What I find astonishing is the surprise itself caused by news flows regarding the ‘alarming’ rise in NPLs. People seemed astounded by the fact that defaults continue to rise given credit being extended to the private sector has virtually come to a standstill. Still, this should not come as a surprise at all; defaults are emanating from already extended credit. This is because core issues of the economy are still intact resulting in a poor business environment, where the scarcity of opportunities impedes debt repayment capacity. It should be common sense to see that problems are eventually going to be reflected in numbers as they have done so now.
According to recent data released by the SBP, with an increase of six per cent, non-performing loans of banks and DFIs rose to a new high level of Rs629 billion at the end of September 2011. The increase was much higher than second quarter of CY11, as an increment of Rs5.54 billion was registered in NPLs in the second quarter of CY11. This translates to a net NPL to Advances ratio of 6.53 per cent as compared to 5.48 per cent for the previous quarter. The increase in bad loans has been seen across the board – albeit not proportionately – as public sector banks have been hit by defaults the most. Not to say much about the already known poor asset quality of public banks, it is still depositor money in these banks which is being impacted. But despite much hue and cry these vehicles still have leaks in terms of risk management systems which have existed for long and very little willingness to plug them up. Keep in mind this is excluding the situation of the Bank of Punjab as it has not released its accounts for about two years now. Add this to the mix, the figures would most probably be thrown back a bit more.
The reasons cited are nothing new; slow economic activity and high interest rates. When these two things are put together, it usually spells squeezing of debt repayment capacity. Borrowers are finding it difficult to execute the business activity they had acquired these loans for, engaging in a fight for survival and so not being able to afford financial costs. The key word here is affordability as interest rates where they are now are definitely not affordable. Not to say that effort has not been made to resolve this, reflected by SBPs slashing of the policy rate by a big 150bps which has definitely provided some comfort to entities. Notwithstanding, more needs to be done and further drops need to be seen both in the interest of the corporate borrower and bank alike. However, this is only one aspect. The structural problems of the economy still exist in the form of power outages, namesake law and order, and tax policy issues. They need to be sorted if the ‘environment’ is to be improved.
A hint of the problems faced by the banks have also been self orchestrated. Stringent contingencies and tough conditions have proved to be restrictive in nature more than protective. Given the requirements banks put on borrowing, it is easy to see why companies feel stifled when paying up. On the other hand some blame should also be thrown at those ‘willful defaulters’ who carry an element of sinister intent at the time of repayment. Key here is that both the borrower and lender need to work together in a tit-for-tat arrangement which is the original essence of a borrowing arrangement.
This is exactly where the solution to arresting rising NPLs lies. Where corporate entities should not be disdainful towards public funds, banks should be more accommodating in nature as well. Where genuine problems exist, these financial institutions should not turn a blind eye towards them but actually make an effort to sort problems out. A real-life example comes to mind where an entity, struggling for business opportunities, was pushed to close its operations. In line with the spirit of corporate behaviour, the entity repeatedly requested the bank for renegotiation of its lines – a plea which the bank took to ignore. The funds are stuck and the pains of legal suits are being borne now. Both ended the loser which would not have been the case if proactive action was displayed in a timely manner. Similar examples are not uncommon and if taken care of would probably shave 100bps off overall toxic ratios. This is while other issues are slowly resolved. Unless this attitude is adopted, little can be expected other than the disappointment of another data supplement showing a further increase in NPLs.
The writer is a financial analyst with Pakistan Credit Rating Agency (PACRA)
