Banks mull reviving corporate lending
MANY banks are ‘reactivating’ their corporate divisions anticipating revival of demand for private credit as interest rates fall on the back of declining inflation and manufacturers consider investing in the long overdue technology up-gradation and capacity expansion.
“We are in the process of reviving corporate lending,” an executive of the NIB Bank told Dawn last week. “We believe that the declining interest rates are definitely going to trigger demand for credit by the private sector in the next few months if not now,” he said.
He said most banks were restarting corporate lending not only because they anticipated growth in private credit demand but also because the State Bank of Pakistan (SBP) had passed on directions for this.
The SBP has reduced its key policy rate by 400bps since August 2011 to 10 per cent to spur private investment and economic growth.
Private sector investment contracted to 7.9 per cent of GDP last fiscal year in 2011-12 from 8.6 per cent the previous year, according to the Economic Survey of Pakistan. High cost of credit is blamed for the sluggish private investment.
The private sector has been retiring its loans rather than borrowing from the banks for the last some years in order to cut the cost of doing business. However, the net retirement of credit by the private sector slowed down to Rs24 billion during the first two months of the current financial year from Rs84 billion a year earlier, according to the SBP data.
While the high cost of credit remains a major factor suppressing private credit demand, issues like growing energy shortages, worsening security conditions and political instability have also contributed to the decline in private sector’s appetite for funds.
Another very important factor is crowding out of the private sector from the banking system because of government’s heavy budgetary borrowings.
The banks too shut their doors on the private borrowers after their stock of non-performing loan (NPLs) portfolios began to rise quickly due to heavy losses suffered by the manufacturing sector on the back of growing energy shortages, especially in Punjab.
The NPLs of textile industry, the largest manufacturing sector, for example, have gone up by 31 per cent. The banks found it easier and more profitable to invest in government papers rather than risk their money with private sector borrowers.
“Now the situation is changing: interest rates are coming down and investment in government papers is also becoming quite risky because of heavy accumulation of public debt in last four years. Banks are charging up to three per cent spread on commercial loans provided to the government organisations despite reduction in interest rates in view of the increased risk,” an executive in the corporate division of the Silk Bank said. “So the banks will have little choice soon but to direct their
resources to the private sector,” he said.
But he was not very optimistic about ‘rapid growth’ in private credit demand for the next six months. “I think the private sector wait for easing of energy shortage and results of new election next year before seeking loans for capacity expansion. Moreover, many would like interest rates to fall further,” he argued. He, however, said some major groups were likely to start BMR before the next election, giving a push to the demand for private credit.
The NIB executive said bankers were approaching the customers with good credit history for new loans and offering them credit on floating rates as the business is expecting further, substantial cuts in the credit costs over the next few months to single digit.
He pointed out that the reduction of 200bps in the discount rate since August had already triggered investment in the real estate, increasing property prices by up to 20 per cent in major cities.
His assertion was confirmed by a person who procures land for major projects for both private and public sector. Refusing to give his name, he said: “The prices of land in Lahore have increased by between 10 to 15 per cent in the last couple of months.
Had the central bank brought down the rate by another 100bps in its last monetary policy revision we would have a rapid jump in property prices. The central bank must bring interest rates to at least nine per cent in its next monetary policy review to boost invest in real estate. “Even the manufacturing sector will not start investing until the rate is brought down to single digit.
It will have a great psychological impact on investors”.
A textile manufacturer from Lahore said the industry was dismayed by the central bank’s decision to slow down monetary easing in its last policy decision on October 5.
“We were expecting a rate cut of 100bps to 150bps. Instead we got a cut of 50bps. The industry would like the central bank to take a bolder decision next month and bring the rate down to 8.50 per cent at least. What we are expecting is reduction in rate to seven per cent before election to make our manufacturing and exports competitive in the world markets,” he said.
He admitted that the cut of four percentage points in the rate had already reduced the cost of the manufacturers and many were planning long outstanding BMR over the next several months. the textile industry is ready to invest $5billion over the next five years to replace its ageing technology, expand capacity and boost exports.
“But we would definitely be watching the behaviour of the central bank over the next few months and see if monetary easing continues or halts before we implement our investment plans,” he said.
But analysts say the continuation of monetary easing depends on many other factors, especially the speed and quantity of foreign capital flows as well as reduction in the government’s demand for funds to finance its budget in the next three quarters of the current fiscal year to June.
If these two things happen, we are going to see a speedier cut in interest rates. If doesn’t we see monetary easing halting and reversing in the months to come,” a Karachi-based financial analyst said.