KARACHI, Nov 13: The private sector credit off take shot up to Rs123.5 billion in the first four months of this fiscal year, up from 70.8 billion in a year-ago period, primarily due to increased cotton and consumer financing.
"The private sector is borrowing more aggressively this year because of an early and larger cotton crop," said Mr Riaz A. Tata, a big textile exporter and president of the Federation of Pakistan Chambers of Commerce and Industry. "Besides, the textile sector continues to borrow heavily to prepare itself for the post-quota regime from January 1."
Data released by the State Bank show that the private sector borrowing from the banks totalled Rs123.5 billion in July-October 2004, up from Rs70.8 billion in July-October 2003. Senior bankers say private sector credit expanded much faster in September and October than in earlier months on the back of cotton financing. In July-August 2004, private sector borrowing totalled Rs21 billion only.
Bankers and businessmen attribute this more than Rs100 billion increase in the private sector credit in the last two months to larger borrowings for the purchase of cotton by textile millers and ginners. They also link it to wheat financing and a greater appetite for consumer finance including personal loans.
"Cotton arrival started a bit earlier this year, in July, and now it is in full swing with all indicators pointing to a much larger crop than before," said Mr Tata citing it as a reason for higher private sector credit off-take.
Up to November 1, cotton arrivals into ginneries had recorded a 51 per cent increase compared to the last year, and government officials say that cotton production would reach 12.1 million 375-pound bales this year from 10.05 million in the previous year.
This huge increase in cotton arrivals has increased the borrowing requirements of both textile millers as well as ginners despite a substantial fall in the prices. Textile millers say what else increased their borrowing needs despite a fall in cotton prices is the increase in prices of polyester fibres, used in value-added products.
"Besides, as the post-quota regime is approaching, textile millers continue to invest in capacity building and in increasing their production," says Mr. Shabbir Ahmed, chairman of Pakistan Bedware Exporters Association.
"In fact, we have started getting more export orders for January-February 2005, than we used to get previously," he said citing this phenomenon as a reason for higher private sector credit off-take.
On the one hand, textile sector is making last-minute upgrading in production facilities to compete with China, India and Bangladesh in the post-textile quota regime from January 1. On the other hand, "it is also building up inventories anticipating higher demand from a quota-free world," says Mr Ahmed. Both trends need larger borrowings.
Senior bankers say the private sector credit off-take has shot up in the last two months also because of higher demand for consumer finance, particularly for personal loans and auto leasing as the production of cars, motorcycles and other vehicles continue to rise.
In the last fiscal year ending in June, consumer financing had risen by Rs75.6 billion and accounted for about one fourth of the total private sector credit off-take of Rs325 billion.
Some bankers say that one of the reasons for a more than Rs100 billion increase in the private sector borrowing in July-September this year is the rising interest rates.
They say that businessmen borrowed excessively in the last two months anticipating that interest rates that inched up in July-August, would rise faster from September onwards.
This seems quite a possibility because real interest rates were still negative at end-September. The weighted average lending rate of all the banks combined on their overall stock of loans at end-September was 6.55 per cent, against annualized CPI inflation of 9 per cent.
But businessmen like Mr Riaz A. Tata does not subscribe to this view. "I don't think businessmen borrow at lower rates to build up inventories anticipating increase in the interest rates," he said when reached by Dawn for his comments. "In that case the cost of holding inventories would rise and repayment of loans (presumably taken on floating rates) would also become costlier."
But Mr. Shabbir Ahmed said businesses that are not export-oriented, particularly those engaged in trading of commodities, are known to have obtained cheaper loans only to earn windfalls through hoarding. Wheat hoarding in the last fiscal year is an example.
Wheat traders had obtained cheaper loans from banks to purchase wheat and hoard it for months only to sell it at higher prices and earning windfalls for themselves but pushing up inflation in the process.
