Still in recessionary phase

The quarterly "Development Finance Review" released by the State Bank on 20th December, 2012 confirms once again that the country's economy "is still in the phase of recession with challenges like energy crisis, decline in investment, and poor law and order". Other critical areas of distress for the economy are government's difficult financial position and dwindling foreign direct investment. In such an economic scenario, priority sectors financing (PSF) suffered or stagnated as was evident from the decline in outstanding amount of advances to the priority sectors by 3.4 percent on YoY basis and a rise of only 1.9 percent during the last quarter of FY12 (April-June, 2012).
A small increase in cumulative development finance portfolio during the quarter was primarily driven by agricultural and infrastructure sectors which witnessed a rise in advances by 7.7 percent and 4.9 percent, respectively. Advances for SME finance and housing finance, however, dropped by 4.4 percent and 1.5 percent respectively. The decline in advances on YoY basis was due to a fall in SME finance (-15.3 percent), housing finance (-6.3 percent) and infrastructure finance (-1.3 percent) which was neutralised partly by a rise of 27.4 percent in microfinance and 12.2 percent in agriculture finance. The combined number of outstanding borrowers, nonetheless, went up by 3.5 percent during the quarter and by 1.7 percent during 2011-12. Aggregate NPLs of banks and DFIs depicted a rise of 2.2 percent on a quarterly basis and by 3.6 percent on a yearly basis. Of the total NPLs, SMEs' share was 57.3 percent, agricultural sector accounted for 20.6 percent and the remaining 22.2 percent pertained to microfinance, housing finance and infrastructure finance.
The contents of the State Bank's quarterly Development Finance Review would appear to be a matter of routine or simply uninteresting to an ordinary person but are certainly a true reflection of the state of the economy and the behaviour of the financial system of the country. To a certain degree, they are also indicative of future direction of economy. As is well known, the ratio of development finance in the overall asset portfolio of the banks and DFIs in Pakistan has always been small as the financial institutions have been interested more in advancing credit for working capital and investing in government's securities. The revelation by the State Bank that the outstanding amount of advances for development finance has actually decreased even in nominal terms during the previous year means a declining support to development activity by the banking sector which could have a catastrophic impact on the prospects of growth of economy. A slight increase in development finance in the latest quarter, though welcome, was not enough to compensate for a substantial fall during the year as a whole. However, financial institutions cannot be blamed entirely for this unhealthy development as both the supply side and demand side factors had combined to aggravate the situation. On the supply side, banks had little incentive to extend development finance to the priority sectors, particularly given the opportunity offered by aggressive government sector borrowings at attractive interest rates. They were also reluctant to advance more credit to these sectors due to high and increasing level of NPLs. The demand for credit, on the other hand, was constrained largely by unfavourable economic conditions caused mainly by severe energy shortages, increasing militancy, poor law and order situation, prevailing despondency among various agents of production etc. It is increasingly clear that if inhibiting factors on both the supply and demand sides are not properly addressed, there could be no hope of increase in development finance in real terms and revival in economic activity and the country would remain trapped in a vicious circle of low investment and stagnant growth. We know that it is extremely difficult to overcome these impediments but there are no easy alternatives to a smooth transition to the desired direction.
Coming to the individual sectors, it is quite evident that SME finance has shown a declining trend and credit to agriculture has increased while other sectors have generally shown a mixed trend during FY12. A substantial fall in SME finance, both on quarterly and yearly basis, would appear to be odd due to continuous emphasis and efforts of the authorities on this particular sector but such a trend is understandable due to high share of NPLs in this sector which might have constrained the banks to avoid venturing into this field. Increasing development finance to agriculture sector, supported by comparatively lower level of NPLs, is of course welcome due to its potential for enhancing productivity and generating employment in a very crucial sector of economy.