Private sector borrowing is picking up thanks to the rising output of large-scale industries, increase in domestic wholesale businesses, revival of personal loans, and some expansion in external sector trade, according to just-released SBP statistics.
Banks’ net credit disbursement to the private sector totaled Rs71 billion between July and October this year; a reversal in trend from the comparable period last year, when the private sector had made a net credit retirement of Rs38 billion.
The breakup reveals an even more promising fact. The entire Rs71 billion in bank credit has gone to private sector businesses. Investment in securities/shares of private sector companies, which also forms part of overall private sector credit, has seen no increase at all.
“Large-scale manufacturing is growing faster on the back of rising domestic sales; people are seeking more personal loans, and external trade is expanding. All these factors are pushing up the private sector’s bank borrowing,” says the treasurer of a large local bank.
“What is even more important is that the borrowing is not concentrated in sectors that need seasonal bank financing at this time of the year, like cotton, textiles and rice milling etc.”
But can this trend be sustained amid monetary tightening is a million-dollar question.
Some bankers say banks’ lending to the private sector would have further gathered pace even after the pass-through of monetary tightening on interest rates in the coming months for several reasons.
“Take, for example, the textile and food sectors. Larger-than-expected output is keeping cotton prices from accelerating. And that, along with an increase in export demand, is creating room for textile mills to obtain a bit costlier working capital,” opines a senior executive of Habib Bank Ltd.
“In the food sector, economies of scale obtained by some food processing companies and higher domestic and export earnings of many others indicate that they won’t mind borrowing at higher rates if they think their business is going to grow further.”
Meanwhile, ceaseless depreciation in the rupee’s value, chiefly due to an expanding current account deficit and dwindling foreign exchange reserves amid heavy external debt payments, is also playing a role in keeping the private sector’s credit demand up.
A weaker rupee has made imports costlier, drawing down on liquidity of import houses, besides increasing import-related financial requirements of even export-oriented industries. That, according to some bankers, is also leading to greater off-take of private sector credit from banks. Besides, businesses are generally skeptical about any immediate recovery in the rupee’s value and are taking it as a signal for further monetary tightening.
Naturally then, many of them are in no mood to delay bank borrowing, which they do when they foresee an immediate regain in the rupee’s value.
Apart from all these factors, another thing is believed to have pushed up private sector credit, but statistical evidence about it is yet to come. Expansion in the output of major industries like textile, food, petroleum, cement, fertiliser, chemicals and electronics has led to capacity expansion here and there in the recent past.
Improved electricity supply has also played a role in it. So, another area where private sector lending is up is project financing. But bankers say most of it comprises periodical release of already-committed financing.
And for banks, increased lending to private sector businesses has become possible — even desirable — because the government is currently retiring its commercial bank loans and meeting most of its budgetary financing needs by borrowing from the central bank.
Between July and October, the federal government borrowed Rs681 billion from the SBP and retired Rs299 billion of commercial bank credit. For the private sector, big bank borrowing between July and October became affordable because interest rates did not show any substantial increase.
“Effective lending rates for the private sector would have been much higher than what they are now had the government also been borrowing heavily from banks,” says the head of credit division of another local bank.
Bankers say that in four months of this fiscal year, prime borrowers continued getting six-month bank loans at 100-150 basis points above the weighted average yield on T-bills of similar tenure.
They say the rate for ordinary borrowers of manufacturing and trading sectors (minus exporters) ranged between 200-400 basis points above T-bill yields, though average flat interest rates charged on consumer loans and on SMEs were higher, at between 16-20 per cent.
However, a very pertinent question is whether the private sector’s credit demand would still remain strong in the coming months when the impact of the 100-basis point increase in the SBP’s policy rate (between September and November) would show through.
“The July-October data [on the private sector’s bank borrowing] doesn’t even reflect the impact of the first rate hike of 50 basis points,” says a senior executive of the state-run National Bank of Pakistan.
“We’ll have to wait for a few more months to see the full impact of 50bps policy rate hikes each in September and November. And in case more monetary tightening takes place, the waiting period could be longer, depending upon whether further rate hike(s) is done in one go or in piecemeal.”
Most businessmen say experience tells them that their effective borrowing rates rise not in proportion to, but in excess of, the actual rise in the SBP’s policy rate. That explains why all business lobby groups, including their apex representative body, FPCCI, have vehemently criticised the current spell of monetary tightening.
But if, despite all the criticism and condemnation of the policy rate hikes, private sector credit is growing, it indicates that demand is getting stronger on the back of actual growth in business.
Generally, it takes changes in monetary policy six to nine months to reveal their impact on banks’ lending pattern and loan pricing, as well as on the private sector’s credit demand. However, according to central bankers, these changes ‘hit inflationary expectations a bit earlier’.
The rise and fall in the SBP’s policy rate changes the yields of government treasury bills and bonds. And change in T-bill rates actually leads to re-pricing of most working capital loans, because these loans are offered on floating rates benchmarked with six-month T-bills.
Bankers say once the government changes gear and starts borrowing from banks to bring down its over-the-limit borrowing from the SBP, banks’ lending rates for the private sector may shoot up.
Higher government borrowing from banks would, even otherwise, push up the weighted average yield of treasury bills, which serve as a benchmark for private sector loans priced at floating rates. “Further monetary tightening, therefore, would add fuel to the fire,” warns a former central banker.