BANKS’ private sector lending remained robust in the outgoing year, and the growing economy guarantees further acceleration during this year.

Small and medium enterprises (SMEs) received increased attention of banks last year, a trend they can expect to continue.

By the end of 2017, the State Bank of Pakistan (SBP) introduced a policy to promote SMEs that envisages a more enabling regulatory environment for banks to extend fatter loans to a larger number of SME borrowers. The central bank also allowed export refinance from banks to SMEs operating in eight export-oriented sectors including IT, food processing and printing and packaging.

A big challenge for banks in 2018 will be to build credit appraisal capacity and augment internal controls to keep the infection ratio of SME financing at sustainable levels. In fact, the SBP has already required banks to adopt non-financial advisory services in their SME banking strategy for this purpose.

Under the new policy, microfinance banks (MFBs) have also been permitted to lend up to Rs1 million to a microenterprise employing up to 25 individuals. This will certainly boost demand for microcredit, help MFBs cut their cost of lending and brighten business opportunities.

Banks will have to learn and unlearn many things to keep up with the changing financial environment

Here again, the challenge for MFBs is that they’ll have to enhance their capital base and ensure readiness of handling larger microenterprise loans because, under new rules, they will have to satisfy the SBP on such counts before committing more than Rs500,000 loan to a microenterprise.

Generally speaking, credit quality of banks changed for the better in 2017 with a larger amount of private sector loans offered for fixed investment. This should help companies, particularly those in the manufacturing sector, to improve quality and output of products and would, thus, lead to further demand for private sector loans.

More lending for fixed investment in 2018 can be predicted safely as CPEC investment in big-ticket energy and infrastructure projects in 2016 and 2017 have created demand for such investment in corollary industries.

Also related to the CPEC are some prospects and challenges for banks that will unfold in 2018 and beyond. Banks have already undertaken massive CPEC-related financing projects and will continue to do so in this and many years to come.

Project financing characteristics will be defined anew with greater interaction of local banks, with two Chinese banks already operating in Pakistan.

They will have to learn and unlearn many things when it comes to consortium lending with significant participation of the Chinese banks; and in dealing with Chinese companies and corporate consortia made up of local, Chinese and other foreign companies banks will have to rely more on complex structured finance than simple lending portfolios. In so doing, issues might crop up in complex credit proposal assessment and monitoring of big multi-pooled loans.

The continuity of low interest rate regime through 2017 may get a break in 2018 for two reasons: first, the demand for bank credit is growing and, second, a weaker rupee that may have to be allowed to shed more weight in the next year as well.

Deposit mobilisation may become quite challenging in 2018 if a lax monetary policy is allowed to continue. Both companies as well as individuals are fed up with extremely low bank deposit rates that, in some cases, have already turned negative with a spike in headline inflation.

Even average fresh bank deposit rates may soon turn negative with demand-push inflation building up in the economy. Here again, much depends on how the monetary policy tool is used to strike a balance between economic growth, inflation and stable yet realistic exchange rates.

Digitalisation of the financial services and phenomenal rise of fintech may serve as a catalyst for banks’ business through improved identity management and consequent ease for banks to reach out to underserved segments of depositors and borrowers. But these developments would keep banks on their toes to ensure digital transformation of their back offices, IT managers warn.

Besides, compliance of regulatory requirements such as the recently introduced SBP regulations on branchless banking for promoting home remittances would also add on to banks’ “do more” list of digitalisation work.

On Dec 22, the SBP asked all banks, Islamic banks and microfinance banks to “facilitate swift and cost-effective inflow of home remittances through branchless banking”. They are now required to open special online accounts for people in Pakistan who receive remittances sent back home by their relatives and enable them to withdraw up to Rs50,000 from these accounts on a daily basis with a monthly cap of Rs500,000 rupees.

Since the move would not only boost overall inflow of remittances via official channels and thus help in minimising the surging external sector’s imbalance, it would mean more business for, and greater outreach of, banks.

In 2018, an operational area of banking wherein banks would remain both excited and challenged is growth of lending to private sector by Islamic banking branches (IBBs) of conventional banks. For many years, Islamic banks dominated such lending and IBBs of conventional banks thrived alongside. But senior bankers who oversee the flow of private sector lending say this trend might now change.

Published in Dawn, The Business and Finance Weekly, January 1st, 2018