IN less than eight months of this fiscal year up to April 20, banks lent Rs237 billion to the private sector. This amount is 41 per cent higher than the lending of Rs168 billion in the comparable period of the last year.

Top bankers believe that full fiscal year lending ending June 30 would remain in excess of Rs200 billion against Rs121 billion of last year.

“One particular thing we have noticed is that credit retirement this year is a bit slower for a variety of reasons including lower mark-up on loans and greater appetite for bank credit in commodity producing sectors,” said head of credit division of a large local bank.

“Cotton output up to April 30 has reached 14.8 million bales with a year-on-year growth of 26 per cent. And more importantly we see larger amounts of arrivals in ginneries as the cropping season is about to end. This keeps cotton financing going on at a much faster speed towards the end of the cropping season than in the past. And since raw cotton exports also continue to grow, export financing to cotton sector is also up.” “Apart from an all-time-high production of cotton, the agriculture sector as a whole is performing far better than in the last year,” said in-charge of credit department of another large local bank. “Wheat harvesting is on in the upper Punjab though in lower Punjab and in Sindh it has been affected by rains. My own bank is lending aggressively to both cotton and wheat growers at this time of the year whereas traditionally it’s about time for net retirement of cotton finances.” Various estimates put this year’s wheat crop somewhere between 26 and 27 million tonnes against last year’s 25 million tonnes.

A decline in average lending rate of banks is also said to have facilitated pick up in the private sector credit. Bankers point out that after reaching a peak of Rs250 billion sometime in March, private sector credit disbursed during this fiscal year has remained steady in the range of Rs220-230 billion weeks after weeks.

“This is because of the decline in interest rates and also because as one sub-sector retires part of the bank credit, demand from another sector emerges quickly,” according to the treasurer of one of the top five banks.

From the central bank’s point of view, however, a mere growth in volume of private sector credit or even an increase in it over the last year’s volume has limited importance. “What is more important in our view is that the private sector credit’s share in M2 (overall money supply) is increasing gradually. That is a welcome move because a greater share of the private sector borrowings in M2 often means the supply side of the economy is improving,” said a senior central banker.

According to the SBP statistics, private sector’s net borrowing from banks up to April 20 represented 46 per cent of M2 whereas in the comparable period of the last fiscal year, private sector credit had accounted for just 31 per cent.

Bankers say that apart from agriculture and livestock, stronger private sector credit demand is also originating from some industrial sectors like fertiliser, cement, edible oil manufacturing, leather, automobiles, electronics, engineering and the like.

They also say that in recent months, food processing and fast-moving consumer goods (FMCG) companies have emerged as big borrowers.

“Had the multinational companies not been reinvesting large parts of their strong earnings and had opted for bank borrowings instead, I think private sector credit expansion would have become much more visible,” remarked treasurer of a foreign bank.

Quoting a recent report of the Overseas Investors Chambers of Commerce & Industry he said, multinationals claim they have reinvested about $1 billion in Pakistan during 2011. “It is a separate story though that OICCI and the government agencies have differences over the accounting system of foreign direct investment and the former insists that reinvestment by OICCI has not been fully accounted for in FDI flows.”

He said that penetration of banks into semi-urban and rural areas in the last fiscal year as well as during the current year has also played a part in boosting private sector credit off-take from banks.

“Similarly, online banking has proved helpful particularly in offering personal loans and micro finance. If these trends continue we believe that credit flow towards the private sector would continue to improve.”

Bankers also say that excessive government borrowing crowds out the private sector credit demand. “But the productive part of government borrowing (or the money the government borrows to undertake some projects) often kicks up a new cycle of private sector borrowings. Contractors engaged in such projects borrow from banks to complete the projects and since government payments almost always get delayed, these contractors retire bank loans also with a time lag. I think this is also one aspect of higher private sector credit activity during the current fiscal year,” explained an official of state-run National Bank of Pakistan.—Mohiuddin Aazim