Bank lending needs refocusing

Tuesday, 26 April 2011 11:14

Economic Updates - Exclusive Articles

ARTICLE : Banks form the backbone of any economy as long as they stay committed to channelling savings into sectors that offer the optimal combination of nominal and economic returns. That s why, beginning August 1947 under Governor (late) Zahid Hussain, the SBP focused on inculcating this consciousness in the banking sector. Reforms by the (now much-faulted) Ayub regime boosted economic activity to undo the damage done by political wrangling since 1950. The trend triggered the setting up of the United Bank, Commerce Bank, and Standard Bank in the private sector, but to channel savings into industry and infrastructure, purpose-oriented DFIs were set up. The newly set up commercial banks expanded their networks to mobilise savings for financing the rising needs of industry and agriculture but during the 5-year (post-1965 war) period - the "green revolution - bank credit exceeded deposits while GDP growth averaged 6. 5 percent a year - a record to-date. Commenting on this record, at a WB conference in 1964 on "Problems of Developing Countries Professor Richard Eckaus said "Pakistan is a puzzle, a miracle of levitation; with one of the lowest domestic saving rate in Asia, its economy has performed quite creditably", but wondered whether capital flows sustaining the growth would last. It was indeed a miracle; after Japan, Pakistan had become the second fastest-growing Asian economy. Starting with a non-existent industrial base, by the seventeenth year of its existence 15 percent of its GDP originated from the manufacturing sector, and well into the 1970s, South Korean engineers used to be trained in Pakistan. But this did not overshadow the fact that during the 1960s, per capita income and domestic savings weren t rising in line with GDP growth (a reality that continues to-date) and development was financed by huge chunks of foreign aid and loans - a scenario that worsened with the passage of time. In June 1958, public debt was Rs 5. 8bn with just 13 percent of it being external; by June 1968, it tripled to Rs 17. 6bn and external debt quadrupled becoming 49. 6 percent of it. While the bulk of the debt was spent on building infrastructure and on industrialisation, after the 1965 war, the process slowed significantly. This decade provided the banking sector the freedom it needed to hasten growth, but it posed another challenge; the SBP found it hard to align monetary expansion with economic growth. To maintain a realistic inflation-price level relationship, the SBP used all tools including selective credit controls, credit ceilings and quotas for banks, floors and ceilings on loan rates, statutory reserve requirements, and the bank rate. The fact that SBP did so much to regulate the system signalled a cavalier attitude developing among the bankers ie surrendering to market demands without caring about the consequences, which soon reflected its impact in aggravating the post-1965 war scenario - a tendency that worsened ever since. The economic imbalances it created impacted all aspects of life, the worst being wealth accumulation by the "20 families that Habib Jalib lamented in his poems. This logical reaction scared the capitalists. Consequently, from being 21 percent of GDP during 1959-65, in the next five years gross fixed capital formation fell to 14 percent.

Nationalisation of the economy boosted the rulers popularity at the cost of lasting damage to the incentive for investing, diluted the entrepreneurial talent that developed in the 1960s, and induced capital flight. The 1990s saw a reversal - businesses were privatised, but many new owners lacked the vision for building institutions. This lot had no idea of what banks are obliged to do - allocate credit to sectors with sustainable potential for building self-reliance (ie import substitution) and maximising the use of domestic human and material resources. Instead, they prioritised profit and goaded the bankers into achieving that objective to the exclusion of all others. Instead of making up for the earlier lapse in prudent lending, in the pursuit of profit, bankers again surrendered to market demands, without visualising its consequences. Besides under-lending for exploration, drilling and mining of Pakistan s huge fuel and metal reserves, banks under-supplied credit to agriculture and related sectors. This record manifests lack of vision - the key attribute of good banking - for which we will pay during the foreseeable future. Even in the industrial sector, banks did not finance technology replacement at the time when the Rupee/Dollar parity was under Rs 30. Now, of course, it isn t viable. By implication, in the foreseeable future, Pakistan can t acquire a competitive edge in high value-addition industries. The only choice is maximising the output of agriculture which, in spite of prolonged state and private sector neglect, holds out a promise for food sufficiency and for exports. In the agriculture sector, while natural calamities would be unavoidable, there is a lot that needs to be done. While building dams, bridges, canals and waterways with lined banks to prevent water-logging and salinity, and roads for market access is the responsibility of the state, banks can finance the rest that is as important. This includes investing in seed, fertiliser and pesticide research, fabrication of agricultural gadgetry, constructing modern silos for secure crop storage, improving grain polishing and packing capacities (especially for export), and organising the warehousing sector to allow trading in crop stocks as well as securely extending credit against them. Pakistan is a huge producer of fruits and the sixth largest producer of milk but 40 percent of the fruit crop rots as does the milk output because food processing and packing sectors are wholly inadequate. We urgently need cold chains to process and preserve these delicacies from the point of origin right up to domestic and foreign markets. The cold chain sector has huge potential for expanding the related industries to create jobs for thousands and, over time, indigenizing them to also become export-oriented. And, it would be expedient to increase power generation capacity (whatever the cost) to crystallise the widespread economic benefits this sector can offer. Modernisi0ng cattle farming and hatcheries too has potential for bringing down domestic food prices (the key component of inflation) and making these sectors export-oriented. But all this also calls for developing requisite human skills for which banks need to invest in vocational training centres that are spread out countrywide. Although food shortages will become ever-bigger global headaches, Pakistan could become self-sufficient as well as an exporter of food. The choice rests with us; the state is blind, but can banks also not see this as the option to capitalise on?
Courtesy: Business Recorder