KARACHI, Oct 11: Credit to private sector has gone down to significant lower level and for the first time in four years the credit figure is on negative side.

Bankers said that the State Bank’s tight monetary policy was the real cause of slow credit growth as banks had to keep more money with the central bank.

The SBP in July had increased the cash reserve requirement (CRR) and statutory requirement (SLR) collectively by 5 per cent which forced banks to engage their 25 per cent money with it.

“This decision has the real impact on banks’ cash availability which resulted in slow growth of credit to private sector,” said a banker.

The CRR was increased from 5 per cent to 7 per cent and the SLR was increased from 15 per cent to 18 per cent.

The State Bank’s data showed that the credit to private sector by the commercial banks during July 1 to Oct 11, 2006 (more than three months) was minus Rs5.079 billion while during the same period last year the credit figure was Rs40.819 billion.

However, the credit by specialised banks substantially increased to Rs6.631 billion from just Rs102 million during the same period last year. This high credit of specialised banks brought the over all credit to private sector on positive side with Rs1.5 billion.

“The negative figure shows that more debt is being retired than the borrowing by the private sector,” said the banker.

Bankers said the increased SLR and CRR were effective tools to carry on the tight monetary policy.

The rising inflation was the real source of concern for the State Bank which kept tightening the monetary policy. However, it was still much higher than the desired level.

The consumer price index (CPI) in August was 8.9 per cent mainly because of high food inflation reaching double digit. The target for the current year inflation is 6.5 per cent.

“Inflation is one side of the picture. The other side is economic growth which could be hurt with lower supply of credit to private sector,” said Abid Naeem, an analyst.

Since the beginning of higher credit off-take by the private sector from the year 2003, the credit to private sector never showed negative figure.

“The credit off-take may rise in November which is the peak season of cotton arrival and huge borrowing is a regular feature in this month,” said Muhammad Imran, researcher at the JS and Company.

The second quarter used to be the peak season for borrowings but the credit off-take by the private sector looks declining as the major borrower -- textile sector -- has cut its credit demand.

“The textile sector was the biggest borrower but since last year the sector’s demand has gone down as no more money required for upgradation or restructuring of the textile sector,” said a banker.

He said the textile sector’s performance would also come down in the wake of lower production of cotton in the country. The cotton production is believed to be lower by 8 to 10 per cent due to damage by rain and virus attack in some part of cotton belt.

However, the other strong reason for slow credit growth was the higher lending rate.

“The lending rate has gone up since last year but the new fiscal year witnessed more increase in the interest rate after the State Bank’s decision to increase the discount rate by 0.5 per cent,” said a banker. He was of the view that most of the borrowers would have to borrow at a double digit rate this year.