KARACHI: The State Bank of Pakistan (SBP) has warned that commercial banks are restricting loan provision to only strong performing sectors to the detriment of other sectors. It has also observed that such concentration carries the inherent threat of systemic risk.
The central bank, assessing financial stability in the last calendar year 2009-10, viewed that commercial banks appear to be willing to lend solely to strong corporate clients in certain economic sectors such as textile and power.
The regulator observed that loans to textile and power sectors have outstripped those provided to small and large-sized borrowers. During 2009 and the first half of 2010, credit to the two sectors stood at 20 and 9.5 percent of total bank credit to the private sector, respectively.
Such restrictive lending practices, the state bank noted, was not only causing increased concentration of exposure but also held potential for systemic risk.
“The concentration of credit to a small number of large-sized borrowers needs to be monitored closely as a potential source of systemic risk,” the State Bank cautioned, adding that it had highlighted this risk in the previous financial stability report for 2008-2009 also.
The central bank also expressed its concern over a relatively higher infection ratio in the textile sector when compared to other sectors.
The SBP was, however, satisfied with the fact that the heavily indebted textile sector had started showing substantial signs of improvement on the back of the current rising trend in the domestic and international prices of their products.
“It is expected to reassert its dominance as a strong performer in fiscal year 2011 with a corresponding improvement in its loan servicing capacity,” the bank said.
Additionally, the State Bank also warned banks against targeting the power sector which had borrowed 9.5 percent of the total bank credit portfolio by June 2010. The SBP said such a high rate of lending to a single sector was another indicator of sectoral concentration.
“Notably, in periods of slow economic growth, banks prefer to lend to performing economic sectors, and within these sectors, to strong corporate clients,” it said warning that “This behavior causes a rise in the concentration of exposure.”
According to SBP figures, by December 2009 the banks’ non-performing loans (NPLs) to the textile sector stood at Rs 99.561 billion.
While the size of rescheduled bank loans to the sector had risen to Rs 7.72 billion during the period; the textile sector had cost the banking sector over Rs 4.893 billion on account of loans written off last year, revealed the SBP’s report on loans to the textile sector.
SBP rings alarm bell over loan concentration
