Whereas the economic theory of price elasticity suggests that for goods and services that are price elastic, change in price affects the demand of the goods and services.
“Similar was the trend that we had been witnessing for credit to private sector, where an increase in discount rate led to a decline in demand for credit and vice versa,” said InvestCap analyst Muniba Saeed.
The same can be seen in the graph on the right, she said. The inverse relationship can be explained by the rationale that an increase in interest rate would augment the cost of borrowing therefore reducing the return on investment.
However, Muniba said, the recent trend had been quite divergent from the conventional one, where despite the decline in discount rate witnessed since Oct-11, benchmark rate slashed from 14% in Sept-11 to 9.50% at present, we saw the change in loan to private sector to be quite range bound, increasing by a meager Rs251bn (on closing basis).
“We attribute such behavior displayed by private sector borrowing, specifically since Jun-12, to three factors broadly diminished investment appetite amongst the private sector fuelled by an overall economic slowdown, banks shying away from lending to private sector as lack of clarity witnessed at both the political as well as security front, led to increased level of risk associated with such lending and increased budgetary deficit demanding an amplified need for borrowing by the government, thus providing a safe haven to banks in desperate need of safe avenues to park their assets,” said she.
Borrowing by the government from scheduled banks in the same period increased by Rs 1.345 trillion, more than five times than that to the private sector. Such risk free investments have thus translated into lower returns for banks.
Going forward, now having achieved clarity on the political front as well as improved law and order situation in the country, “we expect this to fuel economic growth”, the analyst said.
The analyst was positive on the oil exploration and production sector, better peace situation in Balochistan to encourage drilling activity, cement sector, increased demand due to construction of dams and highways, fertilizer sector, improved availability of gas, textiles, free trade agreement for exports to EU to start from FY14, power and OMC’s due to resolution of circular debt.
“We expect such revival to first and foremost shrink the current fiscal deficit”.
With increased spending by the private sector and newly found risk appetite within the segment this along with expectations of the upcoming budget to introduce measures to broaden the tax base.
“We see government revenues to step up. With such controlled need for borrowing from the government and decline in risk associated with lending to the private sector, we see commercial banks to diverge back to lending to the private sector,” said the analyst.
Also the security situation having improved in the country, the analyst sees risk associated with investment to decline thus increasing the actual return on investment.
“Though we expect discount rate to remain stable in CY13 whereas the same is expected to be raised CY14 onwards, we expect an increase in loan disbursement to private sector despite such a rise, however of course in the latter case the change is likely to be subtle. We expect the same to be positive for the banking sector where banks will be presented with an avenue for lending to private sector for higher return and comparatively low risk,” Muniba said.
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