WITH a surge in private sector lending by banks, retailers also have got greater access to bank financing, which, however, still falls short of their needs.

In nine months of FY14, banks’ lending to the retail sector totaled Rs10.8 billion, up from Rs2.5 billion in the year-ago period. Given its enormous size, there is still much room for enhancing banks’ lending to it.

This, however, requires a new approach towards retail businesses, both by the government as well as by banks. Presently, this sector is scantly documented, which makes banking with it difficult.

And one key reason for the lack of documentation is that retailers fear “they would become fat cows for tax milking, like salaried people,” says a finance ministry official. “Easier, simpler documentation can encourage them to avoid tax evasion and make them better bank borrowers.”

Currently, bank financing to retail outlets is very limited, admit senior bankers, citing their lack of documentation.

Lack of documentation by retail outlets and of credit products designed specifically for their needs is said to be hampering faster growth of bank financing to the retail sector

Providing financial support to retail businesses falls under merchandise or commercial banking, along with financing of external trade and local wholesale businesses. With the recent growth in exports, lending to export businesses is growing.

But slower expansion in imports has created room for additional financing for wholesale and retail trade, which banks are trying to fill in.

Retail businesses are very diverse by nature and geographical locations. That is another reason why “banks think they can’t venture aggressively in this area,” says a senior executive of the state-run National Bank of Pakistan. Even if the retail sector becomes more documented, it will take banks a few years to cater to their financing requirements according to their specific need and nature of business.

“We will have to come up with financial products that are not only client-friendly, but are also as much default-proof as possible. Besides, we’ll have to develop some new modes of credit appraisals and strengthen the ones that already exist.”

Since the mid-2000s, the retail sector has been growing steadily, averaging no less than 8pc between 2006 and 2010. In FY11, its growth rate shot up to 26pc, which moderated to 12pc in FY12 and then to 8.9pc in FY13. In FY14, the growth rate again rose to 11.6pc, according to provisional estimates prepared for budget-making.

Despite the recent surge in franchise retailing and the popping up of chains of super stores, the retail market is still dominated by independent retailers, i.e. those who own their outlets. They are in the hundreds of thousands.

“Reaching out to them requires bankers with the right set of skills and expertise as well as strong cushions against the possibility of loan defaults. That is why you don’t see banks making loans to such retailers,” says the head of commercial banking at one of the top five banks.

“But we do lend to big retailers who have franchise of big companies, and also to retail businesses being run as joint ventures under licensing agreements. Macro, Metro Cash and Carry, Mothercare, Levis and big hotels all borrow from banks.”

A number of independent retailers also get bank financing in various forms, the most common being credit cards, which they use to draw money from banks when required to make payments to wholesalers.

Retailers confirm this. “I have one such facility from a local bank and the rate they charge is not too high, considering the ease of business it provides me,” says Muhammad Irfan, a pharmacist in North Nazimabad. He has to pay Rs85 per day to his bank and he can borrow up to half a million rupees in a month.

“It’s like revolving credit. When I need money, I use this facility, and when my receivables are realised, I deposit them in my account to draw again when necessary.”

Another mode is when retailers get real estate financing. Bankers say many independent retailers turn to them for outright purchase of additional shops or for paying installments of shops they book in commercial plazas or markets.

Besides, large super stores and chain of retail outlets seek bank credit for expanding their business, whether by acquiring more land for constructing outlets, purchasing new buildings, or for adding stocks of articles in their shops.

Bankers say the problem with financing of the retail sector is that it has to be done mostly against cash flow. A vast majority of retailers don’t have verifiable cash flow statements, and many more don’t have national tax numbers. So, lending to them becomes difficult.

As for collateral-based lending, large retail outlets are not discouraged from placing their stocks of articles or their buildings as collateral, but that too can become tricky, like in cases where the building is rented “or if the stocks of articles has been purchased on installments, leasing or deferred payments,” says a senior executive of Habib Bank.

Of late, large super stores have been providing small independent retailers stocks of articles on deferred payments. Some even use them as their informal branches to clear out inventories on reduced rate. “Dealing with them could be trickier for banks with little expertise.”

Published in Dawn, Economic & Business, June 2nd, 2014