"Pick up in private sector credit and increase in demand for exports by our trading partners, in the wake of better than expected global economic recovery, could further support domestic economic activity," according to central banks latest monetary policy statement.
The quantity of lending to private borrowers has indeed increased. After contracting by Rs75 billion in the first quarter, private sector credit increased by Rs199 billion during the second quarter 2010 - taking the first half numbers to Rs124.6 billion as against Rs203 billion in the year ago period.
A more important question, however, is about the quality of lending - i.e. where is this money going.
The central bank data shows that most of this credit expansion was for working capital purposes. Of the total borrowings during the first half FY10, about 65 percent was for working capital needs - nearly double from 32 percent in the same period last year.
Since majority of these loans classified as working capital financing, were for export finance purposes, and considering that textile sector constitutes the biggest chunk of total exports, a closer look needs to be taken at the performance of textile business during the period.
In the first half FY10, the industry borrowed some Rs52 billion, or about 42 percent of the total credit pie. Most of these loans were taken in the second quarter and in fact, up until the first three months, textile businesses were actually paying off loans instead of taking new ones.
Incidentally, according to Jul-Nov production data released by the Federal Bureau Statistics, average production in Oct-Nov period was, by and large, equaled average output in the first quarter. So, its not that the industry started producing more in the second quarter.
Bulk of these loans, instead, are being used to finance exports - and that too of raw cotton and cotton yarn. FBS data reveals that exports of raw cotton more than doubled to $105 million in the second quarter from $40 million in the first quarter. Now, you know why APTMA had been raising hue and cry throughout last month.
Worrisomely, thats just one side of the lending picture. Other issues include, for instance, the persistent fall in personal financing which shows that consumer confidence is still fragile.
Likewise, the decline in agricultural credit, which fell not just in absolute terms but also in terms of its ratio to total loans, raises concerns. It also creates serious doubts over the so-called farming led economic recovery, our dear old finance minister has been talking about.
As for the better-than-expected global economic recovery, central bank officials have been relying on; much is still too early and unclear to comment at this point. Yet, if Chinas tightening arrests global demand, things could really become troublesome.
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Private Sector Credit
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billion rupees
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Flows during
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H1-FY10 H1-FY09 FY09
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Total credit to private sector 124.6 203.1 18.9
1. Loans to private sector businesses 124.7 194.1 49.2
By type
Working capital 81.3 65.8 -112.7
of which: Export finance 23.5 4.1 15.4
import finance -3.9 -5.4 -7.6
Fixed investment 43.4 128.2 161.8
By sectors: of which
Agriculture 6.1 11.0 3.3
Manufacturing 85.3 130.5 27.4
of which: Textiles 52.2 26.3 -33.4
Electricity, gas and water 27.3 36.6 43.4
Construction -1.6 -1.4 -8.7
Commerce and trade 5.9 8.8 -16.2
2. Personal -24.3 -27.2 -54.8
of which: Consumer financing -28.4 -34.3 -62.5
3. Investment in security & share 2.4 -0.6 3.2
4. Others 21.8 36.9 21.3
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Source: SBP
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