Bank Lending to Private Sector Surges Amid Changing Economic Landscape
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Loading... - Divija Bhatkar
- 12 Nov 2024
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Experts have noted a significant shift in banking dynamics in Pakistan, driven by surplus liquidity in the government’s account and a steep decline in interest rates. The government has adopted a cautious borrowing strategy following an injection of Rs2.7 trillion from the State Bank of Pakistan (SBP) in profits. This influx of liquidity has enabled the government to reject nearly all bids for treasury bills, opting instead for longer-term borrowing that falls short of auction targets.
The change in the government’s borrowing strategy has resulted in a liquidity surplus, compelling banks to increase lending to the private sector. A critical factor in this shift has been the sharp decline in the SBP policy rate, which has been reduced by 700 basis points to 15% since June 2024, down from an unprecedented level of 22%. This reduction has incentivized banks to extend loans to private businesses, as the unused liquidity represents a loss for the banks.
Currently, large corporations are borrowing at rates lower than the SBP policy rate, with the Karachi Interbank Offered Rate (Kibor) hovering around 13%, reflecting the prevailing real interest rate in the market. With the main inflation rate recorded at 7.2% in October, the real interest rate remains positive at 7.8%, indicating potential for further cuts. Trade and industry leaders have urged the central bank to lower the policy rate to single digits, especially as CPI-based inflation has shown a faster-than-expected deceleration.
According to SBP data, conventional banks have taken the lead in extending Rs249.5 billion in loans to the private sector during the first four months of FY25, compared to a net debt retirement of Rs108.5 billion during the same period last year. This marks a significant turnaround, as banks had refrained from lending to the private sector over the past two years, contributing to an economic contraction in FY23. The government has projected GDP growth of 2.5% to 3.5% for the current fiscal year.
Islamic banks have also joined the trend, extending Rs200.8 billion in credits to the private sector in 4MFY25, a stark contrast to the net debt retirement of Rs45.5 billion recorded last year. However, the Islamic banking branches of conventional banks have struggled, showing a net debt retirement of Rs3.2 billion against lending of Rs594 million in the same period last year.
The surge in bank advances to the private sector in 4MFY25 has already surpassed the total lending for the entire FY24 (Rs364 billion) and FY23 (Rs208 billion). This changing trend could potentially lead to higher economic growth, provided the government curtails its borrowing from banks. However, challenges remain, particularly with the Federal Board of Revenue (FBR) falling short of its tax collection targets.
In the first four months of FY25, tax collection stood at Rs3.442 trillion, falling short by Rs190 billion or 5.23% compared to the estimated target of Rs3.632 trillion for July-October. This shortfall may compel the government to resume borrowing from banks, potentially undermining the positive momentum in private sector lending.
In summary, the surge in bank lending to the private sector in Pakistan reflects a significant shift in the economic landscape, driven by surplus liquidity and declining interest rates. While this trend holds promise for economic growth, the government’s borrowing practices and tax collection challenges will play a crucial role in determining the sustainability of this positive momentum.
