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Increase in the non-performing loans

Finance Ministry figures show an increase of almost Rs. 6 billion in the defaulted loans

Feb 12 - 18, 2001

There has been alarming increase in the amount of non-performing loans during the 15 months of present Government. According to the figures available in Finance Ministry the amount increased to about Rs. 263 billion in Sep 2000 from Rs. 212 billion in June 99 and Rs. 239 billion in June 2000. This shows a net rise of almost 24 per cent. Most of these non-performing loans may turn into default, in due course of time.

Recovery of stuck up loans was one of the prime objectives of General Musharraf, when he took over in October 1999, ousting the then government. The recovery drive launched by the National Accountability Bureau (NAB) made wholesale arrests of the businessmen, even on circumstantial defaults, resulting in severe backlash and further loss of confidence. NAB was able to recover few billions rupee from the erring industrialists, but during the process many industries fell sick. The contracting economic activity in the country fuelled further failures, and more loans were categorised as non-performing.

Despite the official claims of Rs. 25 billion cash recoveries, the Finance Ministry figures show an increase of almost Rs. 6 billion in the defaulted loans during the present regime. The defaulted loans of banks and DFIs, which amounted to Rs. 143.1 billion in June 1999, increased to Rs. 148.1 billion in June 2000 — an increase of Rs. 5.0 billion in one year. The defaulted loans increased marginally to Rs. 149.1 billion by September 30, 2000, i.e. an increase of Rs. 1.0 billion in three months.

Realising its dismal performance on the recovery of defaulted loans, the government took a fresh initiative in this regard in Dec. last. President Rafiq Tarar promulgated an ordinance to provide for expeditious legal remedies for the matters relating to non-performing assets. The ordinance also provided for legal remedies for the recovery of outstanding loans of the banks and other financial institutions to make them attractive for privatization and to promote the revitalization of national economy and rehabilitation and restructuring of industrial undertakings. The ordinance was expected to enable the government to expedite the process of recovery of outstanding loans as it provided for the high courts to set up special tribunals to deal with the loan defaulters. However like previous attempts and actions, this effort has also failed to bring about any significant improvement in the situation.

There is, however, one saving grace. The nationalised commercial banks performed better than all their local banks in reducing the percentage of non-performing loans during the past few years but this portfolio increased substantially in development financial institutions (DFIs). A State Bank of Pakistan's latest report on total non-performing loans of the financial institutions points out that by the end of December 2000 these loans amounted to Rs. 239.541 billion. The non-performing loans have thus more than doubled from Rs. 107.837 billion in 1995. Out of these, loans from commercial banks increased from Rs. 92.904 billion in 1995 to Rs. 184.300 billion in 2000. Loans from DFIs, however, more than tripled from Rs. 14.933 billion in 1995 to Rs. 55.241 in 2000 in Pakistan.

Contrary to common belief, the nationalized commercial banks performed much better than the other banks operating in the country. The non-performing loans of NCBs, which stood at Rs. 63.860 billion in 1995, increased to Rs. 87.900 billion by December 2000. But the share of NCBs in non-performing loans reduced from 59.2 per cent of the total loans in 1995 to 36.7 per cent in 2000.

The worst performance of managing loans was shown by the private domestic banks. The non-performing loans of these banks increased more than six times from Rs. 1.878 billion in 1995 to Rs. 12.694 billion in 2000. Their share in total non-performing loans in the banking sector also increased from 1.7 per cent in 1995 to 5.3 per cent in 2000.

The combined non-performing loan portfolio of specialised banks and DFIs at Rs. 27.284 billion in 1995 was less than half the Rs. 63.860 billion of NCBs. This amount has now increased to Rs. 112.299 billion, which is Rs. 24.329 billion higher than the total non-performing loans of NCBs. The combined share of specialised banks and DFIs in total non-performing loans of the country has likewise increased to over 40 per cent.

The report shows that loan recovery from these two sectors remained almost zero during the five-year period. This calls for more concentrated efforts by these institutions to stem the rot. The successful measures adopted for recoveries by the NCBs should also be adopted by these institutions.

The report revealed that even the foreign banks failed to change the bank default culture in the country. Their non-performing loans increased from Rs. 3.565 billion in 1995 to Rs. 6.533 billion in 2000.

This increase is much higher than the increase in this portfolio of NCBs during the same period. This is despite the fact that the foreign banks were more liberal in writing off bad loans and the fact that the exposure of foreign banks in domestic market has drastically reduced since May 1998.

Another interesting aspect of the statistics of SBP was the performance of privatised banks. The loan problem was tackled more prudently by the NCBs than the new private management of privatised banks. The non-performing loans of this segment increased by 70 per cent in the last five years from Rs. 10.607 billion in 1995 to Rs. 17.634 billion in 2000.

Habib Bank emerged as the leading bank of the country with a share of 18.9 per cent in total bank deposits in Pakistan edging out the National Bank of Pakistan, which has a deposit base of 18.8 per cent of total deposits.

Five years earlier in 1995, the National Bank with 20.9 per cent of total deposits was the bigger bank than the Habib Bank, which had 19.7 per cent share in bank deposits. This also indicates that the deposit base of these two leading banks has narrowed in the last five years.

Muslim Commercial Bank occupies third position as far as deposit share of banking sector in Pakistan is concerned. With a deposit share of 11.6 per cent, it has an edge of 1.7 percentage points over the United Bank, which has 9.9 per cent share in total bank deposits.

United Bank, however, has achieved a constant increase in deposits during the past five years. Its deposit base increased gradually from 8.8 per cent in 1995 to 9.9 per cent in the year 2000. Muslim Commercial Bank's share in total deposits declined from 12.9 per cent in 1995 to 11.6 per cent in 2000.

The market share of loans is again led by the Habib Bank, which provided 18.5 per cent of the total banking sector loans in Pakistan. It is followed by the National Bank with 17.1 per cent of the total loans sanctioned and the Muslim Commercial Bank with 8.7 per cent share.