NPLs down on cautious lending, falling interest rates

Constitute 2.8% of net advances at the end of 2014.

KARACHI: Non-performing loans (NPLs) of the banking industry have come down substantially in recent months mainly on the back of banks’ cautious lending approach and declining interest rates.

Net NPLs of all banks and development finance institutions (DFIs) constituted 2.8% of their net advances at the end of 2014, latest data released by the State Bank of Pakistan (SBP) shows.

They comprised 3.3% at the end of September, which shows a significant quarter-on-quarter decline of NPLs as a percentage of net loans of the banking sector.

In addition to their decline as a share of outstanding loans, net NPLs have also decreased in absolute terms. NPLs net of provisions for all banks and DFIs amounted to Rs125.9 billion at the end of last year, down 10.6% from the corresponding figure of Rs140.9 billion recorded at the end of September.



Speaking to The Express Tribune, Topline Securities research analyst Umair Naseer said banks have adopted a highly cautious lending approach following the financial crisis of 2008. “Most NPLs originated from the 2008 crisis, which forced banks to embrace a conservative role in following years,” he said. Naseer added that net NPLs are on the decline because banks lend conservatively now while companies try to retire their overdue loans.

Data shows the decrease in NPLs has been consistent over the last many years. Net NPLs constituted 5.6% of net loans in 2011, 4.7% in 2012, 3.2% in 2013 and 2.8% in 2014.

According to Naseer, the consistent decrease in NPLs is partly explained by a notable drop in interest rates. Typically, NPLs tend to decrease when the interest rates are stable or decreasing.

Banks give out a major portion of their loans on a floating interest rate basis, which means their mark-up rates change in line with the monetary policy stance of the central bank. Delinquent borrowers find it relatively easy to pay back overdue loans when interest rates drop during monetary easing. The SBP has reduced the discount rate by 150 basis points to 8.5% since November.

Specialised banks had the highest net NPLs (10.5%) in terms of their net loans on December 31. They were followed by DFIs (7.9%), public-sector banks (5.8%) and local private banks (1.6%).

NPLs of commercial banks, which do not include bad loans of DFIs, constituted 2.5% of their net loans, substantially down from 2.9% recorded at the end of September. More than half of Rs18.2 billion that all banks and DFIs collectively recovered against their NPLs in the Oct-Dec quarter belonged to local private banks only.

Published in The Express Tribune, February 25^th,  2015.

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