Growth in domestic trade, increase in urbanisation and spread in the network of retail outlets across major cities continues to fuel banks’ lending to retailers. But banks have yet to tap the potential credit demand of this sector.

In the last fiscal year, banks lent Rs13bn to retailers and, senior bankers say, they continue to lend generously during the current year as well.

This is viewed as a positive sign, more so because after flooding the retail sector with bank credit between FY07 and FY10, banks had become a bit cautious in retail lending, often ignoring genuine demand.

Historical data supports this view: net average annual lending to retailers in the past five years (between FY12 and FY16) has remained just a shade above Rs5.4bn. And in two out of these five years retail lending has remained nil (in FY13) and even negative (in FY15) chiefly due to the federal government’s missteps in its attempt to tax banking transactions of small traders.

Contrary to this, in the preceding five-year period (between FY07 and FY12), banks’ annual net average lending to the retail sector stood around Rs 10.8bn, even though FY11 had seen negative lending of Rs3bn as banks imposed a credit squeeze following the super floods of 2010.

“... on balance, after discounting specific reasons for a dip in retail lending ... one can see a growth cycle in banks’ lending to the sector”

Banks’ lending to retail trade outlets peaked between FY07 and FY10 when the economy was growing, while heavy inflow of foreign investment between 2001-2007 spurred economic activity, besides encouraging leading foreign brands to enter the Pakistani market.

But from FY11 onwards, the flow of bank credit to the retail sector has remained uncertain and in three out of the seven years (between FY11 and FY16) net credit flow has remained zero or negative as well.

“But on balance, after discounting specific reasons for a dip in retail lending (like the super floods of 2010 or the government-traders tussle on taxation issues), one can see a growth cycle in banks’ lending to the retail sector,” says a former president of the state-run National Bank of Pakistan.

Easing of foreign investment policies in the first decade (2000-2010) and the consequent influx of foreign investment up till 2007 saw the popping up of networks of retail outlets, both backed by foreign money and purely local ones.

Then in 2010 till date, “the expansion in domestic trade, fast urbanisation and changes in lifestyle requiring consumption of more sophisticated goods and services—and of course the ease of online shopping ­-- is keeping demand for retail loans high,” opines a central banker.

Bankers claim they are capitalising on this demand but lending volumes suggest they have so far tapped only a fraction of potential demand.

In Karachi alone, there are no less than 100,000 retail businesses with an annual turnover of Rs60m per year or Rs5m per month, according to officials of the Pakistan Commodity Traders Association.

These include eateries, shopping malls, super stores, large old-fashioned retail shops, meat and chicken sellers’ establishments, chain stores of food items, retail outlets of famous brands of clothing and bedding, laundries, schools and coaching centres, hospitals and polyclinics etc.

Even if each of these retailers needs just Rs1.2 per year (or Rs100,000 per month) bank borrowing, there is a potential credit demand of Rs120bn per year. And if, for argument’s sake we halve the estimated number of retail trade and service outlets in the city to 50,000; even then the potential demand works out to be Rs60bn per year, officials of the Karachi Retail Grocers Group contend.

Against such a huge demand, what banks end up lending to the retail sector in the entire country (Rs5.4bn on average in the last five years) is just peanuts.

Bankers say lack of documentation and non-tax filer status of retailers are two key roadblocks to retail loaning. Banks have to comply with State Bank rules on retail financing, and those regulations, plus their own requirements of prudent lending, compel them to exercise care in lending to retailers, senior bankers say.

Besides, the bulk of retail loans are normally in the shape of revolving trade finance. Throughout the year, loans are forwarded and recovered. “And the final stats on retail lending that people look at are the difference of the year-end stock of net loaning (to retail sector). That doesn’t give you a fair idea of our loaning activity as such,” argues the head of retail financing of one of the top five commercial banks.

Stagnation in exports of textiles has led many leading textile groups like Al-Karam, Gul Ahmad, Afroze and Chenab to increase the number of their retail outlets and encouraged the less-known among them to follow suit. Similarly, leather export houses are also focusing more on local sales. “This is certain to keep demand for retail credit high as stand-alone outlets attached with big industries are regarded as the best borrowers among all other retail credit seekers,” says the head of the credit division of a large local bank.

Besides, eateries and motels are mushrooming within big cities and along inter-provincial highways.

Bankers treat many of them as ideal retail borrowers because of their huge annual turnovers and affiliation of many to big businesses, including transport contractors and dairy farmers with old relationships with banks.

Published in Dawn, Business & Finance weekly, October 24th, 2016