The banks are bracing for the most acute two-year spell, which will test their resilience to a bevy of adversities coming from the rising non-performing loans, squeeze on capital and liquidity and worst, even some sizeable contractions in their balance sheets amid a nosediving economy, which is set to lose 20 percent of its size from the 2018 peak, while credit conditions are being pushed further into the restrictive territory.  

According to data, the licensed commercial banks have seen a sharp contraction in their loans to the private sector in May, after stripping out the foreign currency depreciation impact on their foreign currency-denominated loans and advances portfolio, even before the rise in yields and interest rates in June. The Central Bank last week further hiked its key policy rates by 100 basis points, citing hyperinflation, bringing the total increase since August last year to 1,000 basis points or 10 percent, the most by any central bank in recent times.  

This pushed the lending rates further into restrictive territory, where the banks can no longer engage in lending activities, except with their clients with who they have deep-rooted relationships, provided they are also on a sound financial footing.  Most of the MSMEs have already been wiped out and others are on their way out of business, leaving hundreds of thousands of workers jobless and others without a livelihood, due to the hyperinflation, commodities shortages, crippling fuel shortage and demand destruction policies.

The banks are already exercising extreme caution on new lending and have virtually closed their lending spigots to safeguard themselves from the massive toll that is expected on their asset quality from the potential defaults.  

For instance, the commercial banks saw their cumulative outstanding private sector credit suffering a rather deep contraction of Rs.47.3 billion, when the numbers were stripped off of the foreign currency impact, in a sign of what could be expected in the months to come. Going by the headline credit growth numbers, which showed a paltry Rs.2.0 billion growth for May, it is expected that the contraction in private credit would persist at least in the next 18 months before seeing any tangible growth, as the monetary policy would stay tighter at least in the next nine to 12 months. 

“The expansion of credit to the private sector is expected to slow down during the remainder of the year,” the Central Bank said. During this period, the private credit markets are unlikely to return to any semblance of normalcy, given the acute economic pain inflicted on corporate and household balance sheets, which has hampered their credit worthiness.  As a result, economic analysts opine that the banks will have to make up their minds to brace to unwind the sugar-high growth, which they underwent in the recent past and thereby be willing to budget for shrunk balance sheets in the next two years.