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As it turns out, net credit to private sector businesses in the fiscal year to-date is worse than last year. But it isn’t as bad as it is being perceived by those shouting ‘crowding out’, although government borrowing has hit its highest level since FY13 (4MFY20: Rs374bn; 4MFY13: Rs461bn). However, with the interest rate cycle at its flattish peak, bank lending can be expected to improve from this point onward. This seems to be the implicit reading of the central bank’s quarterly Bank Lending Survey (BLS).

The State Bank of Pakistan (SBP) conducts this survey at the end of each quarter where it takes responses from 31 senior bankers on various factors that affected bank lending in the just-ended quarter, and their outlook for the same in the quarter ahead. For example, in the latest wave of BLS conducted in October 2019, 'current' refers to 1QFY20 whereas ‘expected’ refers 2QFY20 or the ongoing quarter.

A reading of these graphs based on SBP’s bankers survey brings home the following points.

First, that in so far as overall demand for loans is concerned, negative perceptions about overall economic conditions and monetary policy appear to have bottomed out, even as loan demand for inventories and working capital continued to be on a downward trend in 1QFY20, as per the BLS.

Second, the concern for government borrowing as a factor affecting the availability of funds isn’t very pronounced amongst bankers. In fact, the perception on that front seems to be improving even after a rather large government borrowing (of Rs1516bn from both SBP & banks) in the fourth quarter of FY19.

The overall index for availability of funds (current & expected) has weakened since FY18 but it hasn’t really gone below the threshold of 50, which would have indicated that on the whole availability of fund is a major problem in the lending market.

However, no surprises that the SMEs are perceived to be worst hit when it comes to availability of funds, as measured by the percentage change of current sector-wise availability of funds index over the value in 1QFY18 when the overall index of views for availability of funds was the highest. SMEs demand for loans is also seen to be taking second-biggest hit after consumer finance, which is also a no-brainer.

The central bank’s loans by-type-of-finance show that credit for SMEs was down by 10 percent in 1QFY20, as against a fall of 3 percent and 0.2 percent in the preceding two comparable periods. In contrast, credit to non-SMEs was down 1 percent in 1QFY20 as against an increase of 2 percent and fall of 0.8 percent in the preceding two years.

Third, while the perception index for overall demand for loans in the current quarter (1QFY20) has continued to slide downward for the fourth consecutive quarter to its lowest level since the central bank started taking these views of senior banker, the situation seems to be improving in so far as their expectations for the ongoing quarter (2QFY20) is concerned.

For now, these expectations can only be validated after the data of actual credit disbursement is released. Since the BLS series is new it’s difficult to establish a consistent relationship with actual credit off-take and use it as a reliable leading indicator for private sector credit. But what could offer useful insight is a Bank Borrowing Survey from a cohort of agriculture, SME, and corporate borrowers, which could be contrasted with the BLS, and also feed into the central bank’s overall efforts to gauge consumer and business confidence in the country.