Private sector credit off-take plunges 68.2pc in July-Jan

KARACHI: Banks’ lending to private sector sank 68.2 percent to Rs175.2 billion in the seven months of the current fiscal year, the central bank data showed on Thursday, mainly owing to high interest rate amid sluggish manufacturing activity.

State Bank of Pakistan (SBP) released numbers presented the banks extended Rs552 billion loans to private businesses in the corresponding period of last fiscal year. Analysts said massive decline in credit off-take points to continuing tight financial conditions and weakness in the economy.

The conventional banking branches provided Rs77.1 billion loans to private businesses in July-January FY20, compared with Rs394.2 billion in the same period last year. Islamic banks extended Rs22.2 billion advances to firms, compared to Rs86.3 billion last year, while Islamic banking branches of conventional banks lent Rs77.8 billion against Rs71.4 billion in the same period last year.

The persistent decline in the private credit growth is attributed to high interest rates and slow activity in the manufacturing sector as stabilisation measures and regulatory changes weighed heavily on industrial activity.

Pakistan’s large-scale manufacturing (LSM) index contracted by 5.93 percent in July-November FY20. Most businesses avoided bank borrowing to finance their liquidity needs after the central bank hiked policy rate by 7.50 percentage points since the start of 2018.

The SBP’s latest report showed a reduction in the number of applications received for working capital loans by banks.

Banks are mostly parking their investment in the risk-free government papers due to high returns on these investments. They have locked in their liquidity in short-term and long-term government securities i.e., Treasury Bills and Pakistan Investment Bonds.

Analysts said the economy was in need for a monetary stimulus in the shape of slashing interest rates to rebound growth and spur demand for the credit from the private firms. The central bank, analysts said, was most likely to maintain a hawkish stance in its upcoming monetary policy reviews due to inflationary fears.

“Interest rates are expected to remain at current levels till September around which we can expect some easing,” said Saad Hashmi, executive director at BMA Capital. Economist Intelligence Unit, in its latest report said the SBP, currently committed to inflation-targeting, was expected to continue with a tight monetary policy. The SBP left the policy rate on hold at a decade-high of 13.25 percent in the last monetary policy.