After ascending by nearly 5 percent in each of the last four quarters, toxic assets in Pakistans banking industry have finally hit a plateau. They remained stagnant during the quarter ending June 2010.
With a meagre rise of Rs2 billion in non-performing loans during the Apr-Jun quarter, a 39 basis point decline in the net NPLs ratio implies a reversal in the direction of the gross infection ratio.
The ratio of toxic assets to gross loans, which were on a steep upward trip for the past two years, apparently peaked by March, as the implied calculation reveals that the gross infection ratio receded to 12.9 percent in June after peaking to 13.1 percent at the end of the previous quarter. This had a twofold impact; a slowdown in the growth of bad loans, along with a pick up in advances.
Although detailed numbers have not been released by the SBP, reverse calculations from NPLs and their ratios suggest that net advances registered a growth of 2 percent in the quarter, ending June, vis-à-vis a decline of 2 percent for the Jan-Mar period.
A closer look at the data reveals an interesting feature - that public sector banks, inefficient and in bad financial health, have shown significant signs of recovery in loans, whereas bad loans in local private and foreign banks, that have the lions share, continued to increase. Still, growth in local private banks toxic assets is much lower relative to previous quarters.
The recovery of over Rs4 billion in public sector banks could be attributed to the one-off redemption in the Bank of Punjab as BoPs new management is aggressively expanding, whereas the investigation of BoPs ex-president, charged under the famed Haris Steel fraud, may have also aided the banks recovery process. So the tide could turn back again on public sector banks.
Nonetheless, bad debts in private sector banks, which were growing at an average of 6 percent for the previous four quarters, slashed to a mere 2 percent. This change can be attributed to some pick up in private sector credit and economic activity, as well as, slightly better banks confidence.
But an exogenous water factor might wash away the thesis of the downward movement in the gross infection ratio.
The massive floods, which are going to change the overall macroeconomic landscape for the short and medium term, might also increase non-performance in the coming quarter or two. SBPs estimates, which appear conservative at the moment, suggest that non-performing loans, owing to damaged crops and other businesses in the flood-hit areas, will be in the vicinity of Rs50 billion
Hence, the toll of toxic assets is expected to be around Rs510-525 billion by the end of the current calendar year. Despite that, the State Bank has stressed that commercial banks should ensure smooth flow of credit once the water recedes, in order to facilitate rehabilitation and reconstruction activities in the flood affected areas.
Sources close to SBP have told BR Research that the central bank is formulating a strategy to relax the provisioning requirements for credit doled out to flood affected areas, especially in the agriculture and SMEs segments, while keeping a critical eye on capital impairments.
"Non-performance is going to be a secondary issue, rehabilitation is our priority", SBP sources echoed. But then, at the end of the day, lower provisioning requirement won necessarily lower the risks, would it?