Aug 24 - 30, 2009

The latest data pertaining to non-performing loans (NPLs) provides some level of comfort but certainly there is no room for complacency. While NPL accretion continued in 2QCY09 the trend seemed on a downward trajectory, with sequential NPL slippage (absolute) being the lowest since 2QCY08. The NPL ratio seems to have almost flattened indicating the worst of asset quality may be behind us.

AKD securities identified rightly in its report, 'with fresh NPL creation less of an issue now, bad loan aging comes into the limelight'. Some of the banks have the lowest portion of substandard and doubtful loans and consequently less concern over aging. However, the key risks stem from resurgence in inflationary pressures (power tariff hike) and continued power outages leading to further NPL slippage.

Reportedly NPLs of commercial banks have increased by 6% QoQ to Rs 371 billion on June 30, 2009. Sequential NPL accretion of Rs21 billion in 2QCY09, though still high, is the lowest since 2QCY08. At the same time, the NPL ratio has almost flattened to about 12.1% as compared to 11.8% in 1QCY09. However, asset quality issue could drag into CY10.

Now analysts are paying more attention on the composition of NPLs of individual banks. They believe that banks with bulk of NPLs in the loss category (fully provided for) stand to display improvement in asset quality ahead of others.

With the ongoing easing in the monetary policy stance analysts expect asset quality is to improve further. Improved macroeconomic conditions are evident from Moody's rating upgrade, declining inflation and lower interest rate environment is likely to result in improved credit flows. Analysts expect banks to re-rate along with the economy although key risks are resurgence in inflationary pressure.

Moody's has also published a special comment on its global review of the capacity of governments and central banks to support their banking system, In this regard it has changed the systemic support input for Pakistani banks' ratings to B2 from Ba2 local currency deposit ceiling. Ratings for NBP and MCB have remained unchanged.

Rising NPLs in the recent past can be attributed to a number of factors, worst of all being high interest rates and sluggish performance of the economy. All those companies heavily leveraged or having done substantial borrowing have to face the worst. Two of the key sub-sectors of large scale manufacturing, textiles and cement bore the brunt. Cement manufacturers were able to maintain their profitability to some extent due to declining prices of coal. However, their bad days are about to start. Unless the cartel is able to assert its authority and fix daily production quota, supply glut could adversely affect the weak players.

Textile industry constitutes the largest percentage of NPLs. One of the reasons for their fragile health is excessive borrowing. One may wonder why they have indulged in such a huge borrowing. A little probe indicates that the listed textile not only suffer from small capital base but have failed in undertaking timely Balancing, Modernization, and Restructuring (BMR). As a result, they have also failed in achieving high value addition. Obsolete plant and machinery keep the production and productivity low.

Similarly, over the last one decade the financial health of sugar industry has deteriorated. Over the years poor capacity utilization of less than 50% has undermined the margins of sugar industry. On top of this ill timed import of refined sugar and denial of permission to import raw sugar forced the mills to indulge in heavy borrowing. While the government was kind enough to provide moratorium to the textile industry, sugar mills were not given the same treatment.

It may be a fact that some of the borrowers face circumstantial default but many can be termed 'habitual' defaulter, the reason being simple that when they borrow they do not have any intention of paying it back. Interestingly the successive governments be it dictatorial or elected, loyalty of 'turncoats' has been bought by granting permission to set up industrial units and also arranging soft term loans.

Another factor which has proliferated 'default' is writing off loans by the financial institutions. Since the defaulters are 'well connected' they also get their overdue loans written off and also succeed in obtaining fresh loans. This practice is rampant and also led to virtual bankruptcy of some of the public sector financial institutions. NDFC, ICP and PICIC, others may be live on papers but are of no consequence.

Having said that, it is also necessary to reiterate that at time bad government policies also turn good enterprises into loss making entities. One of the examples is Fauji fertilizer Bin Qasim. It is the only DAP manufacturing company in the country, which meets 30% of the total demand but the shift in government policy threw it into problems. However, the subsequent decision to pay subsidy improved its economic viability.

In the past in an attempt to attract investors various areas were declared duty free, which included exemption from payment of import duty, sales tax and even income tax. However, the policy on one hand posed problems for the units operating in 'tariff areas' and also created 'industrial graveyards' on the other. Some of the most visible examples are Gadoom Amazai, Hattar, Hub and Nooriabad.

According to an analyst the key reason for high NPLs in Pakistan is changing policy stance of the government. If a government initiates a policy its successor cancels it and initiates another policy. Most of these policies are aimed at attaining political mileage at the cost of national exchequer.


The Financial Markets Association of Pakistan (FMAP) has elected Mr. Shah M. Azim Azmi of NIB Bank Ltd. and Mr. Muhammad Abdullah Ahmed of Meezan Bank Ltd. as President and General Secretary of the Financial Markets Association of Pakistan (FMAP) for the year 2009-2010.

The election was held at the Annual General Meeting of FMAP held at a local hotel.

FMAP is a non-profit professional body of the Money Market & Foreign exchange dealers of banks, financial institutions, and brokerage houses in the country, and is affiliated internationally with Association Cambiste Internationale Paris, France.

Other committee members are M. Ismail Usuf (Assistant Secretary), Masood Wahedna (Treasurer), Kashif Rafi, Anees Abbasi, Hasan Zia Syed, Qasim Nadeem, and Zain Raza Kazmi (Members).