Feb 16 - 22, 2009

The export oriented industries especially the textile sector wailing over the death of demand in the export market are causing concerns to banks as the major chunk of loans concentrated in the manufacturing sector mainly in the textile sector are feared to become infected.

In fact, the bank loans mostly concentrated in the manufacturing sector are estimated at 47% of total private sector credit. Textile sector constitutes the major chunk of loans Rs543billion as of December 2008.

Among textiles, spinning sector holds the larger share of Rs260bn, approximately 50% of textile and 10% of private sector loans. The spinning units have been closing down their operations over the last few months due to heavy operational losses mainly due to worst power shortage in the country and high interest rates.

While the extent of damage is uncertain at this point, it could likely to have a profound impact on the banking sector in a worst-case scenario. Among large capital banks, HBL is most exposed to the textile sector as it has the largest loan portfolio followed by UBL, NBP, ABL and MCB.

The Non Performing Loans or bad loans (NPL) of the banking sector have increased 28.5% YTD, outpacing loan growth for the same period and resulting in a gross NPL ratio of 9.19% for all scheduled banks and 8.37% for commercial banks in September 2008 outpacing loan growth by 14.8% YTD.

According to central bank data, scheduled banks' gross NPLs increased Rs36billion, 15% Quarter on Quarter (QoQ) to Rs278billion in September 2008. The NPLs of the commercial banks for the same period rose Rs32billion, 15.1% QoQ to Rs245billion. After declining to 7.54% in June 2007, the gross NPL ratio of the banking sector has continued to trend upward due to monetary tightening and inflationary pressure. Among large capital banks, NBP leads the pace with NPL ratio of 11.2% followed by HBL 7.4%, UBL 6.4%, ABL 6.1% and MCB 5.7% as of Sep-2008.

The major sectors contributing to the increase in NPLs are commercial textiles, real estate, construction and trade, consumer and agriculture.

Similarly, the net NPL ratio has increased to 1.89% for scheduled banks and 1.53% for commercial banks in September 2008 from 1.18% and 0.83% respectively, in 2007. Despite an increase in provisions by banking sector in 9 months of 2008, an increase in net NPL ratio at both scheduled and commercial banks should keep provisions high in 4th Quarter of 2008.

The banking sector in Pakistan remains immune to the global financial turmoil but it faces domestic headwinds due to its exposure to domestic cyclical sectors (manufacturing and consumer), which are in growth downside, high interest rate and tough operating environment on the back of energy crisis.

While investors are accustomed to the domestic problems faced by the banking sector, ambiguity on exports and textile performance in a slowing global growth has also taken the center stage recently. It should take some time to discern the real potential impact of exports and textile industry on the economy and the banking sector; however a relief package by the government and apex regulator cannot be ruled out if the situation turns worse.

Asset growth and quality of the sector to remain under pressure in 2009 and do not rule out downside earning as the visibility remains low.


The borrowers seeking bank loans for car financing or home and other consumer products would be required to divulge details of facilities already obtained from the banking system.

This declaration by the loan seekers for consumer financing is the part of the Prudential Regulations for Consumer Financing based on the review of prudential regulations and feedback from banks/DFIs.

All the commercial banks and DFIs, at the time of granting facility under various modes of consumer financing, shall obtain a written declaration on the prescribed format from the borrower divulging details of various facilities already obtained from other banks/financial institutions.

The banks shall also obtain a consumer credit report from the Credit Information Bureau of the State Bank of Pakistan; the banks/DFIs shall obtain a consumer credit report from the Credit Information Bureau of State Bank of Pakistan or from any consumer Credit Information Bureau before allowing any financial facility.

While determining the credit worthiness and repayment capacity of the prospective borrower the banks and DFI shall ensure that the total monthly amortization payments of consumer loans should not exceed 50% of the net disposable income of the prospective borrower.

Bank/DFI may issue credit card to one person with a maximum unsecured limit not exceeding Rs 1,000,000, subject to mandatory credit check & prescribed debt burden and condition that total unsecured credit card limits availed by that person from all banks/DFIs do not exceed that prescribed limit.

Banks/DFIs may extend mortgage loans for housing up to any tenure defined in the bank's/DFI's duly approved credit policy and keeping in view the maturities profile of their assets & liabilities.

Banks / DFIs shall, as a matter of rule, obtain a copy of financial statements duly audited by a practicing Chartered Accountant, relating to the business of every borrower which is a limited company or where the exposure of a bank / DFI exceeds Rs 10 million, for analysis and record. The banks / DFIs may also accept a copy of financial statements duly audited/certified by a practicing Cost and Management Accountant in case of a borrower other than a public company or a private company which is a subsidiary of a public company.

However, if the borrower is a public limited company and exposure exceeds Rs. 500 million, banks/DFIs should obtain the financial statements duly audited by a firm of Chartered Accountants, which have received satisfactory rating under the Quality Control Review (QCR) Program of the Institute of Chartered Accountants of Pakistan. Subsequently, if the firm's rating is downgraded in QCR program, then the financial statements of such borrowers are audited in the subsequent year by a firm having satisfactory rating under QCR.

Banks / DFIs may waive the requirement of obtaining copy of financial statements when the exposure net of liquid assets does not exceed the limit of Rs 10 million. Furthermore, financial statements signed by the borrower will suffice where the exposure is fully secured by liquid assets.

This amendment in the regulation will be applicable after December 31, 2009. Banks / DFIs are advised to communicate the contents of this circular to all of their existing borrowers which are public limited companies and their limits are exceeding Rs. 500 million so that they will submit the financial statements in accordance with the above instructions after 31-12-2009.