Banks remained fairly liquid in FY17 and chances are their liquidity will remain high in FY18 as well.

But will they use their sufficient liquidity for channelling funds into areas that keep crying for formal finance?

“In the outgoing fiscal year, you saw a surge in banks’ private sector lending. I hope the banking industry will maintain this tempo,” says head of one of the top five local banks.

“Achieving financial inclusion and reaching out to the unbanked or less-banked areas is far different than offering traditional credit. It’s an ongoing process.

“It might consolidate and improve in the next fiscal year but given the huge lending gap and banks’ limitations I don’t see a dramatic change in the situation.”

In the second and third quarters of FY17, banks’ liquid assets to short-term liabilities ratio stood at 107.2pc and 108.6pc respectively.

Will banks use their sufficient liquidity for channelling funds into areas that keep crying for formal finance?

This is thanks largely to heavy injection of funds by the central bank through open market operations, or OMOs, and improved deposit inflows, according to SBP reports.

The last quarterly report on the banking sector is yet to be published but banks’ liquidity levels have remained comfortable during this quarter, too, central bankers say.

Top bankers say, however, that though banks are fairly liquid and have also been lending more to the private sector, ‘preferred lending’ will remain the norm in FY18 as in FY17.

“You may see some adjustments here and there (in the lending pattern) in-line with the changing dynamics of private sector credit demand and the overall economic situation.

“But generally speaking corporate and consumer sectors, along with real estate, will continue to get the bulk of bank credit in FY18 as well,” the head of a mid-tier bank told this writer.

Many CPEC-related infrastructure projects would be on and foreign direct investment from China in these and other projects would be flowing in fast.

Higher intake of private sector credit in FY17 might keep demand in some sectors moderate, senior bankers speculate.

And above all, the next year being an election year, developments in the political landscape too would have a bearing on banks’ lending behaviour.

Besides, political tensions and regional security concerns in the Middle East will also be keenly monitored by banks for their ramification on our economy.

“These and similar other factors would weigh on banks’ lending decisions and they might not venture into riskier territories. Lending for financial inclusion, therefore, may or may not accelerate in FY18,” says the president of another local bank.

In eleven months of FY17, banks lent about Rs494bn to private sector businesses, more than double their lending of Rs237bn in the same period of FY16, latest SBP stats show. But the bulk of credit went to traditional corporate and consumer sectors as also in real estate.

Net lending to agriculture remained negligible (though banks made heavy lending to the agriculture sector on gross basis, but because agricultural loans are normally repaid within a year, net lending as usual remained too low — just Rs1bn).

Financing to tech startups, an area that has always skipped banks’ attention, also saw no big growth, executives of start-ups say.

Lending to SMEs saw a surge in the first half of FY17 but that largely tapered off in the third quarter, SBP reports reveal; though microfinance, together with agriculture and SMEs, and which make-up the core of lending for financial inclusion, did see some progress.

Lending under the much-trumpeted Prime Minister’s Youth Loan Scheme also remains low (just Rs18bn so far against the target of Rs100bn). Whereas government officials accuse banks of neglecting this scheme, senior bankers say most of the loan seekers don’t fulfill the criteria laid down for lending under this scheme.

“A couple of banks, under government pressure or in order to please the present regime, may find ways to boost loans under this scheme ahead of elections in FY18.

“But that, too, is a possibility only if the political system is not jolted as a result of the ongoing investigation into the panama leaks,” says a senior executive of a large local bank.

The extent of government borrowing in FY18 would also determine the extent to which banks would go farther in exploring fresh avenues of lending and the pace with which they would continue to cater to credit demand originating from traditional sectors.

We know from experience that the government, particularly in the election year, exceeds its target for borrowing from banks.

The target for FY18 is Rs390bn which many bankers believe will be exceeded by a wide margin, not only because of political exigencies in the election year but also because of the growing fiscal deficit, anticipated to grow further with the government spending more liberally ahead of elections.

“In that case, it would be easier for banks to continue to invest heavily in government debt securities and stick to ‘preferred lending’ (or lending to corporate and consumer sectors and the real estate),” says the head of a credit policy group of a major local bank.

Despite a big spike in private sector lending in FY17, banks’ advances to deposit ratio remained low, just 47.5pc as of March 2017 primarily because excessive government borrowings enabled them to keep investing funds in debt securities.

Published in Dawn, The Business and Finance Weekly, July 3rd, 2017