Lending from Privatized Banks: More for government, less for private sector

A new report released by PRIME finds that the commercial lending to the private sector has declined from 24.1 percent of GDP in 1995 to 17.9 percent in 2019 undermining private sector economic growth, while increasing bank’s profitability manifolds.
The report finds dramatic increase of share of government securities in banks’ investment portfolio from 10 percent in 2010 to 46.4 percent in 2020, which indicates that banks have turned to risk-free lending to the government rather than playing a role in allocation of capital to the private sector. On the other hand, the profitability of banking sector increased from Rs 7 billion in 2000 to Rs 244 billion in 2020. These are the main messages from a recently released report by PRIME, an independent think tank, authored by economist Beenish Javed.
The report finds that the private sector lending stands at 17.9 percent of GDP in Pakistan, while regional economies like Bangladesh stood at 45 percent and India at 50 percent.
The report mentions gradual extinction of Development Finance Institutions as a factor, which were used to complement the banking sector by bridging the gaps in the supply and demand of financial services.
The report notes that after privatization, the infection ratio that stood at 25 percent in December 2000 fell to 8 percent in 2017and then increased to 9.2 percent as of December 2020.
The report also finds that in Pakistan, the banks’ credit disbursements to private sector are heavily skewed towards large enterprises. The share of large sized borrowers in total loans of the banking sector stands at 87 percent in Pakistan, such borrowers account for only 1.6 percent of the total borrowers, in contrast to 72.5 percent in Bangladesh.
PRIME Executive Director Ali Salman, commenting on the report, said that “the government needs to minimize its reliance on commercial borrowing as it not only displaces the private sector firms but also reduces risk appetite in banks”. Ali also urged that the commercial banks should streamline their financial procedures to reach out traditionally unbankable but profitable enterprises thus helping the policy goal of financial inclusion.

Please click on the pdf below to read the full report.