The net private sector borrowing from banks rose to Rs27 billion as credit retirement on net basis ceased after mid-November. Though fresh borrowing has outpaced credit retirement, bankers say private sector borrowing in FY10 may remain constrained and low.

In FY09, net private sector borrowing nose-dived to Rs19 billion from Rs408 billion in FY08 because of the domestic economic slow down amidst global financial crisis and recession. Heads of credit departments of major banks estimate this year's borrowings somewhere around Rs100-Rs150 billion.

Currently cotton ginners, yarn makers, auto assemblers (minus car makers), rice exporters and some sugar-millers are obtaining loans. But bankers said that net credit flow towards sugar mills remains lower-than-anticipated for two reasons. First, many sugar millers are busy retiring previous loans that were supposed to be repaid earlier. (The State Bank had extended the deadline set for this purpose). Second, sugar mills have started cane crushing a bit late during this season following the worst-ever sugar crisis in the country.

Large-scale manufacturing that declined 0.65 per cent in the first quarter of this fiscal year experienced a strong 4.97 per cent year-on-year growth in October. As a result, the LSM output for July-October FY10 increased slightly to 0.67 per cent over July-October FY09. Bankers and businessmen say the industries showing a recovery in output are expected to have kept up the trend in November as well.

Such industries like fertilisers, cement, paper and boards, soda ash, soaps and detergents, automobiles (including cars and jeeps), cooking oil, leather and footwear, pharmaceuticals, electrical and electronics and light engineering posted a growth in production during the first four months of this fiscal year. These industries may now start to borrow from banks.

Car assembling has seen some growth in sales so far this fiscal year but as the output of this industry still remains below capacity, car makers as such are not seeking any big loans from banks. “However, the rise in car sales has slightly lifted consumer financing,” said a senior banker, adding that “on net basis car financing too is not going to be substantial because a large number of consumers also continue to retire previously obtained car loans.”

Businessmen say, private sector credit is likely to remain low during this fiscal year primarily because the textiles' value-added sector has still not recovered from the last year's slump. “We continue to repay old loans. We are not making fresh borrowing because exports are not picking up and we keep producing below capacity,” said Shabbir Ahmed, Chairman, Pakistan Bedwear Exporters Association. Overall textiles' exports including those of cotton and yarn fell 4.7 per cent to $3.348 billion in four months of this fiscal year—and various segments of value-added textiles posted a much sharper decline as cotton and yarn exports witnessed a huge growth.

Businessmen say, private sector credit off-take is not growing fast despite some recovery in key economic indicators also because of high interest rates. Average lending rate on the entire stock of bank loans stood at 13.67 per cent in October 2009 only slightly below the October 2008 level of 13.89 per cent. But bankers point out that a more appropriate barometer of the change in lending rates is the average interest they charge on fresh loans.

“If you compare the fresh average lending rate of 13.82 per cent in October this year with 15.54 per cent in October 2008 you'd agree that our lending has become much cheaper,” said the head of a local bank quoting the latest data. “Besides, bear in mind that banks lend much below the average rate to first-class clients and blue chip companies”.

The State Bank of Pakistan lowered its policy rate by 50 basis points on November 24 to support the pickup in the economy and to induce banks to cut their own lending rates. But the government raised domestic oil prices at the beginning of this month that may push up inflation and offset the benefits of the rate-cut. Since inflation has also edged up in November after going through a gradual decline for a full year till October and if the trend continues, there may be very little room for SBP to further ease off its monetary policy. The central bank's own assessment, as stated in its FY09 annual report released at end- October, is that inflation for FY10 may range between 10-12 per cent against the target of 9.5 per cent.

Hence there is almost no chance for bank lending rates to fall substantially in the months to come. “Businesses will have to live with this reality and try to cut their operation costs on other heads,” remarked head of treasury of a foreign bank.

Businessmen say the continuing shortage of gas and electricity, the pre-announced increase in power tariff from January 1 and a resurge in inflation make it difficult to keep businesses running let alone cutting operational costs. They also complain that despite relaxation granted to banks by SBP in classification of bad loans and the required provisioning against them banks continue to ignore loan proposals of small and medium businesses and remain focused on servicing a handful of large companies.

A real net return on zero-risk government treasury bills encourages banks to follow this path. Government borrowing from banks between July 1 and December 5 this year shot up to Rs166 billion against net credit retirement of Rs66 billion in a year ago period. But the government used the money borrowed from banks to retire its borrowings from the central bank, regarded most inflationary.

This reduced its borrowings from SBP to Rs255 billion from Rs338 billion..

“There is no denying the point that the government is crowding out the private sector. But it makes sense for us to continue to invest in zero-risk treasury bills so far the returns remain where they are,” conceded the head of treasury of a large local bank.

The average annualised return on six-month T-bills stood around 12.55 per cent at end- November— yielding a net return of 2.29 per cent for banks after adjusting the average inflation of 10.26 per cent. He however, said that after the expected inflow of $1.2 billion fourth tranche of the IMF standby loan towards the end of this month, the government is likely to reduce its borrowing from banks freeing up more space for private sector credit. And with the start of wheat procurement by the private sector in March-April, the overall off-take of private sector credit would grow further.