Banks not lending

Bank lending trends show little to suggest investment is about to increase anytime soon. In fact, government data actually shows that lending to the private sector was negative in the first half of the ongoing fiscal year, reflecting banks’ lack of confidence in the economy, and conversely, investors and other potential borrowers’ lack of interest in getting stuck with loans at record-high interest rates. Bank lending contracted by Rs41 billion in the year to date, compared to a Rs141 billion increase last year.

The negative trend transcended banking categories, with public, private, traditional and Islamic banks all showing net debt retirement, meaning that the total amount of money they have loaned out fell. Although subcategories such as Islamic lending by regular commercial banks did not show negative growth, instead increasing by Rs13 billion, this was partly influenced by the collapse of lending by this particular sector last year, when their net debt retirement was over Rs150 billion. Part of the problem is that banks are averse to the very real risk of default that goes with all lending to the public when they can instead invest in risk-free government bonds. The constraining nature of high interest rate is made most obvious by the state of industrial growth. While no one expected anything like double-digit growth, some expansion would be necessary to meet the government’s overall economic growth target of about 3%. Instead, large-scale manufacturing actually shrank slightly. Although data was not available for the full six months, the monthly trend remained mostly negative, and the only silver lining was that it was not as bad as last year, when large-scale manufacturing was down by over 10%.

Unfortunately, interest rate will remain high until jaw-dropping inflation is reined in, because the State Bank sees high rate as the only cure for high inflation. Meanwhile, the government’s failure to propose measures to encourage economic growth that can work alongside high interest rate means that growth targets for 2024 are already looking unreachable.

Published in The Express Tribune, December 29^th, 2023.

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