Karachi, May 31, 2023 (PPI-OT): Private sector credit growth trend alters

As Pakistan's economy operated in a record-high interest rate environment, private sector credit growth witnessed a drastic decline to almost a 2.5-year low pace at 5% YoY in Apr-2023, which was 20%+ YoY just a year ago.

Increasing macro challenges, tighter import conditions and phasing out of lower-rated SBP facilities have led to the ongoing slump in private sector credit growth.

We expect the ongoing trend to further deteriorate where lenders prefer other asset classes in the ongoing macro landscape.

Private sector credit growth declines to 2.5-year low

As Pakistan’s economy operated in a record-high interest rate environment, private sector credit growth witnessed a drastic decline to almost a 2.5-year low pace at 5% YoY in Apr-2023.

To recall, just a year ago, Private sector credit growth was reported at 20%+ YoY pace. Since then, Policy Rate has moved up from 13.75% to now 21%. The key contributors to higher loan growth were segments across the board, led by tail-end of Temporary Economic Refinance Facility (TERF) loans, broadly reflected in the Textiles segment (18% of Private sector credit), which maintained loan growth of 30%+ YoY. Moreover, consumer loans, which were 10% of Private sector credit, also reported growth pace of 25%+ YoY, led by auto loans (+20% YoY) and home loans (+80% YoY).

Declining pace witnessed across the board

Increasing macro challenges, tighter import conditions and phasing out of lower-rated SBP facilities have led to the ongoing slump in private sector credit growth. Moreover, alternate avenues for the banking sector, providing higher risk-free yields, has also compounded to the lower loan growth impact. Loans growth to textile segment have dropped to 10% YoY, while growth in loans to wholesale and retail (6% of Private sector credit) clocked in at -4% YoY.

Consumer loan growth has declined to almost flat growth, where within the consumer loan segment, auto loan growth has been in the negative trajectory since the past six months, reaching to -16% YoY in Apr-2023. This low pace was last witnessed 11 years ago.

We expect the ongoing trend to further deteriorate where lenders prefer other asset classes in the ongoing macro landscape that offer relatively lower risks with similar yields. Our view is further strengthened with no ADR-level linked taxes in the ongoing year. We expect loan growth to limit to single-digit.