Crowding out on the cards

From the surface, the business of providing credit to the private sector is back in full swing. The central banks latest data show that net loans to private businesses rose to Rs111 billion December - its biggest monthly flow since October 2008.
The off-take in December, mainly led by the manufacturing sector borrowers, correspondingly resulted in the biggest quarterly flows since the second quarter FY08. Net quarterly credit flows to the manufacturing sector were also at their highest in memory, Rs171.8 billion - taking the net loans to private business to Rs220 billion for the second quarter FY11.
Beneath the hunky-dory picture of the biggest and the highest, however, is a disturbing portrait.
The quality of lending seems rather weak. For instance, 56 percent of net loans to private sector businesses were consumed by the textile sector alone, up from 42 percent in the same period last year.
But this was not because of any major investment but rather to meet working capital requirement, or, more specifically, trade finances, as average cotton prices more than doubled to Rs7592 per maund year-on-year, in the half year ending December 2010.
According to the State Bank data, credit for trade finance purpose, for all sectors combined, rose to 27 percent as a percentage of total loans in the first half FY11, from 16 percent in the year-ago period.
While this implies that the textile sector would keep stoking credit demand in the latter half in the face of persistent rise in cotton prices, it may not be a sure shot reality. The only reason why banks were able to provide credit to the private sector in the first half was the governments excessive reliance on the central bank in the second quarter.
But now if the government keeps its promise of maintaining its central bank borrowings within the pledged limit of about Rs120 billion, it eventually will gulp down more credit from the scheduled banks - elbowing out the private borrowers, just like it did in the first quarter FY11.
Besides, banks are also reluctant, and not constrained, to provide credit to the private sector. "The expansion in private sector credit is not in proportion to the growth in deposits of the banking system.....as a result, the private sectors credit to deposit ratio declined to 67.8 percent from 73.8 percent in the corresponding period of last year," the SBPs latest monetary policy statement noted last week.
Similarly, with the outstanding stock of credit, extended to the public sector (commodity procurement & PSEs), remaining at an elevated level of Rs748 billion up to January 15, the banks capacity to lend to the private sector is rather squeezed.
Yet, while some part of the credit availed for commodity operations maybe retired by the government, thanks to wheat exports, a huge part of it will remain locked with the PSEs in the foreseeable future, in the absence of any concrete plan thus far. Or, in other words, the business of private lending will remain at the whims of the government.