Ballooning NPLs, MCR pushing some banks towards insolvency: SBP

KARACHI: With the government seeming to have resolved to destabilise the country’s socio-economic structure through rampant inflationary bank borrowings, the State Bank of Pakistan (SBP) sees the risk of insolvency for some small banks increasing fast.
“Bank-wise information shows that some small banks were not able to withstand various negative developments in their operating environment and are now in an increasingly vulnerable position,” viewed the central bank in its Financial Stability Review 2009-10 issued on Wednesday.
Elaborating on the ‘negative developments’, the State Bank underlined the biggest ever increase in the stock of non-performing loans (NPLs) since 1997 along with current minimum capital requirements as the major contributing factor.
According to SBP, the banks’ bed debts had hit the historical high of 24.2 percent in 2009 and 6.4 percent in the first six months of 2010 to stand at Rs 432 billion and Rs 460 billion, respectively.
“The increased risk to the solvency position is visible from the surge in the net NPLs to capital ratio of the banking system to 20.4 percent, compared with only 5.6 percent for Calander Year 2007 (CY07),” it cautiously observed.
The regulator, however, feels some comfort drawn from a decrease to 17.2 percent in the capital ratio by end-June CY09. The State Bank said that after the biggest ever increase in NPLs, the pace of deterioration in the quality of advances had slowed down considerably during last calendar year. The bank said that the NPLs booked in partially provided initial categories during CY08 had matured into losses during CY09, resulting into an increase in the share of the loss category in the total bad debts.
“Irrespective of the factors responsible for the rising volume of NPLs, the high infection ratio has implications for the overall financial performance of banks,” it noted adding during CY09 the banks had booked a loan loss of Rs 97 billion, slightly lower than the amount of Rs 106.1 billion booked in CY08.
“These expenses carry implications for banks’ profitability, especially, when majority of the outstanding NPLs (65.5 percent) are categorized in the fully provided loss category,” said the State Bank.
Though the SBP views the banks as having a strong footing to absorb unexpected losses, the central bank is concerned over their risk-averse behavior of investing more in government securities as compared to the recession-hit private sector.
“It is exactly this shift and the reallocation of banks’ loanable pool of funds, which is the underlying potential source of financial instability,” the SBP warned suggesting that “(The) banks need to step up their efforts to improve the quality of the loan portfolio by closely monitoring loan recovery prospects and restructuring of existing classified loans.” The central bank said although the banks had shown a strong aggregate resilience to the headwinds of instability, bank-wise information showed that some small banks were not able to withstand the various negative developments in their operating environment, and were now in an increasingly vulnerable position.
“Given the current MCR requirements, it is expected that these banks will either have to merge in order to survive, or exit from the industry altogether,” the State Bank noted with concern.
When contacted, SBP Chief Spokesman Syed Wasimuddin declined outright to reveal the names of those banks which, as indicated by the central bank in its report, were on the verge of insolvency. This would adversely impact their (the banks’) businesses,” the soft-spoken Wasimuddin said.
However, a cursory glance at Daily Quotations of the banking sector placed at Karachi Stocks Exchange on October 11 would reveal that over a dozen commercial banks were lagging far behind SBP’s paid-up capital limits, which were once again revised recently.
Out of the total 29 commercial and investment banks, some 13 had shown their paid-up capital falling short of the State Bank’s MCR limit (then Rs 7 billion) set by the bank on April 15 last year.
The banks whose paid-up capital was less than the required limit till October 11, 2010 included Askari Bank, Atlas Bank, Bank Islami Pakistan, Bank of Khyber, Bank of Punjab, Faisal Bank, JS Bank, JS Bank (R), Meezan Bank, Mybank, Network Microfinance Bank, Summit Bank and Soneri Bank .