Rising level of NPLs

The rising level of Non-Performing Loans (NPLs) of banking sector, if not checked in time, could pose a threat to the solvency of the financial institutions in any country. According to the latest data released by the State Bank, overall NPLs of the financial sector shot up by Rs 12.99 billion during January-March, 2016 from Rs 620.4 billion as of December, 2015 to Rs 633.4 billion at the end of March, 2016. NPLs of banks jumped by Rs 13.6 billion from Rs 605.4 billion to Rs 619.1 billion while those of DFIs declined by Rs 653 million from Rs 15 billion to Rs 14.35 billion during this period. A sector-wise analysis revealed that NPLs of Public Sector Banks (PSBs) and Local Private Banks (LPBs) witnessed an upward trend while those of Specialised Banks and Foreign Banks (FBs) decreased between January and March, 2016.

A number of factors could have contributed to the rising level of NPLs. One of the major reasons for this unhealthy phenomenon could be a slowdown in economic activity compared to the targets, particularly in the textile sector, a concomitant decline in exports, and lack of political stability in the country, energy shortages and massive refund claims withheld by the FBR to show a better fiscal position. The problem could have also been compounded by the overall culture in society to equate the non-payment of bank loans with the power and prestige enjoyed by borrowers to harass the banks' managements. However, whatever the reasons, the rising level of NPLs and deteriorating asset quality is always a big challenge for the banking industry to put its house in order. Such a challenge is all the more annoying when SBP has been quite vigilant about the situation, insisting upon higher provisioning requirements, and a major chunk of loanable resources of the banking sector have been invested in gilt-edged securities of the government which are entirely risk-free. A huge concern arising out from the present unpleasant situation is that the banks, mindful of the possibility of rising NPLs, could increase their portfolios in government securities further and desist from extending credit to the private sector. Such an attitude would certainly retard economic activity and increase unemployment and poverty in the country. Also, a higher level of NPLs would necessitate increased provisioning which would adversely affect the profitability of banks and reduce the deposit and saving rates in the economy. All of this suggests that although NPLs are an essential part of the banking industry due to the very nature of the business, yet it is also necessary to contain their level within reasonable limits so that viability and the solvency of the financial system is ensured. Of course, the best guarantee for containment of NPLs could be a vibrant industrial and commercial base and a thriving economy but certain other factors could also help. While the State Bank could continue to improve the policy framework in this respect, banks and DFIs have to help themselves by redoubling their efforts to control the problem by improving their credit appraisals and monitoring standards. It is fortunate that Pakistan has not faced the kind of financial crisis which has been witnessed in some other countries but it is better to take precautionary measures in time to erect the necessary safeguards to avoid such a bad situation.