There are several ways at the disposal of central banks to facilitate the flow of bank credit to a particular sector or industry. On 15th July, 2010, the State Bank of Pakistan took an important step to encourage the provision of bank credit to the consumer and SME sectors by including gold bullion and gold ornaments as liquid assets for the purpose of advancing credit to these sectors.
Now the list of liquid assets would comprise the value of government securities, bank deposits, gold ornaments, gold bullion, certificates of deposits, shares of listed companies which are actively traded on the stock exchange, NIT Units, certificates of mutual funds, Certificates of Investments (CoIs) issued by DFIs and NBFIs rated at least 'A', listed TFCs rated as 'A' and certificates of asset management companies for which there is a bookmaker quoting daily offer and bid rates and also an active secondary market trading. These assets, with appropriate margins, should be in the possession of banks/DFIs with preferential lien. As the name suggests, liquid assets are the ones, which are readily convertible into cash without recourse to a court of law.
The State Bank's amendment, with reference to the widening of the definition of liquid assets in the Prudential Regulations for consumer and SME financing, can be analysed from various angles. As per the present practice, a borrower's maximum limit is Rs 1 million under consumer and SME financing, but this limit is exempted when any asset is included in the list of liquid assets. It means that now the borrowers may get higher than Rs 1 million loans by keeping their gold and jewellery as guarantee with the banks.
Obviously, the State Bank's decision to widen the list of liquid assets would help the borrowers by increasing their loan limits and the banks by keeping attractive physical assets like gold and jewellery as collateral. Since the price of gold is rising with the passage of time, there would hardly be any chance of default or non-performing loans appearing on the books of the banks on this account.
However, while appreciating the move of the State Bank, one cannot ignore the impact of the new measure on the flow of credit to the targeted sectors and the economy. Though it is not possible to be very precise, yet the decision of the State Bank is likely to increase the supply/availability of credit for the SME sector and consumer financing. While SME is a priority sector and should have been favoured, there was no reason for the State Bank to accord such a treatment to consumer finance because of the current state of the economy.
In fact, in the economic environment now prevailing in the country, it is imperative to design policies with a view to discouraging consumption at all levels of society and the government, to generate higher savings in the economy. The need of the hour is to increase the rate of investment in the country in order to achieve a higher growth rate and create more employment opportunities and since foreign investment is declining at a rapid rate, the only way left for the country is to increase the domestic savings rate. The present decision of the State Bank for consumer financing is contrary to this objective.
Also, the increase in consumer loans could increase the import demand for certain products, push up the inflation rate and raise the interest rate structure somewhat, due to increased demand for credit. Besides, there is a great tendency in the country to keep up with the Joneses, which could ultimately make life difficult for many families by increasing their present credit limits through this measure. Those who argue for the higher availability of consumer finance in Pakistan forget the fact that the economic situation in most of the other countries is much different.
Their households, in particular, are more frugal and could, therefore, be encouraged to spend a higher proportion of their income on durable consumer items to assist the revival of their economies. Keeping in view all these factors, it would have been better for the State Bank to maintain the present position with regard to the definition of liquid assets so far as consumer financing was concerned.