MONEY WEEK: 452 companies benefit from Rs 13 billion credit write-off by 2 major banks

Looking at the monetary survey for the week ended on April 9, 2005, it appeared, for a moment, as if the private sector had started retiring credit and the State Bank had ultimately succeeded in halting private sector credit expansion in the aftermath of its recent moves directed at inching up of interest rates. There was also a likelihood that private borrowers, who until recently were reportedly using bank money to buy shares, had stopped this business after suffering heavy losses because of subdued activity at the stock exchanges.
What turned out to be, however, was that major scheduled banks finalised their financial accounts for the calendar year 2004 only recently and their balance sheets now showed all the amounts written off during the year in terms of sub-section [3] of section 33A of the Banking Companies Ordinance 1962. On finalisation, written-off loans have since been adjusted against banks' loan portfolio which depressed the outstanding level of their loans to the private sector as on the end of the CY 2004 and hence for the fiscal year 2004-05 (July-June).
According to published accounts of HBL and NBP (BR April 27 & 28), these two banks alone wrote off as much as Rs 8.3 billion and Rs 4.6 billion in loans and accumulated mark-up to as many as 322 and 130 clients, respectively. Outstanding level of private sector credit during the week was, therefore, adjusted downward by the amount of written off loans showing thus a contraction of about Rs 14 billion in private sector credit instead of an expansion which actually might have been the case.
The question arises what basis the State Bank would use to gauge actual credit expansion in the private sector since July 1, 2004? And also, would the hard hit depositors on account of historic low levels of interest rates and rising inflation also benefit from the benevolence of banks? Indeed, majority of depositors, whose money is used to finance private sector credit requirements, belonged to the middle and poorer segments of the country's population.
Government borrowings, in the meanwhile, rose by Rs 2.2 billion to Rs 13.5 billion, including borrowing for budgetary purposes (up Rs 2.7 billion to Rs 16.3 billion), partly offset by fresh retirement of credit under commodity operations, whose negative balance increased by about Rs 0.5 billion to Rs 5.1 billion during the week. Federal government budgetary borrowing rose by Rs 5.2 billion to Rs 20.5 billion, while that of provincial governments further declined by Rs 1.7 billion to (-) Rs 4.3 billion. An increase in negative balance of other items (net) of Rs 3.3 billion also caused contraction of overall credit by a similar amount. Taken together, domestic credit stood reduced by Rs 14.5 billion to Rs 255.8 billion as on April 9, 2005.
Money supply during the year so far, however, increased from Rs 322.6 billion to Rs 326.6 billion, showing an increase of Rs 4 billion resulting mainly from an increase of Rs 18.5 billion which more than offset the contraction impact originating from domestic credit.
Component-wise growth of money supply during the year so far revealed that the share of currency in circulation stood at 33.9 percent of incremental money supply, compared with 28.6 percent on April 2, 2005, while that of deposit money decreased from 71.4 percent to 66.1 percent for the same period. Reserve money in the meantime increased by Rs 9.5 billion from April 2, 2005 to Rs 126.7 billion during the year so far due to an increase of Rs 15.1 billion in currency in circulation, partly offset by a decline of Rs 2.5 billion in cash in banks' tills and Rs 3.2 billion in banks' balances with SBP.
The above-mentioned changes in money supply and domestic credit were brought about by the following changes in the provisional accounts of the State Bank & the scheduled banks as of April 9, 2005. After witnessing a decline of Rs 14.2 billion over the past three weeks, total assets/liabilities of Issue Dept of the State Bank increased by Rs 12.6 billion, to Rs 717 billion, on April 9, 2005 accounted for in the main by increases on the assets side of Rs 1.2 billion and Rs 11.5 billion in holdings of approved foreign exchange and GOP securities, respectively, and a rise on the liabilities side of Rs 12.6 billion in notes in circulation. Total assets/liabilities of SBP Banking Dept increased by Rs 9.1 billion to Rs629.7 billion, explained by increases on the assets side of Rs 13 billion and Rs 2 billion in approved foreign exchange and loans and advances to banks under other loans, respectively, partly offset by declines of Rs 3.6 billion in investments in govt securities and Rs 2 billion each in other investments and other assets and increases on the liabilities side of Rs 8.6 billion, Rs 2.4 billion, and Rs 2.1 billion in deposits of Federal govt and provincial govts, and other liabilities respectively partly offset by a decline of Rs 3.2 billion in deposits of banks.
Scheduled banks' total assets/liabilities declined by Rs 14 billion to Rs 3357 billion, accounted for in main by declines of Rs 9.6 billion in advances, other than to banks, of Rs 2.1 billion in bills purchased/discounted, Rs 2.6 billion in investments in other approved securities/ other investments (all the four being components of private sector credit), of Rs 2.7 billion in balances with SBP/other banks and of Rs 5.5 billion in advance tax partly offset by increases of Rs 5.3 billion in investments in treasury bills, of Rs 2.2 billion in balances with banks abroad and of Rs 2.6 billion in other assets on the Assets Side and by declines of Rs 11 billion in total demand/time liabilities (incl Rs 7.4 billion in demand deposits-general, and Rs 2.4 billion in time deposits-general), of Rs 2.2 billion in borrowings from banks abroad and of Rs 1.3 billion in other liabilities on the Liabilities Side.
During the week ended April 9, 2005, growth in private sector decelerated to Rs 348.7 billion compared with Rs 362.5 billion at the end of the previous week and Rs 243.6 billion on April 10, 2004. Almost entire reduction of Rs 13.8 billion in private sector credit during the week occurred in commercial banks credit to the sector as the entire credit write-off occurred on their account. Export credit also appears to have benefited from loan write-off as its growth decelerated from Rs 20.8 billion on April 2, 2005 to Rs 20.6 billion on April 9, 2005. Credit extended by specialised banks, however, increased by Rs 304 million during the week to Rs 798 million compared with retirement of credit of some Rs 8.3 billion in the corresponding period of last year.
In line with the massive rise of Rs 18.5 billion in net foreign assets of the banking system during the week, liquid foreign exchange reserves of the country soared to $ 12994.8 million on April 9, 2005, showing an increase of $ 228.8 million after recording declines of varying magnitudes for the preceding three weeks. This was the highest ever reserve level achieved on a week-end during recent years so far, being only $ 5.2 million short of the coveted $ 13 billion mark. The reserves with the State Bank soared by $ 234.6 million to $ 10249.6 million while those with the scheduled banks declined by $ 5.8 million to $ 2745.2 million over the week.
Despite the rising demand for dollars by the corporate sector, especially textile companies, to cover their forward buying, the rupee resisted sharp fall in its value as the SBP continued providing dollars for major payments, including oil whose prices surged to over $ 58 per barrel in the world markets. At Rs 59.75 and Rs 59.85 for buying and selling, respectively, the rupee remained firm versus dollar in the open market as smooth supply of dollars provided ground for the rupee to stage recovery The domestic currency, however, lost 20 paisa versus euro at Rs 77.30 and Rs 77.60, respectively. In the inter-bank market, the rupee showed marginal fall but ended the week firm against the greenback at Rs 59.38 and Rs 59.39 for buying and selling respectively. (For comments and suggestions: research.dept @aaj.tv).