KARACHI: Private sector credit offtake plunged by 69.5 per cent to in the first seven months of this fiscal year (between July and February 14) to Rs179 billion, from Rs587bn in same period of 2018-19, reported the State Bank of Pakistan

The decline in lending to the private sector reflects the slowdown in the country’s overall economic activity.

Traders and industrialist have been criticising the high interest rate environment, dicouraging them to borrow from banks. That has played a key role in bringing down domestic investment while banks invested most of their liquidity in the government papers.

Recently the SBP indicated that the policy rate may not be changed downward due to inflation. Bankers believe that an inflation rate higher than the interest would not allow the policymakers to cut the key rate.

With private sector not borrowing from banks, the latter find it difficult to use the excess liquidity. For the past few months, participation of banks in the government debt papers has been increasing and their offers to buy treasury bills have crossed Rs1 trillion in the last two auctions.

However, the government has remained close to the targets sets for auctions. In the previous one, investors offered Rs1,061bn to buy T-bills but only Rs274.5bn was raised against the target of Rs300bn.

This suggests that over Rs700bn surplus liquidity was left in the banking system, making it more difficult for them to use the unused money.

Some bankers say that lending at high interest rate is prone to infection which means it would increase the default rate that’s already on the rise. However, no official figure is available to support.

Published in Dawn, February 25th, 2020