The non-performing loans (NPLs) of the country’s banks and development financial institutions (DFIs) continue to increase and have witnessed a growth of four percent during the third quarter of the current fiscal year, January-December FY2010-11. This increase is despite an upward trend in the banks’ and DFIs’ cash recoveries against NPLs that during the said quarter stood at Rs16.762 billion against Rs15.532 billion of last quarter.
Economics observations attribute this negative growth in bad debts to a constant decline in the debt repayment capacity of borrowers who are fighting for their survival in a “troubled economy”.
According to State Bank of Pakistan (SBP) data, during January-March FY11 the NPLs of all banks and DFIs aggregated to Rs588.933 billion, registering an increase of 3.9 percent or Rs22.288 billion when compared with bad debts of the same quarter in FY10.
The central bank, during the corresponding period last year, had calculated the NPL’s of banks and DFIs at Rs566.645 billion.
With this increase, the banks’ and DFIs’ net NPLs to their net credits also rose by 0.18 percent to 5.82 percent against 5.64 percent in the previous corresponding period. The analysts warned against such a higher, 5.82 percent, ratio of the banks’ net NPLs saying it must be curtailed and should be kept between 3 and 4 percent. “It should come down to 3 percent,” viewed an economic observer. Former Governor State Bank and senior economist Dr. Ishrat Hussain held the same opinion, terming the trend as “not good”. A breakup of SBP figures shows that during the said quarter NPLs of the banks and DFIs, respectively, rose to Rs573.524 billion and Rs15.409 billion against Rs552.010 billion and Rs14.634 billion of the same quarter previous year. The banks and DFIs saw their NPLs increasing by 3.8 percent or Rs21.514 billion and 5.2 percent or Rs 775 million during the said period, respectively. Despite their “risk-averse” behavior, the commercial banks could not reduce their NPLs which ballooned to Rs542.160 billion during the said quarter against Rs519.614 billion in last the quarter.
The central bank recorded NPLs of the public sector banks, local private banks, foreign banks and specialized banks at Rs170.345 billion, Rs365.026 billion, Rs6.789 billion and Rs31.364 billion, respectively.
This is despite an increase of 7.9 percent or Rs1.23 billion in the volume of banks’ and DFIs’ cash recovery against their bad debts that, the SBP data show, accumulated at Rs 16.762 billion against Rs 15.532 billion. During the last quarter, October-December FY11, the two sectors were able to recover a cash of Rs15.532 billion.
The cash recovery drives of the foreign banks, specialized banks and DFIs, however, remained sluggish and stood, respectively, at Rs229 million, Rs1.41 billion and Rs172 million against Rs689 million, Rs2.56 billion and Rs306 million during the previous quarter.
Concerned about the rising NPLs and its troubling consequences for the country’s ailing economy, analysts suggest banks for more provisioning in their income statements.
Further, the analysts see “over leveraging”, energy crisis and a higher interest rate as the major attributive factors in the increasing number of defaults over bank loans by recession-hit businesses.
The analysts opine that a higher interest rate in current recessionary times was playing havoc with the country’s business and industry where managers had borrowed more than their needs from the banks. “Over leveraging is the biggest problem in Pakistan where the monetary system is poorly regulated,” said Asfar bin Shahid.
The analyst said that instead of maintaining a 40/60 percent balance between the size of their equity and borrowings the corporate sector was borrowing more than its needs. “On the contrary, their equity stands at 10 percent against 90 percent borrowings,” A.B Shahid said.
