The effect of falling interest rates is finally appearing in the loan books of commercial banks: credit to private businesses is notably up, and so is consumer financing.
Outstanding loans to private-sector businesses amounted to Rs3.2 trillion at the end of 2015, which is 9.8% up from six months back, according to the latest data released by the State Bank of Pakistan (SBP).
Demand for long-term loans surges 20.6%
In the wake of declining oil prices resulting in subdued inflation, the SBP has consistently brought down the benchmark interest rate in the last year and a half. The interest rate has come down 350 basis points since the start of 2014-15 and currently stands at 6%.
Interestingly, banks increased their lending to private-sector businesses only during the second half of 2015, as their outstanding loans had actually recorded a slight decline in Jan-Jun last year.
Main reasons for enhanced credit off-take by the private-sector businesses include continuous monetary easing, improved financial conditions of the major corporate sector and better business environment, according to the SBP.
“Going forward, improvements in large-scale manufacturing (LSM), expansion plans announced by major industries and favourable monetary conditions are expected to provide continued momentum in the demand for credit,” the SBP said in a recent statement on the state of the economy.
Official data also shows outstanding long-term loans for fixed investments, such as plants and machinery, went up 8.8% between June and December.
Banks reluctant to extend loans despite low interest rate
The increase in working capital /short-term loans extended to private-sector businesses clocked up at almost 12% over the same six-month period.
Spike in consumer financing
Consumer financing, which includes loans for housing, cars, credit cards, consumer durables and personal loans, started gathering pace a little earlier than banks showed renewed interest in enhancing private-sector lending.
Consumer loans reached Rs292.9 billion at the end of 2015, up 11.6% on a year-on-year basis. Among major categories within the consumer financing segment, the sharpest increase was witnessed in car financing. Outstanding car loans at the end of 2015 amounted to Rs96.9 billion, up 36.4% from a year ago.
Statistics for 2014-15: Credit to private sector shrinks to 13% of GDP
According to one estimate, car financing accounts for as many as 31% of total car sales in Pakistan. “We expect car financing to find momentum during 2015-16 and 2016-17 after the maturity of Pakistan Investment Bonds (PIBs), as banks will have a liquidity glut of approximately Rs1.3 trillion,” said Global Securities research analyst Asad Nayani in a research note.
Published in The Express Tribune, February 3rd, 2016.
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