The Non Performing Loans (NPLs) of banking system rose to historic level of Rs 473 billion by June-end because of higher interest rate, economic slowdown, high cost of production and brownouts. The State Bank of Pakistan on Thursday revealed that an increase of some Rs 1.907 billion was witnessed in NPLs of banks and DFIs during the second quarter of current calendar year (April-June).
With current surge, overall NPLs of banks and DFIs mounted to a historic level of Rs 473.891 billion as on June 30, 2010 from Rs 471.984 billion on March 31, 2010. Sources in banking sector said although some increase was witnessed in NPLs, however, the current increase was less than previous quarters.
They said during last two years global economic recession was the chief factor for rising NPLs, but now slow economic activity and high interest rate are the major contributors to high NPLs. "Presently the key policy rate in the country stands at 13 percent and this high interest rate has directly raised the lending cost for the industrial loans, resulting in the slow recoveries and increase in NPLs," they added.
"Economic slowdown, rupee depreciation, higher inflation and political uncertainty have also contributed to the high increase in the NPLs." They said brownouts and high inflation have also raised industrial cost of production, as a result the industries are facing huge losses and forced to use alternative power.
"Rising trend in the NPLs is a big threat for the banking system, therefore banks as well as central bank should also develop a compact policy to cap the increase in NPLs," they added. Out of total NPLs, the banks' NPLs posted an increase of Rs 2.596 billion to Rs 459.840 billion by end of last quarter from Rs 457.244 billion in March. However, during the period NPLs of DFIs registered a decline of Rs 689 million to Rs 14.051 billion from Rs 14.74 billion. The NPLs for all banks rose by Rs 2.6 billion in second quarter of CY 2010 to reach Rs 460 billion, however increase during the second quarter is significantly lower than last two quarters. The NPLs of all banks had risen by Rs 19.6 billion in first quarter of 2010 and Rs 16 billion in fourth quarter of 2009.
With a notable increase of Rs 1.487 billion during quarter ended on June 30, Commercial Banks' (CBs) NPLs reached Rs 431.352 billion from Rs 429.865 billion. Interestingly, NPLs for the public sector banks (NBP, BoP, BoK & First Woman Bank Ltd) reflected reversals of Rs 4.3 billion in second quarter of current calendar year, as against accretions of Rs 4.8 billion in first quarter of CY 2010.
The NPLs under this segment fell to Rs 115.996 billion from Rs 120.286 billion, depicting a decline of Rs 4.29 billion in last quarter. However, the specialised banks' NPLs, which earlier posted decline, are once again rising and with an increase of Rs 1.109 billion reached Rs 28.488 billion in June this year.
In addition, increase in NPLs was noted mainly in the initial categories, which require lesser specific provisioning, therefore, the net NPLs (non-performing loans minus provision for loan losses) of the banking system have decreased to Rs 128.369 billion from Rs 138.339 billion, depicting a decline of Rs 9.97 billion during the last quarter.
Similarly, net NPLs to net loan ratio (as a percent of net loans) also declined to 3.92 percent in June 2010 from 4.31 percent in March 2010. Bankers said slow recoveries of consumer and industrial portfolios have played primary role in the NPLs surge. "High spread and stock business had raised the banks' profits during previous years. Therefore, banks' monitoring system of advances and internal control got weaken, which raised the NPLs," they added.
In addition, banks are also facing recovery problems in the advances against the shares due to the declining trend in the stocks, they added. They said at this point in time, banks are required to further tighten credit appraisal and monitoring standards to increase their NPLs portfolio and reassess exposures in relatively high-risk areas.
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