Bank lending to private sector stays negative, highlighting economic challenges

The State Bank of Pakistan (SBP) released data indicating that bank lending to the private sector remained negative in the first half of the current fiscal year, reflecting a challenging economic growth scenario.

From July 1 to December 15, the private sector retired its debts, with a net debt retirement of Rs41 billion compared to net borrowing of Rs141 billion during the same period last year.

Bank advances to the private sector sharply declined to just Rs208 billion in FY23 compared to Rs1,329.7 billion in FY22, contributing to GDP contraction in the year. Currently, most macro indicators are portraying a grim economic outlook, with banks opting for substantial investments in risk-free, high-yielding government papers, yielding returns of more than 22%.

Despite the government’s economic growth target of 2-3% for the current fiscal year, Large-Scale Manufacturing (LSM) production contracted by 4.08% in October on a year-on-year basis.

The negative growth was mainly attributed to sectors such as textile, paper and board, iron and steel products, electrical equipment, automobiles, and furniture. LSM output contracted by 0.4% during July-October FY24, according to PBS data.

Analysts expressed surprise at the economic challenge, questioning how the economy could grow without a supply of liquidity. Negative lending to the private sector is attributed to the high cost of borrowing, causing banks to hesitate in lending money to the private sector, given the 22% policy interest rate.

Some bankers suggest that the recent equity market rally attracted significant amounts from banks, helping them generate more profits before the Pakistan Stock Exchange (PSX) experienced a substantial correction, losing over 11% since December 12. Banks also managed to avoid a 40% tax on windfall profits after obtaining stay orders from the courts.

Analysts note that the government’s heavy borrowing from banks leaves little room for the private sector. The allure of risk-free substantial profits from government papers is cited as one of the reasons for the reluctance to lend to the private sector.

Commercial banks reported a net debt retirement of Rs51.4 billion compared to net lending of Rs262 billion in the same period last fiscal year. However, Islamic banking branches of commercial banks recorded a net lending of Rs13.1 billion to the private sector, contrasting with a net debt retirement of Rs151 billion in the same period of FY23.

Despite this, Islamic banks also noted poor performance, with net debt retirement of Rs2.6 billion during this period against net lending of Rs31.4 billion in the same period of FY23.