BANKS’ lending to private sector businesses is set to grow during this quarter after the seasonal net retirement seen in the first quarter of the fiscal year, inquiries made at leading commercial banks reveal.
Demand for credit from PSBs was not depressed even during the first quarter. But usual retirement of old loans outweighed gross lending, resulting in net retirement for the entire banking sector, senior bank executives told Dawn.
With cotton-picking progressing fast, ginneries are seeking revolving credit. Sugar mills are borrowing money from banks to clear overdues of sugarcane growers before receiving the new sugarcane crop in November.
Rice millers and exporters are obtaining fresh financing after the arrival of the new crop this month, and credit demand would remain strong in the coming months after the harvesting of basmati crop in most parts of the country. Apart from this, banks are anticipating higher intake of bank credit by energy, fertiliser and cement companies.
‘Unless we reintroduce the culture of banking decisions really originating from bank branches, sustained growth in lending to private sector businesses isn’t possible’
Sizable project financing has already been underway in gas and electricity distribution, petroleum refining and physical infrastructure development. Bankers say quarterly fund releases for these sectors would also boost total credit to PSBs. On top of all this, the fact that agriculture and agriculture-related manufacturing sectors need net bank financing during October-March should also reflect in higher bank lending in this quarter and the next.
During April-June, overall PSB credit demand traditionally shows a mixed trend, with some sectors like wheat-milling, food, textile and leather manufacturing and electricity production showing credit appetite, while others like cement, fertiliser and gas production resorting to credit retirement.
“But generally speaking, July-September is always the time for net credit retirement,” says the head of credit division of a large local bank. “The scope for credit contraction expands if companies are sitting on cash piles or if the market expects a lowering of interest rates, in which case it becomes appropriate for them to retire expensive loans to utilise more of the freed-up limits for intake of low-interest financing.”
Information gathered from various local banks suggests that banks expect the ongoing government bank borrowing to continue. The extent of this borrowing would definitely impact the pace of their lending to PSBs. In 1QFY14 (up to September 26), the federal government’s net bank borrowing was in excess of Rs102bn, whereas its borrowing from the central bank was a negative Rs11bn. Excessive central bank borrowing by the government isn’t going to take place because it has to bring it to zero at the end of each quarter under the fiscal responsibility law.
“I believe the government’s borrowing from commercial banks will be strong during this quarter as well. That, perhaps, can squeeze the room for aggressive lending to PSBs,” says the treasurer of a large local bank.
But other bankers say actual demand for private sector credit and the sources of its origin will weigh equally on banks’ decision on sharing their liquidity between PSBs and government securities.
In the last fiscal, banks had made net lending of Rs298bn to PSBs, of which Rs187bn (63pc), had gone to the manufacturing sector alone, according to revised SBP statistics.
Some bankers say several sub-sectors of manufacturing, like food, textile, electricity and gas had taken loans both for meeting working capital requirement and for financing capacity enhancement projects. Many companies in these sub-sectors are rolling in excess liquidity and their need for bank borrowing may not be higher than the previous year.
“This means there is little room for any unusual growth in credit to PSBs this year in manufacturing,” says a senior executive of state-run National Bank of Pakistan. But he thinks that this can be compensated by higher credit demand in agriculture, SMEs and consumer sectors.
But bankers’ assessment of private sector credit demand is generally based on what they see on the surface — performance of sizable companies and trading houses, agriculturists with a history of bank relationship, and literate, technology-aware individuals seeking consumer finance. Credit requirements of a lot of smaller companies, small growers in remote areas, SMEs with no access to banks, and unbanked people with entrepreneurial skills are normally not accounted for.
“These segments are not being exploited simply because bank branches now serve as reception desks for banks,” admits a member on the board of directors of one of the top five local banks.
“A minority of bank executives has taken everything in its hand in the name of region and zonal administration. Unless we man our branches with competent people, instead of blue-eyed boys of one executive or the other, and unless we reintroduce the culture of banking decisions really originating from bank branches, sustained growth in lending to PSBs isn’t possible.”