The decline in NPLs growth may continue

The talks on economic recovery are in ambiguity, but clearly most of the indicators, even if not improving are not worsening as fast as they were earlier. The credit to private sector is in green, inflation is halved, current account deficit is much lower and many others have similar tale to tell. Likewise, one of the major indicators that instigated the global crises and lately played havoc in Dubai is borrowers inability to payback debts.
Non-performing loans growth of commercial banks which peaked at 29 percent in Oct-Dec 08 reduced to a mere 4 percent in Jul-Sep 09 period, as per SBPs latest data. While its coverage which was as high as 81 percent in Sep08 reduced to 71 percent in a years time, this has not let the full impact of higher toxic assets to be on the book value and earnings of banks.
Going forward with the relaxation of Forced Sale Value benefit, banks will have the liberty to provide less NPLs on their books. This trend is visible from the weekly balance sheet data of all commercial banks, as the provisioning remained at same levels since the start of this quarter, making room for the FSV benefit to be accrued, as against 6 percent increase in the previous quarter.
This, however, is merely an accounting treatment helping the banks to have more leverage on their deposits and to dress up their books. The decline in growth of toxic assets is a real indicator to show the pace of economic worsening is low, of late.
Going forward, the phase of stabilization Pakistan is currently in, fundamentals of the export oriented textile and allied industries are likely to improve further on the back of the spillover impact of stimulus-led global recovery. Growth in textile and allied businesses - an industry most infectious with high concentration of NPL - means that the quantum and frequency of bad loans will decline.
Moreover, growth in the private sector credit in the ongoing quarter also depicts improvement in banks confidence to lend the industrial sector. Although the data of NPLs for that period is not public yet, the continuation of its growth declining trend is plausible. Having said that, NPLs are not likely to fall in the near future, nor there is a chance of reversal in provisioning.