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Even after substantial drop in the cost of loans, and various sorts of fresh loans and loan restructuring under the central bank’s Covid-19 schemes, private sector credit offtake is off to a bad start. Private sector businesses retired Rs101 billion on net basis in the first quarter ending September 2020 as against a net retirement of Rs85 billion in the same period last year. Such has been the impact of Covid on Pakistan’s economy across various sectors.

Some of this retirement is a function of commodity prices. The sugar producers, for example, took higher working capital loans in the milling year 2020 on account of higher prices, which led to higher net retirements in the year so far. Sugar producers retired Rs82 billion in 1QFY21 as against a retirement of Rs42 billion in the same period last year.

Similar is the case with cement makers. As a result of sharp fall in coal prices, net retirement by cement makers stood at Rs10 billion in 1QFY21 as against Rs1.7 billion in the year before. Seventy percent of this number stems from net retirement under import financing and the rest under loans for working capital. The fact that cement makers retired Rs3.5 billion of working capital loans in 1QFY21 as against net borrowing of Rs5 billion in 1QFY20 is also a reflection of poor cement sales.

The auto sector retired Rs16 billion in 1QFY21 as against net borrowing of Rs30 billion last year, largely as working capital requirements eased on account of lower auto sales during the period. However, if growth in consumer financing for motor vehicles is any guide (1QFY21: Rs21 bn; 1QFY20 net retirement of Rs1.9bn), working capital loans by auto makers is likely to pick up in the second quarter considering that it takes about three months to deliver a car after it has been booked and loan for which has been obtained.

Similarly, if loans taken by construction sector is any guide, then cement and steel sales should pick up in the months ahead. According to central bank’s credit data, loans for construction of both residential and non-residential buildings combined grew by Rs10 billion in 1QFY21 as against a net retirement of Rs16.6 billion in the comparable period last year.

One could argue that this growth may be misleading because it may be a reflection of loan deferment and restructuring under the central bank’s Covid-19 relief measures and therefore should not be read as fresh offtake. However, such restructuring is unlikely to be the sole contributor to growth in net borrowings of construction, and that of wearing apparel for that matter.

Here is why: loan deferment or restructuring doesn’t change the outstanding loan position substantially. Ceteris paribus, and in simplistic terms, imagine if a borrower had an outstanding of Rs100 billion as of June 2020 due to be paid over next five years under equal quarterly installments. Under normal circumstances his loan outstanding would have reduced to Rs95 billion by September 2020. Now that his loan is restructured with deferment of say one year, his outstanding position as of September 2020 would only be misleading by Rs5 billion. Ergo: the growth in loans by construction sector in 1QFY21 is likely to be substantially more than simply restructuring.

The story of wearing apparel within textile sector may also be the same. In line with growth in exports of wearing apparel in 1QFY21, the sector saw a net borrowing of Rs7.2 billion as against a net retirement of Rs1.7 billion in 1QFY20.

The central bank’s credit data by-type-of-finance shows wearing apparel makers borrowed Rs3.6 billion (on net basis) under export refinancing scheme in 1QFY21 as against a retirement of Rs1.5 in year-ago period, whereas their borrowing under various types of fixed investment/long term loans stood at Rs2.4 billion against a retirement of Rs1.4 billion. This echoes well with expansion stories in textile sector, the latest of which was announced yesterday by Interloop Limited following the ground-breaking of its fifth hosiery plant; the plan will cost around $36 million and expected to be completed next year.

The textile sector on the whole, borrowed Rs13.8 billion under fixed investment/long term loans in 1QFY21 as against Rs8.5 billion in the same period last year, its retirements under working capital needs grew to Rs29 billion this year (notably due to retirements by spinning sector) compared to Rs17 billion last year.

Meanwhile, fertilizer producers took fresh borrowing of Rs9.3 billion on net basis in 1QFY21 compared to net retirement of Rs19 billion in the same period last year. Considering that this largely reflects working capital loans, this growth is possibly on account of GIDC decision-led cashflow constraints faced by fertilizer producers.

But when even after an estimated Rs84 billion financing of new projects/expansion/BMR, Rs78 billion of loan deferment/restructuring, and Rs102 billion of wage loans under Covid scheme, credit offtake takes a hit across the board amid one of the lowest interest rates in recent memory, then really the year doesn’t look good for private sector offtake especially if second wave of Covid leads to second round of lockdown


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