KARACHI, Sept 13: Consumer loans rose too fast during the last fiscal year contributing to consumption-led growth of the economy but at the same time pushing up inflation through enhanced buying spree.

According to the State Bank’s quarterly review of the banking system, consumer loans doubled to Rs206 billion during July-June 2004-05. This increase of Rs103 billion accounted for 22.7 per cent of the total increase of Rs453 billion in banks’ loans, analysis of the data contained in the report shows.

Auto loans which are part of consumer loans also doubled to Rs66 billion during the last fiscal year and this was the largest component of consumer loans. More importantly, housing loans more than tripled to Rs27 billion at the end of June 2005 from Rs8 billion at the end of June 2004, showing a huge growth of Rs19 billion. Whereas auto loans played their role in lifting the auto and allied sectors, which in turn, boosted overall manufacturing, housing loans gave a boost to a large number of supportive industries including cement, iron and steel making and paints and varnishes manufacturing besides opening up new jobs.

Personal loans also increased rapidly during the last fiscal year, rising from Rs49 billion at end-June 2004 to Rs92 billion at end-June 2005. Loans obtained through credit cards also rose from Rs11 billion to Rs19 billion during this period. Financing of loans for the purchase of consumer durables e.g. TVs, ACs and refrigerators etc., showed a negligible increase of Rs200 million only, rising from Rs1.4 billion at end-June 2004 to Rs1.6 billion at end-June 2005.

A big increase in personal loans and loans obtained through credit cards certainly contributed towards a consumption-led growth of the economy but at the same time this prompted buying spree to push up demand-induced inflation.

Pakistan’s economy grew by an estimated 8.4 per cent during the last fiscal year — and consumer inflation went up by around 9.3 per cent.

Whereas an increase of Rs103 billion in consumer loans was 22.7 per cent of the increase in overall loans, it was equal to only 11.4 per cent of the total outstanding loans of Rs1,804 billion at the end of last fiscal year, up from 7.6 per cent a year earlier. Even then it was the third largest component of the banks’ overall credit after corporate sector and small and medium size enterprises (SMEs). The corporate sector exhibited a reduced appetite for credit during the last fiscal year though it received additional loans of Rs203 billion. At end-June 2004, the total outstanding corporate loans were worth Rs741 billion; the amount grew to Rs944 billion at end-June 2005.

An increase of Rs203 billion in the corporate loans accounted for 44.8 per cent of the overall increase in banks’ loans during the last fiscal year. And it was equal to 52.3 per cent of the total volume of banks’ loan outstanding at the end of June 2005, down from 54.9 per cent at the end of June 2004.

The breakup of corporate loans show that loans obtained for fixed investment grew by Rs46 billion to Rs369 billion at end-June 2005 from Rs323 billion at end-June 2004. On the other hand, working capital loans grew faster, by Rs135 billion, to Rs385 billion during the last fiscal year. Trade finances rose by Rs21 billion only during the last fiscal year rising to Rs189 billion at end-June 2005 from Rs168 billion at end-June 2004.

A slower growth in the loans for fixed investment can be explained by the fact that most corporates, particularly textile mills had completed their BMR and expansion projects in the last four years i.e. between 2000 and 2004. And a rapid increase in working capital needs is reflective of the faster-than projected growth of the economy. (The economic growth target was set at 6.6 per cent for the last fiscal year).

The SMEs sector received Rs82 billion loans during the last fiscal year which was 18.1 per cent of the banks’ total lending of Rs453 billion during the last fiscal year. (The increase of Rs453 billion in banks’ loans in the last fiscal year includes the loans advanced to various sub-sectors of the economy both in the private as well as public sector entities).

FUTURE OUTLOOK: As the economy seems set to slow down during this fiscal year as compared to the last fiscal because of high-base effect and also because of skyrocketing of oil prices, corporate loans may also show relatively slow growth. Fixed investment loans, in particular, are expected to rise modestly but working capital is likely to grow fast, senior bankers say. If banks continue to focus on SMEs, loan growth in that area would be substantial.