Dec 5 - 11, 2011

The volume of bad loans or nonperforming loans of the banks and financial institutions are on the rise. According to a latest report of the State Bank Pakistan, there had been an alarming increase of over Rs135 billion in the size of nonperforming loans in the outgoing financial year (2010-11), surging to an all time high of Rs629 billion from Rs494 billion. It had registered an increase of Rs78 billion during 2009-10.About 40 percent of the NPLs originate in textile and energy sectors.

All Pakistan Textile Mills Association (APTMA) has expressed deep concern over the situation and appealed to the government to help the industry by providing some relief measures to save it from collapse.

According to APTMA, the reasons for such an abnormal increase in NPLs include high interest rates and shortage and high costs of gas and electricity. Mainly because of these reasons, the industrial sector is not performing at its full capacity, claimed APTMA chief, adding that the textile industry is struggling for its survival in the most unfavorable atmosphere and badly needed a bailout package from the government.

The NPLs are assets that do not produce income, adversely affecting profitability, liquidity and reputation of banks with ramification on stock and money markets. Other stakeholders, particularly the small depositors suffer the most as they receive lower income on their savings. Well managed banks, therefore, always keep a vigilant eye on the loans they advanced in order to ensure that they do not accumulate bad assets.

Normally, the banks take all possible precautions at the time of advancing the loans to their regular customers, but they are extra cautious while advancing loans to new parties and make thorough probe about their business operations.

Default by the borrowers is also unintentional in majority of cases. The NPLs generally increase at a time when overall economy is in trouble and when uncertainties abound under which both - the banks and the borrowers-suffer. The banks are expected to keep NPLs under check but it is not possible to eliminate them altogether.

Unfortunately, the economy of Pakistan is in turmoil for the last 4/5 years partly because of international economic recession but mainly because of uncertain law and order and political conditions, bad governance and above all the failure of the PPP led government to develop any sound economic policy or program to take out the country from the prevailing mess.

There is no money to meet the day to day expenses for which the government is depending heavily on borrowing from all possible sources including reckless printing currency notes grossly adding to the inflation.

The country is faced with the worst energy crises of its history forcing industrial sectors to work on two shits (instead of three) because of prolonged load shedding of 10 to12 hours a day.

Under these conditions prevailing for the last many years with no sign of relief on the near future, loan defaults are just a natural outcome.

However, most borrowers with successful projects wish to resolve the problems and try their best to keep their projects in profit. They cooperate with the banks in project restructuring and loans rescheduling and the banks also generally accommodate such proposals. However, there are some borrowers who start with ulterior intention and use loans for purposes other than sanctioned project. Such parties are known as willful defaulters and should be dealt strictly.

One would find NPLs more serious in the public sector banks and development finance institutions (DFIs) followed by private sector. The lowest NPLs are in case of foreign banks operating in Pakistan. Higher NPLs ratio in public sector banks and DFIs could largely be attributed to the undue pressure from ruling politicians and their supporters, the quality and low caliber of professionals and the low emolument package offered to employees handling loaning functions who succumb easily to the temptation to underhand deals, commission and kickbacks.

Such financial crises in the banks, investment banks, and money markets also hit the developed countries of the world in recent past, but they were swiftly controlled by prompt and effective actions by their governments, which stepped in to bail out the affected institutions. In Pakistan, the situation is entirely different. The government has neither the will nor the resources for any bailout package. The appeal from the textile industry has, as was expected, evoked no response from the government.