Banks face damage to branches, loan write-offs

KARACHI: Banks will have to contend with damage to branch networks and write-off of agricultural loans in the immediate aftermath of the floods in Punjab, Khyber-Pakhtunkhwa and Sindh.

Banks and other sectors including insurance, fertilisers and automotive industries will feel the brunt of the shocks to their assets and will demand certain products in coming months, according to an AKD Securities report issued on Friday.

The recent hike in the discount rate could put additional pressure on some corporate borrowers as well, adding to the perils raised by recent flooding that has been termed the worst in the country’s history, according to experts.

Among the biggest banks, direct exposure to the agriculture sector through loans and credit disbursement is less than five per cent of their total loans, according to AKD Securities. However it explains that, “being an agrarian economy, several corporate borrowers are heavily reliant on the performance of the agriculture sector.”

Agriculture provides 25 per cent of the country’s gross domestic product (GDP) and as such, many different sectors of the economy are affected by changes in it.

“Spinners may have to face margin compression due to the cotton crop shortfall this year. In a worst-case scenario, for some spinners this could impinge on their loan repayment abilities,” warned AKD analysts.

They also pointed out that the big five banks’ loans to the spinning sector comprise four to eight per cent of total outstanding loans.

They also highlighted that Allied Bank has the greatest exposure in agriculture loans as a percentage of total loans, at 7.3 per cent, while MCB has the lowest ratio at 3.9 per cent.

The report cited that purchasing power of farmers will likely be affected in coming months due to the devastation caused to their livelihoods. Analysts asserted that fertiliser off-take and sales of farm equipment such as tractors could suffer as a consequence.

According to them, while it is still early to assess the scale of damage to the agriculture sector, the government is considering downgrading its GDP growth forecast from 4.5 per cent to 3.5 per cent.

Published in The Express Tribune, August 14^th, 2010.