KARACHI, June 21: Commercial banks made Rs32 billion new loans within last two months part of which is believed to have been used by institutional borrowers for reinvesting in the stocks.

Senior bankers say the stock of total advances of commercial banks rose from Rs925 billion at end-March to Rs957 billion at end-May this year showing an increase of Rs32 billion.

They say whereas the new loans generally financed production and trading activities of the private sector part of it was used by the borrowers for reinvestment in the stock market.

The Karachi Stock Exchange 100-share index jumped from 2715 points at end-March to 3099 at end-May showing a rise of 384 points. The aggregate market capitalization went up from Rs581 billion to Rs675 billion.

“There is no doubt the institutional borrowers have made big investment in stocks out of their borrowings from banks,” said director of brokerage Aziz Fidahuesin & Company, Sarfaraz Aziz.

Surplus liquidity available with the banks led to generous lending by them and many institutional borrowers were encouraged during the last two months to invest in stocks. “Because return on other modes of investment were bottoming out...be it local currency or foreign currency deposits of banks or special dollar bonds,” said Sarfaraz Aziz when reached by Dawn over telephone.

He said real estate and stocks have emerged as key areas of investment not only for resident Pakistanis but also for those living abroad. “Much of home remittances are also flowing into these two areas,” he said.

But central bankers say it would be misleading to presume that the major chunk of additional bank credit had been used only for reinvestment in stocks.

“Corporates have been using the money borrowed from banks to finance trading and production activities quite substantially,” remarked a senior central banker. But he said it was too hard to say how much of fresh bank credit has been used in businesses— and how much has gone into the stock market.

The current fiscal year is likely to close with Rs100 billion plus private sector borrowing from banks against the original target of Rs94 billion and revised target of Rs50 billion. In eleven months to May 2003 all banks combined lent Rs117 billion to the private sector and central bankers say the huge credit volume is well spread among various sectors of manufacturing. The amount also includes farm lending of banks.

Senior bankers say the pace of credit disbursement may keep up through next fiscal year starting July as the budget for 2003-04 has opened up brighter opportunities for increased lending in housing/small and medium enterprises/agricultural and consumer sectors. But they say the credit offtake in net terms may not be very impressive because the borrowers may start repaying bank loans in a big way in the first quarter of fiscal July-June 2003- 04. “We anticipate this for two reasons,” says head of credit of a large local bank. “This year credit retirement has remained somewhat slow because many borrowers were out there to make money out of their bank borrowings,” said the banker. He said another reason for faster credit retirement in the next fiscal year is that the stock market may start losing its extra weight or at least stop rising further thus putting on brakes on borrowings for the purpose of reinvestment in stocks.

Stock brokers too know that. But what really matters is the anticipated timing and the level from where the stocks might start receding. Says Sarfaraz Aziz “I think the current bullish trend will reverse only after the index touches 3500 points. But how I cannot say how soon this may happen.”