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Bank credit eludes KP businesses

Updated December 04, 2017

BUSINESSMEN in terrorism-hit Khyber Pakhtunkhwa are complaining about the financial sector’s evasive attitude in providing credit and banking facilities to them despite collecting huge deposits. There is a growing disconnect between banks’ lending and their deposit mobilisation in the province.

In recent interactions with the federal government and the State Bank of Pakistan (SBP), businessmen recorded their displeasure over the attitude of the banks operating in the province to “export” their funds to other provinces.

Interestingly, commercial banks are aggressively pursuing rising bank deposits across KP. However, they shy away from extending loans to the private sector in the province. The loans issued to businessmen by commercial banks provide a peep into the liquidity issues faced by the local business community.

Policies and withholding taxes have discouraged the province’s business community from using formal banking channels for their transactions

Data shows that the lending issue ratio of commercial banks is 1.13 per cent against their deposits of 7.4pc in KP. Commercial banks lend money mostly to provincial government institutions compared to private businesses.

The low level of lending to the private sector is only because of one stringent condition which involves 200pc to 300pc collateral requirement for commercial banks.

Khyber Pakhtunkhwa Chamber of Commerce and Industry (KPCCI) President Zahidullah Shinwari criticised the commercial banks policy for ignoring the private sector in their lending priority. He said top businessmen of the province recently held a meeting with the SBP Governor Tariq Bajwa to apprise him of the prevailing situation in the province.

He said a formal request was placed before the federal government as well as the SBP governor to urge commercial banks to increase their lending ratio against deposits in the province and that bank performance should be evaluated on the basis of lending not deposits.

The existing commercial banks’ policy hampers business activities of industries, trade, agriculture and small and medium enterprises.

The SBP spokesperson, however, claimed that no commercial bank has declared KP as a “red zone”. On the instruction of the SBP governor, a meeting of the Bank Advisory Committee was convened at the KPCCI last week to listen to grievances of the business community.

Opening a bank account is also difficult for the business community. Normally it takes more than a month to open an account despite complete documentation, a Peshawar-based businessman told this writer. He said it was difficult for the business community to comply with the documentation requirement.

This policy has discouraged the province’s business community from using formal banking channels for their business transactions and therefore they have opted for dealing in cash. He said businessmen also prefer to deal in cash because of withholding taxes on cash withdrawals and banking instruments.

No regional data is available to determine the use of banks by individuals and the business community in KP. “We don’t have region wise data on bank account holders,” the SBP spokesperson said.

The KPCCI conducted a study a few years ago on the dynamics of bank deposits and advances in the country, between 2001 and 2011, to ascertain trends in deposits and advances. Though no other study has been carried out on the subject so far, its findings are still thought to be relevant in KP.

The study observes KP’s share in bank deposits and advances actually dropped in comparison to Punjab, Sindh and Islamabad; this is more drastic in bank advances.

In background interviews with the province’s businessmen, two major issues emerged that lead to lower lending in the province. There is an unwritten policy not to extend loans to businessmen and individuals in KP. Secondly, banks are reluctant to extend loans on long-term projects as well.

The KPCCI president said that debt fault rate was also very minimal in KP, but commercial banks were still not willing to extend advances so that businessmen in the province faced liquidity issues and were unable to expand their production capacities.

The non-availability of credit to the private sector also hinders investors from investing further in the province. As a result, local investors are also shifting their businesses to other provinces, especially central Punjab and Karachi where access to credit is not an issue.

Published in Dawn, The Business and Finance Weekly, December 4th, 2017