The week in focus

NPLs of commercial banks increased by Rs34.2 billion in the first quarter of the current financial year 2010-11.

Non-performing loans (NPLs) of commercial banks increased by Rs34.2 billion in the first quarter (July to September) of the current financial year 2010-11 compared to the June quarter, which was mainly caused by defaults in the wake of devastating floods last year that swept away businesses and livelihood of many people, experts say.

According to the State Bank of Pakistan, the increase in NPLs in the July to September quarter was considerably higher than that in the four quarters of financial year 2009-10. Total NPLs of commercial banks stood at Rs494 billion at the end of September last year.

In addition to the rise in infected loans, bank advances to the borrowers dropped by Rs49 billion, reflecting the high cost of doing business due to high interest rates and unchecked government borrowing sidelining corporate customers.

Government borrows from commercial banks by selling treasury bills and from the central bank in the form of printing of currency notes.

Banks are also said to be reluctant to give huge amounts in consumer finance to individuals and risky corporate borrowers. About three years ago, a large number of borrowers of consumer finance defaulted on loan repayments, prompting banks to drastically slash lending to this category. In the developed world too in 2008, some financial institutions collapsed under the weight of widespread defaults by sub-prime mortgage borrowers.

Flood impact

BMA Capital Head of Equity Research Hamad Aslam said many businesses closed down following floods in July and August last year that damaged people’s livelihood, crops and infrastructure. After that, borrowers became unable to repay the money, leading to a spike in bad loans of banks.

Later, the State Bank eased conditions for loan repayments by people whose businesses were affected by the floods and allowed banks not to book such defaults till the end of December this year. “Now, it is expected that NPLs will come down in the second quarter and beyond,” Aslam said.

Discussing the shrinking advances of banks, he said the seasonal effect caused the decline in the July to September quarter and lending will pick up pace later because of financing needs for commodity purchases from farmers and borrowing by the textile sector, the biggest exporter of the country.

High interest rates have also discouraged the corporate sector from borrowing as their cost of doing business gets dearer, making them uncompetitive in the international market. Banks lend at the Karachi inter-bank offered rate (Kibor - 13 to 14 per cent) plus three to four per cent.

Highlighting other factors that have slowed down the flow of financing to the private sector, Aslam cited heavy government borrowing from banks through treasury bills auction and financial institutions interest in investing in risk-free government papers compared to risky small and medium-sized borrowers.

High interest rates

JS Global Capital banking sector analyst Mustafa Bilwani said one or two big corporate houses may have failed to serve their loans during the stipulated time period because of high interest rates and that has mainly contributed to the rise in infected loans.

About bank advances, he said demand for loans was low in the first quarter but credit flow may have picked up momentum in the next quarter due to financing needs for commodity purchases. “In calendar year 2010, advances grew by 6.5 per cent.”

Bilwani said business environment is not very encouraging, prompting banks to pour money into risk-free government securities, the returns on which are continuously rising. “Banks are also inclined towards lending to big corporate houses where the possibility of non-payment is quite low,” he added.

the writer is incharge Business desk for the Express tribune and can be contacted at [e-mail]

Published in The Express Tribune, February 7^th, 2011.