When the government’s needs are very high along with interest rates, the private sector will always be crowded out, said JS Bank President & CEO Basir Shamsie in an interview. “Even if banks were willing to lend money to the private sector, there is not much demand at the current monetary policy rate.”

He elaborated on the dynamics of the credit market, explaining that the risk and reward trade-off. When interest rates decrease, credit spreads tend to decline because the economic environment improves, reducing the risk associated with lending. This leads to lenders charging lower additional premiums over the benchmark rate, reflecting a more favourable credit perspective.

Thus, the trade-off for credit is more favourable at lower interest rates, which allows for narrower spreads. However, the high level of economic risk is causing a shift in credit from the private sector to T-bills and the public sector.

This trend is particularly concerning given the lack of demand for borrowing in the current high-interest environment, which he termed “fatal” for entities trying to borrow at a steep 22 per cent. The private sector’s borrowing from banks has dropped steeply from Rs1.32 trillion in FY22 to just Rs208 billion in 2023, according to the State Bank of Pakistan (SBP).

The record-high profits of the sector may be eroded because of higher non-performing loans

Agreeing that the banking industry’s profitability was above average, he said it was a function of higher interest rates but that he did not expect the trend to continue. When interest rates are higher, so are non-performing loans (NPL).

Among the top five lenders to Small and Medium Enterprises (SMEs) in the country, JS Bank has had a ‘very good experience’ in the SME sector over the last eight years or so. However, the NPL ratios of SMEs have started to being affected. Among the three categories of loans — corporate, commercial, and SMEs — commercial loans have been the worst affected, with corporate loans performing the best and SMEs falling somewhere in between.

The slowdown in the industry has profoundly impacted some commercial banking clients more than SMEs. Mr Shamsie emphasised that when lending to SMEs, the quality of the customer onboarded is critical to managing risk, adding that it’s a ‘difficult’ business that has to be grown with caution over time.

JS Bank’s latest annual report shows that its NPL remained most unchanged from Rs16.3bn in 2022 to Rs16.2bn in 2023. However, Mr Shamsie expects the trend to change; the stress started showing up in Q4. Going forward, the veteran banker expects some of interest gains made by banks be eroded by NPLs.

‘Even if banks were willing to lend to the private sector, there is not much demand at the current monetary policy rate’

According to data released by the SBP last month, NPL in the banking sector increased by 7.6pc, or Rs70bn, during 2023. The textile sector was the largest defaulter from December 2022 to December 2023, as per SBP data.

While there has been a sharp curtailment in housing and auto loans, demand is still robust on the credit card and personal loans side. In Punjab, the break on sales tax on digital payments or through cards is driving demand as well as the discounts offered over a range of debit and credit cards.

Though cash in circulation has been increasing, the foot flow at brick and mortar branches has decreased — year-on-year the bank has received an almost 50pc increase in digital transactions, said Mr Shamsie.

“It’s the government’s responsibility to make cash transactions very difficult,” he said, adding that if the country needed to survive, it would have to bring the cash component down. Equating it to a ‘national cause’, Mr Shamsie said all players in the economy are fully aligned in knowing the importance of digitising the economy.

Even now, with the economy in the better state, there remain some hurdles to opening letters of credit that plagued the country at the peak of its crisis. “We are still not 100pc fluid when we are onboarding new customers,” he said, though the situation is considerably better than it was a year ago.

Reflecting on JS Bank’s acquisition of BankIslami last year, the CEO noted that while there has always been a preference for Shariah-compliant banking, consumer options were previously limited. The expansion of the ‘product menu on the Islamic side’ has increased customer touchpoints through various transactions, from auto loans and mortgages to diverse deposit products. This expansion has made Islamic banking more accessible and attractive to consumers.

Published in Dawn, The Business and Finance Weekly, May 20th, 2024