NPLs: Evil still lurks!

Realizing that the quality of assets is critical to financial health of lending institutions, an exorbitant rise in the non performing loans (NPLs) during the past few years, coupled with weak business environment, has tilted the local banking industrys focus towards less risky investment avenues. To no ones surprise, the industrys asset base grew by 15 percent during CY11 to Rs8,207 billion at the end of December, 2011, relative to the same period last year, when the advances level stayed unchanged at last years level of around Rs3,341 billion.The growth in the asset base stems from a whopping 43 percent expansion in the industrys investment base during CY11 to Rs3,053 billion as on December 31, 2011. The lenders are capitalizing on the governments insatiable appetite for funds, as investments in government securities accounted for nearly 85 percent of the industry total investment base. Hence, the industry successfully increased the investment to deposit ratio (IDR) to around 49 percent at the end of CY11, nearly 10 percentage points higher than same period last year. Although, the industry is hard put to peter out growth in toxic loans, in part, shift in the asset base towards risk-free avenues has assuaged pressure of rising toxic loans. NPLs for all banks grew by 11 percent to Rs607 billion as on December 31, 2011, relative to CY10. This marks improvements compared to the previous years, since the industrys NPLs had registered an average annual growth of 34 percent during the past four years (CY01-07). But the irony is that the rate of growth in toxic loans has reduced not on account of improvement in economic fundamentals and business environment. Lenders are still wrestling with a fresh influx of toxic loans, largely fueled by the looming energy crisis and higher inflationary pressures. Therefore, the industrys infection ratio has reached an alarmingly higher level; close to 16.2 percent at the end of CY11. The infection ratio had stood around 14.7 percent and 12.6 percent, in CY10 and CY09, respectively. The gravity of the situation can be analysed from the fact that the lending portfolio concentrated in the corporate sector, one of the largest borrowers in the private sector, which accounted for nearly 65 percent of the industrys advances base as of December 31, 2011, faces an infection ratio of around 17 percent. At the same time, infection ratio of the other two key borrowing sectors; SMEs and commodity financing stood at around 31 percent (one of the highest) and 1.1 percent (the lowest), respectively among other sectors. The Infection ratio of the public sector banks is close to 23.8 percent, while it was 13.6 percent and 10.3 percent for the local private and the foreign banks, respectively. Bank-wise data suggests that a few of the smaller and mid-sized banks continue to grapple with relatively higher infection ratios. Decline in interest rates and increase in exposure in government securities will check growth in toxic loans. But a bitter pill to swallow is that the lenders will continue to wrestle with defaults until and unless economic indicators start improving.