LARGER export orders for the current quarter, a surge in imports from the second quarter, seasonal financing of cotton and sugarcane sectors and declining interest rates have accelerated private sector bank borrowings.
A one and a half percentage point cut in the SBP policy rate in November last has particularly spurred private sector’s credit off-take since mid-December. Net private sector borrowing shot up from Rs115 billion as on December 16 to Rs210 billion as on January 20—an increase of Rs95 billion within five weeks.
Federal government’s bank borrowings between July 1 and December 16 last year was in excess of Rs624 billion. After more than a month on January 20, it remained almost unchanged at Rs621 billion.
During the period between July 1, 2011 and January 20, overall private sector borrowing totaled Rs210 billion, up from Rs175 billion in the same period of the last fiscal year.
“Export financing in January was higher than average financing in the previous quarter and the trend continues. This combined with increased import financing due to larger import volumes and rupee devaluation has boosted private sector borrowings,” said head of trade finance of a local bank.
Leading exporters say export orders in October-December last year remained below their expectations but they have obtained larger orders for January-March from the US, the UK and some Middle Eastern countries.
Couple of exporters of textiles, rice and leather garments said though their export volumes in the last quarter either shrank or remained unchanged over the year-ago period, they managed to secure additional orders for January-March delivery.
Exporters of non-traditional items like cement, fertiliser, engineering goods and jewellery also said that foreign buyers had placed substantially big orders for shipment between January-March.
“Massive construction activity in Afghanistan has helped us get sizable export orders for cement for the current quarter,” said an official of D.G. Khan Cement adding that both his company and rival Lucky Cement expect the rising trend in exports to Afghanistan to continue.
“Industries line up required financing keeping in view their confirmed deals with foreign and local buyers much before actual delivery of products start,” he said hinting that cement makers with big export or domestic orders for this quarter had started arranging bank finances.
“Bank financing to private sector is also up because imports are growing much faster than before,” said Sardar Muhammad Ashraf, chairman of Pakistan Polypropylene Manufacturers Association.
“In last two years, recovery in agricultural activity has helped in expansion of packaging industry. The number of polypropylene manufacturing units has increased from 140 to 200. This has increased imports of the chemicals used in polypropylene.”
This is one of many such examples of capacity growth that has led to increase in imports volume.
Besides, more than five per cent rupee depreciation so far this fiscal year has naturally given rise to bank financing needs of importers.
Exporters admit that as rupee remained on the downward slide particularly in the second quarter most of them held back export proceeds and many of them continue to do so in anticipation of further erosion in rupee value.
“When exporters don’t realise export proceeds in time they tend to borrow more from banks to meet day-to-day financial expenses,” said treasurer of a local bank citing it another reason for a rising trend in private sector credit demand.
On the other hand, though the State Bank has made forward dollar buying by importers, a bit more difficult to curb speculation against the local currency genuine demand for forward forex cover is being met.
“Forward covers availed of against actual needs of importers for financing their import. LCs are now not being rolled over for the purpose of speculation in currency market. So, when on due dates of availing of forward covers fall, importers have to arrange local currency either from their own resources or through bank borrowings,” said a senior local banker.
“That also explains, in part, why private sector credit has been on the rise in recent weeks.”
In addition to all other factors listed above, ongoing cotton ginning and sugar milling financing, banks’ lending to wheat/rice growers and exporters continue to play an important role in boosting private sector credit demand.
Lately, an increase has also been witnessed in car financing as well as in personal loans being offered by banks under various lucrative schemes. This too is adding up to private sector credit off-take from banks.