KARACHI, April 14: Banks have sped up credit disbursement—but only after learning the lesson the hard way. On the other hand the private sector is showing no hurry in credit retirement as it has recently got low-priced loans from the banks desperate to make use of their surplus liquidity after a sharp cut in treasury bills yield.
Senior bankers say the private sector has got more than Rs20 billion credit in one and a half month ending in March this year.
They say not only the demand for private sector credit was up during this period for a variety of reasons but credit retirement also remained slow. Banks too found it feasible to make generous lending. The reason was that a sharp cut in treasury bills rate had left them with no option but to increase their private sector lending. At the beginning of last month the yield on six-month T- bills had fallen from more than three per cent in February to a record low of two per cent. And even before then the yield was down 58 basis points at the start of February. The State Bank had deliberately allowed the T-bills yield to fall gradually to this level (from more than six per cent in July) to drive the banks to enhance private sector lending.
The Rs20 billion plus lending made by banks in one and a half month has raised overall credit disbursement between July/March 2002/03 to about Rs102 billion. The amount is double the revised target of Rs50 billion and exceeds even the original target of Rs94 billion projected initially in the credit plan for fiscal 2002/03. The overshooting of private sector credit has its roots in higher demand for credit from agricultural sector and from big manufacturing sectors including textiles and telecommunications. Top bankers say consumer and retail financing has also raised overall private sector credit.
“Agriculture has been a major recipient of bank credit during this fiscal year,” says president of state-run National Bank Syed Ali Raza. He says that an aggressive marketing of consumer and retail loans by local and foreign banks has also led to credit disbursement growth. Mr. Raza said additional demand for credit was also seen from the textile sector that had previously relied more on equity financing for capacity enhancement projects but was now focussing on bank credit “because of a steep fall in the lending rates.” The weighted average lending rate of all banks combined came down to 9.36 per cent at end-February from 12.17 per cent in July last year. Figures for March are awaited—and top bankers say that the rate would witness further decline in March.
This fall in weighted average lending rate reflects major cuts made in the lending rates of individual banks. Top bankers say— and businessmen confirm that some top corporates are getting bank loans at 5-6 per cent. A few have managed to secure bank credit even at four percent. “I know some textile tycoons got bank loans at four to six per cent,” confirmed owner of a major textile house in Pakistan. This falling interest rate scenario has also made it feasible for the private sector to delay retirement of seasonal bank credit. And that in turn keeps the volume of overall private sector credit too high. NBP President Syed Ali Raza said this is one of the primary reason for a phenomenal buildup in the private sector credit. Bankers say low-priced cotton financing on a big scale has been one of the factors that pushed up private sector credit volume adding that now cheap wheat financing has started and would last for some time.
Banks normally offer seasonal loans to growers and businesses involved in production of staple crops and manufacturing of final products out of them for upto six months. When the rate of bank financing is high people tend to retire credit earlier to keep the cost of borrowing as low as possible—but when the rate is low as is the case now they delay credit retirement to get full benefit of low interest rates.
Some bankers also link the phenomenal growth in private sector credit in mid-February through March to higher than normal import on fear of US invasion of Iraq. There was wide spread fear of US invasion in the second half of February—and the invasion did take place in March. “All this had an impact on businesses. They imported more of commodities of all sorts and that enhanced the private sector credit,” explained a foreign banker. Though it was mainly the public sector that imported more of fuel oil ahead of US invasion of Iraq some private oil marketing companies also built up inventories. Besides both commercial and industrial importers of essential items and raw materials also imported more than in normal times. A huge 38 per cent increase in imports in dollar terms last month provides a good explanation. Imports in March shot up to 1.27 billion from $919 million in February.
Some bankers part of the money borrowed by the private sector from banks was invested in the stock market that remained bullish last month. The Karachi Stock Exchange 100-share index shot up to 2715 at end-March from 2399 at end-February. Financial experts say when businesses invest in the stock market the money they borrow from banks it finally has no major impact on liquidity levels of the banking system because the money invested in the stock market returns to banks after a lag of time. They point out that when businesses borrow money from banks and employ the same into stocks—and that additional investment is not used for liquidating bank credit by the sellers of the stocks—then the level of private sector credit remains high. Senior bankers say that had the investment made into the stock market been used for retiring loans by the companies selling the stocks as well as the brokers the overall private sector credit volume would not have remained as high as Rs102 billion.
