High interest rate, law & order situation: Rs six billion decline in development finance credit

Banks are reluctant to extend credit for development finance (DF) sector due to the current challenging economic and business environment characterised by rising interest rates and law and order situation. The State Bank of Pakistan on Tuesday said that total outstanding amount to DF sector stood at Rs 843.5 billion in December, 2010 after a decline of Rs 6.7 billion, YoY basis.
It was Rs 850.24 billion in December 2009. On the other side, non-performing loans (NPLs) of DF sector increased by 16.2 percent, YoY basis, reflecting the strained economic conditions. Although the government, recognising the severity of economic and social impact of recent floods announced a number of relief packages for affected borrowers which are being implemented by State Bank in consultation with the relevant ministries. However, the DF portfolio of the banking sector continues to stagnate due to credit constraints faced by the private sector on account of high government borrowing to support commodities and sustain increasing budget deficit.
The total outstanding DF portfolio recorded a marginal decline of 0.8 percent YoY, though recording an increase of 1.3 percent per quarter basis. Of the total DF outstanding amount, SME segment holds the largest share of 39.6 percent, followed by infrastructure, agriculture, housing and micro finance sectors with 31.3 percent, 20.0 percent, 7.9 percent and 1.2 percent respectively.
NPLs of the banking industry have been increasing due to strained economic conditions and during the last quarter NPLs of banking industry rose by 3.1 percent while those of DF sector recorded an increase of 1.3 percent from Rs 148.1 billion to Rs 150.1 billion. The total number of DF sector borrowers (excluding infrastructure borrowers) was 2,132,607 with a decline of 1.4 percent YoY basis, while the decline recorded on quarterly basis was 1.9 percent.
According to SBP, the current challenging economic and business environment characterised by rising interest rates, law and order situation and banks' reluctance to extend credit will continue to adversely affect the growth in DF sectors. However, implementation of fiscal side reforms by the government as well as a recovery in the agriculture sector will provide breathing space to the DF sector and enable recovery in the economy.
Given the challenges faced by the economy, not only post-2008 global financial crises but also due to the recent unprecedented floods in the country and the strenuous fiscal situation, credit availability to neglected sectors will be crucial for economic growth.
Pakistan's economy has witnessed a moderate recovery in FY10 with real GDP growth rising to 4.1 percent despite the challenges. The energy shortages, reduction in subsidies, rising inflation, law and order situation, and other economic imbalances will continue to restrain positive growth in the DF sectors. However, serious reforms on the fiscal side need to be implemented to enable economic growth in general and DF sector in particular.