The bad debts of banks and development financial institutions (DFIs) have increased to an alarming level of 6.53 per cent of their total
advances.
Exorbitant increase
According to data released by the State Bank, during first quarter of the current fiscal year, July-September FY12, the Non-Performing Loans (NPLs) of banks and DFIs skyrocketed to Rs629.555 billion. The central bank had calculated these bad debts at Rs591.226 billion during the last quarter ending on June 30, 2011. The economists believe that such an exorbitant growth in the banks’ NPLs might not be a good omen for the country’s businesses.
Alarm bells
Dr Ishrat Hussain, former Governor State Bank of Pakistan (SBP), says the net NPLs to the banks’ total liabilities should not swell beyond 5 percent. “This is not good. They (banks) should keep it (NPLs) below five percent preferably between three to four per cent of their net loans,” the economist told Profit. The State Bank figures reveal that during the said quarter the banks’ net NPLs to their net credits swelled to 6.53 per cent against 5.48 per cent of the last quarter.
Cash recovery on decline
During the review period, the DFIs saw their NPLs increasing to Rs16.336 billion against Rs15.378 billion of last quarter, the bad debts of banks surged by Rs37.37 billion. The banks’ NPLs, exhibiting an upsurge of 6.4 per cent, climbed to Rs613.219 billion compared to last quarter’s Rs575.848 billion. The cash recovery against the NPLs also shows a negative trend and dipped by 20 per cent or Rs3.458 billion as the banks and DFIs’ could recover only Rs13.779 billion against Rs17.237 billion of the previous quarter.
‘Not good’The banks recovered Rs13.657 billion against Rs17.007 billion, the commercial banks Rs12.736 billion against Rs14.471 billion, the public sector banks Rs2.134 billion against Rs2.463 billion, the local private banks Rs10.476 billion against Rs11.841 billion, the foreign banks Rs126 million against Rs167 million and the specialised banks could recover only Rs921 million against Rs2.536 billion during the quarter in review. Former SBP Governor Dr Ishrat Hussain views that the five plus per cent growth in the bad debts was “not good”. The ex-central banker said the banks should maintain the ratio of their bad debts between three to four per cent of their net lending.
Rescheduling loans
“The banks should do more provisioning,” said Dr Ishrat, who is currently the dean and director of the Institute of Business Administration. The analysts also cite a higher cost of interest rate and double-digit inflation that, they opine, have taken a toll on the borrowers’ ability to pay. The analysts said owing to their inability to repay many of the businessmen were asking the central bank to reschedule their loans for at least one to five years against the regulator’s two-year extension.
Breather in terms of liquidity
Analysts said in a country like Pakistan all businesses are “highly leveraged” requiring more liquidity to clear the previous business loans through selling the bought goods. “This phenomenon was building up over the time. The first indication towards this collapse had come in April 2005, but no one heeded that,” said an analyst. He said an “effective” legal system, providing for the extension of fresh liquidity to the businesses to provide it with a commercial breather, would help the country rid the ever-increasing NPLs.