Surge in NPLs

The rising level of Non-Performing Loans (NPLs) of the banking sector is usually a precursor of lingering problems in the financial landscape of a country. According to the latest data released by the State Bank on 9th October, 2016, NPLs of the banking industry posted a phenomenal increase of over Rs 25 billion during the first nine months (July-Sept) of the current calendar year (CY16). With the current surge, cumulative NPLs of banks and DFIs reached Rs 646.23 billion as on 30th September, 2016 from Rs 620.45 billion at the end of December, 2015. NPLs of all the banks soared to Rs 631.33 billion as compared to Rs 605.44 billion, depicting an increase of Rs 25.88 billion while those of DFIs came down by Rs 100 million to Rs 15.90 billion in September, 2016. A further analysis revealed that NPLs of Public Sector Banks (PSBs), Specialised Banks (SBs) and Local Private Banks (LPBs) registered increases and those of Foreign Banks (FBs) witnessed a decline. NPLs of PSBs jumped by Rs 14.93 billion, followed by SBs (+Rs 9.38 billion) and LPBs (+Rs 1.73 billion) while NPLs of FBs declined by Rs 165 million to stand at Rs 3.00 billion at the close of September, 2016. As a result of sharply rising trend in NPLs, the ratio of net NPLs to net loans rose from 1.94 percent to 2.1 percent during the three quarters ending September, 2016.

A sharply rising trend in NPLs is of course a very disturbing development. The deteriorating asset quality is always a big challenge for the banking industry as the continuation of such a trend could ultimately force the banks to close their shops and deprive the depositors of their lifelong savings held with the banking institutions. As the banking sector is instrumental in mobilising financial savings from the economy and place them at the disposal of entrepreneurs to invest them in various productive avenues, economic activity in the country could suffer immensely, with highly adverse consequences on exports, inflation, employment and poverty level. Another depressing aspect is that NPLs are on the up despite the policy of the State Bank to check such a trend and obliging the banks to meet the provision requirements as prescribed under the Basle agreements and higher investment of banks in gilt-edged securities of the government which are entirely risk-free. Another fear is that if the State Bank becomes more stringent, increases its vigilance through rigorous regulation and supervision, or forces banks to meet higher provisioning requirements, the banks could increase their portfolios in government securities further and reduce borrowings to the private sector which could retard economic growth. It is also strange that businessmen and industrialists had been arguing for a long time that higher NPLs were due mainly to high interest rates but their contention also does not seem to be entirely valid as the NPLs are now rising at a time when the policy rate is quite low compared to the norm. Although it is difficult to pinpoint the reasons and quantify their impact, some of the factors which could have led to deteriorating asset quality and high NPLs could be a depressed economic activity, particularly in the textile sector, a concomitant decline in exports, lack of political stability, low investment from foreign sources and refund claims still withheld by the FBR. However, it needs to be pointed out that the challenge of NPLs cannot be fully overcome due to the very nature of the business. Some of the entrepreneurs out of a long list of borrowers would always make poor decisions, suffer losses and not have sufficient funds to repay their loans. Some of the negative developments beyond their control could also force borrowers to declare insolvency even if their plans were sound at the time of borrowings. The best the banking system could, therefore, do is the containment of NPLs within reasonable/minimum limits. A good guarantee of limiting or reducing the level of NPLs is of course vibrant industrial and commercial sectors and a thriving economy backed by an appropriate policy framework. Banks and DFIs could also help the situation by improving their credit appraisals and monitoring standards. It is reassuring, however, that the amount of NPLs is still quite manageable and does not pose a threat to the solvency of banks but the recent rising trend in their level suggests that more attention needs to be given to this particular issue.