Contraction in credit

Private sector credit which is considered as a major input to facilitate economic activity has shown a sharply declining trend during the current fiscal year. According to a report released by the SBP, private sector credit off-take in the first two months of FY17 was negative by as much as Rs 227 billion compared to the debt retirement of only Rs 77 billion in the corresponding period of last year. Although nobody could predict the trend in bank advances in a precise manner during the remaining part of FY17, it would be worthwhile to note that a negative trend in bank credit had started reversing in the second quarter and finally the FY16 had ended with a private sector credit expansion of Rs 460 billion as compared to Rs 224 billion in 2014-15. It may also be added that credit expansion in the private sector had not only set a record in FY16 but the increase in credit was shared by almost all important sectors of the economy including agriculture, manufacturing, electricity, gas and water, construction, transport, storage and communications, services and consumer-financing. Besides, growth in private sector credit was not limited to short-term working capital as investment loans for projects were also approved and disbursed during 2015-16.
Such a huge contraction in credit to the private sector in a period of only two months would not only adversely affect the growth rate of the economy but is also difficult to comprehend. It is true that the first quarter of the fiscal year is almost invariably a period of retirement of credit but, given the low lending rates, better business sentiment, projected higher growth rate of 5.5 percent during the current year and optimism of the government for increasing the level of investment and revive economic activities, such a drastic fall in private sector credit was unexpected and does not bode well for the prospects of the economy. It shows that the attempts of the government to project and propagate revival of the economy could easily be described as misplaced optimism. It is, however, hard to find the reasons behind the reluctance of banks to provide credit to the private sector. It is quite possible that the banks are by now so much accustomed to invest in risk-free government securities that they continue to avoid risk-based lending to the private sector. Another possibility is that withholding tax on bank transactions and government's intervention in the property market to raise tax revenues may have played a role in containing deposit growth which determines the lending capacity of banks. Overall, however, the situation with regard to the present trend in advances is too grim to be ignored easily. It needs to be understood that bank credit is the life-blood of manufacturing activities in the country and if it goes dry, the industry and other sectors of the economy could also become lifeless. Hopefully, the SBP will analyse the situation carefully with a view to finding ways to reverse the sharply declining trend in advances to the private sector.