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SBP credit to private sector overshoots target

This is happening even in an environment of rising lending rates, slightly improved deposit rates, and an increasing inflation.

State Bank of Pakistan (SBP), the central bank, has set a Rs.200 billion credit target for the private sector for the whole of 2005. The actual disbursement in 2004 was Rs.300 billion (b). But, all indications are that not only the SBP target but the previous year's record will be burst and the actual lending is seen rising beyond Rs.300 billion. An additional reason for demand of a larger bank cash is the fact that rupee is depreciating against the greenback. As against the dollar, the Pakistani currency has depreciated 5.2 per cent in the first four months of fiscal 2005. It means cost of imports-machinery-industrial raw materials, and the already spiraling oil prices — in rupee terms are on the roller skater. Bankers see "a big appetite, and a hefty credit demand," this fiscal.

An early indication of a fast credit growth is that according to SBP, lending rose to Rs. 65 billion between July 5 and October 4 up from Rs. 21 billion on July 4. The new fiscal started July 1. Bank lending in the like period of 2004 was less than half — Rs.31.8 billion (b). Advances for raw cotton, wheat and sugarcane, personal financing for auto leasing, consumer durables, housing, agricultural requirements and textile industry credit needs for capacity expansion upgrading of its equipment are pushing the volume of advances. Big business and corporations are also borrowing heavily, apprehending the interest rates are likely to rise rapidly in the coming months. October already is seeing still more private sector credit demand and disbursement as the sugarcane crushing season is underway.

Consequently, lending rates and inflation are going up too. Inflation has already reached a 9.0 per cent year-on-year level making the government projection of 5.0 per cent for the whole of 2005 already redundant.

SBP says the weighted average lending rates (WALRs) moved up from 4.63 per cent in July to 5.08 per cent in August. Firm data is still to come, but the average rose further in September and October. The commercial banks got the clue to raise lending rates as SBP itself moved in to apply a squeeze and modify its Easy Money Policy (EMP) that has been in vogue for the last two years. The effect of the August move by banks, raised the average lending rates (ALRs) on the all-banks' total credit stock from 6.43 per cent in July to 6.48 per cent in August.

There was some variation in ALRs of various categories of banks. The ALRs of state-owned banks, for instance, raised the cost of credit from 5.90 per cent in July to 6.05 per cent in August. At the same time, the foreign banks raised it from 3.33 per cent to 3.44 in the two months. The privately-owned Pakistani banks moved their ALRs from 4.82 per cent to 5.4 per cent. But, bankers admit, if the lending rates rise too soon, and too sharply, the private sector's present borrowing spree may slow down.

The other side of this coin, however, is that that with GDP growth moving forward, consumer demands for a range of products continue rising, prices moving up, and corporates declaring dividends at rates higher than last year, the present appetite for credit may continue unabated. In this scenario, the credit volume for 2005 may rise much higher than even the projected volume of Rs 300 billion.

The WALRs and ALRs started moving up, in the wake of SBP offering bigger yeilds on the government paper-Treasury Bills (Tbs), in order to continue to provide funds for the budget deficit of the Government of Pakistan (GoP). The move also signaled that it plans to tighten the EMP and resist inflation. This squeeze was applied in February, but more prominently in July this year, at the start of fiscal 2005, when criticism was becoming more vocal over the GoP and SBP inaction to fight rising inflation. It was then that SBP announced its new monetary policy (NMP) for six months. NMP made it known to banks and other stakeholders that it will gradually increase lending rates, in case inflation continued rising. On its own part, SBP started raising the return on benchmark TBs, signaling that the bank lending rates are to rise, and a monetary policy squeeze goes into effect. As a follow up, SBP, this week, raised average yields on 3-montn TBs to 3.2228 per cent, up from 2.9474 on September 29. The yield on 12-month TBs went up to 3.8419 per cent from 2.9684 on September 1. At the last auction, 6-month Tbs yield was raised to 3.0 per cent.

In the wake of February raise in TB yields, followed by a still higher raise in July, the commercial banks started hiking their own lending rates to borrowers. That is still going on. It also provided them an opportunity to increase deposit rates for savers--although the raise is miniscule, and far from demands of savers. This is because even after this small raise, savers continue to loose because of 9.18 per cent inflation. It means the savers are loosing 7.5 per cent in terms of the inflationary erosion of their cash. As such, the deposit rates and the NMP is basically anti-savings, anti-savers.

SBP data indicate the all-bank weighted average return (WAR) on new deposits rose to 1.51 per cent in September from 1.20 per cent in July-an increase of merely 0.31 per cent, as against an inflation rate of 9.18 per cent.

That hardly provides an environment and encouragement to save, especially in a country where the savings rate is already one of the lowest in the world.

One banker says, the banks had to "improve" deposit rates for savers in order to help their deposit base grow, as appetite for credit increased, which, in turn, enabled them lend at rising interest rates. Banks attracted Rs.8.5 billion deposits in August, that raised the overall volume of deposits to Rs. 2,060 billion. August also saw credit disbursed by all banks rising to Rs. 18 billionto Rs. 1,365 billion.

SBP also reports, the currency in circulation (CIC) rose 2.81 per cent between July 1 and October 2, down from 4.33 per cent in the like period of fiscal 2004. SPB Officials claim, if the CIC growth was not restrained, the inflation rate could have been higher than the present 9.18 per cent. But, still that high an inflation rate should be a very worrying thought, indeed, for GoP and SBP who, over the last five years, have prided themselves for keeping the inflation rate at less than 4.0 per cent. That low-inflation environment-- for sure -is gone for good. The top leadership of SBP and Ministry of Finance, supervised directly by Prime Minister Shaukat Aziz himself, has to come out with something brand new--and effective--to contain and counter inflation, alongside their much cherished high growth rate stance. The continuously weakening rupee-against the dollar and other hard currencies- a growing trade deficit, high prices of imported oil, and a close to 15 per cent food inflation, are other worrying thoughts. This is the phenomenon, the government has been fighting, but unable to tackle, so for.