Despite favorable environment, declining trend persist in private credit sector: SBP

Despite a favorable environment, a declining trend was witnessed in credit to the private sector during Q1-FY21, revealed the State Bank of Pakistan (SBP) in its latest The State of Pakistan's Economy - First Quarterly Report 2020- 2021.

As per the report, during Q1-FY21, a host of positive factors prevailed compared to the same period last year. First, the policy environment was accommodative, with the policy rate down by 625 bps to 7.0 percent, from 13.25 percent in Q1-FY20. Second, the SBP had introduced a number of refinancing schemes to counter the impact of Covid, such as Rozgar Scheme and Temporary Economic Refinance Facility (TERF) since March 2020. Third, the overall business confidence improved during the quarter.10 Finally, the industrial activity (proxied by LSM) registered improvement during the period under review.

However, despite this favorable environment, the declining trend in the private credit, which had started from the third quarter of FY19, continued in Q1-FY21, stated the report.

The downward trajectory in loans to businesses until the outbreak of Covid mainly represented subdued credit demand on the back of slowdown in manufacturing activity, coupled with higher interest rates. The demand for credit was further dampened with the start of business closures amid Covid-related lockdowns in the country. In fact, private businesses (mainly export oriented sectors) made relatively higher short-term loan retirements in Q1-FY21, over the same period last year.

The SBP report was of the view that the weak private credit momentum in Q1- FY21 is likely due to three factors. First, firms’ sound liquidity position on the back of increased sales, higher sales tax refunds by the government, and SBP’s relief package (deferment and restructuring).

During Q1-FY21, private businesses benefitted not only from SBP’s concessionary financing facilities, such as Export Finance Scheme (EFS) and Long-term Financing Facility (LTFF), but also borrowed under the schemes introduced by SBP to counter the impact of Covid, mainly Rozgar Scheme and TERF.

The disbursements under these schemes have been quite substantial in Q1-FY21. Thus, while the disbursements under LTFF and TERF have played their part in the quadrupling of fixed investment loans in Q1-FY21 over the same period last year, they might have also induced few firms to retire their previously taken bank loans against the conventional facilities, pointed out the report.

The second source of weak credit momentum could be the availability of surplus carryover stocks, which led to weak demand for working capital loans. Subdued economic activity in the preceding two quarters gives credence to this assumption.

Finally, input prices remained muted, mainly driven by oil, glass sheets, steel bars, and sheets and chemicals. This might have dragged down the working capital demand as well.

The report, however, highlighted that consumer financing, did benefit from a relatively accommodative policy environment in Q1-FY21. Under car financing and personal loans, a significant increase was registered in Q1-FY21 over the same period last year.