Non-Performing Loans (NPLs) of banking sector rose to historic level of Rs 783 billion at the end of June 2019, mainly due to lower recoveries on the back of higher interest rate. According to State Bank of Pakistan’s statistics, NPLs of the banking sector (including banks and DFIs) escalated by 13 percent during the first half (Jan-July) of this calendar year (CY19). NPLs of all banks and DFIs reached all-time high of Rs 783 billion in June 2019 compared to Rs 694.4 billion in December 2018, depicting an increase of Rs 88.552 billion.
Bankers said that the increase in NPLs is due to addition of fresh non-performing loans and lower cash recoveries owing to higher interest rate. The detailed analysts revealed that most of the surge in NPLs of the banking industry registered in the second quarter of this calendar year. NPLs mounted up by Rs 10.648 billion in first quarter of CY19 (Jan-March) and Rs 77.9 billion in the second quarter of CY19 (April-June). Net NPLs to net loans ratio also surged to 2.09 percent at the end of first half up from 1.44 percent.
NPLs of all banks increased by Rs 88.262 billion to Rs 768 billion in June 2019 up from Rs 679.744 billion in December 2018. during the period under review, NPLs of DFIs surged by Rs 290 million to Rs 14.954 billion. Analysts said that most of the fresh domestic NPLs have emerged in sugar, agriculture and production along with individuals. Lower market price of sugar and the delayed purchase and crushing of sugarcane by sugar mills restrained farmers from fulfilling their financing obligations to banks on time.
The rise in agriculture sector NPLs results from low crop yields owing to water shortage and drought conditions, late procurement of wheat by public procurement agencies. In addition, rise in input prices such as seed, fertilizers, pesticides, electricity and petroleum products due to Pak Rupee depreciation has also contributed to higher NPLs.
They said that banks’ fresh loans are being disbursed at a higher rate in response to monetary tightening, while existing portion of outstanding loans have been renegotiated by the financial institutions. Major rise in key policy rate has occurred at the end of CY18 and beyond, of which borrowers have faced further hike in interest expense.
Any further downgrading in cash recoveries may increase NPLs and lead banks to bear additional provisioning expense during this calendar year, they cautioned. According to the SBP, NPLs of public sector banks stood at Rs 226.097 billion, local private banks at Rs 468.338 billion, foreign banks at Rs 2.838 billion and specialized banks Rs 70.733 billion end of June 2019.
Bankers said that credit risk of the banking sector in Pakistan mostly emerges from private sector loans, in which banks have limited exposure. Banks have significant holding of domestic government securities, which attract zero credit risk.
(This news/article originally appeared in Business Recorder on September 13th, 2019)