Jan 23 - 29, 20

High interest rate, economic slump, and energy crisis are the trio that is aggravating the incidence of non-performing loans (NPLs) that indicate the failure of the companies to meet their debt obligations on time.

Since the beginning of this financial year (July-June 2011/12), State bank of Pakistan (SBP) has brought down the lending rate to commercial banks by cumulative 200 basis points to 12 per cent. Advances-seekers look for further cut in the policy rate to spur growth.

Cash recovery against nonperforming loans of all banks and development finance institutions for the first quarter of current financial year dropped to Rs13.7 billion from 17.2 billion earlier. The net NPLs stood at Rs215 billion as of 30th September 2011 compared with Rs188 billion three months ago. Therefore, net NPLs to net loans ratio rose to 6.53 per cent from 5.48 per cent.

High interest rate affect working capital that business acquire to meet their business needs. The growth in credit risk-weighted assets encourages banks to place money in government papers, considered the profitable/safest avenue, and discourage financing to consumers as well as small and medium businesses.

"While the weak operating environment faces further downside risks, increases in the banks' exposures to the sovereign make the sector's solvency increasingly vulnerable to sovereign credit risk," Christos Theofilou, Analyst, Financial Institutions Group at Moody's told Gulfnews.

"Banks' reliance on market and/or foreign funding also remains minimal. However, we believe that related vulnerabilities will persist, namely the short contractual maturities of customer deposits that create asset-liability mismatches and high government-deposit concentrations."

Independent analysts also point out at habitual defaults they say are commonplace in the country. Although the central bank is confident of its reforms and regulation in mitigating credit risks, legal issues are widely cited as cause of infected assets or defaults. Prolonged default cases are said to go in favour of the wilful defaulters while accidental non-payers are treated wrongfully. There is a need of efficient legal mechanism to speed up the process and discern wilful and accidental nonpayers.

Most of the advances provisioned to the SMBs are related to working capital. According to SBP, 76 per cent of loans to SMBs are working capital or running finances based on variable interest rate. High interest rate discourages businesses to seek bank financing and weakens their repayment abilities.

From Rs437 billion in Dec 2007, the advances to SMBs slid to Rs268 billion in Sep 2011. Incumbent governor SBP has expressed his dissatisfaction over the reluctance of banks in financing the crucial economic sector. "This has significant negative implications for both the drive for modernization, expansion of businesses and the process of asset formation by SMBs," said the governor.

SMBs account for 98 per cent of the businesses in Pakistan and employ 78 per cent of the non-agriculture workforce. He asked the banks to focus on this profitable sector in the course of diversification and widening customer base.

Undoubtedly, energy crisis is a major issue sapping the industrial competiveness. Many of the industrial units were closed down or nearing closure due to dual gas and electricity shortages. Running industrial machineries is perhaps one of costly feats in the present circumstances where gas and electricity shortages are upsetting the production schedule on one hand and exorbitant tariffs are pulling up the cost of outputs on the other.

As has been brought in the notice many a times, SMBs are adversely affected by the power outages.

"Now, there are no fixed working hours in a day," said a power loom entrepreneur. "When electricity restores as per the schedule we get back to the work and during interruption-at least thrice a day and every pause spans 1 and Ω hours-we do other jobs needing no electricity like taking naps and taking in meals," he told this scribe.

"This is commonplace here," he said referring to the cottage industry comprised of more than 400 home-based industrial units in a crowded Korangi town of Karachi.

"The working hours were flexible earlier but we are compelled to tune in ourselves to the need of the time at present that is causing serious frustrations among business community."

Vice president Saarc chamber of commerce, Iftikhar Ali Malik said the government has to ensure uninterrupted supply of gas and electricity to the industrial units 'to get the economy out of the intensive care unit'.

"Electricity, gas, and water are the industrial inputs that companies are receiving in bits and pieces," he said in a press statement. "In such a situation, rising exports and bringing valuable foreign exchange in the country will remain a pipedream," he added.

Growing inability of businesses to stay afloat has repercussions for the financial sector. This, among other things, prompts risk aversive investments by the financial institutions. SBP keeps on injecting liquidity in the system and banks are encouraged to buy government bonds and securities that are risk free and defray solid returns as opposed to advances to the private sector.

Energy crisis and generally economic slowdown sapped the private sector in the last financial year and thereby reducing their appetites for loans. Rise in private sector credit of Rs121.3 billion and increase in government borrowings from commercial banks by Rs590.2 billion last financial attested this fact.

The government domestic debts have been growing dangerously at 30 per cent year on year, having touched the six trillion rupees mark, according to a latter-day report issued by the SBP.

Reduction in NPLs is very much dependent on the redressal of energy issues, cut in interest rate, and increasing lending to the private sector.