Bank credit to the private sector drops to its lowest: SBP – Journal

KARACHI: Formal credit to the private sector in Pakistan has fallen to one of the lowest among emerging markets and developing economies (EMDEs), according to a special report by the State Bank of Pakistan (SBP) released on Friday.

“Formal credit to the private sector in Pakistan has declined in both absolute and relative terms over the past decades, and is currently one of the lowest among emerging markets and developing economies (EMDE),” the report.

In FY21, credit to the private sector almost doubled from the previous year, but credit penetration is at its lowest. The country’s banks easily reap the benefits of huge investments in government papers, ignoring the needs of low-income segments of the economy.

“This (weak credit to the private sector) despite multiple reforms aimed at deregulating and liberalizing the financial sector since the 1990s, with the aim of reversing the impact of the nationalization of banks in the 1970s,” said the SBP report.

The special report indicates that various factors have contributed to the low level of formal credit in Pakistan. The reforms aimed to increase access to finance by implementing measures to improve governance, supervision and risk management of financial institutions.

“However, while bank profitability has improved as a result of these reforms, the presence of market failures in the form of information asymmetries has made commercial banks generally reluctant to lend to underserved segments such as housing, agriculture and small and medium enterprises (SMEs), ”the report said.

“This behavior was further fueled by the presence of a dominant borrower in the form of the public sector, whose need for debt has increased dramatically,” the report said.

Meanwhile, challenges such as a high rate of informality in the economy, faith-based considerations, and low financial and digital literacy continued to keep the demand for formal credit low in the country.

“Financial institutions are placing more emphasis on serving affluent and already well-served segments of society and avoiding lending to low-income people and SMEs,” the report says. Both the government and the SBP have focused on higher lending for SMEs, but banks prefer to extend loans to well-served, low-risk borrowers.

“Even when these segments are extended loans, financial institutions charge higher rates to assess their risk, which has a negative impact on the demand for formal loans,” the report said, adding that this in turn hinders credit underwriting and ultimately is detrimental to economic growth. and development.

In the agricultural sector, banks have limited incentives to increase their loan portfolios, according to the report. Recently, the SBP conducted a finance project that revealed the potential benefits of value chain finance in overcoming adverse selection and moral hazard issues.

Credit to GDP ratio is 19 percentage points higher in EMDEs where credit bureaus keep information on loans less than 1 pc of income per capital compared to EMDEs where this data is not kept and used for various purposes information, according to the report.

“Credit bureaus coverage in Pakistan is slightly better than the minimum threshold of 5% as set by the World Bank,” the report said, adding that in Pakistan alternative data coverage is currently non-existent as the data does not exist. are not available.

In April 2020, the government ordered all electricity and gas distribution or transmission companies to be members of the credit bureau and advised to provide information.

“With the exception of K-Electric, to date no other electricity and gas utility provides the data to the credit bureau. Even if reported, the utility data set is subject to factual inaccuracies and therefore unreliable, ”the report said.

Meanwhile, telecommunications data, which can be a boon to nano-loans and microfinance lending, is not yet available, despite the 2019 government notification that asked mobile operators nationwide to become members of the. credit bureaus and provide billing information for telecommunications users.

Posted in Dawn, July 18, 2021