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Banking and private sector credit demand

Greater opportunities are opening up for banks as private sector demand for credit is picking up on the back of a growing economy and the CPEC related activities.

Top bankers with knowledge of the CPEC related projects say their banks have started positioning themselves to tap the additional private sector demand.

“Construction sector activity is not just up due to the higher demand from those conventional builders that are engaged in housing and commercial projects. Activity in this sector is also growing in anticipation of the start of work on physical infrastructure projects associated with the CPEC,” says the head of one of the top five banks.
Private sector lending of banks has been on the rise in almost all those areas where increased business activity is taking place

Some of these projects, including several related to Gwadar, are in an advanced stage. Construction work has either started or is about to start within this fiscal year. “This is just one example of additional economic activity (via the CPEC) taking place in one sector (construction).”

Even excluding the CPEC — related likely demand-boost in construction and its allied industries, the “construction sector’s conventional demand has gradually picked up in the last two years and so has bank credit flow,” says another banker. Banks’ lending to the construction sector rose from a negative Rs1bn to Rs13.7bn in FY15 and then shot up to Rs31.5bn in FY16.

Due to this high base effect of FY16, the construction sector loans may not grow much in the current fiscal year; in fact in four months of the year these loans have rather shown a contraction of about Rs4bn on net basis.

So, the additional lending to this sector to be made in FY17, either on conventional demand or in relation to the CPEC related projects, might not reflect in net lending numbers. But bankers confirm that such demand not only exists but is also expected to remain strong.

One indicator of the fact that activity in physical infrastructure construction has risen in the private sector is that despite a net decline seen in July-October in construction loans, financing of infrastructure rather rose by more than Rs1.2bn, the latest SBP figures reveal.

According to an SBP report released last week, the corporate sector acquired, in FY15, about 88pc of its total external borrowing from banks. The opening and closing balance of the stock of corporate loans remained almost unchanged due to a bit faster credit retirement. “But the very fact that the corporate sector met 88pc of its external borrowing requirement from banks is healthy.”

The FY16 report on this subject is not available and will be out sometime next year.

On net basis, bank loans rose from Rs224bn to the private sector in FY15 to Rs460.6bn in FY16. Bankers now generally talk about the high credit demand being not only intact but growing rapidly in some areas.

For example, electricity and gas supply companies have borrowed very extensively in the first four months of this fiscal year, consuming gross loans of no less than Rs53bn partly to retire circular debt and partly for revamping and upgrading their services.

(In the entire FY16, bank borrowing of the corporate sector dealing in utilities was Rs46bn)

However, since July-November is usually credit retirement period in the country, the total volume of private sector lending is still negative on net basis. The SBP data showed that between July 1 and November 18, banks rather witnessed net private sector credit retirement of Rs7.6bn.

“From the next set of data, due in the first week of December, you’ll see the net credit turning positive after the seasonal cycle of credit retirement comes to an end,” says a senior executive of the National Bank of Pakistan.

Private sector lending of banks has been on the rise in almost all those areas where increased business activity is taking place. In the retail trade, for example, banks made fresh loans of a about Rs13bn in FY16. And, in first four months of this fiscal year, this sector consumed another Rs4.5bn in bank loans.

Despite an uptick in demand, conventional banks as well as Islamic banking institutions or IBIs (comprising Islamic banks and Islamic banking windows of commercial banks) have not been lending aggressively to the private sector.

For the past few years, the advances to deposit ratio (ADR) of conventional banks and financing to deposit ratio (FDR) of IBIs has remained low. Banks’ ADR was as low as 45.5pc at end-September 2016. IBIs’ FDR was slightly higher — 46.3pc.

Conventional banks’ excessive investment in government debt securities and Islamic banks’ high investment in fixed assets of all sorts and Shariah-compliant bonds and funds are the factors responsible for this situation, central bankers say.

courtesy: dawn news

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