Jan 2 - 8, 20

Adverse market dynamics driven by high interest rates and slowdown in economic growth have negatively affected the asset portfolio of the banks in Pakistan leading to high, yet unavoidable influx of non-performing loans (NPLs).

According to the financial stability review released by the state bank of Pakistan (SBP), banks accumulated Rs31.4 billion in infected assets in the first half of last calendar year (1HCY11) as compared to Rs27.8 billion during the same period preceding year. This pushed up non-performing loan ratio (NPLR) from 14.7 per cent in 1HCY10 to 15.3 per cent in 1HCY11.

Overall, NPLs increased from Rs550 billion in CY10 to Rs580 billion in 1HCY11. During first half, banks accumulated Rs31.3 billion in the loss category as compared to Rs39.8 billion in 1HCY10.

SBP said 77 per cent of all NPLs are currently classified under loss with minimum chance of recovery. A significant change seen among banks is the credit portfolio is adequately covered against anticipated losses.

During 1HCY11, provisions held by the banking system increased by 7.6 per cent over the previous year. Though this increase partly reflects growing infection that requires higher provisioning, growth in provisions outpaced the rise in NPLs. Consequently, the NPL coverage ratio (provisions to NPLs) increased from 66.7 per cent to 67.9 per cent, according to the report.

Breakup of NPLs in terms of various banking groups show that both public sector banks and local private banks have significantly high infection ratios.

Public sector banks have an infection ratio of 21.5pc whereas local private banks have an infection ratio of 13.2pc against industry average of 15.3pc computed for all banks.

In order to help mitigate the rise in NPLs, banks have slowed down lending and fresh advances to corporate, commercial and retail and have further made the requirements for availing new financing facilities more stringent for the borrowers. The challenge for banking is to generate revenue from its existing and current performing portfolio.


Retail exposure includes asset portfolio for personal loans, home loans, auto loans, credit cards and SME loans. Commercial banks have largely curtailed advances in its retail portfolio focusing on earning potential through existing asset portfolio.

Advances for home financing were only provided to borrowers who were financially sound with enhanced requirements on income level, education and family status, repayment capacity, financing need, quality of collateral held and intended use of funds.

Advances for auto financing witnessed a more stringent credit assessment criterion.

A major change in benchmark is an upward revision in income level requirement by 30 to 50pc of the borrower planning for financing of an automobile.

Banks with portfolio of credit cards largely discouraged release of new cards through an increase in income levels as a credit granting criteria to be eligible to apply for a card.

Even if an individual is eligible, there is a likely possibility that banks will not provide limits on cards as approved in the past when consumer financing was on growth. In addition to stricter requirement for assessment of credit, consumers are further discouraged through high lending rates, which have also been a contributing factor for the rise in NPLs.

Similar to consumer finance, credit to SMEs has been on a decline with an increase in infection ratio.

During 1HCY11, banks reduced credit to SME to Rs290 billion from Rs334bn. Curtailment in SME financing resulted in slowdown in economic growth, and increase in unemployment.


Corporate and commercial loans include advances for both funded and non-funded exposure undertaken by the clients where revenue is earned through volumetric transaction though spread charges over benchmark rate is lower than that of retail and consumer business.

Banks are on a consolidation phase where fresh financing facility for short term financing extended to corporate clients is carried out on exceptional grounds based on soundness of financials and industry prospects of the company being financed.

Long-term loans have been discouraged to industrial groups that have high leverages. Focus exists for earning of revenue primarily from an existing portfolio where few new accounts are booked. With respect to commercial advances, small and midsized banks focusing on growth in its lending portfolio have extended financing, preferably on short-term basis without taking on term exposure on clients.

The textile sector for both corporate and commercial contributed to 17.7pc of all advances and continued to be the largest sector for bank advances followed by individuals and energy sectors.

Infection ratio in textiles, due to depressed business growth, recession in western markets, increase in cost of inputs due to exchange devaluation, cost of utilities, and inflation increased to 27.4pc from 24.3pc.

Banks sought to reduce exposure on textiles. Fresh facility was only provided for establishment of letters of credit (LCs) and letters of guarantees (LGs). Funds were provided on exceptional grounds to textiles, which have sound repayment and operating history with the bank.

Banks have become cautious over textile exposure especially after the demise of Dewan Group as small deterioration in the asset quality of textile sector can have serious implication for the solvency of some of the banks.

Though the demand for cement was high in the industry with additional orders coming from construction activities in Afghanistan, infection ratio in cement increased to 23pc in 1HCY11 from 18.5pc largely driven through high interest rates.

As a result of slowdown in asset growth to safeguard increase in NPLs, banks found themselves with excess liquidity with unutilized deposits.

Such deposits were used for investments in government debts as risk free investment, share of which in total assets of banks rose to 38.2pc from 35pc. Banks benefited from such investments earning through risk free yield averaging between 13.2pc to 14pc for different tenors.

Based on current market dynamics and rise in NPLs, banks have curtailed further lending and focus more on asset quality and residual liquidity through deposits being invested in government securities. In doing so, banks have lost ability to act as a financial intermediary.

Low lending rates will encourage private sector to contribute towards the growth of the economy through business developments.