ISLAMABAD, 21 April 2003 — Credit now becomes cheap in Pakistan and business is doable. How long will this once-in-a-blue moon phenomenon last? Big question! But, off the cuff guess is that barring any major financial disaster it may go on for, at least, two years or more.
This is how it does look as of now. But, Pakistani government, politicians and economic bureaucracy has the knack of committing hara-kiri, often. That can change the entire business scenario. Add another caviat to that: The mood in Washington, and the Western-dominated international financial institutions, toward Islamabad.
However, as of now, there is good news about the business at hand. Bank credit is now being offered at as low as four percent.
The big, blue chip corporate borrowers are being selective in accepting credit from commercial banks. They are getting large chunks of credits at 4.0 percent for the last few months. At the moment, big businessmen, industrialists and textile mill owners are closing credit deals at four to five percent. Banks, recently, have also been lending large amounts to two booming sectors — telecom and energy — at cheaper rates. Bankers, beset with growing liquidity are now trying to find borrowers in more and newer sectors, offering better terms and conditions, and declining interest rates. High-profiled bankers of yester-year are now running even after the much-disdained small and medium enterprises (SMEs).
They were keeping away from SMEs because they felt assessing such borrowers’ creditworthiness and doing proper documentation was a headache. A large number of these SMEs still belong to the “informal sector”. But, are there many private sector takers even at this low an interest rate? Surprisingly the answer is: Not Many, as yet, but their number is growing. A large number of potential borrowers are waiting and hoping, the lending rates will fall further under the central bank’s easy money policy.
Inspite of this, the latest reports from the financial market show bank credit take off is rising. In fact it has shot past the Rs.95 billion credit target, originally set by the National Credit Consultative Committee of State Bank of Pakistan (SBP), the central bank. Bank lending in the first nine months of the current fiscal 2003 has reached a level of Rs.102 billion, the banking industry reports. SBP’s Export Refinance Facility (EFR) has now reduced export finance to 2.5 percent, to which the banks add a 1.5 percent of their own margin, and provide the credit at 4.0 percent. It was possible because EFR is linked to 6-month Treasury Bills (TBs), yields of which are declining. This cheaper credit is helping boost exports. EFR rates are likely to decline further, as the TB rates are still coming down.
The reasons for the long-awaited, and hoped for, cut in lending rates is the conscious, easy money policy of the SBP. The SPB, for more than two years, has been urging commercial banks, both Pakistani and foreign banks based in Pakistan, to lower their lending rates in order to help revive the economy that has remained beset by numerous domestic political and economic woes, as well as recession in various parts of the world. They were asked to reduce their intermediation cost, and lower the spread.
No one listened to urgings by SBP Governor Dr. Ishrat Hussain and Finance Minister Shaukat Aziz. Then 9/11 happened, forcing a large part of remittances by overseas Pakistanis through the official banking channels on the back of US-directed monitoring of international financial flows.
It not only led to doubling of remittances as it happened this year, but also proved to be a major factor in strengthening the rupee against the dollar. The remittances were the key element that generated piles of liquidity with the banks. Remittances, in the first nine months of fiscal 2003 are $3,230.08 million — a hefty 98.58 percent higher than the like period of fiscal 2002, the latest announcement by SPB says.