August 20, 2007	Monday	Sha’aban 6, 1428

With the start of new fiscal year in July, banks have been investing more in the risk-free, high-yielding treasury bills but their lending to the private sector has, so far, not picked up.

Between July 1 and August 4, banks’ overall investment, including that in the government securities, rose by Rs42 billion. But their net advances after provisioning, declined by Rs55 billion.

“Currently, the private sector is not rolling over their seasonal bank credit as fast as in the past,” said head of the credit division of a local bank. “We are also experiencing retirement of credit by large borrowers who may seek fresh credit later on,” he added.

Chairman of Pakistan Bedwear Exporters Association, Shabbir Ahmed said textile companies including bed-wear manufacturers have minimised borrowings from banks. “We are keeping bank credit to bare minimum because of rising interest rates. This is truer in case of sub- sectors of the textiles whose exports are falling.”

Pakistan’s textile exports grew only 5.3 per cent in the last fiscal year and exports of bed-wear declined four per cent. Exporters link their poor performance partly to high interest rates and the fear that the recent tightening of monetary policy would hit them even harder.

Top bankers say that the policy tightening would not raise lending rates sharply. President of Pakistan Banks Association, Mr Zubyr Soomro said that a half per cent increase in the SBP discount rate gives a signal to inflationary expectations, adding, “But logically, it should not lead to a rise in lending rates beyond this level itself i.e. half a per cent.”

While the increase in the SBP discount rate from 9.5 to 10 per cent should help “on the inflation front it should not have a meaningful impact on credit off-take”, he added.

The PBA chairman said the incentives announced by SBP to encourage banks to raise long-term deposits and the streamlining of foreign currency financing procedures would also “enable corporate borrowers to tap alternative avenues at lower costs.”

But business leaders say and bankers directly involved in credit disbursement confirm that private sector credit is not picking up.

“Expensive bank credit has forced many businessmen to borrow less,” said Mr Amjad Rashid, chairman of banking committee of the Federation of Pakistan Chambers of Commerce &Industry.

“Businessmen are no more borrowing excessively from banks to invest in stock market and real estate. They are borrowing from banks just to meet their genuine requirements.”

There are several other reasons for a fall in the private sector credit. Large-scale manufacturing is not growing fast; weaker textile spinning mills are closing down; expansion work in textile sector has almost stopped and input cost of various industries for production has begun to shrink for a host of reasons.

On banks’ part, the reasons for a slowdown in private sector’s lending are manifold. But, perhaps, the most important is that lately the government has shown a great appetite for bank borrowings. And with gradual tightening of the monetary policy, the return on banks’ investment in treasury bills has increased. In just one and a half months of this fiscal year, the SBP has sold T-bills worth Rs150 billion.

And average yields on the bills are now as high as nine per cent for three months; 9.14 per cent on six months and 9.40 per cent on one-year. These are good returns on the most secured risk-free investment. (Average lending rate of banks stood at 11.33 per cent at the end of June 2007).

Bankers involved in credit disbursement say that the demand for corporate credit may remain depressed till December 2007 before the announcement of the new monetary policy. But they say it would happen not only because of high interest rates.

They say interest rates would only crawl up in response to the tightening of the monetary policy simply because in the current competitive market they could not make their lending much dearer for their borrowers.

Besides, they pointed out, that the inter-bank market was too liquid these days to allow any big increase in lending rates.

Since July 1, the six-month KIBOR has risen from 10.02 to 10.12 per cent, showing an increase of only 10 basis points, a proof to high liquidity levels.

So, the growth in corporate loans may remain low in the current fiscal year. But indications are that agricultural loans would grow at a reasonably high rate.

Farm lending: The main reason for a faster growth prospect in farm loans is that the Zarai Taraqiati (Agricultural Development) Bank has re-emerged as a strong lender. And other banks also have started lending more to the agricultural sector to earn higher returns.

In the last fiscal year, ZTBL disbursed Rs56 billion farm loans against the target of Rs48 billion. Overall agri lending at Rs168 billion also burst through the target of Rs160 billion.

“Farmers would be borrowing more in this fiscal year mainly because the recent floods have ruined them financially,” said Mr Qamaruzzaman Shah, president of the Federation of Pakistan Chambers of Agriculture.

He said due to the loss of standing crops in the recent floods, farmers need money immediately for sowing other crops or for saving the standing ones from being completely ruined.

Qamaruzzaman Shah said that banks were charging a minimum of 13 per cent mark-up on agricultural loans in the last fiscal year and pleaded that the rate should be lowered to help the floods-affected farmers. But the head of agricultural credit division of a large local bank said, the mark-up might remain unchanged.

“The reason is that agri loans run the highest risks of defaults. Besides, the cost of disbursing agri loans is pretty high,” he explained.

At end- December 2006, non-performing agri loans constituted 18.5 per cent of the overall NPLs of the banking system. This denominated a very high default ratio because the share of agri loans in banks’ overall lending was slightly less than six per cent.

SMEs: Bankers say that the recently announced first ever policy on Small & Medium Enterprises (SMEs) would lead to increased lending to this sector. “There is a huge potential of lending to SMEs because not only their current share in overall lending is low but also because SMEs operations are growing pretty fast,” said a senior banker. At end-December 2006 SMEs share in overall bank loans was 17 per cent—almost one third of the 53 per cent share of corporates.

The SME policy unveiled on August 15 envisages spending of Rs13 billion till 2009 for the promotion of SMEs and setting up of small business development centres in six major cities. These centres would improve supply of the skilled workforce for SMEs. Bankers say like agriculture, SMEs also provide an ideal opportunity to them to earn higher interest rates adding that they are currently lending funds at 12-16 per cent to SMEs.

Consumer loans: The highest return, however, is earned on consumer financing, which ranges somewhere between 16-22 per cent and in some cases, like credit cards, can go even higher.

Bankers say they would most likely increase the mark-up on consumer financing but are not sure whether this would dampen the demand.

Lately consumer loans somewhat decelerated mainly due to higher interest rates. Between July-May FY07, consumer financing expanded just 15 per cent compared against 34 per cent in a year-ago period. And within consumer loans portfolio, car loans showed the sharpest fall in growth rate from 44 per cent to 10.2 per cent.

Bankers say that in one and a half months of this fiscal year they have not seen any visible shift in consumer financing pattern. “Chances are that consumer financing would show more or less the same trend as seen in the last fiscal year,” said head of consumer financing at a foreign bank. “The low demand in auto financing, which is partly due to higher prices of automobiles, might be compensated by a faster growth in personal loans and housing finance.”

The Middle Eastern countries, walling in cash on the back of oil prices boom, have started taking up big town housing and land development projects in Pakistan. That might spur demand for housing financing during this fiscal year and beyond.

Another major component of consumer financing is credit card business. But apparently there is little scope for boosting it. In July-May FY07 the growth rate of credit card business fell to 27 per cent from 68 per cent in the year-ago period.

Banks’ mark-up including hidden charges on credit card business ranges between 24-30 per cent — and in certain instances even more. This high mark-up is the biggest impediment to growth in this business.