NPLs: re-emergence of the spectre

One of the biggest fears a lender faces when extending a loan is the default on repayments. As businesses across the country continue to wrestle with weak fundamentals, the banking industry is keeping its distance from lending to the private sector. Economic shocks in the midst of a fragile business environment have been weighing on the banking industrys asset quality for the past few years. What makes lenders (bankers) uncomfortable is that the industrys (all banks ) toxic loans level has reached Rs.613 billion at the end of September 2011 marking a jump of around 24 percent compared to the same period year ago, when the gross advances have elevated by a mere 4 percent. Although the escalation in the level of toxic loans had petered out in the 2QCY11 with June statistic unchanged at the March ending level, still the market was taken aback by an abrupt 6.5 percent growth in the NPLs during the third quarter of the current calendar year. Therefore, the industrys (all banks) infection ratio deteriorated to 18 percent at the end of September 2011 marking a jump of 150 bps compared to June-ending level. Battered by inherited inefficiencies, the public sector banks owe the major blame for distorting the industrys asset quality statistics. Given that the combined NPLs on their books rose by Rs.26 billion during the third quarter of CY11 to Rs.193 billion as of September 30, 2011, accounting for around three fourth of the total Rs.37 billion jump in NPLs for all banks. Three out of the four public sectors banks-National Bank of Pakistan, the Bank of Khyber and First Women Bank of Pakistan-have witnessed a combined net Rs.9.8 billion growth in NPLs in the 3QCY11. Therefore, without a shadow of doubt, it would be right to assume that the Bank of Punjab (BoP) has accounted for the remaining increase of Rs.16.4 billion in NPLs witnessed by the public sector banks. BoP did not issue its financial statement from June 2008, but given that the bank is bound to release financial statements for December 2011, the actual picture will be revealed after the announcement of its financial results. Although the private sector witnessed a slower growth in NPLs compared to the public sector, still they are hard pressed to check rising NPLs. The sectors NPL level surged to Rs.377 billion as of September 30, 2011, from Rs.369 billion at the end of June 2011. However, a handful of banks, namely UBL, MCB, Soneri Bank and Summit Bank, were responsible for around 75 percent of the total jump of Rs.8.7 billion in NPLs witnessed by the private sector. Hoping to control the growth of non-performing loans, the banks are tinkering by increasing their exposures to investments in government securities. But, with the discount rate on a downward trend, it would be difficult for banks to stay away from the private sector credit, as embedded risks in the private sector loans compensate the banks with higher interest income. Hence, a rational antidote to control high NPLs would be to make industry lending practices more prudent through the implementation of a rigorous credit analysis process. In short, the industry needs to do its homework.