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Finally, small, and mid-size firms in Pakistan are feeling the heat of high interest rates and slowing down economy, as top bankers fear that many companies in a few sectors might be unable to service their debt obligations by March 2024 end that were due by December 2023 end – which would make these loans to be classified as sub-standard loans.

There are a few sectors where the companies are more vulnerable – one is textile (mainly spinning and weaving), and the other is steel rebar manufacturers, and the third in line is poultry feed mill business. One can expect companies in these sectors (and perhaps in others too) to default in 2024.

“Every day, I wake up to find a new company in the textile sector delaying its loan repayment,” chairman of a big bank lamented in a worried tone who himself is a top businessman in the country, and his bank is known as one of the most prudent and profitable banks.

It’s not only the high-interest rates and slowdown in sales that is triggering these defaults, but an equally important reason is the depressed real estate market. Companies and their owners in SMEs, commercial ,and small corporate sectors usually invest chunks of their savings and profits in real estate and pay off the loans by selling properties. With the real-estate market under stress, the companies are finding it hard to generate cash to pay off loans.

The business situation in many sectors has been bad for a few quarters. However, the companies were managing to service the debt due to hang over of the last boom – they were able to off-load real estate, expensive cars, or other assets to remain current on debt repayment.

Now, the chickens are coming home to roost, and banks are worried about growing gross loans which stood at Rs1 trillion as of December 2023 end – up by 7.5 percent year-on-year.

In textile, the spinning and weaving companies’ margins are squeezing due to unprecedented increase in the energy cost while the interest rates are almost at historic high. The overall export market is good, but the companies in the low-value addition segment are finding it hard to remain current on loan repayment.

The vertically integrated big corporate sector is generally doing better, as these companies started to deleverage when interest rates were starting to go up; and then their investment in real estate is relatively small to their companies’ size. However, some companies are also under stress within big textile firms.

The other concerning sector is rebar steel manufacturing where one company is already known for its debt distress and another one is soon to be in the news. The demand is down due to sluggish construction activities while the interest cost of leveraged companies is becoming unbearable. In the poultry feed mill, the GMO import issue in 2022 is making some companies default.

This situation is not good, and having businesses afloat and banks’ balance sheets clean should be one of the top priorities for the new government.

The good news is that the finance minister is landing directly from the biggest bank of the country and is aware of the ground realities, and he should think of making policies to minimise the default pickup in 2024.

Comments

200 characters
Abrar Ahmed Mar 12, 2024 11:16am
A clear situation, biggest robbery in Pakistan's history by banks. SBP helped them depreciate PKR by 100% and raise interest rate from 7% to 22% in three years. Is a judicial commission needed on this
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KU Mar 12, 2024 12:44pm
So when is the government disbanding SOEs and down sizing the 3.2 million Raj Baboos who are gobbling up scarce revenue? Surely, everyone can see the useless expenses and wastage of tax payers money.
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Riaz Ahmed Qureshi Mar 12, 2024 02:43pm
SME sector is mostly under pressure. It is high time that Govt announce some relaxation scheme . Unfortunately there are only few consultancy firms which can act as a bridge between the banks and SMEs
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Test Mar 12, 2024 03:26pm
@Abrar Ahmed, Now you are jealous that banking sector is earning profits we should be happy at least one sector is growing rapidly.
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[email protected] Mar 12, 2024 05:23pm
Sink or swim Let them b bankrupt No socialism for business
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Johnny Walker Mar 12, 2024 05:58pm
Lets see what the new Fin Min does.
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KU Mar 12, 2024 06:48pm
@Test, just look at the role of banking sector around the world for industry and agriculture, our banks make profit by loans to government.
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Shahab Mar 12, 2024 08:24pm
Lets be real which business can borrow at the rate of 20plus percent and remain profitable?
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Usman Mar 13, 2024 08:59am
There are reasons why interest is forbidden.
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