Credit has now become cheap in Pakistan and business is doable. How long will this once-in-a-blue moon phenomenon last? Big question! But, off the cuff guess is that barring any major financial disaster it may go on for, at least, two years or more. But, even now, are there any takers?

This is how it does look as of now. But, Pakistani government, politicians and economic bureaucracy has the knack of committing hara-kiri, often. That can change the entire business scenario. Add another caviat to that: the mood in Washington, and the Western-dominated international financial institutions, towards Islamabad. However, as of now, there is good news about the business at hand. Bank credit is now being offered at as low as four percent. The big, blue chip corporate borrowers are being selective in accepting credit from commercial banks. They are getting large chunks of credits at 4.0 per cent for the last few months.

At the moment, big businessmen, industrialists and textile mill owners are closing credit deals at four to five percent. Banks, recently, have also been lending large amounts to two booming sectors—telecom and energy—at cheaper rates. Bankers, beset with growing liquidity, are now trying to find borrowers in more and newer sectors, offering better terms and conditions, and declining interest rates. High-brow bankers of yester-year are now running even after the much-disdained small and medium enterprises (SMEs). They were keeping away from SMEs because they felt assessing such borrowers’ creditworthiness and doing proper documentation was a headache. A large number of these SMEs still belong to the “informal sector”.

But, are there many private sector takers even at this low an interest rate? Surprisingly the answer is: Not many, as yet, but their number is growing. A large number of potential borrowers are waiting and hoping, the lending rates will fall further under the central bank’s easy money policy.

In spite of this, the latest reports from the financial market show bank credit take-off is rising.

In fact it has shot past the Rs95 billion credit target, originally set by the National Credit Consultative Committee of the State Bank of Pakistan (SBP).Bank lending in the first nine months of the current fiscal 2003 has reached a level of Rs102 billion, the banking industry reports. The SBP’s export refinance facility (EFR) has now reduced export finance to 2.5 per cent, to which the banks add a 1.5 per cent of their own margin, and provide the credit at 4.0 percent. It was possible because EFR is linked to 6-month Treasury Bills (TBs), yields of which are declining. This cheaper credit is helping boost exports. EFR rates are likely to decline further, as the TB rates are still coming down.

The reasons for the long-awaited, and hoped for, cut in lending rates is the conscious, easy money policy of the SBP. The SPB, for more than two years, has been urging commercial banks, both Pakistani and foreign banks based in Pakistan, to lower their lending rates in order to help revive the economy that has remained beset by numerous domestic political and economic woes, as well as recession in various parts of the world.

They were asked to reduce their intermediation cost, and lower the spread. No one listened to the urgings by SBP Governor Dr. Ishrat Hussain and Finance Minister Shaukat Aziz, himself a banker.Then 9/11 happened, forcing a large part of remittances by overseas Pakistanis through the official banking channels on the back ofthe US-directed monitoring of international financial flows. It not only led to doubling of remittances as it happened this year, but also proved to be a major factor in strengthening the rupee against the dollar. The remittances were the key element that generated piles of liquidity with the banks. Remittances, in the first nine months of fiscal 2003 are $3,230.08 million—a hefty 98.58 per cent higher than the like period of fiscal 2002, the latest announcement by SPB says.

Bilateral assistance also improved, and Western aid donors re-profiled Pakistan’s $ 12 billion foreign debt for 38 years, reducing the need for dollars to repay these debts.

In view of this, the SBP gradually reduced its benchmark discount rate (DR) for banks that need short-term borrowing from the central bank and slashed yield that it paid investors on government’s main borrowing instrument of TBs.The SBP nearly halved the DR from a one-time high of 14 per cent to 7.5 effective November 18, 2002. The government’s long-term scrip, the 10-year tenor Pakistan Investment Bonds now fetch a mere 4.0 percent yield— down from a high of 14 per cent. The reduction in the government’s other, and more-often used instrument, the TBs, to borrow from the banks, saw an eye-popping slide from 13 per cent to 2.2 per cent until last week. The reasons: the government can now manage to borrow cheaply in the face of big liquidity with commercial banks, and at the same time, Islamabad’s credit needs have declined.

Banks, specially foreign banks, until last week, were expecting that TB yields will “bounce back” in April as these had “reached almost a bottom.” It hasn’t happened. The proof: when the SBP auctioned TBs this week, bankers’ hopes were dashed. “SBP is not overly concerned with the current spate of declining TB rates, because our monetary policy aims at encouraging cheap credit to the private sector,” said a central banker. The policy is to discourage banks from investing in TBs. Its a signal for the banks to lend more to the private sector—and at cheaper rates.

This policy was reflected in this week’s TB auctions. The cut off yield declined 0.06 per cent on one-year TBs to 2.69 per cent, from the previous 2.75 per cent, a couple of weeks ago. This yield is a far cry from the situation ten months ago. The yield on one-year TBs in July 2002 was 6.81 per cent, down to 2.69 per cent this week. The SBP accepted offers totalling Rs24.43 billion for one-year TBs, while bids worth Rs16.67 billion were rejected. The SBP also accepted merely Rs500 million bids out of the offered Rs22.60 billion at 1.65 per cent for 3-month TBs. The yield was reduced by 35 basis percentage points from the previous auction. It rejected offers totalling Rs22.1 billion.

This scenario reduced the government’s cost of borrowing on the one hand, and forced the banks to look for other investment avenues, including the private sector.

It also signals bankers to go into consumer financing, leasing, housing and mortgage, and small and medium enterprises.

While looking at the recent upswing of the stock market, and persistent demands of bankers and financial institutions called non-banking financial companies (NBFCs) who wished to lend for stocks, as well as the stock market stake-holders who needed to borrow, the government and the SBP have just demurred. Effective April 1, NBFCs have been allowed to provide margin loans (MLs), according to an official announcement. It said: “The term margin loan means a loan made by an NBFCs, licensed to provide investment finance services, to partly finance investment by the clients in marketable securities which shall be held by the NBFCs as a collateral, the amount invested by the client being the margin against loan.”

The maximum mandatory exposure limits, as percentage of the liquid net worth of NBFCs, under risk assets management, are: equity investment 10 per cent, margin loaning 10 per cent, corporate financial paper 30 per cent; and, short-term commercial paper, underwriting of shares and corporate financial paper 50 per cent. The ML facility is expected to encourage investment in stocks and shares, strengthen bourses by enabling them to operate on a sound footing, and make their deals transparent and documented. Pakistani bourses have recently seen a boom. The Karachi Stock Exchange KSE-100 index, for instance, crossed 2,954.63 points, January 17 this year. But, it declined to 2,418 Feb 10. However, it raced again to 2,944.14 April on 17. Market operators, at the moment, are quite bullish, setting their sights on 3,000—once again. More money— easy money— can boost the bourses again as share demand is rising in the face of a constant short supply of good scrips, because hardly any new shares have been floated in the last two years. Doesn’t that go for the economy, as a whole, that needs more investment, more employment, larger production and bigger exports?