AN expected pickup in economic growth is luring banks to lend more liberally to the private sector since December 2015, supported by widening credit demand from various segments of the economy and low interest rates.

The private sector’s bank borrowings so far this fiscal year indicate that this does not seem just one-off phenomenon. And as it is somewhat broad-based, it may be safe to assume that it will be sustainable at least for a while, if not in the long-term, senior bankers say.

Net credit flow to the private sector began to rise in December 2015 on higher credit demand from agriculture, energy, textile, chemicals, fertiliser, cement and construction sectors. And the appetite for consumer loans and trade finance grew stronger.

Project financing in oil refining and marketing companies and in alternative energy projects including wind and solar is on the rise

The private sector’s net borrowing between July 1, 2015 and Jan 5, 2016 rose to Rs342bn from Rs198bn in the corresponding period last year. In a sharp contrast, the federal government’s borrowing remained literally unchanged at the a-year-earlier level of Rs624bn.

Bankers foresee further increase in bank lending till the end of March before the private sector begins credit retirement. “Low interest rates have played a big role in creating additional demand for bank credit notably consumer finance,” says head of credit division of a large local bank.

“We’ve noticed that in many cases personal loans are used by individuals to finance their business activities in the informal sector. This has been going on for years but in FY16 the government’s documentation drive has strengthened this trend,” says head of credit department of another big local bank. “This, too, reflects larger off-take of consumer and personal finance in particular and overall bank credit disbursement in general.”

A senior executive of state-run National Bank of Pakistan pointed out that accelerated production of defence industries that are entirely in the public sector, also contributed to higher demand for credit by prompting business activities of hundreds of private sector contractors. “Besides, launching of mega housing projects by top real estate development companies also created more appetite for bank financing.”

He revealed that an under-construction mega housing project at Sea View has even sought bank loans for a captive power plant. “They plan to use the electricity produced at the plant in their project and also to sell it to a large composite textile mill in Korangi. Owners of the same project have also set up a gas plant of limited capacity.”

Bankers also say that project financing in oil refining and marketing companies and in alternative energy projects including wind and solar has begun and is on the rise. Besides, oil exploration companies that had scaled down their operations due to oil price slump are seeking bank loans to retire part of overdue circular debt.

Rupee depreciation in FY15 and in this fiscal year combined with a spike in inflation mean the State Bank may eventually have to tighten its monetary policy. “Some big businesses including MNCs that think on this line are also borrowing more from banks these days so that they have to borrow less in FY17,” says a senior executive of MCB Bank.

Loaning to export-oriented sectors had remained static till November 2015 but bankers say that from December onward they have been making new net loans.

The government actions like exempting industries from power load-shedding and speeding up clearance of the backlog of export rebate claims have encouraged exporters to upscale their operations.

The breakup of credit flow to the private sector indicates that in the agriculture sector, animal and fish farming loans are growing faster than in other sub-sectors, sources in the SBP say, adding that the data for the first half of FY16 would be released sometimes in February.

They also say in manufacturing sector, textile loans are growing at 5-6pc followed by ready-made apparel. Chemical manufacturing companies also have consumed 10pc more loans in 1HFY16. Similarly, manufacturers of electrical machinery and apparatus have borrowed 8pc more net loans from banks during the first six months of this fiscal year. Industry sources say that forecasts of another hotter summer this year have led makers of air-conditioners and fans to raise their production levels.

Strong export performance of electric fans and rising local sales of fridge and deep-freezers also have increased bank credit appetite of electrical machinery producers.

Published in Dawn, Business & Finance weekly, January 25th, 2016