Reduction in NPLs

The revelation by the State Bank of Pakistan that the amount of Non-Performing Loans (NPLs) had declined, albeit marginally, during 2014 should be a source of some comfort to the monetary authority of the country as well as the banking community. According to the latest data made available, the NPLs of the entire banking industry (including all banks and DFIs) posted a decline of Rs 3.03 billion in the last calendar year, falling from Rs 622.861 billion as on 31st December, 2013 to Rs 619.831 billion at the close of 2014. The detailed analysis indicated that while NPLs of all banks came down by Rs 1.1 billion to Rs 604.698 billion, those of DFIs showed a higher decline of Rs 1.922 billion to Rs 15.133 billion by end-December, 2014. However, while NPLs of local private banks (LPBs) and foreign banks decreased by Rs 2.154 billion and Rs 1.48 billion respectively, NPLs of public sector banks (PSBs) and specialised banks went up by Rs 2.067 billion and Rs 0.459 billion respectively. Also, encouraging was the fact that the ratio of net NPLs to net loans dropped by about 1 percent to 2.8 percent during CY14.

Fall in the level of NPLs is particularly satisfying when compared with the trend in the last few years. NPLs of the banking industry had generally been rising since 2008 because of economic slowdown, high interest rates, worsening law and order situation, acute energy shortages and political uncertainty. Frequent announcement of write-offs by the authorities to earn popularity, banks’ own inefficiencies and an ineffective mechanism to punish defaulters may be some of the other reasons for increasing NPLs. Whatever the reasons, low level of recoveries and deteriorating asset quality had become a huge challenge for the banking industry, impacting its profitability and prospects. The continuation of such a trend would have curtailed the credit expansion capacity of the financial system over the long run and harmed economic activity in the country. The fact that NPLs of the PSBs and specialised banks are still on the up, is nonetheless, a matter of concern. It is quite possible that powerful borrowers, through their connections in the right places, are still in a position to twist the arms of public sector banks and get relief by dubious means.

Although some of the above factors are still impeding recoveries, certain recent developments seemed to have provided a better environment for the financial industry to reduce their NPLs. While the State Bank has been quite vigilant about the situation and insisting upon higher provisioning requirements against infected portfolios to clean banks’ balance sheets, some positive developments on the economic front and softening of monetary stance by the central bank may have also played a role in the reduction of NPLs. Certain other important developments also seem to have accentuated this trend. As is well known, defaults were quite common in consumer loans. As such, banks are now shying away from this field and focusing more on corporate loans of high quality. Secondly, banking system is investing heavily in government securities like MTBs and PIBs at present, which are absolutely secure and avoiding private sector lending, which is risky in nature. Obviously, such a change in the behaviour of banks would continue to reduce the level of NPLs but deprive the private sector of its genuine credit needs. In a situation where foreign investment is at a dismally low level and domestic savings continue to be depressed, consequences of concentration of banks’ financial resources in government’s instruments are not hard to visualise. Keeping all the factors in view, we feel that the SBP should take certain enabling measures to expand credit to the private sector before it becomes a bigger constraint to the growth prospects of the country’s economy. It is good to see that the NPLs have declined during FY14 but such a favourable trend should not be at the cost of slower economic activity due to stagnation in bank credit to the private sector. Secondly, SBP needs to watch the behaviour of NPLs of PSBs and specialised banks very carefully and if the present trend persists, monetary authorities should be prepared to take appropriate measures to reverse the situation.