It is too early to say when exactly the private sector credit distribution would pick up on higher demand. But concessional financing approved for steering the economy out of the crisis, a rebound in exports and the low base of credit in the last fiscal year may strengthen demand pretty soon.

The net disbursement of private sector loans generally remains negative or shows a marginal increase during July-September, the first quarter of our fiscal year, due to seasonal demand pattern and the retirement of the bulk of loans taken during the previous year. So, a clue to how gross disbursement of loans is faring can be found in the volume of net negative disbursement. Between July 1 and 17 this year, net retirement of private sector loans stood at Rs93 billion, down from about Rs97bn in the same period last year, the State Bank of Pakistan’s stats reveal. This indicates that right from the beginning of this fiscal year, the pace of banks’ gross lending to the private sector is somewhat faster than the last year. In the last fiscal year when the economy shrank by 0.4 per cent, net lending to the private sector had plunged to Rs196bn from Rs693bn a year ago.

How soon allegedly corrupt, ultra-rich and politically strong sugar barons are taken to task for their corporate and financial wrongdoings would also impact the asset quality of banks in due course of time

Further updating of this credit data in coming weeks would likely show the continuation of the trend noted in the first two weeks of July — smaller net credit retirement compared to last year, senior bankers say. That would indicate that underlying gross lending to the private sector is rising and offsetting the impact of the private sector’s credit retirement.

Another factor that would likely support the faster distribution of private sector credit in coming weeks is that many Covid-19 prompted concessional loans are consistently being approved while the disbursement of previously approved ones continues. Higher credit demand from export-oriented industries on the back of a recent uptick in export orders is also expected to maintain demand for overall private sector credit.

In July this year, Pakistan’s merchandise exports rose to $2bn depicting a 5.8pc year-on-year increase after four months of successive declines, according to the Ministry of Commerce.

As of July 24, banks approved Rs126bn concessional loans for companies and businesses that paid their workers during the Covid-19 triggered lockdowns and refrained from laying off jobs. They also approved Rs6bn cheap financing for hospitals and Rs119bn investment loans to companies to help them stay afloat and build their production capacity to fight the negative economic impact of the coronavirus pandemic.

Going forward, two things would help define the extent of the private sector’s contribution to economic growth and the banking industry’s health. First, the private sector’s credit demand and second, the impact of bank loans’ restructuring on banks’ profitability.

Pakistan is moving towards flattening of the Covid-19 curve and authorities have started lifting restrictions of smart, localised lockdowns, enabling and facilitating domestic economic activities. This brightens hope for the revival of private sector credit, more so if the government starts following through its promise of kick-starting the construction industry and if nascent exports’ recovery continues.

Besides, the auto industry that was hit the hardest in the final quarter of the last fiscal year has started producing more and food and fast-moving consumer goods industry that suffered during the lockdown is showing signs of recovery – thanks to increased online transactions.

Private sector credit demand is expected to see some solid increase via food and fast-moving consumer goods. Cement and fertiliser industries are also doing well even though overall large-scale manufacturing output remains negative.

A major chunk of private sector credit demand is also originating from individual consumers and households whose income levels fell during the period of negative economic growth, particularly while the lockdown was in place from March to June.

Since mid-March, the State Bank of Pakistan has rapidly cut its key policy rate by 625 basis points to 7pc from 13.25pc paving the way for banks to make loans cheaper. The government has emerged as the main beneficiary of this monetary easing as its cost of bank credit and the cost of domestic debt servicing have come down. The private sector has got lesser benefit because when it comes to the repricing of private sector loans, particularly consumer loans, pass-through of monetary easing takes a longer time and remains limited.

At the end of June 2020, the weighted average fresh lending rate of all banks (excluding inter-bank and zero markup) was at 10.03pc, down only 272bps from the end-of-June-2019 level of 12.75pc. This happened at a time when the 6-month Karachi inter-bank offered rate that serves as a benchmark for pricing most commercial, corporate and consumer loans, fell on the back of monetary easing to 7.24pc from 13.11pc.

Banks need to improve their loan pricing mechanism to ensure that consumer loans, in particular, and all other private sector loans, in general, become cheap enough to attract more credit seekers.

Read | Private-sector lending: a tricky business

Chances of freshly issued bank loans going bad in the near future cannot be ruled out even though banks are taking lots of precautions in this regard. Noisy protests by small and medium enterprises over ‘banks’ indifference’ to their financial woes are proof of banks’ heightened banking prudence.

Even before Covid-19-hit Pakistan in late February, non-performing loans had become a headache for banks because more than a year of politico-economic uncertainty had started ballooning bad debts. At the end of March 2020, gross non-performing loans of all banks and development finance institutions stood at Rs821.6bn, far higher than Rs705bn at the end of March 2019.

How soon allegedly corrupt, ultra-rich and politically strong sugar barons are taken to task for their corporate and financial wrongdoings would also impact the asset quality of banks in due course of time. Due to unscrupulous activities of these barons, now being probed by the Federal Investigation Agency, the sugar industry’s circular debt is growing. That can potentially lead to larger loan defaults by this industry.

Published in Dawn, The Business and Finance Weekly, August 10th, 2020