With GDP growth slowing down and the interest rate going up, demand for private-sector credit may remain low this year. But that has not been the case so far.

In the first eight months of this fiscal year, banks’ net lending to the private sector has risen to Rs582 billion, beating the year-ago level of Rs321bn, according to the State Bank of Pakistan. But can banks actually hit the magic target of Rs1 trillion? That looks quite difficult, although chances remain for total lending to shoot up if CPEC-related projects or well-performing industries make one-off big borrowings in the remaining four months of the year.

Prospects for economic growth coming down to somewhere between 3.5 per cent and 4.2pc are high against the last fiscal year’s revised growth estimate of 5.22pc. The output of large-scale manufacturing remains negative and the agriculture performance is far below the level of last year. Components of the services sector, such as transport, communications and domestic trade, are already taking a hit because of the slowing manufacturing and agricultural activities.

The government should keep its net borrowing from commercial banks low in March-June to help banks meet the 2018-19 private-sector credit target of Rs1tr

Sectoral breakdown of the banks’ net lending to the private sector for the eight months is not available.

But funds’ distribution across sectors for the seven-month period reveals that 75pc of the loans for private-sector businesses went to the manufacturing sector. The remaining 25pc of the loans were shared among commerce and trade, personal loans and consumer financing and mining and quarrying. Lending to the agriculture sector on a net basis showed no growth simply because such loans are offered on a revolving basis. They often record a nominal increase on a net basis at the end of the year.

This pattern of credit suggests that between July 2018 and February 2019 banks made no big lending to the neglected sectors, like wholesale and retail businesses. So where was demand coming from amidst an economic slowdown, interest rate tightening and poor showing of large-scale manufacturing?

Don’t forget that large-scale manufacturing recorded negative growth of 2.3pc in the first seven months of this fiscal year.

The central bank’s data shows that the bulk of private-sector credit is going towards food and textile sectors. The export performance of both sectors has lately shown some encouraging signs. So the lending means these industries were partly using funds to make up for the revenue losses via output losses, as reflected in large-scale manufacturing data, as well as for remaining export-competitive as reflected in external trade numbers.

In July-January, the textile sector showed an output loss of a quarter per cent but the food sector recorded a much bigger decline of 4.26pc. Bankers say that heavy lending to the textile sector and its encouraging performance on the export front mean the full-year output will turn positive.

In the first seven months of the current fiscal year, overall textile exports have recorded a 24pc rise in rupee terms though that has translated into a meagre growth of 1.2pc due to the massive rupee depreciation. Food sector exports have also recorded a 26.2pc increase in rupees and 2.46pc in dollars).

Perhaps some reflection on a few peculiarities of the banks’ private-sector lending is in order. Successive governments have been borrowing heavily from banks to bridge fiscal gaps, crowding out the private sector.

But the government keeps alternating between borrowing from the central bank and drawing loans from commercial banks on quarterly and half-yearly bases. Hence, lending from commercial banks may look nominal or even negative at a given time. This exactly is the case right now. In July-February, whereas the federal government has borrowed Rs3.2 trillion from the central bank, it has actually retired commercial banks’ credit of about Rs2.2tr. When exactly the government will switch gears and start borrowing from commercial banks on a net basis cannot be predicted.

But if the past governments’ behaviour is any guide, bankers know this is going to happen sooner than later. That means in the remaining four months of this fiscal year, banks will not like to entertain private-sector credit demand as generously as they did in the first eight months.

If the PTI government is really interested in facilitating banks to meet the 2018-19 private-sector credit target of Rs1tr, it should rather keep its net borrowing from commercial banks low in March-June. But that is easier said than done. In order to do so, the revenue-deficit government will have to continue borrowing from the central bank.

Can that be possible at a time when headline inflation has already risen past 8pc and average inflation is close to 7pc against the full-year target of 6pc? Inflationary expectations are already strong for several reasons, including a lagged impact of the 30pc rupee depreciation within a year, unfolding impact of upward revisions in energy prices, prospects of further energy price hikes and an uncertain political and security environment.

On the other hand, can the narrow base of the private sector that banks have long been catering to continue showing more appetite for credit as signs of an economic slowdown become visible amid interest rates tightening?

Isn’t it time for banks to come out of their comfort zone and lend more to those individuals and businesses that have so far not been entertained? Bankers say a lack of documentation makes this task harder than non-bankers can imagine. But given the fact that tax authorities are making efforts to document more and more individuals and businesses now, banks can be expected to capitalise on whatever little outcome we see of these efforts and reach out to the less-serviced segments of borrowers.

Lending more to the SME sector can be the first big step in this direction and participating effectively in the low-cost housing finance scheme another. To encourage banks in both areas, the central bank has recently come up with guidelines and instructions. But the government will have to double up its efforts to incentivise the SME sector for greater documentation. It will have to define exact and commercially viable parameters for banks to participate in its low-cost housing scheme. So far in the first eight months of this fiscal year, the banks’ net lending to the construction industry has seen a decline, SBP data reveals.

Published in Dawn, The Business and Finance Weekly, March 18th, 2019