Private sector credit

Bank credit to the private sector is often considered as life-blood for various sectors of the economy and if it goes dry, the industry and other sectors of the economy could suffer immensely. Seen from this perspective, almost a double-digit growth in credit to the private sector during the first half of FY19 appears to be a positive development for the economy of the country. According to the latest data released by the SBP, credit to the private sector posted a healthy growth of 9.5 percent or Rs 521 billion, reaching an all-time high of Rs 6.003 trillion at the end of December, 2018 compared to Rs 5.482 trillion by the close of June, 2018. It may be mentioned here that credit to the private sector includes Rs 238billion of investment in shares and securities and Rs 5.765 trillion of loans to the private sector. Most of the demand in private sector credit emanated from manufacturing sector, as credit to this sector surged by 14 percent or Rs 384 billion to Rs 3.092 trillion during the six months period ending December 31, 2018. Among manufacturing sector, textile ranked first as financing to this sector crossed the one trillion mark, reaching Rs 1.009 trillion in December, 2018, up from Rs 807 billion in June, 2018, depicting an increase of 25 percent or Rs 202 billion. It may be added that SBP is also making efforts for a more balanced distribution of bank loans across sectors and has launched a comprehensive road map for the promotion of SMEs. Besides, the State Bank of Pakistan has prepared a draft framework for the promotion of low-cost housing finance.
A substantial increase in bank credit to the private sector during the six-month period ending December 31, 2018 is of course a healthy development for the country, especially when first quarter of the fiscal year is invariably a period of retirement of bank credit and the second quarter usually witnesses a modest growth in credit. The increase in credit demand may be due to increasing economic and industrial activities in the country and in anticipation of higher financing costs due to the expectation of further tightening of monetary policy if Pakistani authorities opt to enter into an IMF programme. Even otherwise, policymakers would like to raise the interest rate structure if inflation rate in the economy continues to increase and the balance of payments position of the country remains under stress. Banks are also willing to expand their exposure due to low credit risk emanating mainly from the declining non-performing loans as a percentage of total loans. On the supply side, sufficient liquidity is available in the banking system to cater to the demand of credit in the private sector as the government shifted its budgetary borrowings from the banks to the SBP. One could, however, argue that pace of credit expansion to the private sector could slow down if the monetary stance of the SBP remains tight in the remaining part of FY19. It is, however, good to see that the banks which were very much accustomed to invest in risk-free government securities and avoided risk-based lending to the private sector have now changed their lending behaviour and loaning freely to the private sector. Such a change in the behaviour of banks augers well for the prospects of economy and would be helpful for creating employment and reducing poverty. In fact, as the data show, banks are investing in the manufacturing sector and not lending for speculative purposes which will be in the long-term interest of the country. However, in order to push for further lending, banks would have to mobilise more deposit resources by offering better rates of returns to the savers and expanding their outreach to remote areas of the country. The SBP, on its part, also needs to review its policy towards distribution of bank credit under which the banks are persuaded to lend to the priority sectors like SMEs, agriculture and housing. This is necessary because consolidation of credit, rather its segmentation, yields greater dividends for the economy.