Nov 19 - 25, 2012

The volume of bad or non-performing loans (NPLs) of the commercial banks and financial institutions is constantly on the rise and according to the latest report of the State Bank of Pakistan has reached an all time high figure of Rs.653 billion by the end of fiscal year 2012-June 30 last on the back of high interest rate and slow economic activities. During the earlier fiscal year (2010-11) it had crossed the figure of Rs.518 billion by June 30 2011 a highest figure till that time. During a period of 12 months it has jumped by RS 135 billion-an all time high increase in one year.

The report revealed that NPLs of all types of bank including specialized banks and local private banks, foreign banks and public sector have all posted some growth in the volume of their NPLs. During the period under review , NPLs of local private banks surged by over Rs 16 billion to reach the figure of Rs 394.720 billion. With an increase of Rs 1.191 billion, NPLs of specialized banks reached Rs.35.788 billion level in June this year. During this period, NPLs of public sector banks went up with an increase of about Rs 10 billion to Rs 196.399 billion Foreign banks registered an increase of Rs7.883 only during the period under review.

The State Bank repot revealed that the NPLs of banks and DFIs continued to grow and registered a big rise of 5percent in the first half of the current calendar year (Jauary-June 2012 )and the total NPLs mounted to Rs 653 billion on June 30 2012 compared to Rs 623 billion on December 31 2011 depicting a rise of about Rs30 billion in the first half CY 12. However, the increase in the second quarter of the current calendar year is much higher than the first quarter.

Normally the banks take all possible precautions at the time of advancing loans to their regular customers, but they are extra cautious at the time of advancing loans to the new parties and make through probe about their business operations and their dealings with their banks earlier . In most cases , big loans are approved by the full boards specially in case of new customers. Defaults by the borrowers are also unintentional in majority of the 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-equally 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 four to five years partly due to the international economic recession but mainly due to uncertain political conditions of the country, unsatisfactory law and order conditions, and above all the failure of the present PPP led government to develop any sound economic policy or a program to take out the country out of prevailing mess. There is no money to meet day to day expenses for which the government is depending heavily on internal borrowing mainly by printing currency notes to the tune of about one billion rupees a day grossly adding to inflation.

The country has been facing the worst energy crisis during all these years forcing industrial sectors to work on two shifts basis (instead of three ) because of prolonged load shedding of 8 to 10 hours a day badly hitting their profitability becaust of lower production. Under these conditions prevailing for the last many years with no signe of relief in 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-may be nominal. They cooperates in project restructuring. Accommodate The banks generally accommodate their good clients in such efforts.

However, there are some sponsors who start pilfering of project funds or use loan funds for purposes other than the projects. Such project sponsors are known as willful defaulters are dealt with strictly-and rightly so - by their banks who even start legal measures by filing criminal cases against such borrowers. The lenders are expected to ensure that the loan amount is spent on the purpose or the project for which the loan has been sanctioned Normally there is no compromise on this issue

The practices among the lenders, however, sometimes also differ and this is mainly because pressure from the above or some understanding for mutual benefits among the parties at lower level. Although it seems difficult to eliminate such immoral practices under values of our present culture more vigilance can, however, control this practice to a large extent..

If one looks at NPLs situation I Pakistan's banking sector, one would find the highest to gross outstanding loans in the public sector banks and DFIs followed by the private sector banks. The lowest NPLs are in case of foreign banks. 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 caliber of professionals employed and the low emolument package offered to employees handling loaning functions which otherwise offered many opportunities of underhand deals, commission and kickbacks.

The financial crises in the banks, investment banks, and money markets were also developed in the developed countries of the world, but swift, prompt, and effective actions tackled the situations . In Pakistan , the situation was entirely different as the government neither was in a position to bail out nor prepared to do it.

Every country has passed laws for the recovery of bad loans. In Pakistan, the banking courts are there but they can handle cases up to Rs25 million whereas bigger loans are taken to higher courts which are already overworked as the number of judges are grossly short of the requirements than the interested parties use all the delaying tactics with the results that cases are not decided for decades. This is high time that the government takes a serious notice of the deteriorating situation involving loss of huge amounts, which the country needs badly to stabilize its economy.