At its meeting held in Karachi on October 9, the central board of directors of the State Bank examined this and other recent economic developments. Sources said that the private sector’s representatives on the board pointed out that the monetary tightening was resulting in a slower off-take of the private sector credit.
State Bank Governor Dr Shamshad Akhtar, however, insisted that the tightening of the policy had slowed the rate of inflation and added that the inflation target of 6.5 per cent set for FY08 would be achieved.
Business leaders are concerned about a big fall in banks lending to the private sector. They are also unhappy with the State Bank for not holding the meeting of the Private Sector Credit Advisory Committee. Sources close to SBP believe that the committee would meet early November. Dr Shamshad Akhtar is leaving for Washington to attend the IMF-World Bank annual meetings and would be back towards the end of this month.
The advisory committee is expected to draw the credit plan for this fiscal year and set a tentative target for the private sector borrowing from banks. “There is little point in holding the meeting after four months of the new fiscal year have passed,” remarked a member of the committee.
Business leaders fear that a low bank borrowing of the private sector would lead to a lesser than expected growth in industry during this fiscal year. “That is very much obvious,” says Mr. Iqbal Ibrahim, vice chairman of the All-Pakistan Textile Mills Association. “And once the industrial sector growth falls short of target it means we won’t achieve the economic growth target as well.” The government has set the GDP growth target at 7.2 per cent for this fiscal year.
In the last fiscal year, growth in the large-scale manufacturing had declined to 8.5 per cent against the targeted 12.7 per cent partly because higher interest rates had lowered private sector’s borrowing from banks. In FY07 the private sector’s borrowing fell to Rs366 billion against the target of Rs390 billion and far below the FY06 borrowing of Rs402 billion.
That the slowdown in the private sector credit flow is likely to impact on industrial growth is evident from the fact that in the first month of FY08, large-scale manufacturing has grown at a low rate of 6.2 per cent. The full year growth target is 10.5 against 8.5 per cent in the last year.
Business leaders say the appetite for private sector credit is low primarily because the textile sector’s borrowing from banks has fallen sharply. They claim that many yarn processing mills have closed down and even those operating are working below capacity as this sector fights for survival amidst growing international competition and rising input cost.
The sector-wise credit disbursement data for Q1 FY08 are not available. But older statistics show that the manufacturing sector rather made a net retirement of Rs21 billion during the first two months of this fiscal year.
Senior bankers say this happened as banks tightened credit disbursement after bad loans ballooned during January-June 2007.
Non-performing loans of all commercial and specialised banks rose to Rs187.3 billion at end-June 2007 from Rs173 billion at end-December 2006, showing an increase of Rs14.3 billion.
Financial observers point out that in the first quarter of FY08 banks did not bother much about lending to the private sector because the government borrowing from banks was at its peak. In Q1 FY08 the government borrowed Rs88 billion from banks to fill in the gap between budgetary income and expenses. It, however, retired Rs9 billion of central bank credit.(In Q1 FY07 the government had retired Rs21 billion bank loans and borrowed Rs60 billion from SBP.
On the one hand, heavy government borrowing from banks has led to a situation where banks are not much concerned about a negative growth in private sector credit. But on the other hand, the government policy to borrow from banks and not from the central bank has helped keeping core inflation in check. Small wonder than that in July-August 2007 CPI inflation accelerated 6.4 per cent against 8.3 per cent in July-August 2007.The government has agreed to keep its borrowing from the central bank at bare minimum from this fiscal year to help the State Bank in its fight against inflation..
The manufacturing sector, particularly textiles, looks certain to borrow less in this fiscal year because of high interest rates combined with rising input cost including increased wages. But the farming community believes that agricultural borrowing would rise.
“The government has increased the produce index value—a tool that determines the borrowing requirement of farmers—from Rs400 to Rs1200,” says Syed Qamaruzzaman Shah, president of Sindh Chamber of Agriculture. “This means a farmer can now borrow up to three times his previous borrowing limit. This would boost banks’ agricultural lending.”
In the first two months of this fiscal year, agricultural lending increased 18 per cent to Rs25.8 billion and bankers say it would increase faster once the notification about calamity-affected areas is issued.
After heavy monsoon rains and flooding earlier this year, the government had eased the terms for farm loans recovery—and even waived parts of outstanding loans in certain parts of the countryside. “But bankers say they have not received notification of this and insist on recovering previous loans before making new ones,” complained Syed Qamaruzzaman Shah.
The FY08 growth target for agricultural sector is 4.8 per cent. But lower-than-expected cotton production, concern about rice output and increase in the prices of agricultural inputs including fertiliser might let the target slip by. Agriculturists, however, believe that agricultural lending this fiscal year would reach the targeted level of Rs200 billion—not only because of an increase in PIU but also because over the past two years Zarai Taraqiati Bank has improved its financials and commercial banks have learnt the art of farm lending. In the last fiscal year banks lending to agricultural sector rose to Rs168 billion against the target of Rs160 billion.
More importantly, as National Insurance Corporation has just facilitated crop and crop loans insurance by banks, agriculturists think this would go a long way in boosting agricultural credit. But they point out that there is very little awareness about this among farmers.
The overall private sector credit growth has remained negative in Q1 FY08 also due to slower distribution of consumer loans. Data covering the first two months of FY08 show that consumer loans rose just 2.6 per cent. Bankers say though auto loans might continue to show a nominal growth because of a rise in car prices, housing finance might grow faster.
“The reason is that the real estate prices have seen a nominal fall in the recent months and have become attractive again,” said a head of credit division of a large local bank. “If the sub-prime credit squeeze in the US worsens, you’ll see lot of investment in the real estate here and that would be followed by a growth in bank loans for housing and construction.”
In FY06 when the private sector credit had hit an all- time high of Rs402 billion ,it was widely believed that part of the bank credit was used in speculative investment in the real estate and stocks thus fueling inflation. This phenomenon weakened in the last fiscal year when private sector credit totaled Rs366 billion against the target of Rs390 billion. And since the SBP has made it difficult now to use bank loans taken for other purposes in investing in the real estate and stocks, this too has dampened the private sector credit appetite this year.