The number of small loans as well as the aggregate volume of these loans increased significantly in FY04. "This is a heartening development," says the SBP annual report 2003-04.
In FY04, loans ranging between Rs 30,000 and Rs 40,000 were availed by 502,873 clients amounting to Rs 17.44 billion, as against 282,581 account holders obtaining loans amounting to Rs 9.97 billion in FY03.
This was made possible because of persistent, low interest rate during the last two years (and negative real rates on small deposits), which diverted the individuals towards banking sector credit utilisation instead of saving in terms of deposits.
The report says that many of the financial products were especially designed under consumer financing for small borrowers. As a result, net consumer credit grew strongly in FY04, rising by Rs 75.6 billion, compared to Rs 48.6 billion in the preceding year.
"Among the consumer sector, although automobiles and personal loans registered major increase in absolute terms, highest growth was observed in financing for consumer durables," says the SBP.
Another less visible but arguably important development in FY04, according to the central bank, had been the increased competition in banking to agriculture sector. As a result, not only had the volume of credit to the farm sector increased significantly, but also the cost of funds had declined.
"The lending rate was brought down further from 7.58 percent in June 2003 to 5.05 percent by June 2004, a drop of more than 250 basis points over and above 500 basis points drop in FY03, said the SBP.
The spread between deposit and lending rate also narrowed from 568 basis points to 384 basis points this year, showing a marked improvement in the intermediation efficiency of the banks.
Although deposit rates declined from 1.90 percent to 1.21 percent, the proportionate change was much lower than expected. Rates in savings and fixed term deposits were relatively higher than this average rate.
"Continued drop in lending rates caused by easy monetary policy and improvements in macroeconomic fundamentals accelerated capacity utilisation in manufacturing sector and thus led to higher growth rate in the FY04. In this process, though, the depositors failed to receive positive real rates of return on their savings and suffered as a result," the SBP added.
There has also been a structural shift in the credit cycle, observes the SBP. "Traditionally, the bulk of the net credit growth during the year was concentrated in September-December period.
These loans were typically short-term (3-6 months) working capital loans, and therefore net credit growth during the second half of a fiscal year often saw flattening of the net credit growth as loan retirements partially offset fresh disbursements, culminating in net retirement of credit during the initial months of the succeeding year."
According to the SBP, this pattern, which is clearly evident in the preceding years, changed substantially towards the end of FY03 and particularly in FY04. Specially, the growing volume of consumer finance, increasing agri-credit, and the rising private sector participation in commodity procurement meant that much of the lending was no longer concentrated in the second quarter of the fiscal year.
In fact, the credit extended through credit cards has a sustainable outstanding credit level on rollover basis, not necessarily showing a visible cyclical pattern in monthly data.
Moreover, the loans for durables, and auto and housing as well as personal loans, were of longer maturity in general, the report concludes.