Banks are lending again. Not that they had stopped lending, but at their service was a hungry government with a never ending appetite, that kept banks away from the core business of private sector lending. Things have started to change in the past 18 months, as private sector credit has picked pace. Having followed an almost flat growth in private sector credit from FY09 to FY12, things are shaping up nicely.
Advances to corporate sector have grown by an impressive 17 percent year-on-year as at March 2017, which is the highest growth in ten years. The expanding GDP, reduced cost of borrowing, and more importantly, reduced government borrowings from the banking system have all contributed to the steady growth.
Corporate sector continues to fetch the major chunk of overall advances, at nearly 69 percent. The pie has always been heavily in favour of corporate sector, and is not much different from a decade ago. Importantly, the loan books are less infectious. Some part of it is owed to prudent lending, while some is to do with improved business environment that has enabled the corporates’ ability to pay back on time.
Energy production and transmission now account for the single highest chunk in the overall advances, swapping positions with textile that led for decades. Advances to the energy production and transmission business have grown at an average of 20 percent in the last three years, more than double the previous three year average growth. It hardly comes as a surprise given the focus on energy generation ever since this government took over.
Textile, on the other hand, has been rather patchy, with an average credit growth of 4 percent in the last three years, versus that of 10 percent in the preceding three-year period. The share of textile in total advances has shrunk from over 18 percent in CY11 to a little under 14 percent today. Just like energy, the situation in textile does not come as much of a surprise either, given the precarious export situation and the almost non-existent value addition in the sector, regardless of better energy availability.
The automobile sector has slowly crept up its share, and in absolute terms, it has almost doubled in five years. All others, expect for sugar have maintained their shares with minimal growth. A detailed look at the break up shows much of the fresh advances are going into domestic consumption related businesses, whereas, exports have been left far behind.
Recall that private sector credit to GDP ratio in Pakistan stands amongst the lowest in the region at almost 16 percent. To bring it in perspective, the likes of Sri Lanka and Philippines, have the same ratio in excess of 30 percent. So, while the advances have picked up, it remains a long road to be travelled. The financial depth is still found wanting, as Pakistan sits at the bottom of the ladder, with only 10 percent of the listed firms using banks to finance investment.
The SBP had earlier put this down to low financial literacy and the bank-corporate nexus, amongst other factors. Talking of which, the very high concentration of advances to the corporate could well invite trouble some day. The SBP had earlier warned that the banks need to diversify their portfolio, to shield from any unexpected sudden drop from a dominant borrower. No one wants to sit on a stash of cash, which goes unproductive.
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