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The banks and financial institutions have added a sum of Rs78 billion in their non-performing loans (NPLs) during the last one year that reached to a staggering Rs457 billion by end March 2010, showing an increase of 20 per cent over Rs379 billion in the corresponding period last year.

The latest quarterly performance review of the banking system by the State Bank of Pakistan said that a challenging economic and business environment continue to affect the growth and assets quality of the banking system. This is likely to affect adversely the profitability of the banks as well. "Banks' investments particularly in government papers continued to grow through at a decelerated pace as compared with the trends of the last six quarters," the report said.

The quarter under review was marked with significant reduction in the banks' lending to the public sector and slight increase in advances to the private sector which otherwise experienced constant decline during the previous 4 quarters of year 2009.

"However, the borrowing needs of the government for budgetary support as well as that of public sector enterprises will keep an upward pressure on the banks' investment in government papers," the report said adding that "in this scenario, the banks' capacity to lend private sector and build high return earnings assets will largely depend on a number of factors mainly their ability to mobilise additional savings, manage increased credit risk and high inflexed profit and early retirement of commodity financing by the government."

Unprecedented rise in the NPLs is attributed to economic slowdown due to higher interest rates, high cost of production and power breakdown apart from global economic recession.

The NLPs of the banks had been declining during the six years from CY2001 to CY2006 and they started surging in 2007. The trend continued during CY 2008. During the CY2007, NPLs rose by Rs30 billion, or 17 per cent, to Rs 206.1 billion from Rs175.5 billion.

A surge of about 52 per cent was witnessed in overall banks' NPLs during CY 2008 to a record level of Rs313.657 billion on December 31, 2007. It was a record increase in the history of banking industry, which never had been witnessed in the past in a single year. The NPLs stood at Rs240 billion in CY2001, Rs231.5 billion in CY2002, Rs211.3 billion in CY2003, Rs199.8 billion in CY2004, Rs177.4 billion in CY2005, and Rs175.3billion in CY2006.

The policy rate was raised by some 50 basis points, from 10 per cent to 15 per cent during the last calendar year, which directly raised the lending cost for industrial loans, resulting in slow recoveries and increase in NPLs. That policy rate had been constantly on the rise during last two years, and NPLs also witnessed the same trend during CY2007 and CY2008. Sector-wise statistics were not available but it was most likely major increase was witnessed in the consumer and industrial loans.

The State Bank in a report has expressed concern that the banking growth in Pakistan may be dampened. Growth rates, credit risk and earnings of the banking system are likely to remain under strain in future due to constrained economic environment both at home and global fronts.

According to the State Bank of Pakistan's Quarterly Performance Review of the Banking System for the quarter ended December 31, 2008, Pakistan's banking system effectively coped with several challenges emanated from economic slowdown, both at home and abroad due to strong resilience built over the years and effective regulatory and supervisory regime. However, the impending economic slowdown may dampen the growth rate of the banking system in coming quarters. Low demand for banks advances will shift asset mix away from advances to government papers, and deposits are likely to grow at a steady pace. This respite in liquidity may have positive bearing on interest rates, the report said.

The latest post quarters statistics of March 2009 also vindicate these trends. Since the last week of December 2008, the asset base over three weeks has grown by 2.3 per cent, while advances declined by 2.3 per cent. The present tough economic environment will also heighten the credit risk and affect the earnings due to increased loan loss charges and constrained incomes. Through the concerns about the solvency of top banks of the world are weighing on the investor confidence across the globe, the banks in Pakistan are still maintaining their resilience, the report said.
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Publication:Pakistan & Gulf Economist
Geographic Code:9PAKI
Date:Jun 27, 2010

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