The ADR race is now close to the finish line. After reaching a bottom of 37 percent in September 2024, the banking industry’s advances-to-deposits ratio has inched ahead by 9 percent in under two months, reaching 47 percent by mid-November – with only 300bps more to go.
During this time, Pakistan’s banking sector has cumulatively shed Rs600 billion in deposits.
But more significantly, it has gone on a lending spree, advancing more than six times or Rs2.6 trillion! On a cumulative basis, the banking industry’s loan book has grown by a fifth in size in less than seven weeks.
Historically, it has taken the industry 18–24 months on average to grow its balance sheet by that size. Clearly, the ADR loans have helped short-circuit that race. But where is all the money headed?
The rapid increase in private sector lending, fueled by the ADR-driven surge in liquidity, warrants careful scrutiny from the State Bank of Pakistan (SBP). While the immediate gains in credit availability might appear positive, the potential for these loans to create demand-side pressures on the real economy cannot be ignored.
This is particularly important when viewed through the lens of the velocity of money, a critical factor in understanding how monetary changes translate into economic activity.
Over the seven weeks, over a trillion rupees have been parked with NBFIs, fueling a trailblaze of activity in fixed-income and equity markets funds. But even more significantly, an additional Rs1.2 trillion has been parked in the private sector, of which more than Rs900 billion rupees has made its way to private sector non-financial businesses. Even SME businesses have received more loans in one month than they did in the past two years put together. Such is the magic touch of fiscal policy.
Critically, this situation unfolds against a backdrop of economic uncertainty, where the real economy remains fragile, and the fiscal space for corrective measures is limited. While easing monetary policy might appear as a quick fix to stimulate growth, the risk of igniting a self-reinforcing cycle of demand-led inflation cannot be overstated. The short-term boost in economic activity achieved through additional liquidity could lead to long-term destabilization, necessitating more aggressive tightening later, potentially stifling growth.
As of October 2024, the top five industries to benefit from the latest private sector credit bonanza were pharmaceuticals, where Rs203 billion in additional loans has been borrowed over a month – recording 179 percent MoM growth. Next is hotels & hospitality, with Rs39 billion or 97 percent in incremental loans since Sep-24. The cement industry borrowed an additional Rs48 billion or 22 percent in a month, and the largest, textiles & apparel, with Rs230 billion or 13 percent. Chemical industries borrowed an additional Rs42 billion or 11 percent during the same period.
The SBP must also consider the temporal disconnect between when loans are disbursed and their real economic impact. Even if these loans are repaid or rolled over after the new year, the increased liquidity will have already circulated within the economy. By then, its effects—both intended and unintended—will have set off a chain reaction that is difficult to reverse without substantial policy interventions.
The central bank must closely monitor the situation before considering further easing in monetary policy before year-end – the meeting scheduled for mid-month.
Even if the fresh loans made during the Sep-Dec quarter are settled after the new year begins, the additional liquidity (or even a part of it) made available to the private sector may have remained in the system for long enough to set off a chain reaction, with demand-side pressure creating a ripple effect in the real economy.
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