KARACHI, March 27: The private sector borrowing from banks has risen to Rs230 billion in eight and a half months of this fiscal year. This is more than three times the private sector borrowing of Rs78 billion in the comparable period of the last fiscal year. This all-time high private sector borrowing is also more than two and a half times the target of Rs85 billion set for this fiscal year.

But top bankers say the pace of private sector borrowing from banks would taper off in the last quarter of this fiscal year starting from April. They also say that an unprecedented growth in private sector credit has thrown a big challenge upon banks.

"The increase in private sector credit will taper off in the remaining part of the fiscal year as it is (driven by) a seasonal demand," National Bank President Syed Ali Raza told Dawn. He said that the corporate sector would be retiring credit and overall credit to the private sector "will be less when the increase is compared on a monthly basis." But "over the year growth will be more as consumer credit needs will remain, not affected by seasonal factors."

Data released by the State Bank shows that banks offered Rs230 billion credit to the private sector in eight and a half months to mid-March 2004 up from Rs78 billion in a year-ago period. This is the largest expansion in the private sector credit offtake not only in eight and a half months of a fiscal year but during any year in the banking history of Pakistan.

There are several reasons for this unprecedented growth. Some of them are: (i) low interest rates (ii) increased credit requirement of the private sector because of higher cotton prices and for achieving higher industrial output (ii) increased financing in the agricultural sector (iii) strong credit demand coming from SME (small and medium enterprise) sector and consumer sector and (iv) higher demand for mortgage financing and housing finance.

During this fiscal year cotton prices showed upto 50 per cent increase which automatically enhanced the borrowing requirements of the textile sector-the largest of all which also earns two thirds of the total exports. Similarly a huge increase in the growth rate of large-scale manufacturing or LSM in seven months to January 2004 provides good justification for an unprecedented rise in the private sector credit offtake. Data released by the State Bank shows that in July/January 2003/04 LSM grew by a cool 15.1 percent. Figures for LSM growth in February would be out sometime next month.

As for agricultural credit banks disbursed Rs43 billion credit during July/February 2003/04 against the full fiscal year target of Rs65.5 billion. SBP officials say banks would likely meet the target.

A historically high demand for private sector credit has not only opened up new opportunities for banks it has also exposed them to a big challenge. "New opportunities have opened up for commercial banks which have diversified their portfolios and gone for consumer financing and equity market investment," says NBP chief Syed Ali Raza. "It is also a challenge for the banks which have to prudently manage their lending because if care is not taken it could prove risky and the banks could end up with more NPLs. Proper credit appraisal are critical."

That a fast-paced disbursement of private sector credit may result in banks booking more NPLs or non-performing loans has always been a point of concern for banking analysts but when a top banker like Mr Raza seconds this view it means this threat is real.

Banking analysts say that apart from the oft-cited reasons for increase in private sector credit some other factors have also contributed to it. They say that quite a number of businessmen obtained cheap loans from banks only to invest part of the same in stock market or real estate or in more speculative currency and gold trading. They say this applies more on to top business tycoons who got loans at 5-6 per cent from banks and used part of it for investment purpose earning much higher profits. They did this at the cost of the depositors who have been getting negative rate of return. "There are always losers and gainers in every situation. In this case the depositors are unfortunately the losers," commented head of another large local bank. At the end of February weighted average annualized rate of return on bank deposits was only 1.33 per cent against annualized inflation of 3.49 per cent in July/February 2003/04.