In a little over six months of this fiscal year (until Jan 8), banks’ net lending to the private sector totalled Rs215.5 billion. In full 2019-20, banks had lent only Rs196bn to the private sector. This indicates the economy that shrank at least 0.4 per cent in 2019-20 is well on its path of recovery. Lax monetary policy and targeted concessional financing to the private sector under the government’s post-pandemic fiscal stimulus and the State Bank of Pakistan’s (SBP) specially designed schemes deserve credit for this positive development.

Signs of economic recovery and a less worrisome inflation outlook have emboldened the central bank to keep its key policy rate unchanged at 7pc for the next two months starting Jan 22.

As domestic demand is growing, not only companies but also individuals are now taking personal loans from banks. In large part though, individuals are using personal loans to fight joblessness and reduced wages. Those who luckily retained jobs even amidst a Covid-19–triggered recession are also borrowing from banks to support jobless relatives and loved ones that don’t qualify for bank loans. Pakistan has apparently avoided Stage 3 of 18.53 million job losses projected by the Pakistan Institute of Development Economics (PIDE). It is now trying to contain job layoffs below 12.33m — Stage 2 of Covid-19’s fallout.

Thicker inflows of personal loans to address financial hardships can help contain social evils associated with joblessness

That is why the central bank continues to follow an easy monetary policy and the government is also trying to keep its borrowing from banks under check to crate room for private-sector lending. Borrowing by the federal government of Rs950bn between July 1, 2020 and Jan 8 was slightly smaller than what it had borrowed in the year-ago period — Rs990bn. This encouraged banks to lend more to the private sector taking advantage of specially designed concessional financing schemes.

That a broad-based economic recovery is well under way is evident from the fact that the surge in overall private-sector credit demand is not without a matching rise in demand for personal loans.

Between July and November 2020, banks made Rs24.6bn fresh personal loans against that of Rs7.1bn in the year-ago period. The pace of personal loaning accelerated this much also after banks began making concessional loans to financially constrained companies under the SBP’s scheme to help them retain employees amidst the Covid-19–triggered recession. By mid-November, banks had “approved” loans of Rs238bn under the said scheme. One can expect personal loans growing further as distribution of the “approved” loans gains momentum.

Thicker inflows of such personal loans that individuals get from banks presumably to address financial hardships can help contain social evils associated with joblessness besides playing their due role in economic recovery.

Bulkier personal loans made by banks to their own employees can play an even more significant role particularly as bankers are taking these loans mostly for house building and car purchases, SBP statistics reveal. Between July and November 2020, bankers got personal loans of Rs20.8bn — about twice as much as they had borrowed in the same period of 2019.

The output of large-scale manufacturing or LSM grew 7.4pc in July-November 2020 against a contraction of 5.3pc in the same period of 2019, the SBP has noted in its monetary policy statement.

The manufacturing recovery is also becoming more broad-based and employment is beginning to recover, the statement points out. Between July and November of last year, 10 of the 15 subsectors recorded output growth. Of them, the auto subsector where lots of bank financing is pouring in showed about 6pc yearly growth in output. But the subsectors of iron and steel and engineering products that must show rise in production during a construction boom are still facing a declining trend. This means overall economic recovery is yet to be stimulated by full recovery in construction activity.

Since the output of automobile manufacturing has started bouncing back in both urban and rural markets with greater numbers of cars and tractors being produced, banks are making far more auto loans than in the recent past.

Between July and November 2020, they disbursed Rs34.5bn auto financing against Rs4.2bn in the same period a year earlier. It is true that upwardly revised prices of automobiles are also one of the reasons that have pushed up volumes of auto loans. But that is just one factor.

Other factors include an increase in demand for commercial automobiles like small and medium delivery vans and tricycles as cash-on-delivery business has increased in the wake of Covid-19 and companies tend to augment their fleets of vehicles. Tricycles fitted with loading beds are now increasingly being used in both rural and urban areas for farm-to-market or market-to-market transportation of goods. That domestic economic activity is recovering is also evident from a rising trend seen in the banks’ lending to retail businesses. Banks made fresh loans of Rs4.5bn in July-November 2020 for 20-plus lines of retail businesses, including food, beverages, pharmaceuticals, textiles and computers and cell phones. In July-November 2019, they had made about Rs2.8bn fresh loans for this purpose.

The ongoing recovery in manufacturing and an impending take-off of construction activity can be expected to keep credit demand up for wholesale, retail trade and transportation businesses.

Banks need to accelerate lending to SMEs, wholesale, retail and transportation businesses fast enough to help them reap the trickle-down effects of a much-needed but “costly recovery” in the construction sector. We must not forget that the construction sector’s demand is being revived at the cost of a third-time extension allowed in the tax amnesty scheme for those investing in the construction business. Before becoming prime minister, Imran Khan was the most vocal opponent of tax amnesties.

Published in Dawn, The Business and Finance Weekly, January 25th, 2021

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