KARACHI, Oct 21: The demand for the private sector credit is not picking up pace leaving banks with no choice but to invest surplus liquidity in the government securities.

In the first quarter of this fiscal year all commercial banks combined saw credit retirement of Rs28 billion from the private sector. Heads of credit of leading local and foreign banks say that in October net credit disbursement has started but the pace has been very slow.

“Net credit to the private sector by the end of this month may not rise beyond Rs6-8 billion,” estimates head of credit at a leading local bank.

The government has set a target of Rs94.7 billion for private sector credit disbursement in fiscal year 2002-03. But bankers fear this target cannot be achieved due to a slump in the economy. Economists say that if the government wants the banks to make faster and larger lending to the private sector it may have to ease off its monetary policy — unchanged since January 23 this year. In the last fiscal year the private sector had received Rs30 billion credit from banks against the target of Rs98 billion.

The textile sector — the largest recipient of private sector credit — is struggling hard to remain competitive amidst soaring cost of inputs including that of fuel and electricity. Textile millers say one reason for the private sector credit not picking up pace is that some of them have suspended relatively long-term borrowing and are seeking bank finance just to run day to day business. Says a textile exporter Majyd Aziz “There is a paradigm shift in the borrowing pattern of the private sector. Some business houses have not only confined themselves to short-term finance facility but they are also getting rid of interest-free financing.” But what alternate resources of financing they have found?

“In some cases such business houses are turning to internal resources...in other cases they have suspended growth for the time being and have stopped living beyond means...and there are those who have intensified recovery of receivables to improve their balance sheets.”

Majyd Aziz says his own business house has reduced its bank borrowing by 95 per cent.

Apart from this paradigm shift in the borrowing pattern that is relatively new there are other factors too that have slowed the demand for the private sector credit. The list includes (i) lower than anticipated growth in various sectors of the economy (ii) more frequent launching of term finance certificates (iii) huge inflow of foreign currency funds after 9/11 part of which are being fuelled into the economy (iv) higher tax rebates; and (v) more efficient management of balance sheets by top business houses.

Some textile millers say an immediate reason for the slower pickup of private sector credit in October is that many textile mills already have enough stocks of cotton and their need to purchase more is limited.

Economists say despite all the limitations the demand for the private sector may increase to a certain extent if the monetary policy is eased off. “Given the macroeconomic stability achieved so far...and in the backdrop of low inflation and stable exchange rates...one fails to understand why the interest rate is still so high,” questions noted economist Dr. Shahida Wizarat. She says that the State Bank may consider easing off its monetary policy to create an environment for reduction in the bank lending rates.