors, especially manufacturing, within which the weakest borrowers were textile sector. Outstanding bank loans to the manufacturing sector fell 1.331 percent to Rs2.964 trillion in three months. Textile firms availed Rs848.2 billion from banks till September-end compared with Rs853 billion three months ago.

The private sector advances were on declining trajectory. The continued tightening of the monetary policy along with the regulatory measures relating to import duties taken during the last fiscal year eventually impacted the production activity.

Softening of aggregate demand in turn reflected in dip in growth of advances. In addition, there was drop in consumer and investor confidence in the economy.

The slowdown in private sector advances also resulted from increased risk aversion by banks in addition to other factors, the SBP said.

The SBP said banks became risk averse as they anticipated rise in defaults in the private sector due to hike in interest rates as well as slowdown in economic activity.

Banks increased investments in the risk-free government securities due to high returns that also led to a slowdown in the demand for the corporate credit.

“The private sector financing demand is likely to remain subdued in the coming months,” the SBP said in its mid-year performance review of the banking sector.

“While macro stabilisation measures have started to show favourable results, particularly on external front, the economic activity is expected to remain muted.”

The SBP said a projected slowdown in global economic activity—particularly in the US and Euro area—is likely to influence exports and the demand for advances.

“In addition, owing to perceived weakening in re-payment capacity of firms and recent pick-up in the non-performing loans, banks may remain risk averse in their lending behaviour. However, banking sector exposure to the public sector could increase due to government zero borrowing from the SBP,” it added. “The government’s commitment to cease its borrowing from SBP is expected to increase government reliance on banks for meeting its financing needs, which will further increase the banks’ exposure to the public sector.”