A cursory look at the un-audited weekly banking balance sheet numbers summed up last years tale. There is a clear shift in the deployment of banking deposits to government securities at the cost of corporate and consumer lending. The deposits of commercial banks increased by Rs521 billion (14%) whereas advances surged by mere Rs121 billion (4%) as virtually all the pie was taken by investments that, dominated by Treasury Bills, increased by Rs 659 billion (68%).
Despite this meager growth in advances, non-performance mounted as the ratio of NPL provisioning to gross advances rose 156 bps over the year to 7.83 percent. To curb this surge in NPLs, the regulator relaxed FSV value benefit on corporate sector loans just before the start of last quarter. By virtue of it, the provisioning ratio declined from 8.10 percent in September 09 - a fall of 27 basis points in the last quarter.
The deposits growth of 14 percent is in line with 13 percent growth in monetary aggregates. However, the brunt of economic slowdown is mirrored by low growth in advances and high toxic assets. The advance-to-deposits ratio fell by 8 percentage points to 72 percent in 2009.
With a 320 bps (in GDP terms) fall in current account deficit in the last fiscal year, the decline in fiscal deficit (240 bps, in GDP terms) forced the focus of fiscal financing shift towards domestic sources. And, at the time of falling purchasing power, the over 2 percent decline in domestic savings in GDP terms, crowding out became an obvious outcome.
In the first five months of FY10, 81 percent year-on-year fall in current account deficit reduced the pressure from external account at one end, but with fiscal account unable to keep the pace, domestic monetary sources, remained under pressure.
Global crunch and bleak security situation are making things more difficult to raise credit from global private lenders. Hence, in the absence of foreign inflows from bilateral and multilateral pledges, the fate of domestic private borrowers in 2010 would be not much different from the outgoing year.
However, within 2009, credit to private sector depicts an entirely different picture for the two months of last quarter relative to the first three quarters, as per recent data published by the central bank. Loans to private sector rose 2.48 percent in November - its biggest month-on-month growth since October 2008.
This shift is partially attributed to the seasonal credit requirement, especially for textile sector and partially due to some monetary easing and improvement in other macroeconomic variables. But even the continuation of this trend is contingent upon the bilateral and multilateral foreign inflows.
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