KARACHI – Bad debts of the country’s banks and development financial institutions (DFIs) have increased by Rs 54 billion to Rs 562.404 billion in second quarter of the current fiscal year, ranging from October 1 to December 31, 2010-11. Bankers and analysts believe that such an exorbitant growth in NPLs is likely to hurt the country’s businesses. “This is not good. They should keep it (NPLs) below five percent – between three to four percent of their net loans,” viewed former State Bank of Pakistan (SBP) Governor Dr Ishrat Hussain.
According to data released by the State Bank, non-performing loans (NPLs) of all banks and DFIs ballooned to Rs 562.404 billion in the second quarter of FY11 compared to Rs 508.832 billion in the first quarter of FY11. Figures from the State Bank reveal that, during the said quarter, banks’ net NPLs to their net credits increased to 5.51 percent against 4.65 percent in the previous quarter.
Whereas, NPLs of DFIs stood at Rs 14.634 billion, marking a Rs 186 million or 1.2 percent reduction in the said quarter against Rs 14.82 billion in the last quarter, while bad debts of banks rose by Rs 53.75 billion. The banks’ NPLs, exhibiting an upsurge of nine percent, climbed to Rs 547.770 billion against Rs 494.012 billion in the previous quarter.
This bleak situation exists despite an increase of 48 percent or Rs 4.93 billion in the size of the banks’ cash recovery against their bad debts that, the SBP data shows, amounted to Rs 15.226 billion during the period under review. During the first quarter (July-Sep FY11), banks were able to recover Rs 10.287 billion. The specialised, private (local) and foreign banks, respectively, recovered Rs 2.56 billion against Rs 565 million, Rs 11.421 billion against Rs 8.343 billion and Rs 689 million against Rs 455 million during Oct-Dec 2010.
Whereas, cash recovery of public sector banks and DFIs remained sluggish and stood, respectively, at Rs 546 million and Rs 306 million. Recovery of the two sectors stood at Rs 924 million and Rs 351 million during the first quarter. Analysts like Asfar Bin Shahid cited a higher cost of interest and principle amount as factors triggering an increase in NPLs.
“The ever-increasing interest rates have eroded the borrowers’ capacity to repay” bank loans, the analyst opined, adding that most of the businessmen were asking the State Bank to arrange for a reschedule of their loans. “They want an extension of one to five years, with the SBP granting only two years,” he said.
According to AB Shahid, all businesses were “highly leveraged”, requiring greater liquidity to clear previous business loans by selling the bought goods. “This was building up over time. The first indication, towards this collapse, had come in April 2005, but no one heeded to that,” he lamented.
The analyst said that an “effective” legal system, providing for extension of fresh liquidity to businesses, would help the country get rid of growing bad debts. The banks had, reportedly, increased their provisions for NPLs in the same quarter of the last fiscal year, keeping in mind that borrowers might not be able to clear their loans.
