As govt debt grows: Banks exploit private sector borrowers.

Byline: Shahbaz Rana

ISLAMABAD -- The government's increasing reliance on borrowing to remain afloat has allowed commercial banks to exploit private-sector borrowers as the banks have started charging a premium on lending to the private sector despite an overall low demand for credit, reveal minutes of the last Monetary Policy Committee (MPC) meeting.

The minutes showed that economic growth would remain low this year due to the agriculture-sector supply shocks and the Federal Board of Revenue (FBR) would not be able to achieve even the downward-revised tax target of Rs5.238 trillion. The federal cabinet has not yet endorsed the revision in the FBR's target from Rs5.5 trillion.

The MPC had met on January 28 and decided to keep the policy rate unchanged at 13.25% with a majority decision of 7-2. The central bank released the minutes of the meeting days before the next MPC meeting on Tuesday to review the monetary policy.

This week, Prime Minister Imran Khan has twice said that the central bank is going to cut the interest rate.

Foreign exchange: SBP reserves jump $32m to $12.8b

'Banks demand an added premium while lending to the private sector, particularly at a time when the repayment risk is high,' according to the minutes of the MPC meeting.

The situation warrants action on part of the central bank, which is not playing its role effectively and has long been accused of protecting the interests of banks as compared to consumers.

The minutes showed that as the government increased its borrowing from scheduled banks, the spread between risk-free investments and risky lending normalised. This was otherwise declining when the government was retiring the debt taken from scheduled banks. With the shift in the pattern of government borrowing from SBP to scheduled banks, the inter-bank market currently operates in deficit mode.

The State Bank of Pakistan (SBP) noted that the demand was not growing significantly and the reasons for weak private sector credit demand included higher cost of borrowing, persistent slowdown in economic activities and high government borrowing, which likely altered the credit risk premium.

The minutes showed that the central bank would cut the growth projection for the private sector credit for this fiscal year.

The overall private sector credit witnessed an increase of Rs146 billion during July 1, 2019 to January 17, 2020, which was lower than the expansion of Rs507 billion in the corresponding period of last fiscal...