KARACHI, Oct 9: Banks' total advances during the first quarter of this fiscal year rose by Rs72 billion that points to a growing appetite among both the government as well as the private sector for bank loans.

Data released by the State Bank show that banks' advances went up to Rs1396 billion at end-September 2004, from Rs1324 billion at end-June 2004. "This indicates that there was a huge credit appetite among both the private as well as the public sector," said head of credit division of a local bank.

Complete Data for credit disbursement for the first quarter of this fiscal year are yet to pour in, but between July 1 and September 4, 2004 the banks lent Rs66.7 billion to federal and provincial governments and Rs28 billion to the private sector. This provides a clue to understanding the underlying trends in growth of banks' advances.

Growth in banks' deposits kept pace with the growth in advances. SBP data show that banks' deposits grew by Rs73 billion to Rs2066 billion at end-September from Rs1,993 billion at end-June 2004.

Banks' investment also grew by Rs59 billion to Rs771 billion at end-September from Rs712 billion at end-June. The bulk of this investment must have been made in treasury bills and other government papers as banks' investment in the stock market fell slightly during this period, from Rs32.3 billion to Rs29.7 billion.

Senior bankers say banks' deposits have risen primarily because of better performance of state-run enterprises and also of big businesses that saw a surge in production during the first quarter of this fiscal year.

Improved performance of the public and private sector corporates have also impacted on the growth of advances as faster-growing corporates need more access to bank loans. But the fact that banks made a huge investment of Rs59 billion during the first quarter of this fiscal year indicates that there was still room for them to explore more avenues for credit disbursement.

Senior bankers say that banks are now struggling hard to increase their lending to the agricultural sector and SMEs while meeting the credit demand of the corporate sector. They say credit demand in the agriculture sector is enormous and banks have accordingly been able to lend more to this sector. But so far SMEs are concerned, banks are still shy of lending generously in this sector of economy that requires special skills and offer challenges in the area of determining borrower's credit worthiness and their capacity to repay.

As the economy is poised to grow by a targeted 6.6 per cent this year, from estimated 6.4 per cent last year, banks should expect steady growth in both their deposit base as well as advances' portfolios. But as the government is still reluctant to let the yields on long term bonds rise in response to an overall rise in interest rates, banks may be facing problems in investment area.

The market perception about interest rates increase is such that the government has not been able to sell long-term Pakistan Investment Bonds during July-September 2004.

It may try to sell these bonds during the current quarter but senior bankers say that it will have to raise the yields substantially for this purpose. Corporate buyers of these bonds are not simply willing to invest in them at the current low rates. State Life Insurance Corporation or SLIC has made it clear to the government. It has taken a view that investing in 15 and 20 year bonds that offer a 9 and 10 per cent return is not feasible. It does want a higher yield on these bonds.

But if the government allows the yields on these bonds to rise sharply that would disturb the entire yield curve. Introduction of even longer term bonds is an answer to this problem. But it is not clear if the government will launch such bonds in recent future.