TARIQ AHMED SAEEDI (tariqsaeedi@hotmail.com)
Aug 24 - 30, 2009

Local private banks have been frontline financial institutions that accumulated maximum volume of non-performing loans by the end of last fiscal year (2008-09). Public sector banks also recorded significant bad debts. However, due to their relatively risk-aversive exposures they registered NPLs almost 100 percent lesser than that of local private banks. As of June 2009, local private banks recorded Rs72 billion net non-performing loans while public sector banks posted Rs38.46 billion NPLs by June. Cash recovery by local private banks against bad debts was high in the last of quarter of FY09 in which the banks recovered Rs10.32 billion while in April-June, 2009 public sector banks recovered Rs1.78 billion cash against NPLs. Almost all banks observed rising NPLs. But, small and middle-sized banks reported significant surge. The upsurge in NPLs has raised cost of provisioning. Yet, earnings of banks continued to grow, though passively.

By the end of FY09, net NPLs of all banks and development financial institutions were to the tune of Rs122.33 billion. Non-performing loans of foreign banks were lowest amongst that of local private, public sector, specialized banks, and development financial institutions. Foreign banks recorded Rs693 million net NPLs, specialised banks Rs7.36 billion, and DFIs Rs3.79 as of June-end 2009. Low amount of NPLs indicate the cautious credit risk management by foreign banks.

Classification of loans gives an interesting account of economic growth priorities. The loans issued for consumer financing exceeded well above the credit extended to agriculture, hunting and forestry by May 2009. The outstanding level of consumer financing increased to Rs298 billion until end of the month while banks sanctioned only Rs157 billion for agriculture sector. Undoubtedly, loans extended for house building and automobile purchases increase economic activities. Nevertheless, financial assistance to give impetus to key economic sectors like agriculture and manufacturing is result-oriented and this can be a direct approach to improving growth. Credit cards and auto loans are more like roundabout economic growth techniques. Critics of former government said consumption-led growth could not spur real economic activities. To an extent, they were right though auto financing augmented production in industries related to automobile, generating employments. Default rate is high in credit cards loans.

Textile industry turned out to be a major victim of slowdown in economic activities during the last fiscal year. Textile exports decreased last year. Energy crisis and shrinkage in industrial production, and contracting export orders aggravated the victimization of textile industry as spinning units closed down or neared a grinding halt. Resultantly, a visible impact was sustained by banks, which extended credits to the sector. Banks manage principal portfolio in manufacturing sector and until May 2009, the textile sector had largest share in total loans to private sector business. Total loans disbursed to manufacturing sector were to the tune of Rs1,248 billion. Of that, textile sector including spinning, weaving, knitwear, and carpets assumed Rs495 billion. Separately, apparel and readymade garments and leather sectors received approximately Rs67 billion. Overall, textile and clothing has been main receiver of bank credits. The corporate, SME, and agriculture represent 78 percent of the overall loan portfolio.

The preceding year was not prolific for private sector credit. Private credit growth was contracted by Rs6 billion as against extraordinary growth of over Rs340 billion in FY08. While high interest rates and low appetite of credit discouraged private sector borrowers to avail bank financing, profitable yields on government securities and infected advances portfolios encouraged banks to keep at distance from private lending. Commercial banks showed great interests in government papers during the last fiscal year. Analysts say high interest rate is the reason behind depressed demand of private credit. State Bank of Pakistan has reduced interest rate to 13 percent in a recently announced monetary policy. The rate is still high as compared to that in other regional countries. Government increased the yield on one-year treasury bills and rejected bids of three and six months. As opposed to banks' offers of Rs150.70 billion, SBP raised only 79.72 billion for one year maturity treasury bills. This is construed a bellwether of private credit growth. Banks have now surplus liquidity, which can be used to revitalize growth of running finance of short-term. However, the issue is now not of liquidity but demand. Private credit continues to face slackened demand. Private sector is not attracted to credit because of high interest rate and non-utility of loans in the wake of demand slump. The SBP quarterly report (Jan-Mar) said impending economic slowdown and domestic securities issues might dampen the growth of banking system in coming quarters. According to SBP latest report, private sector has retired Rs59.8 billion in the first month of current fiscal year. The last fiscal year witnessed decline of private credit growth.

Ministry of Finance informed the National Assembly recently that banks had written off over Rs119 billion loans during last five years. The highest amount of loans was amnestied in 2008 in which banks wrote off Rs33.64 billion loans of borrowers from different sectors. This was the highest during the five-year period (2004-08). Rs31.07 billion was written off during 2005. In that year, a massive earthquake struck across northern areas of Pakistan, rendering server loss to property and lives. Daily lives were affected adversely and people were deprived of their income sources. Government took action to support financially calamity-hit people. For remaining three years, Rs7.41 billion loans were written off in 2004, Rs21.06 billion in 2006, and Rs25.87 billion in 2007.