In Naya Pakistan, will banks stick to the old, tested and tried ways of doing business? Or will there be a change?

It depends on how quickly positive changes take root in the fiscal administration of the new political setup and reflect in its policies.

The private sector can hardly expect a dramatic shift in banking policies and financial intermediation. Back in President Asif Zardari’s era, banks put their heart and soul in government financing and ignored the private sector to the extent that the State Bank of Pakistan (SBP) had to warn them against the trend that it once described as financial disintermediation.

The cost of borrowing in the consumer sector registered a sharp increase in one year

During Nawaz Sharif’s government, banks gradually took enough interest in private-sector lending, but their romance with zero-risk government debt papers still remained strong.

And now, Imran Khan’s government will either help banks move a few steps closer to the private sector or keep them glued to their current position. It depends on how quickly the new government brings its fiscal house in order. But keeping its fiscal house in order for the next five years is one thing and removing the old stock of fiscal garbage is another.

In 2017-18, the last year of the PML-N government, the fiscal deficit shot up to Rs2.26 trillion or 6.6 per cent of gross domestic product (GDP). The federal

government kept rolling over its bank credit to bridge the gaps in income and expenses, although it reduced the stock of bank borrowing via printing money, also known as borrowing from the central bank, on a net basis.

It would be interesting to see how the Pakistan Tehreek-i-Insaf (PTI) succeeds in bringing down the fiscal deficit to 4.9pc of GDP in 2018-19 — a target that was set by the previous government and remains subject to review by the new government. “In all probability, even the new government will continue to rely heavily on borrowing from banks, crowding out the private sector but enabling banks to make big profits on investments in zero-risk government debt instruments,” says the head of a local bank. “Borrowing heavily from the SBP will be an unwise option at a time when inflationary pressures are building up and we are fighting it with higher interest rates.”

However, after a year or so, if our new government succeeds in generating enough resources and minimising corruption and wasteful expenses, its reliance on bank borrowing will reduce and that should create room for generous lending to the private sector.

When you feed more inputs into such projections, you find them changing a bit here and there. For example, take into account the possibility of external-sector help coming in quickly from the International Monetary Fund (IMF) and other sources. The projection will change because that is going to help contain fiscal problems as well. Or trust the ability of our new finance minister, Asad Umar, to bridge fiscal gaps with more non-bank borrowing instruments. The projection will change as that too can theoretically reduce the government’s reliance on bank borrowings.

Similarly, the extent to which the new government’s efforts to curb money laundering and bring “plundered wealth” back to Pakistan succeed will determine the pace of its borrowing from banks, senior bankers say.

So before prioritising private-sector lending, banks will be waiting for clues on what is happening on the fiscal side and at what pace.

For quite some time, private-sector credit demand itself would remain dependent on the government’s demonstrated ability to reduce fiscal and external account deficits.

Any delay in bridging the twin deficits means possible cuts in already announced development budgets, little or no room for incentivising industries or agriculture, delays in the execution of job-creating public-private partnership projects, including those under the China-Pakistan Economic Corridor (CPEC), piling up of circular debt with its consequences on supplies to industries and agriculture, higher cost of many imported raw materials for industries owing to import-containing temporary measures — and, in general, a growth-restricting impact on the overall economy. How can higher demand for private-sector credit emerge under this scenario?

In the last fiscal year, banks made net fresh lending of Rs775 billion to the private sector, slightly higher than Rs748bn a year ago and far below the target of Rs1 trillion.

Some bankers say even if demand for private-sector credit remains as strong in the current fiscal year as it was in 2017-18, net lending to the private sector can hardly reach Rs1tr — the target set by the last government, which is subject to review by the new government.

But others have an optimistic view.

The prime minister wants to expedite CPEC projects. A task force has already been set up to find ways for materialising the PTI poll promise of constructing half a million low-cost housing units in addition to creating a million new jobs.

Large-scale manufacturing is growing, agricultural growth prospects are not dim, exports are growing, export-oriented industries are producing more goods, the SME sector is to be streamlined as per the PTI promise, business sentiments are upbeat, the finance minister is serious about fixing energy-sector issues like circular debt and the SBP is easing restrictions on imports.

These are some factors that should keep demand for private-sector credit high during this fiscal year and beyond, some bankers involved in credit distribution at big local banks opine.

Between July 1 and August 17 this year — ie just before the installation of the newly elected government — all banks collectively made net lending of Rs15bn to the private sector. In the same period of last year, banks had seen net credit retirement of Rs116.5bn.

During the July-September quarter, banks usually see net credit retirement due to the cyclical nature of credit distribution and its roll-over and also because of low demand for credit from the agriculture sector. If there is a net credit off-take during the first quarter — in the present case, during the one and a half months of the current fiscal year — this is a sign of stronger private-sector credit demand, some bankers say.

Bank executives dealing with credit disbursement also say that interest rate tightening so far has apparently not squeezed credit demand. “Going forward, it all depends on how much tightening takes place. For better-performing industries, the cost of finance does not matter as much as it does in the case of average-performing industries,” says a senior executive of Habib Bank.

But then, there is a limit to absorption for a higher cost of finance even in best-performing industries and businesses. Currently, the cost of bank finance even for prime borrowers is at least two percentage points higher than last year as a result of the SBP policy rate hikes, bankers and businessmen say while citing a straight two percentage-point rise in the benchmark Karachi interbank offer rate over one year.

For other borrowers, particularly in the consumer sector, the cost of bank borrowing has registered a sharper increase, bankers concede, adding that how and when it will begin to dampen credit demand is yet to be seen.

Published in Dawn, The Business and Finance Weekly, September 3rd, 2018