Commercial banks’ lending to the energy sector, including power producing companies and gas distributors, continued to surge in 2018 to Rs 1.4 trillion due to multiple expansion plans and financial constraints.
According to the State Bank of Pakistan, the energy sector owed around Rs 1.4 trillion at the end of December 2018, up from just Rs 129.6 billion by December 2007.
Advances to the energy sector, which accounted for only 4.8 percent of total advances of the banking system at the end of December 2007, jumped to around 17 percent at the end of December 2018.
More than half of this amount is owed by public sector entities like PHPL, Water and Power Development Authority (WAPDA), Sui Gas Company Limited, Sui North Gas Pipeline Limited, Pakistan State Oil, etc.
The appetite of loans, particularly in the power sector, was experienced due to a noticeable increase in generation, distribution and transmission capacities in both power and gas sectors, hence the hike in energy loans is understandable.
Moreover, the government has been encouraging PSEs to generate their own funds to finance their capital expenditures, instead of relying on PSDP allocations. But since these energy-related PSEs have remained cash strapped due to recurring cash flow problems, most of them had been tapping bank funding to meet their expansion outlays. Not just that, even for working capital requirements, energy-related PSEs have been borrowing from banks.
These outstanding loans of the energy sector have surpassed banks’ combined exposure to major manufacturing concerns, such as textile, chemical, automobile and cement.
Bank-wise analysis suggests that almost all the scheduled banks are involved in lending to the energy sector, irrespective of their size and ownership. However, the level of exposure varies; for instance, in case of four of teh largest banks, the share of total advances ranged between 23 percent and 32 percent by the end of December 2018. But in case of other medium-size banks, the exposure varies.
Energy Sector Is Lucrative for Banks
In terms of earnings, banks are in an advantageous position while lending to the energy sector. This is because despite the guarantee cover, the majority of the energy sector loans entail market rate of return.
For instance, all the lending facilities availed by Power Holding Private Limited (PHPL) during FY18 were contracted at 6m Kibor plus 200 bps, whereas those in FY19, were contracted at 3m Kibor plus 200 bps. Similarly, the financing of Wapda’s Neelum Jhelum hydro project was settled at 6m kibor plus 113 bps. These rates are actually higher than the mark-up that banks are collecting from their prime customers in the private sector.
Though banks are complying with required liquidity ratios, the persistent increase in their exposure to the energy sector may trigger supply-side pressures in the credit market. In this context, it is important to note that the government has recently issued Sukuks worth Rs 200 billion to ease liquidity pressures in the energy sector.