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BR Research

Private sector credit booming

Viola! Loans to private sector businesses are growing.
Published February 17, 2017

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Viola! Loans to private sector businesses are growing. And what a steep growth it has been of late. A whole 37 percent (or Rs82 billion year-on-year) in the first half ending December 2016.

This is one of the highest first-half credit supply numbers in recent memory; though not the highest, which was seen in 1HFY14. Back then, credit expansion was three times the credit in 1HFY13, thanks to growth in the large-scale manufacturing sector, seasonal credit offtake, and the demand for trade financing.

Specifically, 1HFY14 had seen credit demand from textile spinning, weaving and finishing sectors due to increased cotton buying in anticipation of the demand from the GSP+ that had then been obtained just recently. Soft drink and other beverage producers had also seen a rise in working capital borrowings, whereas major dairy players had also borrowed for product diversification and addition in production capacity. Cement players too, had availed additional financing for capacity enhancement, while paper and board industry had then started investing in alternate fuel plants and boilers to deal with the then ballooning energy shortages.

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The situation this time around is somewhat similar in the sense that credit expansion in 1HFY17 is also broad based. The first quarter of FY17 had witnessed some large retirements, which being seasonal in nature was very much expected given substantial borrowing in the preceding quarters. However, in both 1QFY17 and 2QFY17, loans for fixed investment have been on the rise mainly due to expectations of increase in demand in the wake of CPEC as well as improved power supply.

Channel checks suggest that corporations have lately been active in BMR activities, whereas some firms are either converting their plants from natural gas to coal or setting up coal-based power plants. The latter has resulted in additional Rs21 billion net borrowing in electricity, water, and gas sector in 1HYF17 over 1HFY16. Sugar players have also been borrowing to diversify into bagasse-fired cogeneration power plants.

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This trend follows the central banks expectations it spelled out in its 1QFY17 State of Economy report. Released a few months ago, that report said: while a large portion of the funding is expected to come from outside Pakistan, especially for CPEC related projects, the indirect impact might spur credit demand. The same is also visible in sectors as diverse as construction and hotel, restaurants, clubs.

With interest rates at one of its lower levels in history, the CPEC spillover and improved power supply should continue to drive private sector credit in the times ahead. However, the real shift will come from structural reforms in both financial market and related legal affairs allowing banks to give loans to the SMEs and increase mortgage lending. Reforms to lift off lending in these two areas alone can help stoke GDP growth to levels unseen before.

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Copyright Business Recorder, 2017

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