Seasonal working capital need marginally revived private credit amid record high cotton prices. Nonetheless, even though soaring price of the white gold is bringing life to the textile sector, private credit flow in the quarter to date (19-Nov) at Rs 86 billion is slightly less than what was raised in the similar period last year.
However, the recovery is encouraging as the retirement in the first quarter was higher than the corresponding period last year - Rs 34 billion (last year: Rs 13 bn) have been raised, as a result, by the private sector, year to date, despite the setback by the floods.
Unlike the boom period, growth is tilted towards the rural areas. The surging demand of automobiles and consumer products in the rural segment speaks volumes of the flurry in income amongst farmers and the allied community.
No doubt, the support price of wheat, and alignment of sugar prices with the hiked global prices and the rally in cotton prices is doing wonders to growers'' income, and hence, the consumption pattern. Lack of documentation, awareness and banking facilities in rural areas is proportionately taking more money out of the system. A couple of years back, the currency in circulation, which was much higher than that of the regional peers, is on further rise owing to growth in the agri segment. This calls for a greater penetration of the banking system in rural areas, the concentration of which, at this point, is more in urban areas due to lower administrative costs.
Nonetheless, implementation of RGST would be able to help document the economy and may bring back some part of the money out of the system. This will raise the low saving to GDP ratio of our economy, which, in turn, will boost the much needed investment rate.
But that does not undermine the imperative need for banks to reach the far-flung areas. In the modern technological era, penetration of banks is not contingent upon the bricks and mortar model; rather the banking density should be enhanced through branchless networks. Collaboration of banks and cellular companies is the need of the day to spur the savings in rural areas.
Commercial banks, cellular providers and regulators are cognisant of it and are working on M-banking and branchless networks. There are a few products in market at this point but their main concentration is in urban centres. With time, this concept would not only gain momentum amongst urban dwellers, but will also reap dividends in the largely unreached rural areas.
Floods, in this respect, have created an opportunity in crisis, and products like the Watan Card are hopefully the stepping-stone in the rural branchless banking era. This process might concentrate mainly in deposits creation in the short to medium term, but eventually could spill over in asset creation as well.
But the big banks and the regulator should not wait for that time and should rather act proactively to create instruments and policies, respectively. This will help spur agri credit and thus revive private sector credit through some realignment from the urban to the rural segment, and hence, bring about some growth in employment in the agriculture and allied sectors.
Again, the key is to seek opportunities in crises by devising strategies to subsidise credit in the agri sector as well as the SMEs in flood-hit areas through export refinance schemes, mortgage refinancing facilities, and long-term financing for technological advancement in the agri sector.
Big banks, by virtue of their presence, should pounce upon the opportunity and provide the required credit. If successful, the advancement of credit can then slowly be enhanced to those areas which are not affected by the floods, even without subsidy. Further, banks, apart from the big five, can also tap this market.
MONEY AGGREGATES:
The currency in circulation increased by Rs 128 billion between October-29 to November-19 owing to transactions in the cattle market for sacrificial rites. This is much higher than the Rs 76 billion taken out of the system around Eid-ul-Azha last year. The 68 percent increase cannot solely be attributed to inflation; higher growth in cotton procurement help explain the rest.
The tight fiscal situation, amid lack of avenues to finance it, is loud and clear, as evident from the sharp spike in the government''s borrowing from the SBP - it borrowed Rs 83 billion between November 5- November 19 to take the year to date central bank borrowing toll to Rs 265 billion. This is inflationary in nature, and a point of concern for both fiscal and monetary managers.
Seasonal private sector credit is very much in the picture as private borrowers raised Rs 34 billion for the two weeks ending November 19. This, coupled with high-powered money creation and a Rs 14 billion increase in net foreign assets, despite the sharp hike in CIC, increased the demand and time liabilities by Rs 47 billion. Overall the money supply increased by Rs 120 billion or 2.08 percent during November 5 - November 19.
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KEY MONETARY AGGREGATES AS ON NOV 19
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Rs (mn)
19-Nov 5-Nov Change
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Currency in Circulation 268,779 195,015 73,764
Total Demand & Time Deposits 8,619 (37,970) 46,589
Broad Money (M2) 278,778 158,472 120,306
NFA 70,227 56,124 14,103
NDA 208,553 102,347 106,206
Net Government Borrowing 318,067 235,821 82,246
Borrowing for budgetary support 341,850 258,595 83,255
from SBP 265,525 182,238 83,287
from scheduled banks 76,325 76,357 (32)
Commodity operation (25,179) (24,189) (990)
Credit to non-govt sector 8,980 (20,035) 29,015
to private sector 34,075 411 33,664
to PSEs (25,854) (20,899) (4,955)
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Source: SBP
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