Bank lending to private sector turns positive for first time this fiscal year

improvement in the economic activities.

The State Bank of Pakistan (SBP) on Thursday reported that the private sector borrowed Rs98.73 billion during the week ending Dec 22, 2023.

This has pushed the total bank lending to the private sector to Rs9.22 trillion, taking the net borrowing into the positive territory. The total borrowing figure stood at Rs9.17tr by the end of the previous fiscal year and had remained below that level until last week.

This shows that the total net borrowing during this fiscal year stood at Rs57.8bn as of Dec 22. However, it was still way below than Rs267.2bn net borrowing in the comparable period a year ago.

The economy contracted during the previous fiscal year mainly due to the worst bank lending to the private sector totalling Rs208bn compared to Rs1,329bn in FY22 due to political and economic uncertainty.

The situation was not even encouraging till Dec 15, 2023 despite some stability in the exchange rate, successful negotiations with the IMF and a sharp contraction in the current account deficit thanks to curbs on opening letters of credit.

From July 1 to Dec 15 period of FY24, the State Bank noted a net debt retirement of Rs41bn by the private sector. However, the trend changed after Dec 15.

The bank money is still too costly for the private sector as the key interest rate has been kept constant at a historic high of 22 per cent since the start of the current fiscal year. Traders and industrialists have consistently been raising their concerns that survival is not possible with unprecedented lending costs and high inflation at 29pc.

Bankers said that banks are not interested in lending money to the private sector fearing a rise in default and preferred to park their liquidity in risk-free high-yielding government papers.

Despite a higher cost of production, the exports increased by 5pc during the first six months of FY24. However, exporters maintain that the higher cost of production has reduced their margin of profits.

The lending by the conventional banks is still negligible as the borrowing from these banks was just Rs1.76bn against Rs349.8bn in the same period of last year. Commercial banks had always been on the front while lending to the private sector.

This poor lending amount during the first half of FY24 reflects the higher degree of doubts about the private sector’s performance.

However, the Islamic banks showed courage as their lending noted a net outflow of Rs38bn for the private sector during this period compared to Rs50.9bn in the same period last year.

The Islamic banking branches of conventional banks were on the right track but opposite to the previous year’s performance. The lending to the private sector was Rs17.9bn during 1HFY24 against a net debt retirement of Rs133.5bn in the same period last year.