KARACHI, Oct 17: Unlike in the past the demand for the private sector credit did not taper off in the first quarter of this fiscal year and banks disbursed Rs15.8 billion fresh loans to the private sector between July and September.

Bankers say traditionally private sector credit disbursement does not see enough buildup in the first quarter of the fiscal year as people normally retire between April and September the bank credit secured during October-March. This is so because the demand for the credit is higher in October-March when businesses need money with the onset of cotton ginning and sugarcane crushing activity. In July-September 2002, the private sector credit had seen a negative inflow of Rs27 billion. That is why a credit expansion of Rs15.8 billion in the first quarter of this fiscal year assumes special significance.

And it also raises a question. Is the credit offtake genuine and going to help production base expand or is it contributing to the creation of an asset price bubble that is bound to burst afterwards and depress the economy?

Economists and bankers do not rule out the possibility of the higher credit offtake contributing to the creation of asset bubble. But they also believe that businesses have used some of the additional credit offtake in enhancing production capacities and boosting exports.

“We cannot rule out the possibility that businessmen borrowed money from banks to make investment in stock market,” says former SITE Association of Industry chairman Majyd Aziz.

“But at the same time we can trace the reasons for a higher credit offtake (in the first quarter of the fiscal year) to new BMRs and increasing requirement for working capital.” Mr Aziz, an exporter of textile madeups, said the textile millers did exhaust several categories of export quotas in the first quarter that must have increased their borrowing requirements. He said that the exporters also needed more working capital because they could not get in time their sales tax refunds. “And needless to say that BMRs still continue in the textile sector” as the nation braces for the quota-free trading regime from 2005 onwards.

But he agreed with Dawn that many businesses borrowed heavily to invest in the stock market as well as in the real estate. “There is no denying the fact that has been a case,” he observed.

Federation of Pakistan Chambers of Commerce and Industry president Riaz Tata said the private sector credit showed a growth of Rs15.8 billion in the first quarter primarily because higher exports during this period increased the demand for the bank credit. The exports in July-September 2003 rose to $2.968 billion, surpassing the target of $2.916 billion and showing 14.6 per cent growth over $2.588 billion exports recorded in a year-ago period.

Mr Tata said the private sector credit went up also because banks made liberal lending in the consumer sector. He also referred to the BMRs in the textile sector and increased activity in the construction business after banks started offering housing loans. He said that leasing of new cars and machinery, both through leasing companies or directly by banks, must have pushed up the volume of the private sector credit. Like Mr Aziz, Mr Tata also did not rule out the possibility of the money borrowed from banks going into the stock market. “There is a possibility for this but we should remember that actual investment in stocks has not been very high, though prices have increased sharply,” he said. “And I do not think businesses have made investment directly in the real sector through borrowing from banks. But again it is possible that some of them took loans for different purposes but ended up using the same in the real estates.”

The KSE 100-share index shot up to 4,163 points at the end of September, up 763 points from end-June level of 3,400 points. Bankers also confirm that they had made higher badla financing during this period. So far real estate is concerned the boom in prices that was seen one to two years ago was in fact still tapering off during July-September. But real state brokers say some investment did take place during this period.

Both Majyd Aziz and Riaz Tata made it a point that the private sector credit offtake had witnessed an unusual growth also because the interest rates were their historic lows. Weighted average lending rate of all the banks combined fell to 7.58 per cent at the end of June this year and businessmen say prime borrowers are currently getting bank loans at 4-6pc on an average.

Noted economist Dr Shahid Hassan Siddiqui is also among those who believe that part of the private sector credit is being used in non-productive sector. Says Dr Siddiqui: “A significant percentage of credit expansion has certainly gone to unproductive channels and it is in the knowledge of the banks and the State Bank.”

“Channelling of funds into the stock exchange and the property market and car premiums businesses are unproductive in nature,” he said.

Excess liquidity available with the banks and car assemblers right connection in the power corridors gave birth to a new speculative business in delayed cars delivery.

Dr Siddiqui said the very fact that AAA-rated bank borrowers were getting loans at a low interest rate of four per cent showed that there was enough room available for them to secure loans at such a low rate and re-invest it somewhere else, particularly in the national saving scheme.