KARACHI: Non-Performing Loans (NPLs) posted a phenomenal surge of over Rs 100 billion to hit an all-time high of Rs 548 billion by the end of last calendar year (CY10), posing new challenges and credit risks to the growing banking industry.
Sources in banking industry told Business Recorder on Thursday that after experiencing a slowdown in earlier quarters of last calendar year, NPLs moved up by 10.9 percent during last quarter (October-December) of CY10, the highest growth in a quarter since Q1 of CY09.
"The challenge of reversing the rising trend in NPLs is still not over and with Rs 53.7 billion of incremental NPLs in the last quarter of CY10, infection ratio (NPLs to loans) has further deteriorated to 14.7 percent in December 2010, as it stood at 14 percent in December 2009," they said.
According the SBP statistics, NPLs registered a massive increase of 23 percent or Rs 102 billion to Rs 548 billion as on December 31, 2010 compared with Rs 446 billion as on December 31, 2009. However, despite massive build-up of NPLs in the fourth quarter of CY10, year-on-year trend shows a marginal slowdown. Specifically, banks experienced a relatively slower growth in NPLs during CY10, compared with 24.2 percent in CY09 and 64.8 percent in CY08. On a positive note, 77.6 percent of incremental NPLs during Q4 were confined to a handful of banks, with some banks even enjoying a YoY decline.
"With continuous growth in NPLs since CY07, credit risk has been a major challenge for banks and they need to revise their credit policies," bankers said. Detailed analysis reveal that a substantial part of the additional NPLs was concentrated in a few banks and in case of local private banks, there has been a mixed trend as some banks were able to reduce NPLs while others observed expansion during the quarter.
With challenging economic conditions and growing NPLs, banks were shy of venturing into risky lending opportunities. In such testing times, relentless borrowings by the government have been a blessing for commercial banks, providing a convenient option to place bulk of their funds in risk-free securities, they added.
Accordingly, there has been noticeable flight to quality in banks' lending portfolios. For instance, investment in government papers has posted a strong growth of 18.3 percent, compared with 9.6 percent growth in lending to private sector. Accordingly, share of investments in total assets grew consistently since CY08 with concomitant fall in share of advances.
In terms of sector wise distribution of loans and NPLs, textile sector continued to remain the largest user of bank credit, on account of working capital requirements fuelled by soaring input prices. In line with its borrowing magnitude, banks' 31.3 percent of NPLs were also in the textile sector with Rs 705.2 billion lending to the textile sector.
Credit supply to energy sector also remained high during the quarter on account of rising fuel prices and its loans stood at Rs 350.4 billion. While NPLs of production and transmission of energy have 2.4 percent share or Rs 13.3 billion in total NPLs. Further, share of agribusiness loans improved from 4.7 percent to 5.9 percent (YoY), on the back of less than expected impact of floods and seasonal financing needs at times of high input prices. The agriculture business has Rs 14.5 billion worth NPLs and Rs 220 billion credit.
Cement sector NPLs stood at Rs 17.6 billion, chemical and pharmaceuticals Rs 11.4 billion, electronics Rs 23.7 billion, financial sector Rs 7.9 billion, shoes and leather Rs 2.9 billion and NPLs of individuals stood at Rs 71.8 billion end of last calendar year 2010.
The insurance sector is the lone sector, which doesn't have a penny on account of NPLs, while its credit stands at 1.5 billion. Likewise, consumer finance has also been on a consistent decline as NPLs have been on the rise. Infection ratio has deteriorated from 4.4 percent in December-07 to 16.9 percent by December-10, dampening banks' appetite for consumer credit.
Analysis revealed that NPLs of public sector commercial banks mounted by 39 percent or Rs 46 billion to Rs 164 billion in CY10. NPLs of local private banks grew by 17 percent or Rs 51 billion to 344 billion in December 2010 from Rs 293 billion in December 2009. With an increase of Rs 4 billion, NPLs of specialised banks stood at Rs 32 billion at end of CY10 compared with Rs 28 billion in CY09. NPLs of foreign banks posted only Rs one billion surge and at end of last calendar year it mounted to Rs 7 billion from Rs 6 billion.
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