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Bad Loans Hit Pakistan Banks Hard
Global and domestic business slowdown hit banks and reduced their profitability. The non-performing loans hit an all-time high of Rs435 billion as at end-September, 2009. Coupled with this fresh wave of Non Performing Loans, or NPLs, are older advances, totalling Rs193 billion, which banks had written off between 1997 to 2009, by past governments as a gesture of political patronage or outright fraud by borrowers.
- PUBLISHED: Mon 4 Jan 2010, 11:57 PM UPDATED: Mon 6 Apr 2015, 10:23 AM
- By:
- M. Aftab (Analysis)
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That was the case of state-owned banks, most of which have by now been privatised and sold Pakistani and foreign investors. These privatised banks are now performing much better than before.
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That’s yet another plus point of the banking sector. The impact on foreign-based banks operating in Pakistan has been the minimal, and some of them did not face it at all, as they don’t suffer from older-written off loans. But in spite of this, less than happy position, the State Bank of Pakistan, or SBP, says, the banks “stay resilient and profitable.”
However, in its review for the July-September quarter of 2009, SBP says “the overall banking system is “still under stress as a consequence of rising NPLs in the midst of an uncertain economic environment.” But, the April-June 2009 quarter had witnessed some decline in NPLs, SBP says.
The business slowdown is not the only cause of NPLs growth, but a sizeable amount of these loans is still owed by big politicians, resulting from the government’s political patronage.
Yet another headache for banks is the recent rise in NPLs owed by the crisis-hit textile sector. Textiles production and exports are virtually stagnant, partly because of reduced demand in the global markets. Add to this the domestic problems including prolonged outages of electricity and natural gas, high and still rising energy tariff, high cost of raw cotton, excessive export of cotton yarn rather than finished textile products, and rising cost of production.
Cement industry is the second biggest defaulter of bank advances. Reduced export of cement to Dubai due to its real estate sector problems, and reduced sales to Afghanistan are the reasons troubling this sector.
At the same time, the overall bank deposits declined 1.7 per cent, because the state-operated National Savings Schemes are attracting more funds, as a result of much higher profit rates they offer, compared to commercial banks. The decline in bank deposits is attributed to a reduction in funds placed by the financial institutions and current account holders.
The bank advances, both to the private and public sectors, declined, too. Bank lending to the private sector fell down because of the “low aggregate demand in the economy, high borrowing cost, the country’s unresolved political and security issues and risk of default.” The bank have sldo become more risk averse, SBP says. Small and medium enterprises, or SMEs, and consumer advances declined too, because of high lending rates and more cautious approach by banks to all borrowers, particularly for auto and home appliances leasing.
But corporates in the energy sector borrowed more than in the previous quarters. With aggregate NPLs growing, and banks turning more and more risk averse, the banks , since 2008 prefer to park their funds in the government papers. Their investment in that field rose 13.1 per cent. It went into the government’s Treasury Bills, or TBs, and bonds floated by public utilities.
The risk-based capital adequacy ratio, or CAR, of all banks improved 14.3 per cent during the quarter ended September 30. “Overall profitability of the banking system remained fair. However, the earnings were largely skewed towards larger and medium-sized banks as most small-sized banks saw little profits and losses,” SBP reports.
