More challenges for banks
BANKS’ private sector lending remained robust in the outgoing year, and the growing economy guarantees further acceleration during this year.
Small and medium enterprises (SMEs) received increased attention of banks last year, a trend they can expect to continue.
By the end of 2017, the State Bank of Pakistan (SBP) introduced a policy to promote SMEs that envisages a more enabling regulatory environment for banks to extend fatter loans to a larger number of SME borrowers. The central bank also allowed export refinance from banks to SMEs operating in eight export-oriented sectors including IT, food processing and printing and packaging.
A big challenge for banks in 2018 will be to build credit appraisal capacity and augment internal controls to keep the infection ratio of SME financing at sustainable levels. In fact, the SBP has already required banks to adopt non-financial advisory services in their SME banking strategy for this purpose.
Under the new policy, microfinance banks (MFBs) have also been permitted to lend up to Rs1 million to a microenterprise employing up to 25 individuals. This will certainly boost demand for microcredit, help MFBs cut their cost of lending and brighten business opportunities.
Banks will have to learn and unlearn many things to keep up with the changing financial environment
Here again, the challenge for MFBs is that they’ll have to enhance their capital base and ensure readiness of handling larger microenterprise loans because, under new rules, they will have to satisfy the SBP on such counts before committing more than Rs500,000 loan to a microenterprise.
Generally speaking, credit quality of banks changed for the better in 2017 with a larger amount of private sector loans offered for fixed investment. This should help companies, particularly those in the manufacturing sector, to improve quality and output of products and would, thus, lead to further demand for private sector loans.
More lending for fixed investment in 2018 can be predicted safely as CPEC investment in big-ticket energy and infrastructure projects in 2016 and 2017 have created demand for such investment in corollary industries.
Also related to the CPEC are some prospects and challenges for banks that will unfold in 2018 and beyond. Banks have already undertaken massive CPEC-related financing projects and will continue to do so in this and many years to come.
Project financing characteristics will be defined anew with greater interaction of local banks, with two Chinese banks already operating in Pakistan.
They will have to learn and unlearn many things when it comes to consortium lending with significant participation of the Chinese banks; and in dealing with Chinese companies and corporate consortia made up of local, Chinese and other foreign companies banks will have to rely more on complex structured finance than simple lending portfolios. In so doing, issues might crop up in complex credit proposal assessment and monitoring of big multi-pooled loans.
The continuity of low interest rate regime through 2017 may get a break in 2018 for two reasons: first, the demand for bank credit is growing and, second, a weaker rupee that may have to be allowed to shed more weight in the next year as well.
Deposit mobilisation may become quite challenging in 2018 if a lax monetary policy is allowed to continue. Both companies as well as individuals are fed up with extremely low bank deposit rates that, in some cases, have already turned negative with a spike in headline inflation.