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  2. NON-PERFORMING LOANS (NPL's):               

A bitter pill for the financial sector

By Wasif Ijlal
Nov 12 - 18, 2001

Perhaps one of the stringiest problem for the banking sector is that of Non performing loans (NPL). The phenomena is more widespread in the Asian financial sector than anywhere else, as incidents of advancing loans on criteria's other than pure meritocracy remains rampant in the Asian financial sector.

To make matters worse for the Asian banks, still in a bad hangover from the 1997 market crash, non-performing loans (NPLs) are again beginning to mount up amid an expected global recession that would hit Asia the hardest. Even before the September 11 tragedy, regional banks were beginning to feel the heat from a sharp decline in economic output and exports. An increase in the NPL would only make matters worse for the regional economies so heavily dependent on the soundness of their banking sector.

Things can easily go from worse to horrific if the number of NPL mushroom in the wake of the September 11 tragedy. It is expected that even amongst the "technology-driven" economies like Singapore and Taiwan, a large number of start-ups would be filing for bankruptcy in the wake of a sudden plunge in consumer confidences and demand. The resulting scenario that may materialize sooner than expected (giving financial managers nightmares): More NPL for the banks.

Recently, Standard & Poor's (S&P) issued a warning that it was bearish on the short-term outlook for banks in emerging Asian markets. More importantly, it also noted that wealthier economies such as Taiwan, Singapore and Hong Kong were also being affected by NPLs.

Turning to not-so-wealthy-nations like Pakistan, a lot has been said about the reasons behind the NPL problem in the country's financial sector. As it would be a rhetoric to discuss the "why's" and "when's" of the menace again, we have rather focused on evaluating the situation as it stands right now.

At the close of the last fiscal year (30th June 2001), total non-performing loans in the financial sector stood at Rs.279bn. While the principal amount constituted for 71% of the total, interest outstanding on these loans made up for the remaining 29%. The largest (read: bitter!!) chunk of the pie rested with the Nationalized Commercial Banks (NCB's), which held 38% share of the NPL portfolio. Next in list were the specialized banks and DFI's, which held 22% and 21% of the total amount respectively.

NPL as on 31 August 2001


(Rs in bn)

% Chg from 30 June


99.7 -5.0%

Privatized Banks



Private Banks



Foreign Banks



Specialized Banks




60.7 4.0%






NPL's as % of Adances

In % terms








Privatized Banks




Private Banks




Foreign Banks




Specialized Banks








Turning to the NPL/Advances ratio, DFI's and specialized banks top the list with an overwhelming 65% and 52% of their advances classified as bad loans. Out of the Rs.413bn advanced by the NCB's, 25% were classified as non-performing loans till the end of FY01.

So, well into FY02, what's the story now?

The good news is: there is a marginal decline in the total NPL portfolio in the financial sector. The total amount of NPL depicted a decline of 2.3% during the first two months of FY02 to stand at Rs.272.5bn on 31st August 2001. The bad news is, while nearly every financial sub-sector have shown a decline in their NPL's, private banks actually posted an increase of 10.4% on their portfolio.

There has been no radical decline as far as the NPL/Adv ratio is concerned, DFI's still carry the largest bad slice of the apple (68%), followed by Specialized banks at 48%. The ratio for the NCB's declined marginally to 24%. The main concern here would again be the private banks, who's NPL/ADV ratio increased by 15% in the first two months of the current fiscal year.

Miracles don't happen overnight and it would be naive to assume that the NPL menace would be controlled in a matter of 1-2 years. Before isolating Pakistan, one has to remember that the problem is not isolated to any one Asian country. As long as there are banks willing to extend loans on basis other than pure credit worthiness, NPL's would continue to deal a crippling blow to the financial sector; Be it Pakistan, Taiwan, Hong Kong or any other country.

The solution lies in having tighter a regulatory framework built around sound credit policies, a proactive rather than a reactive role by the central bank and an an efficient recovery system. Mercifully, after a downturn of several years, the banking sector appears to be on a road to recovery, thanks mainly to some bold steps taken by the present government. One hopes that the efforts of the government would continue in bringing down the NPL's amount to what can be considered as a "non-hazardous level" for the banking sector in Pakistan.

The author is Head of Research at IP Securities