Bad loans grow 7% between July and September
Non-performing loans in banks' lending portfolios reach Rs494 billion .
KARACHI:
Non-performing loans (NPLs) grew by 7.4 per cent during the July-September quarter, reaching Rs494 billion as banks’ lending portfolio was affected to some extent by recent floods and torrential rains, the State Bank said.
“This coupled with over-the-quarter decline in lending portfolio amplified the deterioration in infection ratios,” the central bank said in its Quarterly Performance Review of the Banking System for the quarter ended September 2010 released on Monday.
However, it said since these fresh NPLs required only partial provisioning coverage, the system’s baseline earning indicators remained positive.
Earlier, the NPL growth had decelerated in the first two quarters of calendar year 2010.
The State Bank stressed upon the banks to devise ingenious strategies to deal with the high level of NPLs so that promising businesses, which are facing transitory difficulties due to a constrained macro environment, continue to contribute to economic growth and service their obligations in an orderly manner.
Commenting on the situation, the central bank said it has responded to the changed and challenging circumstances and rationalised its regulatory requirements on loan loss recognition in respect of advances in flood-affected areas.
It said that asset base of the banking system contracted by 2.3 per cent to Rs6,626 billion which was in line with the established trend for the July-September quarter. “The Ramazan and pre-Eid withdrawals and increase in currency in circulation during the quarter led to a narrowing of the deposit base.”
The report pointed out that the shrinking of the asset base, particularly advances, resulted in a decline in the size of risk-weighted asset (RWA) over the quarter. However, the higher regulatory deductions from the capital reduced the eligible capital as well as risk-based capital adequacy ratio (CAR), which deteriorated marginally to 13.8 per cent, while staying above the regulatory requirement of 10 per cent.
The report forecast that the usual inventory build-up, particularly by Kharif crop-based industries, during the last quarter of 2010 will create additional demand for bank credit.
“Although the banks are expected to remain liquid, the heightened demand for credit from the public sector will mean that the banks’ ability to finance additional private sector loans will be predicated upon mobilisation of fresh deposits and retirement of commodity finance by government-owned agencies which continues to be extremely high,” the report said.
Banks will need to reduce their large portfolio of government paper and lending to public-sector agencies so as to reduce their sovereign exposure as well as to make credit available to the private sector for maintaining economic growth, and thereby enhance and diversify revenues of the banking system, it said.
Nevertheless, the aggregate earnings of the system are expected to be satisfactory, although these will continue to be concentrated in banks endowed with a wide network and competetively better placed to raise stable and relatively cheap funds, the report said.However, the increased credit risk will remain a major challenge for banks in the near future.
Published in The Express Tribune, December 28th, 2010.
Non-performing loans (NPLs) grew by 7.4 per cent during the July-September quarter, reaching Rs494 billion as banks’ lending portfolio was affected to some extent by recent floods and torrential rains, the State Bank said.
“This coupled with over-the-quarter decline in lending portfolio amplified the deterioration in infection ratios,” the central bank said in its Quarterly Performance Review of the Banking System for the quarter ended September 2010 released on Monday.
However, it said since these fresh NPLs required only partial provisioning coverage, the system’s baseline earning indicators remained positive.
Earlier, the NPL growth had decelerated in the first two quarters of calendar year 2010.
The State Bank stressed upon the banks to devise ingenious strategies to deal with the high level of NPLs so that promising businesses, which are facing transitory difficulties due to a constrained macro environment, continue to contribute to economic growth and service their obligations in an orderly manner.
Commenting on the situation, the central bank said it has responded to the changed and challenging circumstances and rationalised its regulatory requirements on loan loss recognition in respect of advances in flood-affected areas.
It said that asset base of the banking system contracted by 2.3 per cent to Rs6,626 billion which was in line with the established trend for the July-September quarter. “The Ramazan and pre-Eid withdrawals and increase in currency in circulation during the quarter led to a narrowing of the deposit base.”
The report pointed out that the shrinking of the asset base, particularly advances, resulted in a decline in the size of risk-weighted asset (RWA) over the quarter. However, the higher regulatory deductions from the capital reduced the eligible capital as well as risk-based capital adequacy ratio (CAR), which deteriorated marginally to 13.8 per cent, while staying above the regulatory requirement of 10 per cent.
The report forecast that the usual inventory build-up, particularly by Kharif crop-based industries, during the last quarter of 2010 will create additional demand for bank credit.
“Although the banks are expected to remain liquid, the heightened demand for credit from the public sector will mean that the banks’ ability to finance additional private sector loans will be predicated upon mobilisation of fresh deposits and retirement of commodity finance by government-owned agencies which continues to be extremely high,” the report said.
Banks will need to reduce their large portfolio of government paper and lending to public-sector agencies so as to reduce their sovereign exposure as well as to make credit available to the private sector for maintaining economic growth, and thereby enhance and diversify revenues of the banking system, it said.
Nevertheless, the aggregate earnings of the system are expected to be satisfactory, although these will continue to be concentrated in banks endowed with a wide network and competetively better placed to raise stable and relatively cheap funds, the report said.However, the increased credit risk will remain a major challenge for banks in the near future.
Published in The Express Tribune, December 28th, 2010.