Non-performing loans of banks rise by Rs2.6b

KARACHI: Non-performing loans of banks had risen by Rs2.6 billion during the second quarter of 2010 to Rs460 billion, according to data released by the State Bank of Pakistan. This was a significant drop in accretions as compared with the previous two quarters, according to JS Global Capital analysts.

They stated that non-performing loans in the ‘all banks’ category had risen by Rs19.6 billion in the first quarter of 2010 and Rs16 billion in the fourth quarter of 2009, showing that the quarterly increases in NPLs were slowing down.

“Banks increased their provisions for non-performing loans in the second quarter of 2010 as they probably thought that most individuals would not be able to honour their loans,” said a State Bank analyst. However, he pointed out that contrary to their expectations, their recovery of non-performing loans actually picked up in the second quarter. The net NPL ratio for ‘all banks’ declined to 3.81 per cent as of Q2 of 2010, from 4.2 per cent at the end of Q1.

Heavy government borrowing from banks has crowded out the private sector and caused private sector credit offtake to take a hit, leading to fewer productive sectors getting loans, said Research Head, Standard Capital Security, Faisal Shaji. He asserts that the government’s borrowing has grown to extreme and was causing non-performing loan provisions to increase. He pointed out that it had even increased beyond the IMF’s set limits.

Looking at the break-up, NPLs in Q2 for private sector banks rose by Rs4.7 billion (Rs15 billion in 1Q2010) whereas those for specialised banks rose by Rs1.1 billion (reversals of Rs852 million in 1Q2010).

According to the assistant vice president of research at BMA Capital, Abdul Shakur, the data released by the State Bank is very encouraging as NPL growth had been in the double digits since December which makes this decline very significant as it dropped from Rs19 billion in March 2010 to Rs3 billion in June 2010.

Interestingly, NPLs for public sector banks, National Bank, Bank of Punjab, Bank of Khyber and First Woman Bank showed reversals of Rs4.3 billion as against accretions of Rs4.8 billion in the first quarter of 2010. “Public sector banks made a key contribution to the NPLs’ decline together with improved cash recovery of Rs3.8 billion during the quarter,” said Shakur, who pointed out that it was possible that the Bank of Punjab would be receiving cash inflow from Haris Steel.

Advances growth usually picks up in the second and fourth quarter due to commodity financing and textile financing, Shakur pointed out, explaining that if advances started picking up, then incremental NPLs would start subsiding and the NPL to loan ratio would also decline. He estimates that NPLs would decline to 13.8 per cent in June 2010 as compared with 14.1 per cent in March 2010.

This improvement should be seen in the backdrop of certain relaxations that have been made by the State Bank whereby export refinance loans do not become overdue if their adjustment is delayed by six months, says economist, A B Shahid. He explained that earlier all export refinance loans used to be treated overdue once they crossed the six-month period and a loan loss provision had to be made for the full amount of the loan. Now that period has been extended to one year. This relaxation allows loans to become overdue and therefore become part of NPLs after twice the normal period.

He said that the reported figures pertained to net known loss provisions, implying thereby that this was the net amount due from the borrower after giving the borrower the benefit of the value of collateral pledged by the borrower.

However, he pointed out that there was a catch relating to the valuation of the collateral, as it is commonly known that collateral in many cases has been recorded at substantially higher against its going market value; which may be a huge loophole that needs to be cautiously monitored, said Shahid.

Published in The Express Tribune, August 20^th, 2010.