During the current fiscal year, banks’ lending for fixed investment has been growing both on higher demand and improved supply of funds.

As the economy shows signs of greater growth, many companies engaged in manufacturing, energy and utility supply, construction, transport, storage and communication, mining and quarrying are now getting bulkier bank loans for capital expenses to enhance capacity. And, banks awash with liquidity are freely making long term loans with no great worry about repayments.

Economic growth is strong and is going to get stronger in the future with CPEC-driven business activities all around. Besides, political intervention in banking is minimal. Growth of bad debts is sliding and the SBP regulations are strict enough to keep things in check. Banks’ liquidity is also high, facilitating adequate provisioning against non-performing loans. All these factors have emboldened them to write new long-term loans a bit freely, bank executives say.

In eight months FY17, between July 2016 and February 2017, banks lent Rs296bn to private sector businesses. About half of that amount was lent for fixed investment. “That’s a very encouraging sign,” says a senior central banker adding that there are indications that this trend might continue.

“This generous lending for fixed investment should help industries prepare themselves for faster growth in output, in the coming years as the economy continues to benefit from a CPEC-driven spike in business activity. And, this should also help them enhance their capacity to produce more, improve production processes resulting in quality goods and services at competitive prices.”

As the economy shows signs of greater growth, many companies are now getting bulkier bank loans for capital expenses

In 8MFY17, bulk of bank loans for fixed investment (Rs93bn) went to the manufacturing sector followed by electricity, gas and water supply (Rs21bn), construction (Rs11bn), transport, storage and communication (Rs7bn) and mining and quarrying (Rs7bn), a closer look at the latest central bank stats reveal.

Within the manufacturing sector, textiles stood out as the largest recipient of fixed loans followed by food and beverages and automobiles, bankers say.

The exact amount of lending for fixed investment to these manufacturing sub-sectors in 8MFY17 is not known; but in the first six months, textiles alone got Rs65bn.

Bankers say almost the entire Rs65bn was lent for machinery purchase. Only a negligible amount of half a billion rupees was lent for purchase of land or for building construction, they say.

A large part of the money lent for purchase of textile machinery is in the form of direct bank loans and a small part is in the form of concessional loans made under the SBP’ long-term financing scheme, top bankers say.

In the food and beverages sector, fixed-term loans have gone chiefly into capacity building for meat and fish processing. “But a number of rice mills are also seeking long term funds for upgrading their machinery while some wheat mills with plans to produce value-added products are getting long-term loans for replacing or modernising their mills,” says a senior executive of the National Bank.

For rice millers long-term lending is also taking place under a SBP scheme meant to help them improve rice processing to stay competitive in export markets, bankers say adding that declining exports of rice have prompted some millers to go for it in a big way.

In the automobile sector long-term borrowing has become necessary to enhance capacity in the face of rapidly growing demand for cars, jeeps, buses and trucks, and light commercial vehicles.

Going forward, banks also see demand for long-term finance coming from the cement sector for the same reason.

Banks’ substantial lending for fixed investment to the manufacturing sector is not limited to big companies. A similar trend in SME lending is also emerging, bankers say adding that the SMEs in textiles, food and beverages, transport and goods storage and ancillary auto industries are some of the main recipients of fixed-term loans.

Companies involved in supply of electricity, gas and water are borrowing long-term funds to replace their supply infrastructure to meet growing demand.

Whereas the textile sector’s borrowing for fixed investment had started picking up from FY16, after a declining trend in exports worried both industries and the government, “companies engaged in energy and utility supply have gone for big long-term borrowing, right from this fiscal year, anticipating higher demand in the wake of greater economic activity,” according to head of corporate credit division of a large local bank.

The same is true for most companies that fall in the category of transport, storage and communication.

The construction sector’s boom began from the second half of the last fiscal year when the issue of land pricing was settled. That has accelerated construction activity in almost all major urban centres, particularly in Karachi and Lahore and has, thus, boosted demand for long-term funds from banks.

In mining and quarrying, smooth progress of the Thar Coal power project has been a key driver in boosting bank lending for fixed investment to this sector, bankers and industry sources say.

Published in Dawn, Economic & Business, April 10th, 2017