KARACHI: Non-banking fina­n­cial institutions (NBFIs) are in distress amid a slump in financing from banks during the current financial year (FY24).

At the end of the third quarter of FY24, the NBFIs failed to get financing from banks and noted a net debt retirement of Rs93 billion. During the same period of last year the situation was opposite as the NBFIs had received Rs140bn.

According to bankers, this negative trend has serious consequences for the NBFIs and some of them are even considering closing down their operations. The main reason for this negative trend is that a record high interest rate has already increased the default rates for banks.

It happened as most banks are reluctant to finance the private sector and prefer to park their liquidity in government bonds.

It has created serious imbalances for the economy, causing a sharp decline in growth in almost all sectors of the economy. The economic growth fell to negative in FY23 and now the IMF estimates the growth rate for FY24 at two per cent.

Non-banking finance companies (NBFCs) or institutions are established to carry out activities like investment finance services, leasing, housing finance services, venture capital investment, discount services and investment advisory.

Pakistan has a bank-centric financial system where the share of NBFIs remains small and its contribution to financial intermediation is relatively limited.

However, the high interest rate has discouraged NBFIs from bank borrowing either for investment or any kind of venture. The CY22 was productive for NBFIs, but the fiscal year FY23 was problematic.

The sector is in growth phase in Pakistan and during CY22 it witnessed acceleration in its growth trajectory. The NBFI sector’s asset base grew by 26.7 per cent during CY22 (compared to 19 per cent in CY21) on the back of an impressive growth demonstrated by the asset management segment, particularly mutual funds and REITs.

However, the NBFIs showed accelerated growth during CY22, mainly driven by mutual funds which comprise the major chunk of the sector’s assets, while Real Estate Investment Trust (REIT) also saw a significant activity.

Historic low

The real estate business has gone down to a historic low in FY24, ultimately hitting the construction industry and forcing the allied 42 segments of the economy to remain out of the growth process or register failure.

While a number of analysts believe that the next monetary policy scheduled for April 29 would be announced with reduced interest rate, some believe the interest rate would remain unchanged. Other analysts believe that even one or two per cent cut in the interest rate would not be enough to stimulate the economy.

Published in Dawn, April 21st, 2024