When the PTI government negotiated the $6 billion loan from the International Monetary Fund (IMF), the global lender advised it to gradually bring its borrowing from the central bank to zero.

The government found an easy solution: it decided to borrow heavily from commercial banks to meet this target. But this easy solution is now creating some problems.

The private sector has been crowded out. Banks’ lending to the private sector has hit a low level. In the first seven and a half months of this fiscal year, banks’ lending to the private sector tanked to Rs179bn from Rs587bn a year ago. The decline in credit disbursement has affected even those segments of borrowers that are known for paying high interests like consumers.

But right now, banks don’t mind even losing such borrowers because they are making lots of profits through their lending to the government. In the first seven and a half months of 2019-20, they lent Rs878bn to the federal government as opposed to the retirement of Rs884bn worth of commercial banks’ credit a year ago.

Credit risk associated with private-sector borrowers is higher owing to slower economic growth. The slowdown in the economy has already depressed credit demand. The build-up in non-performing loans (NPLs) in 2018-19 is feeding the banks’ narrative that the slump we see in private-sector credit offtake is because of low credit demand plus high credit risk. The State Bank of Pakistan (SBP) principally owns this narrative though it keeps goading banks off and on to accelerate lending to agriculture and other commodity-producing sectors.

Making credit cards more user-friendly can help financial institutions ensure a steady source of interest income

Excessive parking of funds in government debt securities means that smaller lending to the private sector is not translating into a decline in banks’ net interest income. Their aversion to lending to the private sector is now wholesome and even consumer finance, the highest return–yielding segment, is witnessing a steep decline.

In July-January, banks’ net fresh consumer lending totalled just Rs16bn. In 2018-19, consumer lending totalled Rs66bn. It seems quite unlikely now that banks can make enough consumer lending in the remaining five months of 2019-20 to stay on the last year’s track. But with a little reshaping of lending policies, banks can still improve their consumer portfolios.

Auto financing, the largest component of consumer finance, saw a negligible growth of Rs2.1bn in the first seven months of 2019-20. Admittedly, demand for automobiles is down owing to an increased cost of production and a resultant jump in prices.

But auto financing can be moderately increased even during these times of falling incomes and high inflation if banks offer more tailor-made financing products for the purchase of smaller commercial vehicles like bikes, tricycles, vans and trucks. Demand for such vehicles is still intact. People need them for their small businesses in big and small cities alike. Making a small adjustment in the rates of return in car financing can also be helpful. It will result in smaller profits but keep the client base from shrinking too fast.

Housing loans, which make up a large portion of consumer finance, are witnessing an outright slump. In the first seven months of this fiscal year, they recorded a net decline of Rs4.2bn, according to SBP data.

Renegotiating those loans that are at initial stages of default, particularly for smaller borrowers, can help banks boost housing portfolios. But they are not doing this as they remain focused on clearing loan books. They are waiting for the launch of big-ticket housing projects where bulk lending makes them huge profits without requiring them to modify their age-old credit risk appraisals.

Banks’ consumer financing through credit cards increased by Rs4.8bn in the first seven months of 2019-20. This segment holds lots of potential as the number of card seekers is on the rise during an economic slowdown. Banks have made a win-win deal with shopping plazas, super stores, hotels, eateries, saloons and branded designer suit makers. People making purchases from there or utilising their services get dazzling concessions.

Users of the credit card of a particular bank can now get up to 40pc concessions if they buy cakes and pastries from a well-known local bakery. Making credit cards a bit more user-friendly, providing more reliable customer care services and partnering with more and more businesses can help banks ensure a steady source of interest income.

Although net NPLs showed an increase in calendar year 2019, the pace of growth in the stock of loans somewhat decelerated in the last quarter. In Jan-March, the central bank is expecting further deceleration primarily because banks are not lending much to the private sector and whatever they lend is being tightly monitored.

This, along with the nascent recovery in industrial activity, should give banks some room to pace up private-sector lending in the April-June quarter.

Published in Dawn, The Business and Finance Weekly, March 2nd, 2020