Banks on a lending spree as investment options shrink

Published February 6, 2019
The commercial banks are reluctant to commit in long-term instruments amid volatile interest rate environment.
The commercial banks are reluctant to commit in long-term instruments amid volatile interest rate environment.

KARACHI: Banks have begun accepting almost all of the applications for loans from the private sector — even at lower rates — amid shrinking investment opportunities.

The commercial banks, who usually favour investing in government securities, are reluctant to commit in long-term instruments amid volatile interest rate environment.

The State Bank of Pakistan (SBP) has raised interest rates by 450 basis points since Jan 2018.

On the other hand, the government during the last seven months has become increasingly reliant on the central bank for its borrowing needs. In absolute terms, the government’s net budgetary borrowing from the SBP quadrupled during the July-January period reaching Rs3.77 trillion. A major chunk of these funds, around 80 per cent, have been used to retire government debt from the commercial banks.

As the government moves away from commercial banks for its borrowing needs, the number of applications from private sector has also seen a significant decline during July-September 2018, according to an SBP report.

Despite low volumes, the banks have accepted almost all applications. The average loan size of these applications is also quite large mainly due to the rising input prices, compared to the same period last year.

The state of affairs is such that the banks, in a bid to expand their loan portfolio, have even lent at the Kibor (Karachi Inter-Bank Offered Rate) to some consumers without charging any extra premium.

Subsequently, the credit to private sector has doubled during the last seven months to Rs530 billion from Rs232bn during the corresponding period last year, according to another SBP report.

The rise in private sector credit off take is on account of rising input costs — especially cotton and petroleum — which increased the demand for working capital loans; and a sharp depreciation of rupee, which increased the cost of imported inputs, machinery and equipment.

Borrowing in the textile sector was particularly high, up mainly due to 36pc increase in domestic cotton prices. The rise in cotton prices, which are calculated internationally, is a result of around 25pc depreciation of the rupee.

Since most of the activity in the textile sector was export-centric, around 39pc of the borrowing was met through SBP’s export re-finance schemes in the first three months of the current fiscal year, offered at a subsidised rate of three per cent, highlighted the SBP report.

Published in Dawn, February 6th, 2019

Follow Dawn Business on Twitter, LinkedIn, Instagram and Facebook for insights on business, finance and tech from Pakistan and across the world.

Opinion

Editorial

E-governance
Updated 10 Jan, 2025

E-governance

Wishing for a viable e-governance system seems like a pipe dream when stable internet connectivity is not guaranteed.
Khuzdar rampage
Updated 10 Jan, 2025

Khuzdar rampage

Authorities must explain how terrorists were able to commandeer the area for eight hours.
Beyond wheelchairs
10 Jan, 2025

Beyond wheelchairs

THE KP government’s Rs370m assistance programme for persons with disabilities is a positive step, not only in ...
Taking cover
Updated 09 Jan, 2025

Taking cover

IT is unfortunate that, instead of taking ownership of important decisions, our officials usually seem keener to ...
A living hell
09 Jan, 2025

A living hell

WHAT Donald Trump does domestically when he enters the White House in just under two weeks is frankly the American...
A right denied
09 Jan, 2025

A right denied

DESPITE citizens possessing the constitutional and legal right to access it, federal ministries are failing to...