KARACHI: A research report by the State Bank of Pakistan (SBP) said 30 per cent of banks’ exposure is to only 20 business groups.

Growth in credit depends heavily on the appetite of the corporate sector, which currently receives nearly 70pc of total bank lending, according to “Bank Credit to Private Sector: A Critical Review in the Context of Financial Sector Reforms” issued earlier this week.

The penetration of bank credit in the economy is quite low compared to regional and emerging economies. The gap is widening over time, it said.

“Over the past 25 years, however, the ratio of private credit-to-GDP has shrunk even in absolute terms,” said the report.

In focusing exclusively on the corporate sector, banks have marginalised other niche segments like small and medium enterprises (SMEs), agriculture and housing, it said, adding that the risk for the banking system has increased as reflected in its loan concentration within a few conglomerates.

SBP report says banks are not effectively channelling depositors’ savings into loans for businesses and individuals

“The overall credit growth in Pakistan has remained subdued as a number of big, cash-rich conglomerates have increasingly begun using their own resources to fund growth rather than borrowing from commercial banks,” said the report.

The overall environment for private credit growth appears to have deteriorated over time. Banks are not effectively performing their core function of channelling depositors’ savings into loans for creditworthy businesses and individuals, it said.

“The repercussions have been quite overwhelming for the economy, namely the dismal state of private investments, and financial and social exclusion of a large segment of the population.”

The report said things began to change course following the deterioration in the overall macroeconomic and investment climate 2008 onwards. Not only did the global financial crisis trigger a sense of uncertainty, but also the growing security concerns and energy shortages significantly dented domestic business prospects, it added.

Balance-of-payment constraints also have a sizeable impact on the financial system’s liquidity, it said, adding that the country’s net foreign assets-to-GDP ratio averaged only 5pc in 2006-15 compared to other countries like Thailand (42pc), Malaysia (36pc), India (18pc) and Bangladesh (8pc).

From a cross-country perspective, however, it appears that high fiscal deficits and a higher allocation of bank liquidity to budgetary lending cannot explain such a low level of private credit-to-GDP ratio for Pakistan, said the report.

More specifically, India, Sri Lanka, Egypt, Turkey and Malaysia ran a persistently high level of fiscal deficits over the past 15 years. Yet their credit growth through these years has been nothing short of enviable, it said.

More importantly, India, Egypt and Brazil even have a very high level of bank claims on government. Still their banks managed to contribute meaningfully to the private sector’s growth, it said.

While estimates put the contribution of agriculture and SMEs to Pakistan’s GDP within 30-40pc, these enterprises get only 6pc of bank credit, said the report.

“Increasing credit to the private sector is not the ultimate aim in itself. The end goal is to ensure that deserving entrepreneurs and households, which are currently excluded from access to finance, can avail credit on equitable terms,” said the report.

Published in Dawn, July 30th, 2017