The quantum of non-performing loans (NPLs) of the banking sector increased rapidly from Rs 177 billion in CY05 to Rs 509 billion in September 2010. The main reasons for this rise include rapid and reckless credit expansion between CY03 and CY07 due to cheap availability of credit, rise in interest rates, poor monitoring of advances and economic slowdown.
The banks have also been enhancing provisions against NPLs in addition to the direct write-offs of advances to the debit of their P&L accounts. The provisions against NPLs, which stood at Rs 136 billion in CY05 rose to Rs 250 billion in CY08 and to Rs 312 billion in CY09.
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Position of NPLs, Provisions and Net NPLs
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Rs (bn) CY05 CY09 Change % Change
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Public Sector Banks 38 118 80 210
Local Banks 96 294 198 205
Foreign Banks 2 6 4 2000
Total Commercial Banks 136 418 282 207
Specialised Banks 41 28 -13 -32
Total all banks 177 446 269 152
Provisions 136 312 176 129
Net NPLs 41 134 93 227
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It is observed that NPLs of the banking sector recorded a rise of 152 percent in CY09 as compared to CY05 whereas the provisions and net NPLs witnessed a rise of 129 percent and 227 percent respectively. It is also interesting to note the following selected sector-wise position of NPLs of the banking sector.
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Sector-wise NPLs
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Rs (bn) Loans NPLs Ratio
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Corporate 2179 289 13.27
SMEs 328 89 27.09
Agriculture Sector 165 27 16.49
Consumer Sector 270 40 14.73
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The pace of rise of NPLs as shown above is indeed very alarming. It is apprehended that the quantum of NPLs would go up further in the coming months. The five major banks between CY02 and CY09 wrote-off advances of Rs 144 billion in eight years.
The two major privatised banks have written-off advances at a much faster pace then the state owned National Bank of Pakistan (NBP). Between CY04 and CY09, the quantum of advances written-off by NBP were Rs 18.9 billion whereas during the same period, the corresponding figures of HBL were Rs 45.4 billion and that of UBL were Rs 40.1 billion.
It appears that the provisions of write-off were in-built in the price for which these banks were privatised. A large quantum of advances has been written-off by the banks in pursuance of the guidelines contained in BCD Circular No19 dated October 15, 2002. This Circular is even against the Partnership Act. The Chief Justice of Pakistan had said a year ago in December 2009 that this circular will be examined by the court. In case the decision is delayed further, the recovery of advances already written-off to any significant extent will not be possible.
The pre-tax profit of the banking sector rose from a mere Rs 4.5 billion in CY00 to Rs 123.6 billion in CY06. It is, however, significant to note that during this period, total deposits recorded a rise of 139 percent, total advances rose by 148 percent, total assets rose by 137 percent, but the total pre-tax profit rose by 2646 percent. This is simply unheard of in the global banking history in recent times.
This profitability was enhanced by banks by drastically reducing the rate of returns paid by banks to the depositors on deposits secured on profit & loss (PLS) basis and over-exposure by many banks in speculative activities and the high banking spread. The pre-tax profit of the banking sector, however, declined to Rs 107 billion in CY07 and to Rs 81 billion CY09. The following is the comparative position of the pre-tax profitability of the banking sector.
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Pre-tax profits
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Rs (bn) CY07 CY09 Change % Change
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Public Sector Banks 33.2 16.8 -16.4 -49.4
Local Banks 69.5 60.5 -9 -12.9
Foreign Banks 2.4 -0.9 -3.3 -137.5
Total Commercial Banks 105.2 76.5 -28.7 -27.3
Specialised Banks 1.7 4.2 2.5 147
Total all banks 106.9 80.7 -26.2 -24.5
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It is interesting to note that out of 38 banks, 17 banks recorded a loss in CY09. Some other important points are:
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Profit & Loss Distribution
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Rs (bn)
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1 The total profit of 19 profit earning banks 108.426
2 Quantum of loss of 16 banks 27.215
(Results of BoP for CY09 not included)
3 Total profit of banks 81 .211
4 The pre-tax profit of five major banks 89.6
(including point 2 above)
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Many important conclusions can be drawn from the above figures for the profitability of the banking sector. It may also be mentioned that had the banks paid the same average real rate of returns to depositors between CY01 and CY09, and not even shared the phenomenal rise in their profitability, the millions of depositors during these eight years would have received an additional profit of Rs 900 billion over and above the amount already received by them in profit. It is, therefore, obvious that the rise in profitability of banks has been achieved at the cost of millions of depositors.
The profitability of the banking sector is now showing an upward growth in CY10 despite the rise in NPLs and ever rising administrative costs. This rise is largely due to amendments in Prudential Regulations by the SBP, allowing banks to avail the benefit of Forced Sale Value up to 40 percent of the collateral value of the security. This should not give banks a false sense of comfort.
The banking sector is facing serious risks and challenges. The fall of Rs 42.3 billion in the pre-tax profit of banking sector between CY06 and CY09, the rise of Rs 332 billion in NPLs after December 31, 2005, the write-off in advances of Rs 144 billion by five major banks between CY02 and CY09 and rise in administrative cost of banks is indeed a matter of serious concerns.
It must be perceived clearly by all the stakeholders that neither the nationalisation of banks was the root cause of all evils in the banking sector nor privatisation alone is the cure of all diseases. The evils in the financial sector in Pakistan have been caused due to a breach of trust, un-professionalism and lack of accountability in banks, SBP and the Ministry of Finance. This rule should also apply to other public sector organisations in Pakistan.
(The writer is the Chairman, Research Institute of Islamic Banking and Finance) ([email protected])
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