LOAN DEFAULTS AT THE EXPENSE OF PUBLIC
TARIQ AHMED SAEEDI
Nov 8 - 14, 2010
With rising pressures on the economy from disappointments of industries over mainly electricity and gas load shedding, banks are concerned if this may add to numbers of cases of bad debts from the private sector. Energy shortages along with high input costs have already crippled the industrial production. Records of non-performing loans are not either good. Rising NPLs imply high provisioning costs or in other words increase in write-offs.
As of June-end this year, NPLs of all banks and development financial institutions totalled around 474 billion rupees and net NPLs 128 billion rupees while net NPLs to net loans ratio stood at 3.92 per cent, according to the latest data. Financial analyst said this ratio is alarming.
Non-performing loans remain a serious issue in the developing financial sector in the country with lending institutions adopting loan write-offs to square their positions contrary to the general criticism from the relevant circles who advocate approval criteria should be strict enough to fend delinquencies. This does not include exceptions related to defaults caused by untoward circumstances.
Most of the cases of defaults or non-performing loans in Pakistan are circumstantial, said Farid Alam at AKD securities. Explaining his viewpoints, he said overall economic situations in the past were not favourable enough to shore up financial positions of debtors rather they dragged topline of many companies down. He is also of the view that numbers of NPLs are in direct proportion to interest rate. High interest rate leads to more incidences of non-performing loans. State bank of Pakistan adopted hawkish stance in the monetary policy announcements to control inflation. Without going into the details of success and failure of these continuous attempts, implication of high interest rates has been negative for the private sector, which lost its financial soundness to liquidity crunch. Above all, high interest rates cause unmet payment obligations from those meeting working capital requirements from banks and development financial institutions. It is generally believed that non-performing loans can be lessened by ensuring strict pre-loaning criteria. Lacking in scrutiny is either because of weak financial model or intentional ignorance. Intentional ignorance to repayment ability of client has assumed an international phenomenon in the financial sector with scams being unveiled related to debtor-creditor collusion.
Print media in Pakistan recently are replete with reports of Supreme Courtís query regarding loans written off by commercial banks since 1971. The amounts of loan write-offs were huge to the tune of 254 billion rupees while in last two years the loans written off were not less than 54 billion rupees. People are waiting for further actions on the details provided to SC by SBP in this relation since making loan defaulters scot-free is nothing less than exploitation of depositors and committed loan payers.
The central bank is content with its prudential regulations, which, according to the regulator of banks and financial institutions, are to tighten noose around violators.
Non-performing loans weaken the financial capabilities of financial institutions increasing the cost of capital. Analysts said there is a need of loan restructuring company to fend the economic fallouts of bad assets on financial institutions as well as on economy as a whole. Referring to corporate industrial restructuring corporation, which was set up during last government, Farid Alam opined such institution should be state-run and established on sunset basis for period of two to three years. He emphasised the importance of loan restructuring organisation to support circumstantial defaulters. Though there are inspection departments working in FIs to monitor loan status or scrutinise solvency of debtors, alone coordinated efforts can bring positive outcomes, he believed.
Consistent shove to discount rate has made the cost of capital terribly unaffordable to the dismay of business community, dragging industries to insolvency. State bank increased interest rate to 13.5 per cent in its last monetary policy announcement. Ironically, while cost of capital is staggeringly high, return on deposits is low in contrast to double-digit inflation; bank spread of 7.5 per cent being highest in the region.
Gas and electricity load shedding are also the biggest drags on industrial capacity to withhold pressures emanating from high input costs. Finance minister Dr Abdul Hafiz Sheikh has already said that government is all set to push up electricity tariff every month to do way with subsidies given to plug electricity cost-recovery gap. Normally, cost of electricity production exceeds what consumers pay for consumption because of overreliance of electricity producer on furnace oil production and other cost inefficient methods. Therefore, government happens to make up for the difference by giving subsidies. But, now under IMF's strict loan programme government is phasing out energy subsidies. The alternatives to save consumers from impulse impacts that are to minimise line losses, are yet to be made part of energy policy.
Textile and agriculture, which are two strong bases of Pakistan's economy and responsible for foreign exchange earnings, have largest shares in total non-performing loans accumulated by banks and development financial institutions. Recent floods have extremely hurt the agriculture base of the country, washing down standing crops on million of hectares. Government's decision to sanction concessionary loans to agriculture sector is appreciated by the private sector. Under new support programme to help flood-hit farming community, farmers possessing below 25 acres will have access to loans at eight per cent mark-up while government would subsidise the differential interest rate.
Non-performing loans are becoming a thorny issue as deteriorating asset base is turning financial institutions into stubbornly risk aversive to the dismay of private sector and engendering write-offs at the expense of public funds.