Private sector’s credit offtake remains muted in July-Sept

KARACHI: Private sector’s appetite for bank financing has been found lacklustre during the last three months despite lower interest rates as business are still recovering from the lockdown impacts, while banks are more interested to take exposure to risk-free government securities, analysts said.

Analysts said there is muted demand for the bank credit from the private sector.

“Businesses are not obtaining loans for financing their investments and working capital needs as they are hit by the coronavirus pandemic,” said an analyst. “Banks prefer to rack cash in risk-free government securities rather than lend to the businesses and households.”

The central bank’s latest data showed the credit to the private sector by banks was minus Rs122.4 billion. Private sector’s borrowers paid off Rs49.4 billion in the corresponding period of last fiscal year, according to the State Bank of Pakistan’s data.

The SBP reduced the benchmark interest rates by a cumulative 625 basis points to 7 percent in the easing cycle from March to June to support the lockdown-hit economy.

Domestic demand started to pick up pace after lifting of the lockdown which was there between March and August. Cement, electricity and oil product sales are showing positive growth. However, the pickup in the economic activity and the lower interest rates has not stimulated appetite for bank financing.

The SBP’s refinance facilities lent much-needed support to the private sector to recover from stunting impact of lockdown.

“These facilities, coupled with other supervisory actions related to deferment and restructuring of loans, have ensured the availability of necessary funding to businesses and households, providing important support to growth and employment,” the SBP said in a monetary policy statement.

Analysts expect a pick up in the private sector credit offtake in coming months because the industrial activity accelerated following the easing of the Covid-19 related restrictions.

Some measures taken by the central bank is also expected to boost the credit appetite for various economic sectors.

The SBP also decided to provide a cash reserve requirement incentive to banks, which fulfill or exceed quarterly housing loans targets. The move is aimed at to promote lending to the construction sector, which is called the mother of all industries. A mechanism to incentivise banks meeting mortgage loans targets has also been developed. The mechanism also penalises the banks for any shortfall in meeting the target.

The SBP has already instructed banks to allocate at least 5 percent of their domestic private sector credit for financing housing and construction of buildings by December 2021. In line with the same, the SBP has agreed quarterly targets from December 2020 till December 2021 with the industry to achieve the targets.