Non-Performing Loans (NPLs) of banking industry posted a phenomenal rise of over Rs 56 billion at the end of calendar year 2011 (CY11), creating new challenges and credit risks for the financial sector of Pakistan. Sources in the banking industry told Business Recorder on Wednesday that despite experiencing a slowdown in last quarter (September-December of 2011), NPLs of overall banking industry jumped by 10 percent during CY11, the banks' financial year.
Non-Performing Loans are loans and advances whose mark-up/interest or principal is overdue by 90 days or more from the due date. "The current rise reflects that the challenge of rising trend in NPLs is still not over as it continued in last calendar year, which is not a good sign for the banking industry," bankers said. They said growth in NPLs is still the same like previous year and its may be a caution for entire financial sector. Talking about the reasons for surge in NPLs, they said "it believed that slow economic activities, high interest rate followed by tight monetary policy, power outage and poor law and order situation, besides taxation policies are responsible for continuous growth in the NPLs."
Owing to high NPLs, the banking industry is reluctant to expand financing to private sector and major financing is to be made in government papers, which are considered more secure as compared to private sector lending. "The banking industry has stiffened the loan conditions due to rising default cases, however, despite these steps, the growth of NPLs is still on the higher side," they said. The State Bank of Pakistan (SBP) statistics reveal that an incremental of 10 percent or Rs 56.54 billion has been witnessed in total NPLs of banking industry during CY11.
With current increase, cumulative NPLs of banks and DFIs mounted to Rs 623.193 billion as on December 31, 2011 compared with Rs 566.645 billion as on December 31, 2010 Major increase was witnessed in the NPLs of all banks, which recorded an increase of about Rs 55 billion during the period under review. NPLs of banks have reached Rs 607 billion in December 2011, previously it stood at Rs 552 billion in December 2010.
During the period under review, NPLs of Development Finance Institutions (DFIs) have also mounted by 10 percent or Rs 1.41 billion to Rs 16.048 billion at end of CY11 up from Rs 14.63 billion in CY10. The detailed analysis revealed that NPLs of all banks including Public Sector Banks (PSBs), Local Private Banks (LPBs), Foreign Banks (FBs) and Specialised Banks (SBs) remained on surge during last calendar year.
With a rise of 13 percent or Rs 22 billion, NPLs of PSBs have surged to Rs 186.606 billion as on December 2011 compared with Rs 164.645 billion as on December 2010. Similarly, NPLs of LPBs and SBs have mounted by Rs 30.296 billion and Rs 2.201 billion to Rs 378.369 billion and Rs 34.59 billion respectively. During the period under review, NPLs of foreign banks have surged by Rs 76 million to Rs 7.57 billion.
Despite build-up of massive new NPLs in CY11, quarter-on-quarter basis analysis reveals a marginal decline in the last quarter of CY11. Specifically, banks experienced a decline of Rs 6 billion in NPLs of banking industry during the last quarter of CY11. QoQ basis NPLs declined to Rs 623.193 billion in December 2011 from Rs 629.555 billion in September 2011.
"With continuous growth in NPLs since CY07, credit risk has been a major challenge for financial sector of Pakistan and they required taking special measures to curtail the rising trend of NPLs," bankers said. They said with challenging economic conditions and growing NPLs, banks are avoiding risky lending opportunities and in the current situation borrowings by the government for budgetary support have been a blessing for commercial banks. The government's high borrowing to meet high fiscal deficit is providing a great opportunity to banks to make a risk-free lending, they added.