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Ringing alarm bells: Public-sector banks lead the pack in risky lending

Ringing alarm bells: Public-sector banks lead the pack in risky lending

By Kazim Alam
Published: August 30, 2012
According to the State Bank of Pakistan (SBP), net NPLs of public-sector banks stood at Rs98.2 billion as of June 30, 2012; up from Rs73.5 billion at the end of the third quarter of fiscal 2012 – a quarter-on-quarter rise of 33.6%. PHOTO: FILE 

KARACHI:  The share of net non-performing loans (NPLs) in loans extended by all banks and development finance institutions (DFIs) has increased from 5.7% in the third quarter of fiscal 2012, to 6.1% in the fourth quarter. The public-sector banks segment is the largest contributor to the quarterly rise in net NPLs.

NPLs usually refer to loans that are in default, or are close to a default. The term ‘net NPLs’, on the other hand, pertains to those loans against which banks have yet to make provisions for credit losses. In most cases, a loan becomes ‘nonperforming’ after being in default for 90 days.

According to the State Bank of Pakistan (SBP), net NPLs of public-sector banks stood at Rs98.2 billion as of June 30, 2012; up from Rs73.5 billion at the end of the third quarter of fiscal 2012 – a quarter-on-quarter rise of 33.6%. Meanwhile, the percentage of net NPLs in public-sector banks increased from 10.4% to 12.7% on a quarter-on-quarter basis.

While talking to The Express Tribune, Summit Capital Senior Research Analyst Sarfraz Abbasi said the main reason for growing net NPLs in public-sector banks’ lending is their clients’ insufficient capacity to make loan repayments. “High interest rates, poor law and order, and the economic slowdown have gradually weakened the repayment capacity of companies that borrow largely from public-sector banks.”
Although the segmented share of local private banks in the net NPLs of all commercial banks is still larger than that of public-sector banks, the former seem to have reduced their overall share considerably in the last quarter of fiscal 2012. Net NPLs of local private banks decreased by 7.6% to Rs98.8 billion on a quarter-on-quarter basis, and their share in the net NPLs of all commercial banks combined reduced from 58.9% to 49.9% on a quarterly basis.

Local private banks increased their cash recovery against non-performing loans in April-June to Rs13.7 billion, as opposed to Rs10.2 billion in the preceding quarter – a rise of 34.3%. Meanwhile, cash recovery by public-sector banks against non-performing loans improved 60% to Rs3.2 billion in the final quarter of fiscal 2012 – as opposed to Rs2 billion during the preceding quarter. Nevertheless, the volume of public-sector banks’ cash recovery in the final quarter of fiscal 2012 is only a fraction of their net NPLs, which total Rs98.2 billion.

According to Farhan Mahmood, who serves as head of research at Topline Securities, the rise in net NPLs of public-sector banks is largely attributable to power-sector companies, which borrow heavily from the former.

“Circular debt has particularly affected energy-sector companies, which resort to public-sector banks for borrowing in order to meet financial commitments. Their inability to pay back loans due to the spiralling circular debt has resulted in the rising net NPLs of state-owned banks,” he said.

However, Mahmood is of the opinion that the situation will improve in the coming months. “The reduction of 350 basis points in the monetary policy rate over the last one year is likely to improve the ability of borrowers to pay their loans,” he said. “Going forward, I foresee that the growth in NPLs is likely to slow down. Power-sector loans are mostly government-backed, so there’s hope that banks will get their money back.”

Published in The Express Tribune, August 30th, 2012.

Source: http://tribune.com.pk/story/428162/ringing-alarm-bells-public-sector-banks-lead-the-pack-in-risky-lending/?fb_action_ids=411282252263858&fb_action_types=og.likes&fb_source=aggregation&fb_aggregation_id=288381481237582

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