Private sector borrowings top Rs. 500 b in 2011

• Low interest rate regime and improved business sentiment swell commercial bank credit to private sector by 34%; cumulative amount tops Rs. 2 trillion mark

• Two full years since end of war has seen lending to private sector balloon by over Rs. 800 b

Private sector borrowing last year had swelled by an unprecedented Rs. 511 billion or 34%, thereby seeing the cumulative amount top the Rs. 2 trillion mark, as per latest Central Bank data.

The half a trillion in borrowing last year was a record high and the 34.5% growth was on top of the 25% increase seen in 2010 over 2009. The combined value of credit of the private sector in the full two years since the end of the war amounts to a staggering Rs. 811 billion.

Credit to private sector via commercial banks’ Domestic Banking Units had grown by 36.6% to Rs. 1.82 trillion in 2011, and from Foreign Currency Banking Units (FCBUs) grew by 17% to Rs. 184 billion. In 2010 the respective growths were 28% to Rs. 1.33 trillion and 4.6% to Rs. 157 billion.

Analysts said credit growth was due to the post-war rebound in the economy and business sentiments fuelled by the low interest rate regime.

Whilst full year data is not available, in the first nine months of 2011, commercial bank loans to the construction sector accounted for 15% of the total, followed by agriculture and fishing (14%).

Credit via pawning had a share of about 13% and reflected the biggest increase as in the case of 2010. Credit to wholesale and retail trade emerged as the fourth largest with a share of about 8%, followed by financial and business, textiles and apparel and consumer durables.

Following its last monetary policy review, the Central Bank early this month admitted that 34.5% growth was “substantially exceeding projections”.

It said provisional estimates indicated that within the credit extended to the private sector by commercial banks, trade-related credit and credit driven by import-related items such as motor vehicles and consumer durables increased significantly.

Import-related credit increased by over 34 per cent during 2011, while the increase in credit for export activity was only around eight per cent during the year. Pawning also displayed a significant increase in 2011.

To check explosive credit growth and to achieve other macroeconomic goals, the Monetary Board decided to increase policy rates in February (first time since 2007) as well as request banks to cut down lending.

The repurchase rate and the reverse repurchase rate were increased by 50 basis points to 7.50% and 9% respectively. Furthermore, commercial banks were directed to moderate their credit disbursements so that overall credit growth in 2012 would not exceed 18% of their respective loan book outstanding at the end of 2011, while credit growth of up to 23% would be allowed for those banks which finance the excess up to 5% of the credit growth from funds mobilised from overseas.

Analysts said that 18% growth would still be high since it would be on a higher base. Based on provisional end 2011 credit to the private sector, the envisaged 18% amounts to Rs. 360 billion, which will be higher in comparison to what the private sector borrowed in 2010.

After dipping by near 6% in 2009, private sector credit in 2010 regained momentum growing by 25%. This too was on account of improved outlook for economic activity and the continued accommodative monetary policy stance of the Central Bank.

The expansion in credit flows was reflected in all sectors of the economy. In 2010, the Central Bank revised policy rates downwards twice, whilst it listed factors such as improved post-conflict economic conditions in the country, enhanced business confidence among entrepreneurs and the recovery in the global economy that helped spur credit flows to the private sector.

The 2010 performance also prompted the Central Bank to stress that these factors had helped ease the heightened risk averseness observed among commercial banks during the previous year, thus encouraging lending activities.