Economic growth creates the private sector’s demand for bank credit. A strong economic recovery of four per cent in 2020-21 — after about 0.5pc decline in GDP a year earlier — led to higher demand for bank credit.

By and large, banks met increased credit demand. But they apparently failed in making sure that bank credit is distributed judiciously across all sectors. They lent generously to the corporate and consumer credit seekers but met the financial needs of agriculture and small and medium enterprises (SMEs) parsimoniously.

Banks did this at a time when agriculture and SMEs needed bank credit as much as the corporate customers and consumers did — and despite the availability of concessional lending windows opened by the State Bank of Pakistan to help SMEs remain afloat amidst the Covid-19 crisis.

This, actually, is the most tragic part of the story.

At the end of May this year, the share of SMEs in total outstanding bank loans to the private sector businesses (PSBs) stood at just 8pc, according to the latest State Bank of Pakistan (SBP) statistics — the share of agriculture remained a little below 4.9pc.

Now one must not get confused. This paltry share of agriculture in the total stock of loans to PSB does not mean banks make negligible loans to this sector year after year.

Banks find it easier to lend huge amounts of money to big players in almost every category of private-sector businesses

The truth is just the opposite. Banks do make hundreds of billions of rupees worth of agricultural loans — but they do it against recoveries of previous loans. This keeps the share of agriculture in total PSB lending too low.

When you talk to bankers they stick to this line of argument. They also point out that agricultural loans are by nature cyclical and short-term and as such making fresh loans to the agriculture sector against recoveries is a norm.

But hold on. This is a half-truth.

The whole truth is that banks do not make enough medium-to-long-term development loans to agriculture. And that also contributes to a low share of agriculture in outstanding loans to PSBs. In eleven months of 2020-21, the share of development loans in gross agriculture loans was 12.5pc. Production loans — that are recovered within a year — constituted 87.5pc of the total agricultural lending. Besides, in eleven months of 202-21, total recoveries of agricultural loans were equal to about 91pc of fresh agricultural loans distributed during this period.

These two facts — fresh agricultural lending largely against the recoveries and a low share of development loans in total agricultural lending are important. These numbers reflect the true picture of the volume and quality of agricultural lending.

But every government boasts about gross agricultural lending during a certain period — in eleven months of 2020-21 more than Rs1.19 trillion against that of Rs1.08tr in eleven months of 2019-20. This set of data hardly tells anything about the state of agricultural lending in the country though yearly readings provide politicians with a heated talking point.

For people not well-versed with the dynamics of agricultural lending the number of gross agricultural lending in a year becomes more confusing because it often exceeds the amount of loans offered to the entire private sector. To put them in perspective, one has to focus on net agricultural lending during a period (gross agricultural loans minus recoveries made during that period). In eleven months of 2020-21, net agricultural lending stood at just 11bn (Rs1.19 trillion gross lending minus recoveries of Rs1.08 trillion).

Now, let’s have a look at lending to SMEs.

The disturbing fact that in the stock of total bank lending to private sector businesses, the overall share of SMEs is 8pc against that of about 63pc for manufacturing — betraying banks’ attitude towards SMEs, the backbone of the economy. What is even more disturbing is that the share of SMEs lending within manufacturing and other segments of the borrowers remains humiliatingly low. For example, the share of SMEs in bank credit flows towards the borrowers in the wholesale, retail and auto-repair segment (a very ideal category for promoting SME finance) remains a shade below 31pc, according to the latest SBP stats. Similarly, only 11.5pc of the total bank credit flow towards the construction sector (another ideal candidate for SME finance) actually goes to SMEs operating in this sector.

At the end of May this year, the share of SMEs in total outstanding bank loans to private-sector businesses stood at just 8%

What do these and similar stats indicate? They do indicate that banks find it easier to lend huge amounts of money to big players in almost every category of private sector businesses. They do this mainly for three reasons. First, bank-relationship history and, thus, ever-improving creditworthiness of big businesses provide safety cushions to banks in terms of observance of prudential regulations and ensuring recovery of loans. Second, lump-sum voluminous loaning keeps the administrative cost of credit distribution low. And third, most of the big borrowers continue to remain influential enough through domestic, regional and international political and big-business connections to be prioritised by banks. In fact, banks themselves have become an integral part of many such big businesses — thanks to investment exposure and shareholding in big businesses.

The agriculture and SME sectors are the biggest employers in Pakistan. A huge 38pc of the total 65 million-strong labour force is employed in agriculture. And SME sector provides jobs to 80pc of the non-agriculture labour force — or 32m plus persons. If bank credit to these two sectors flows more freely enabling them to meet their financial requirements from official sources, the resultant increase in productivity of agriculture and SMEs will also be accompanied by an increased employment rate in the country.

But this objective cannot be achieved by mere talking and tall claims — or occasional, politically motivated incentive packages. They all have failed multiple times. The SBP may consider issuing a detailed quarterly report on agriculture and SMEs — instead of stats spreadsheets. Only then all stakeholders of the agriculture and SME sectors will be able to analyse banks’ lending behaviour towards these two vital sectors in a more informed way.

Published in Dawn, The Business and Finance Weekly, July 5th, 2021