The non-performing loan in Pakistan reflects the health of the banking system. A higher percent of such loans shows that banks have difficulty in collecting interest and principal on their credits and it may lead to fewer profits for the banks.
In absolute terms, non-performing loans (NPLs) of the corporate sector are already the highest among all segments. NPLs of banking system has increased to Rs649 billion for the quarter ended June 2016, which was Rs633.43 billion in quarter ended March 2016, according to data issued by State Bank of Pakistan (SBP). The net NPLs of the banking system increased to Rs115.108 billion for the quarter ended June 2016 as compared with net NPLs of Rs105.47 billion. Main infection in loans recorded credit extended by specialized banks which increased by Rs25 billion as compared with net NPLs of such category of banks at Rs8.9 billion. Net NPLs of all commercial banks, however, came down to Rs86.22 billion as against Rs92.63 billion.
The infected portfolio of the corporate sector has been increasing for the last three quarters. It rose 1.3 percent year-on-year to Rs448.5 billion at the end of the second quarter of 2016, the SBP reported.
According to World Bank’s data for Pakistan from 1997 to 2015, the average value for Pakistan during that period was 14.87 percent with a minimum of 7.3 percent in 2006 and a maximum of 23.4 percent in 2001. The World Bank says nonperforming loans to total gross loans are the value of nonperforming loans divided by the total value of the loan portfolio.
The loan amount recorded as nonperforming should be the gross value of the loan as recorded on the balance sheet, not just the amount that is overdue
INFECTED SME LOANS
The corporate sector was followed by the small and medium enterprise (SME) sector whose infected portfolio amounted to Rs82.2 billion at the end of June. Infected loans as a percentage of total loans of the SME sector are the highest among all segments.
Despite strong support from the government and the SBP, the performance of the SME sector failed to improve, as the percentage of infected loans remains the highest among all segments.
The Statistical Bulletin shows that in percentage terms the infected portfolio of SMEs was 26.5 percent at the end of the second quarter as opposed to 28.1 percent at the end of the first quarter. This drop in the infected ratio appears to be on the back of an increase in advances for the sector.
Advances to the sector increased to Rs310 billion in the second quarter from Rs294.5 billion in the first quarter while the size of the infected loans remained almost flat.
A sector-wise breakdown shows individuals constitute the third biggest defaulter group, as their infected loans were Rs47.2 billion.
Advances to this sector were also the third highest. A big jump in advances to individuals was witnessed over the April-June quarter. Advances increased by Rs59 billion. The agribusiness was the second biggest defaulter with NPLs of Rs58 billion while its advances also rose to Rs504 billion from Rs417 billion on a quarterly basis.
The SBP report shows the infected loans of the corporate sector rose to Rs448.5billion at the end of June from Rs433.6billion at the end of December 2015.
The percentage of default dropped to 11.8 percent in June from 12.3 percent in March, but that was largely due to a substantial increase in advances.
Advances to the corporate sector increased Rs204 billion or 5.6 percent on a quarter-on-quarter basis at the end of June.
Within the corporate sector, textiles remained the top defaulter with NPLs of Rs196.9 billion. The percentage of default was also the highest (26.3 percent) in textiles.
The non-performing loans (NPLs) of the domestic textile sector have reached Rs197 billion nearly 26.3 percent of the total advances of Rs748.8 billion to the sector, an official source said.
The National Bank of Pakistan has advanced Rs56 billion to the textile sector out of which 51.4 percent around Rs 28.7 billion are categorized under NPLs, the source said quoting from Quarterly Performance Review of the banking sector, June 2016. This is the highest percentage of NPL to any sector for the National Bank.
The government was under pressure from the textile sector to provide them relief from the banking sector. They wanted rescheduling of their loans and wavier or some kind of relief in the incurring interest on the loans.
Nevertheless the SBP was stressing that the equity holders in textile firms should make efforts to revive their businesses by investing from personal resources rather than depending on the government or banks for rehabilitation.
The official incentive scheme should be linked to the sponsor’s contribution for rehabilitation of their businesses.
If non-operating textile units are revived through personal resources of the sponsors, then such companies should be provided tax holiday for five to seven years to revitalize the installed capacity, says one of the central banks proposal.
Most textile companies are over leveraged due to which they have high financial charges and low net profit.
These companies have short term credit terms for longer period assets. In recessionary cycle, the companies are unable to meet their liabilities leading to financial distress.
The central bank has proposed to improve the capital structure of the textile companies, the government should encourage debt equity swap by the banks at prices higher than book value or the market value.
The SBP should compensate banks for mark-to-market or book loss from the swap, another recommendation said.
The government team is of the opinion that the low value chain in the textile industry is the major reason of current crisis in the sector.
There is lack of balancing modernization and rehabilitation (BMR) in the sector due to which operating efficiencies are not available during recessionary environment.
The fluctuation in raw material, especially cotton and yarn could be curtailed by introducing commodity hedge futures.
The overall infected portfolio of banks rose to Rs634.5 billion at the end of June from Rs619 billion at the end of the quarter ending on March 31.
The flood in Pakistan has changed the trend of Non-Performing Loans (NPLs) as most of the NPLs are being reported from agriculture sector which may hurt the government’s as well as State Bank’s move to persuade banks for greater participation for the recovery of agriculture sector.
Banking source said that the damages caused by the flood was still too large to assess but banks have been receiving information which leads to greater defaults by the agriculture sector.
The State Bank of Pakistan in an early estimate had said that NPLs could surge by another Rs50 billion due to flood.
The reported default in the agriculture sector has reached about Rs28 billion while the total NPLs caused by the flood was around Rs42 billion.
Banks could not afford to face further losses as the increasing load of NPLs has already reached to optimum point.
The NPLs of banking sector witnessed rapid increase especially in the last two years as it jumped by 137 percent with an addition of Rs266 billion to a total of Rs460 billion.
The flood has changed the trend of NPLs making it harder to extend loans for recovery of flood. Bankers observe that the flood-hit agriculture sector is in worst shape requires huge investment for the recovery.
The infrastructure and the land have been destroyed by the flood. To develop land again for agriculture purposes there is need of huge amount of money.
The State Bank said that the recent floods provide an opportunity for the banking industry to increase financial inclusion, diversify its products on sustainable basis and play its due role in rebuilding the national economy.
The banks have already taken cautious position in the wake of very high default rate ignoring the private sector and investing most of their money into government papers.
The State Bank estimates that food has displaced 20 million people, devastated 78 districts across the country, destroyed crops, livestock, roads, infrastructure while the direct losses to major crops was in the tune of Rs280 billion.
The situation for banks is not useful to allocate money for agriculture sector and extend loans for the recovery of the sector.
The banks many continue to extend loans for the agriculture sector not hit by the flood but the government and State Bank wants them to enhance their activities with diversified products for the flood-hit agriculture sector.
For banks it would be easy to extend loans for livestock than providing money for entire agriculture sector which lost very basic need of infrastructure.
The government has yet not initiated to reconstruct the destroyed infrastructure. The government is running short of revenue which bars her to spend money for the reconstruction.