July 20 - 26, 2009

The critical issue of rising non-performing loans is eroding profitability of the Pakistani commercial banking system. The State Bank of Pakistan and all the banks have been following different strategies and policies to overcome this problem but are still unable to contain this contentious issue. Moreover, the supportive measure of 30% forced sales value has been allowed by the State Bank of Pakistan in CY08 to shore up the earnings of the banks.

The total non-performing loans of the banks stood at Rs345 billion as on December 31, 2008. At end March this year the figure increased to Rs379 billion, which made it vivid that delinquency is still on the rise, according to data released by the SBP.

At the end of first quarter of CY09, all banks recorded non-performing loans against advances of Rs14.8 billion, excluding Bank of Punjab financial result. This figure was of Rs12.8 billion in the same quarter of CY08 when FSV benefit was not allowed from the central bank. This reflects that the situation is becoming worst and in CY09 banks are expected not to change the trend of rising NPLs.

Moreover, several initiatives have been taken by the central bank to assist the defaulted companies and non-performing industries. Nevertheless, outcomes were not effective as expected due to influences, futile monitoring, and time-consuming court procedure.

Banks lend their money to government normally for budget borrowing, public sector, agriculture sector, and private sector. The most surprising thing is that non-payments of loans are increasing in all the domains but mainly from government and agriculture sector. Normally big banks like NBP, MCB, HBL, UBL, and ABL lend their money to government and agriculture sector.

The government can be held responsible for unsecured lending as it made appointment of head the banks on cronyism. Moreover, management ineffectiveness, less visionary abilities and corruption lead to gross mismanagement. The rising intrusion of the state by centrally mandated credit programmers less recovery, unfavorable market conditions, and lack of commitment boosted the NPLs.

The new trend is emerging in the banking industry that lending banks are investing their money in government securities like T-Bills and PIBs. Banks are doing it to safeguard their earning by getting fixed return on investment. At the end of June 2009, total investment of the industry augmented by 37% to Rs1.34 trillion. On the other side, advances the main earning asset of the industry, depicted growth of 1% and touched the level of Rs3.16 trillion.

Some participants in the industry have very efficient management and process of lending. They controlled the non performing loans issue and sustained their earnings. While other banks suffered from huge losses due to NPLs. The large public sector bank, National Bank of Pakistan recorded Rs10.0 billion of NPLs and this distorted the profitability of the bank, by 19% in CY08.

Bank of Punjab after a long time announced financial result of CY08 performance and posted huge loss of Rs10 billion for CY08. The bank booked non-performing loans of Rs19 billion and after this historic loss the equity position turned precarious. But, the provincial government injected Rs10 billion against right shares.

In the private sector credit off take, repayment against lending from textile sector is still unresolved. Because, normally financings base on KIBOR (six months) yield and in 2008 discount rate was also on the higher side i.e. 15%. Therefore, it was very difficult for the textile sector to repay banks loans due to higher interest rate and moreover slow down in the manufacturing activities also hit the repayment potential. A number of banks curtailed lending to textile sector. Now, KIBOR (six months) decreased to 12.1%, 13-month low, and further reduction in discount rate by 100 to 150 basis points is likely to start repayment of loans from textile sector.

Some banks penetrated in consumer financing and, provided vast variety of products. Like, credit card, auto financing, home financing and many more. At the end, banks suffered from huge losses from all products. After learning from mistakes, several banks have closed this window or providing financings to quality borrowers only.

The government, central bank and all banks stand committed to overcome this contentious issue. All have adopted many administrative and legislative steps to recover non-performing loans. But, the mission is not yet accomplished nor the overall profitability of the industry improved.

On top of this credit off take is also decreasing due to higher interest rate which ultimately hit the repayment capacity of the borrower. The corporate clients and consumers are becoming hesitant to borrow from the banks. Furthermore, the spreads of the banks are also shrinking due to high cost of deposits and decreasing yields on lending. The NPLs issue is a serious concern because it is gradually hitting profitability of the banks. Moreover, shifting to government secured investments instead of lending money to borrowers may help in containing NPLs. It could be a makeshift arrangement but not the ultimate solution.