54pc of bank credits go to corporates: Financial sector assessment 2004
By Shahid Iqbal
KARACHI, Oct 15: Despite all efforts of diversification in lending of loans, the corporate sector remained dominant by absorbing 54.1 per cent of banks’ total credit of Rs415 billion during 2004. Banks’ outstanding credit volume reached Rs1.62 trillion at the end of the calendar year 2004, exhibiting a growth of 34.4 per cent.
This was revealed in the State Bank’s latest publication “Pakistan-Financial Sector Assessment 2004” issued on Saturday.
“This was largely an outcome of continued implementation of banking sector reforms, surplus liquidity with banks, and a growth-oriented monetary policy.” The report explains the reason for an incremental growth in credit.
A sector-wise distribution of credit shows that the corporate sector still absorbs the largest share of total bank credit, at 53.9 per cent at end-CY04. SME finance also has a sizable share at 17.5 per cent. Agriculture and commodity finance together captured a substantial share of 14.9 per cent, whereas consumer finance and staff loans jointly contributed 11.9 per cent to the total bank credit.
Within corporate sector credit, the largest share is that of fixed investment loans which exhibited a growth of 32.3 per cent over March CY04. In particular, cement, automobiles, electronics, power generation and petroleum refining are some industries which have taken fixed investment loans from banks for the purchase of plant and equipments and for BMR activities.
The SBP observed that with the increase in credit, another notable development is the increase in the aggregate number of bank borrowers in the last few years.
There has been an increase of around 1.6 million in the total number of borrowers over CY02, registering a growth of over 88 per cent in the last two years. Major increases in the number of borrowers have been observed in agriculture, consumer and SME sectors.
The consumer sector in particular had shown a tremendous growth in CY04 in comparison with CY03. In fact, given the number of products available within its ambit, consumer finance has become the most diversified sector with the largest number of borrowers of total bank credit. This is followed by the agriculture sector where around 92,319 new borrowers had availed credit facilities during CY04. In the SME sector, around 14,585 new borrowers were given access to bank financing in CY04.
While the corporate sector was the major recipient of bank credit, with Rs220 billion incremental credits in absolute terms, credit growth in the consumer sector saw the largest increase of almost 84 per cent over end-March CY04. SME financing at end-CY04 touched Rs284 billion, registering a growth of over 26 per cent. Growth in agriculture credit is not far behind and stood at 16.1 per cent. Commodity finance has also shown a remarkable increase of Rs51.5 billion over end-March CY04 owing to increased involvement of the private sector in commodity operations.
Wheat financing has the largest contribution (around 60 per cent at end-FY05) in overall commodity operations. Total consumer financing reached Rs152.6 billion by end-CY04, exhibiting an increase of Rs69.6 billion over end-March CY04, with the largest growth in mortgage loans of 205.4 per cent. Credit card financing also increased by 45 per cent (its share, however, declined from 11.7 per cent at end-March CY04 to 9.3 per cent at end-CY04).
In absolute terms, personal loans exhibited a rise of Rs42.2 billion, showing an increase of 108 per cent from March CY04 to March CY05.
Interestingly, the share of auto loans remained roughly the same, compared to end-March CY04. However, up to end-March CY05, auto loans increased by Rs29.6 billion.
The share of housing finance has increased tremendously, as compared to end-March CY04. These loans increased by Rs16.2 billion, exhibiting a growth of 294 per cent from end-March CY04 to end-March CY05. This is primarily due to fact that the mortgage finance product is a relatively recent occurrence, and its portfolio is now beginning to grow.
“This rising amount of consumer credit, in some analysts’ view, is a source of concern as banks are largely dealing with individuals whose credit history is usually not known or available through a centralized database,” the financial assessment noted.
However, so far the ratio of non-performing loans to total consumer loans has remained quite minimal (around 1.1 per cent at end-June FY05).
The SBP reported that the overall size of the financial sector (measured by assets) increased to Rs4.5 trillion, with an impressive rise of Rs569.1 billion during CY04. Over 80 per cent of the rise in assets came from the banking sector, which further increased its dominance in the overall financial sector.
The share of the private sector increased to 56.6 per cent -– this is for the first time that the share has exceeded 50 per cent since the nationalization of financial institutions in 1974.
The bifurcation of the private sector into domestic private financial institutions and foreign institutions highlights another notable development. The share of the former reached almost 86 per cent by end-CY04, as compared to 67.2 per cent at end-CY00. This changing pattern of market shares clearly indicates that the domestic private sector now has a leading role in the financial sector.
Islamic banking activities have recorded a noteworthy progress during the year, with an asset base of Rs44 billion and deposits of over Rs30 billion by end-CY04. The share of Islamic banking in the total banking sector assets and deposits remains small.
By end-CY04, 25 licences were issued for Islamic banking branches to nine conventional banks, out of which 21 branches of seven conventional banks started operation in 2004. In addition, two more full-fledged Islamic banks were issued licences by the SBP during the year.
