Banks lend more as economy grows

2016 was a very good year for small and medium enterprises due to a surge in bank lending. A similar trend was witnessed in corporate loans.

The pace of consumer loans’ growth also more than doubled last year, but agricultural lending remained flat on net basis.

“I guess the trends in credit distribution seen in the last quarter, and in 2016 as a whole, are here to stay. Going forward, net yearly advances to agriculture, too, will grow though that has to remain far lower than other sectors simply because the bulk of agricultural loans are repaid the same year,” says head of one of the top five banks in the country.

Bank credit to SMEs grew 29.2pc in CY16 against just 6pc in CY15, according to the recent SBP report on banking performance. “This is very promising. And since we see this coming along with a 47pc annual growth in private sector company’s credit and strong consumer lending it is can be reflection of higher economic growth,” opines a senior central banker.

Pakistan’s GDP growth between FY14-FY16 has averaged at 4.3pc against 3.7pc average growth between FY11-FY13. “This year the GDP is set to grow even higher, around 5pc.”

Another encouraging credit distribution development in CY16 is that 21pc of corporate loans — up from 19pc in FY15 — was in fixed assets. During this period loans to SMEs for fixed assets fell from 33pc to 18pc.

Demand originated from SMEs both in the manufacturing and services sector. In SME manufacturing, the fastest growth in demand came from downstream auto and leather industries’ and in the services, from food business and retailing.

The net non-performing loan portfolio started declining from the beginning of 2016 and that encouraged banks to lend more to this sector, senior bankers say.

Loan infection ratio of SMEs fell from 26.1pc in 2015 to 20.3pc in 2016. Also, in 2016 the SBP eased cash payment condition for immediate declassification of NPLs of SMEs from 50pc to 35pc. That helped SMEs to clean up their balance sheets and go for additional eligible borrowing from banks During CY16, corporate lending also increased, due to higher credit demand for larger working capital to finance growing outputs. A number of them went for fixed investment.

Senior bankers say that private sector companies, taking advantage of low interest rates, also kept retiring their old bank debts and regularised their NPLs. “This also was a key factor behind higher corporate lending in the last year,” according to a senior official of Habib Bank. Corporate loan infection ratio came down from 12.3pc in FY15 to 10.6pc in FY16.

With pickup in large-scale manufacturing, banks’ private sector corporate lending remained dominated by manufacturing loans that grew by 53pc to Rs225bn in CY16 from Rs119bn in CY15.

Consumer finance in 2016 picked up on strong demand for auto loans and loans for purchase of property, house building and renovation. And demand for personal loans was also high during last year, bankers say adding that the trend still continues. The overall consumer lending of banks grew more than 100pc to Rs70bn at end-December 2016 from Rs29bn at end-December 2015.

“We see credit demand in all segments of private sector businesses growing further this year as the economy takes off,” says head of credit division of a large local bank.

Published in Dawn, Economic & Business, March 13th, 2017