Bank lending to consumers picks up

Improvement in bank advances indicates businesses are gradually reviving

Banks finally reported an uptick in fresh financing to a wide range of consumers like businesses in September 2020 after continuously receiving back loans from borrowers in the past three consecutive months, signalling an improvement in confidence.

Total bank lending improved by a net 0.5%, or Rs41.20 billion, to Rs8.09 trillion in September compared to Rs8.05 trillion in the previous month, the State Bank of Pakistan (SBP) reported on Wednesday.

Earlier, borrowers returned over Rs300 billion in the past three consecutive months (June-August 2020), which was around 3.63% of the record-high outstanding loans of Rs8.36 trillion in May.

“The improvement in banks’ advances (loans) indicates that businesses are gradually reviving in Pakistan,” Arif Habib Limited (AHL) Head of Research Tahir Abbas said while talking to The Express Tribune.

The growth in advances, however, remained nominal as businesses would scale up production and sales gradually. The number of new Covid-19 patients dropped drastically in the country in recent weeks, but the pandemic was yet to be over globally, he added.

“Advances should pick up in following months if Pakistan manages to avert the second wave of the virus,” Abbas stressed.

Recent developments suggest that expensive hotels, which offer short stay to the visiting guests, have borrowed more from banks. Earlier, they had been hit hard by the pandemic after the international travel and tourism industry came to a complete halt.

Besides, motorcycle manufacturers have increased borrowing. Sales of cement and cars have also picked up. Essential commodities and service providing sectors like food producers and banks have continued to operate even during the peak of the pandemic.

The uptick in lending may partially be attributed to central bank’s measures aimed at providing relief for old borrowers, offering new loans for starting businesses and giving loans to businesses at subsidised rates for paying salaries to employees during the crisis.

Central bank measures have either provided relief to people and businesses or provided fresh financing to them to the tune of Rs1.58 trillion (3.8% of GDP) so far during the testing times, according to the SBP.

However, majority of the business sectors have continued to retire loans as outstanding lending to the private sector has continued to shrink, according to the latest data.

Bank deposits, investment

Bank deposits and investments in government securities like short-term treasury bills and long-term Pakistan Investment Bonds (PIBs) - which were a source of borrowing by the government - continued to surge.

Deposits of accountholders grew almost Rs559 billion, or 3.42%, and touched an all-time high of Rs16.88 trillion in September compared to Rs16.33 trillion in August.

“Deposits are on the rise for multiple reasons as people are trying to earn more and spend less during Covid-19. Earlier, a large number of people opted to keep hard cash at home to meet essential needs immediately after the virus outbreak (sometime in late February), but now they seem to be preferring to deposit money in banks,” Abbas said.

Secondly, the government injected Rs1.2 trillion into the system to provide relief for the people and businesses during the pandemic. Moreover, businesses on hold, or recovering at a slow pace, have also parked their funds in banks.

Similarly, bank investments in government papers have been on the rise for the past eight consecutive months. They have been aggressively lending to the government as such lending has zero risk.

The investment peaked at Rs11.09 trillion in September compared to Rs8.37 trillion in January 2020, according to the central bank.

Published in The Express Tribune, October 15^th, 2020.

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