Bank private sector credit off-take likely to decline in fiscal year 2012

KARACHI - The scheduled banks will continue to show reluctance in extending credit to the private sector in fiscal year 2011-12 mainly due to the fear of liquidity crunch, experts say. Pakistans federal government may face a grave fiscal situation in current fiscal, if appropriate measures are not taken to balance the deficit. The higher-than-anticipated budget deficit and likely slippages in the tax revenue receipts will force the government to reduce development spending and borrow excessively from the domestic sources, especially banks, putting more pressures on market liquidity. Bank credit to the private sector is likely to be Rs200 billion in FY12. However, despite a potential increase in the quantum of government borrowing from the banking system, there seems to be little room for private sector borrowing unless the government retires Rs400 billion under commodity financing, says Muzzammil Aslam, who is a Head of Research at JS Global. Many financing experts believe banks will remain lure of risk-free investments in government paper during the current financial year on account of the increasing volume of non-performing loans (NPLs) and credit risk. These are two valid reasons, which will stimulate banks for not extending private sector credit at least in the short run, experts say. Experts think there will be no liquidity issue in the market, if remittances inflow continues with its past years trend and current account balance manages to stay in the green. Resultantly, the banking sector will have no issues in financing the deficit. The provisional data on monetary aggregates posted by SBP on its website revealed that banks credit to the private sector swelled from Rs79 billion to Rs86 billion in July-June 25 (2010-11). According to a report issued recently by the State Bank of Pakistan, the outstanding commodity operations loans as of May 28th 2011 stood at Rs 364.2 billion. Of this, Rs205.1 billion is on account of borrowings for commodity operations in previous years. This includes subsidy receivable from the federal and provincial governments, which amounts to Rs118.5 billion as of May 28th 2011. The report stated that while private sector business continued to utilise bank credit, there is hardly any credit demand for new investment activities in the economy. Specifically, the growth of credit to private sector was slightly lower at 3.4 per cent during Jul-May 28th 2011 compared to 3.6 per cent over the same period in FY10. Working capital loans during Jul-Apr 2011 jumped to Rs144.7 billion against Rs47.4 billion in the corresponding period of FY10. This three-fold increase in demand for working capital loans is due to the rise in raw material prices, especially of cotton, sugarcane and edible oil. Both textile and sugar sectors accounted for 68.5 per cent of the rise in working capital loans over the period of analysis, the report added. The surge in exports increased the demand for trade loans. These loans increased by Rs68.0 billion during Jul-Apr 2011 compared to Rs21.0 billion in the previous year. The sectoral distribution of trade loans reflects the dominance of the textile sector, which accounts for 71.6 per cent of the rise, it added. The report revealed that the fixed investment component saw a nominal increase of only Rs1.7 billion against an expansion of Rs62.0 billion over the same period last year. Monthly data indicate net retirement of investment loans in 6 out of 10 months of this fiscal year. This does not bode well for the economy. Consumer loans witnessed net retirement for a third year in succession, as the share of consumer financing in private sector loans declined to 7.7 per cent in April 2011, as compared to 9.1 per cent as of end-June 2010. In absolute terms, these loans witnessed net retirement of Rs21.8 billion in Jul-Apr 2011 against Rs 44.4 billion in the previous year. This slowdown in net retirement is largely because banks are reluctant to provide fresh loans, while outstanding loans continue to be paid off, the report mentioned.