WEB DESK: The State Bank’s policy rate of 6.5 percent is the lowest in 42 years, yet credit to the private sector hasn’t gone up. Considering that eight months ago it was 9.5 percent, this momentous cut in the policy rate should have seen loans rise.
The most commonly accepted reason is the ‘lag,’ while the other is that the bulk of the borrowing is being done by the government. Both arguments are true, but there might be another facet to this; perhaps one needs to look at loans to the textile sector, which forms the largest component of private sector loans (around 21 percent).
The first thing that becomes obvious when looking at the textile sector credit is seasonality – loans peak in the winter months around December and March, followed by a decline in the summers and bottoming out around August and September. This is because cotton is harvested during the winter season. So, one reason we haven’t seen loans to the private sector skyrocket could be seasonality; it may well be the case that come winter, borrowing shoots up via the textile industry.
Another reason could be softer commodity prices; cotton has seen multi-year lows in FY15, as has oil. As such, perhaps the borrowing was not as high as one would expect because working capital requirements were lower. The SBP’s quarterly report on the State of the Economy mentioned that the fall in cotton prices and weak external demand were the main factors behind lower credit off take by the textile sector. In addition, most textile firms retired their fixed investment loans during the first half of FY15.
So, the jury still isn’t out. One can expect the numbers to show a significant increase when winter hits and the textile sector’s borrowing kicks into full gear. That is, assuming, the textile industry doesn’t collapse by then!
Source: BR research