(MENAFN- Khaleej Times) Will banks help or fail Pakistan Prime Minister Nawaz Sharif's government by the time it completes its five-year term? At the start of the new year, prospects for banking sector growth look bright. This is the key question for the banking sector which can lift the economy and prop up growth, especially if it manages to help the industrial sector and business.
Pro-business Sharif was voted into power in May 2013 for a five-year term, mainly on his economic agenda of helping the country get rid of the chronic energy crisis which has curtailed production, reduced GDP rate and brought down exports.
He was to step up growth, end widespread corruption, check rising inflation and create jobs for the unemployed millions. 2015 is crucial for him as the government will complete its half term by December.
A high rate of growth needs an efficient, responsive, considerate and a low-interest rate banking system. The banks in Pakistan will not pass this criteria on several counts, but they have been quite profitable.
The fact remains that four decades ago, a number of Pakistani bankers ventured to the UAE, other GCC countries and Saudi Arabia and had helped them establish new banks which have been expanding and flourishing.
At home, Pakistani banks are still very profitable and rank quite high on the country's premier bourse, the Karachi Stock Exchange (KSE) which itself ranks as the Top-of-10 high profit growth bourses in Asia. The banks are managed by high-grade professionals.
However, the last few years have seen these banks, and bankers, opting for large-scale, safe and highly profitable lending only to the government. At least four governments, including the present one, have been borrowing heavily to account for their budgetary deficits.
They paid up to 13 per cent interest, besides being a safe borrower and loans being state guaranteed. This trend followed stagnation of the economy, with the GDP sinking to 2.5 per cent a year from a high of six to seven per cent up to the calendar year 2006, low demand for bank funds and growing number of non-performing loans as the old industrial and commercial borrowers defaulted on their repayments.
This preference for lending cash chiefly to the government, or investing in state bonds, was "the comfort zone" the bankers built for themselves. The present outlook for bank lending is that this trend will persist, though on a lesser scale. Industry, business and the financial sector regulators say the banks continue to lend to the government on a large scale.
"There is the need to provide much more credit to the private sector in 2015 if the banks wish to sustain the record level of their profits gained in 2014."
The phenomenon is evident from the fact that "commercial banks' investment in government securities sharply rose from Rs1.368 trillion in June 2012 to Rs4.046 trillion in June 2014," a spokesman of the State Bank of Pakistan (SBP) told this writer.
In contrast, "the commercial banks' stock of lending to the cash-starved private sector rose only 34 per cent from Rs2.058 trillion Rs2.765 trillion in the same period. The commercial banks' investment in government bonds and debt paper was Rs2.678 trillion. But during the same period, their lending to the private sector was just Rs707 billion."
A senior commercial banker admitted that "the high profit-making food business is the banker's favourite borrower. Out of the overall private sector lending, 60 per cent of the overall bank credit went to food. At the same time, textiles got 12.5 per cent, agriculture 12 per cent and electricity and gas nine per cent."
In order to stay within their "zone of comfort", commercial bankers have defied the SBP's cautions regarding the dangers of low lending to the private sector as it will hit overall production and result in reducing profits. The SBP had advised them to provide more credit to the private sector.
While this attitude of commercial bankers persists and works against the legally established and openly operating businesses, the informal sector or "the black businesses" are freely getting credit from underground sources.
Although the government has no hard facts about the size of this economy, a senior member of the Federal Board of Revenue, the government's tax collecting arm, told this writer: "It is as big as 60 per cent of the formal or legal sector which pays its taxes. The operators of the black economy pay no taxes at all."
Finance Minister Ishaq Dar said: "The private sector demand for bank credit is now growing as the economy is picking up under Prime Minister Nawaz Sharif's government. The projection for fy-2015 and beyond is a 5.0 per cent GDP growth or even slightly higher. We are shooting for a GDP growth of 7.0 per cent which we plan to achieve by fy-2018 when the present government will complete its five-year term."
Dar's other projections for fy-2018 are: industrial growth of 8.0 per cent, fixed investment-to€GDP ratio increasing to 22 per cent, fiscal deficit coming down to 4.0 per cent and public debt down to 57 per cent of GDP from the current 60 per cent.
Inflation rate will be kept under 8.0 per cent, tax-to-GDP ratio to be increased from the current 8.0 per cent to 15 per cent, exports will be raised from $25 billion to $32 billion. FDI will rise from $1.6 billion to $5.5 billion and foreign exchange reserves will be raised from the current $15 billion to $20 billion.
"These targets can only be achieved through a democratic governance which requires supremacy of the Constitution of Pakistan and the rule of law in order to reduce corruption, avoid tax evasion, wasteful expenditure and misuse of power," Dar added. If progress is made to meet these targets, the banking system will have to expand, and if such an expansion takes place, the banks' profitability will also rise substantially from fy-2015.
"The private sector demand for bank credit has already started to rise, and it will go up significantly as the GDP growth is rising. The outlook for of the demand for bank credit in 2015 will hopefully rise both for new projects and for working capital of the operating industrial units and businesses," the Ministry of Finance said.
But what is the ground reality? The net lending to the private sector from July 1 to November 7 in 2014 was down to Rs8 billion compared to Rs86 billion in the same period last year. However, Zafar Moti, an analyst and senior member of the KSE, said: "2015 will be positive and can lead the stock market to 35,000 points from the current 32,000 by the end of June 2015."
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