The banking sector's cash recovery against Non-Performing Loans (NPLs) is weakening as it posted a notable decline of 10 percent during last calendar year (CY14).
Analysts said some domestic challenges such as energy crisis and poor law and order situation are not supporting banks' efforts for the maximum recovery against NPLs. "Cash recovery or loans' default is directly linked with economy and presently, besides law and order, long standing energy crisis, poor infrastructure and political volatility are some of the major hurdles in the revival of economic and industrial activities," they said and added that without improved economic activities banks cannot enhance their recovery.
Talking about the interest rate, they said previously higher interest rate was also a reason for rising default ratio, but the State Bank has cut its key policy rate by some 1.5 percent to 8.5 percent during last four months and expected to reduce it further in upcoming monetary policy this month. Lower interest rate will help banks to enhance their recovery or reschedule default loans. In addition, some more productive measures will be required to increase the cash recovery against NPLs, they added.
According to the State Bank of Pakistan (SBP), the banking sector's (including all banks and DFIs) cash recovery against NPLs fell by 10 percent during CY14 compared to CY13. Overall, banks and DFIs recovered Rs 66.117 billion during CY14 against recovery of Rs 73.345 billion in CY13, depicting a decline of Rs 7.228 billion.
A detailed analysis revealed that during the period under review an overall decline has been witnessed in cash recovery of banks while DFIs recovery moved upward. With some 10.24 percent or Rs 7.437 billion decline, banks recovered some Rs 65.13 billion in CY14 compared to Rs 72.567 billion in CY13. Similarly, cash recovery by DFIs increased by 27 percent to Rs 987 million at the end of CY14 compared to CY13, in which cash recovery against NPLs stood at Rs 778 million.
Normally, banks and DFIs make concrete efforts in the closing quarter, ie, June and December for maximum recovery, while the detailed analysis revealed that during the last quarter of CY14 cash recovery registered a 24 percent fall. Banking sector's cash recovery against NPLs stood at Rs 18.288 billion in October-December 2014 compared to Rs 24.027 billion in the same period of CY13, depicting a decline of 5.7 billion. The NPLs of the entire banking industry (including banks and DFIs) posted a decline of Rs 3.03 billion during CY14. All banks and DFIs' NPLs stood at Rs 619.831 billion as on December 31, 2014 compared to Rs 622.861 billion as on December 31, 2013.
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