Private sector credit growth has declined to a six-year low of 3 percent by the end of April 09 due to low demand for working capital ahead of slow economic activities and high interest rate, said SBP Third Quarterly Report. The report pointed out that slowdown in private sector credit which started in October 2008, due to temporary liquidity crunch with banks, persisted in the following months of FY09 as well.
Resultantly, the YoY growth in private sector credit reached six-year low of 3.0 percent by the end of April 2009. "In absolute terms, the increase in private sector credit was only Rs 48.6 billion in July-April FY09 compared with remarkable surge of Rs 371.3 billion in the corresponding period of last year," it added. The deceleration in credit growth slightly increased as a few Independent Power Projects (IPPs) settled some of their loan obligations with banks.
Nonetheless, even after adjusting for this one-off impact for bank finance, the credit off-take for July-March FY09 period remained significantly low at Rs 105.8 billion compared with Rs 332.0 billion in the same period of last year, the report said. The slowdown in private sector credit was mainly explained by exceptionally low demand for working capital.
This reflects a number of developments, such as slowdown in domestic economic activities on account of acute power shortages, a sharp fall in raw material prices in the international and domestic markets, rising interest cost and contraction in trade volume partly due to the global recession etc.
The report said that demand for fixed investment loans in contrast remained quite resilient. Adding, "growth in long-term loans was because a few industries such as power, fertiliser and construction, utilised their credit lines committed with banks in the last two years".
This reliance is likely to persist as the commencement of new private sector projects particularly in cement, fertiliser, power and sugar industries would continue to sustain the demand for long-term loans in the coming months.
"The major deceleration has registered in textile sector, as excluding this, the growth in manufacturing sector increased to 12.6 percent in July-March FY09, though still lower than the same period of the previous year," the report said. Besides textile, refinery, basic metal and domestic appliance also dragged down the demand for bank loans in the manufacturing sector, it added.
The slowdown in textile sub-sector was visible in both working capital loans and fixed investment loans, only advances extended under Export Finance Scheme (EFS) registered a significant growth. However, the strong impact of EFS was more than diluted by a sharp drop in import finance and other than EFS loans to textile sector.
Within textile sector, most of the slowdown in running finance requirements emanates from the spinning sector. Monthly trend reveals that the credit-off take in this sector was strong in the initial few months of FY09 partly a reflection of commodity financing for cotton availed by the private sector. However, in the following months of FY09, the loans to the spinning industry could not maintain the growth momentum and dropped drastically.
Though a part of the fall in textile loans was anticipated, in view of continued global slowdown and the resulting drop in exports, the huge stock of inventories on account of delays in export order settlement further aggravated the situation. Furthermore, a few spinning industries have closed down their production operations in the recent months on account of acute power shortages, structural impediments in the industry and rising inability to service bank obligations.
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