Nov 8 - 14, 20

A non-performing loan is a loan that is in default or close to default. Many loans become non-performing after being in default for three months, but this can depend on the contract terms. A loan is non-performing when payments of interest and principal are past due by 90 days or more, or at least 90 days of interest payments have been capitalised, refinanced or delayed by agreement, or payments are less than 90 days overdue, but there are other good reasons to doubt that payments will be made in full.

In the wake devastating floods in the country, the banking circles believe that the non-performing loans are likely to cross the Rs500-billion-mark by end of the current fiscal year.

The State Bank of Pakistan had also indicated that the NPLs would increase by Rs48 billion this fiscal year mainly due to devastation caused by floods.

Bankers believe that the rising NPLs could prove fatal for the banking sector as well as for the economy. Rising non-performing loans are not only hampering the profitability of Pakistani's banking sector but also indicative of weakening financial situation in the country.

Many reasons are causing this alarming rise but primarily high interest rate, economic slowdown and poor law and order situation in the country are the main factors. Non-payments are increasing in all fields but mostly from the agriculture and government sector, the bankers said.

Due to bad performance of the economy and poor risk management by banks the total NPLs have already reached to record Rs473 billion as of June 30, 2010, they said, adding: "No calculation has so far been made for flood-related losses of trade, industry and other businesses, which borrow money from banks, but initial estimates put it around Rs50 billion," said a senior banker.

Banking sector with over Rs500 billion NPLs faces an alarming situation, which has forced banks to adopt cautious approach to check further addition in NPLs stock. The direct impact of such a high NPLs that could be Rs525 billion at the end of this fiscal would force banks to avoid extending loans and continue investing in government papers.

It may be noted that in the financial year 2008-09 the lending to private sector was almost negligible but the last fiscal 2009-10 witnessed improvement especially in the second half of the fiscal year. During the FY09, the private sector credit growth limited to just Rs17 billion while in FY10 the private sector borrowing improved to Rs113 billion but still far below than the average private sector credit growth during first seven years of this decade.

Exporters of the country are now demanding for extension in repayment as they have been stuck into the dilemma of lower demand at global level and a slowdown in production at local level due to poor law and order situation and electricity outages.

Experts believe that banks should further tighten their credit assessment security policy and arrange appropriate monitoring procedures in order to keep an eye on NPLs. In the prevailing circumstances, the banks should avoid financing against high-risk securities. The banks must focus to appoint 'right man for the right job' to avoid risks involved in loaning.

It may be recalled that total volume of non-performing loans of the banking sector has increased by Rs19 billion during second quarter (April-June). NPLs stood at Rs398 billion as against of Rs379 billion witnessed earlier quarter that depicted an increase of Rs18.7 billion on quarter-on-quarter basis. Comparatively, this increase is significantly lower than incremental NPLs of Rs67 billion and Rs34 billion, respectively, recorded in the previous two quarters.

Risk aversion on the part of banks in an environment of rising NPLs, driven by the decline in economic activity, also affected the supply of credit. Rise in NPLs and the consequent banks' reluctance also explains the low extension to the private sector.