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.