KARACHI, March 12: The State Bank has reset the private sector credit target at Rs50 billion for this fiscal year — down from Rs94 billion projected initially in annual credit plan for 2002-03.

SBP sources say the target has been reset in the light of the latest monetary developments. Between July 2002 and February 15, 2003 the private sector received Rs77 billion credit from the banks but credit retirement has already started and the figures for March are sure to reflect it.

In the last fiscal year the banks had disbursed Rs30 billion credit to the private sector — partly due to slumped economy and partly due to other factors including their own inefficiency. The State Bank took notice of this fact and since the very beginning of this fiscal year it started sending signals to banks to raise private sector credit — or be ready to see their profits falling.

The central bank eased off its monetary policy for the purpose and as part of it allowed a rapid fall in treasury bills yield. The banks took the signals more seriously than in the last fiscal year and became a bit more liberal in disbursement of credit to the private sector. In the mean time the economy also showed some signs of improvement — and these two things combined led to a rise in private sector credit disbursement. Whereas bankers say they had made real big efforts to boost private sector credit in this fiscal year — and that there is now very little room left for increasing it further — businessmen complain that the banks are too choosy in offering loans. Small businessmen say in particular that the banks either delay loan making on one pretext or another or charge very high markup rates.

Bankers say they have to examine the credit worthiness of the borrower at all cost — even if its means a reduction in loan disbursement volumes. They say they also have to charge different rates from different borrowers depending on how much business a borrower gives to the banks — and how dependable is its ability to repay.

This debate has intensified after the recent fall of the yield on treasury bills. The yield on six-months benchmark T-bills has fallen to two per cent from more than six per cent at the start of this fiscal year. Bankers say the SBP should provide an interest rate floor to ensure the very survival of the banks meaning that it should stabilize the T-bills rates.

GOVERNMENT BORROWING: But that seems a far cry in near future. Because the government has decided to retire more bank credit than initially targeted in the annual credit plan. Officials say the target of net government borrowing for budgetary support has been revised to minus Rs29 billion from minus Rs14 billion. It means that the volume of the government borrowing for budgetary support would decline by Rs29 billion during this fiscal year. Earlier it was estimated to fall by Rs14 billion only. A higher than initially targeted credit retirement by the government and a lower than initially projected pickup in private sector credit means there will remain more liquidity in the banking system than estimated earlier. This is enough to scare banks that are already wallowing in excess liquidity that threatens to lower their markup incomes.

MONETARY EXPANSION: The revision of the targets of government borrowing for budgetary support and private sector credit comes as a news to most bankers. But the very fact that the banking system as such will remain more liquid than anticipated initially had come to the fore in late January. The SBP had issued its first monetary policy statement on January 29 wherein it had said that the target for monetary expansion had been enhanced from 10.8 per cent to 16 per cent. The central bank had linked it to the fact that the system would continue to receive excess inflows of foreign exchange that would have an ultimate impact on monetary expansion.

SBP statistics (available on its website) shows 11.3 per cent growth in monetary expansion between July 2002 and February 15 2003.