Latest credit data released by the State Bank shows that private sector credit didn decline by as much as was feared in the first two months of the fiscal year. While that might bring a sigh of relief in some quarters, it doesn necessarily mean that exploring means to save private sector shouldn be the order of the day.
But save it from whom, one may ask? The right of the podium would quickly answer "from high interest rates, of course".
However, somebody needs to tell them that high interest rates are inevitable at the moment, even if inflation is being mainly triggered by racing food prices, and even if the actual damage caused by the floods is yet unknown.
Besides, for real investors looking to expand or set up new businesses, interest rate doesn matter as much as it is popularly hypothesized. "Studies have revealed that in Pakistan borrowings for investment purposes are essentially interest rate inelastic," says Ashraf Janjua, former Deputy Governor of the State Bank.
Private sectors real enemy, ergo, are factors exogenous to the credit market; i.e. things like supply side gluts, energy shortages, high power tariffs, law and order and so on. But little can be done to defend against these issues on an immediate basis.
The solution then lies in re-tweaking, reshaping and restructuring the way Pakistans financial markets work.
The mainstream discussions revolve around how to provide credit to the corporate sector, whereas the real issue is to supply credit to the array of sectors that are effectively barred from formal banking sector credit. These sectors are at the helm of informal banking channels that not only extract high rates, but also molest debtors if repayments are delayed.
The central bank has often urged the need for more credit penetration in the SME and micro-finance sectors, while advocating the need to find more solutions for financing infrastructural projects.
Even its latest moot on Damage Assessment of Floods and Implications for the Financial Sector called on banks to play their due role in rebuilding the affected areas by focusing on the agriculture, microfinance and SME sectors.
But with banks focused too much on the corporate sector, there is little scope for other businesses such as SMEs, agri and microfinance.
The need of the hour is to create a separate debt market for the corporate sector, for which the SECP must wake up and play its due role so that banks can start diversifying credit in areas which are the backbone of any economy.
At the same time, banks need to tune up their risk assessment systems and find new products and markets to sell their credit. How long will they choose the risk-free option to finance government expenditure (and the less risky corporate ventures) while keeping their entrepreneurial spirits subdued is something that needs to be deliberated thoroughly.
As for financing infrastructural projects, one wonders whatever happened to the power-sector-specific, debt-market-development report finalized last year. The last anybody heard was that the report, prepared by the big five banks, Engro, Hubco and Rousch Power, was lying with the State Bank coordinator. Hopefully, it is not catching dust at the SBPs offices.
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