More than six months into their financial year and banks are yet not doing what they are supposed to do: lend. Instead they are happy off lending each other money and earning from this side business called investments while the government keeps on gobbling private sectors share in total credit.
Data released by the State Bank of Pakistan (SBP) shows that aggregate advances (net off provisions) decreased by Rs47 billion between January 3 and July 11 - partly due to Rs9 billion drop in gross advances and partly due to Rs36 billion worth of provisions against bad loans.
But its not as if banks dont have any money to lend. Deposits during the period grew by Rs266 billion with a significant part of this growth coming after the central banks policy rate was cut effective April 21. SBP data shows that deposits grew by Rs252 billion between April 25 and Jul 11.
So where did the money go? Analysis reveals that out of these Rs252 billion worth fresh deposits, Rs85 billion was doled out as new loans between April 25 and Jul 11 following the loosening of monetary policy. But this is barely enough as evident by the advance-to-deposit ratio (ADR) which fell from 78 percent on April 25 to 76.44 percent on July 11. ADR stood at 81 percent at the start of calendar year 2009.
Another Rs68 billion was put into investments - primarily government papers which it issued to raise money for its fiscal shortfall. The remaining Rs96 billion circulated between banks as lending to financial institutions - generating ample liquidity in the system which pushed benchmark KIBOR rates down by 361 basis points over the last six months (208 bps since April 25).
In short, the story is simple. There is plenty of liquidity in banks, but there is nobody to buy that money. Why wont they buy is another question. In part, damp business confidence is to be blamed as consumers think interest rate are still too high while businessmen are still wary of the overall economic environment. But on the flip side banks are rather constrained by rising number of delinquencies, with provisions against bad loans rising by Rs39 billion in the last six months.
The other main reason is borrowings by the government and public sector entities which are gradually crowding out the private sector. Who will win this tug of war eventually is a million dollar question, but one thing is for sure that in order to induce the economy to move from stabilization to much-needed growth phase, impetus in private sector credit is imperative. The upcoming monetary policy review on Saturday is ought to address this issue with adequate steps.
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