KARACHI, Nov 15: Despite much slower credit disbursement, the commercial banks’ non-performing loans (NPLs) have started piling up which is in contrast to last year’s trend.

The nine-month results of this calendar year showed that these banks added Rs25.8 billion to NPLs taking the combined total to Rs163 billion by end September 2007. However, the default rate remained on the higher side during the period under review as compared to the same period last year.

The total defaults during first nine months of 2006 amounted to Rs7 billion pushing up the total NPLs to Rs143 billion. The higher defaults in the past were mainly associated with the political influence, but it has no more relevance as most of the banks have now been privatised.

“The major reason behind high default rate was the change of definition of bad loans by the SBP this year, but still most of the bad loans are in loss accounts,” said Mohammad Imran, research head at First Capital Equities.

The NPL is the most important indicator of determining the asset quality of any bank because the gross NPLs to gross advances and net NPLs to net advances are considered very significant.

As on September 30, 2007, the gross NPLs of the banking system recorded at Rs163bn that was at Rs154bn by end of June 2007. The gross NPLs to gross advances arrived at 6.5 per cent at the end of September 2007.

A quarter earlier it was 6.1pc and 5.4pc at the end of December 2006 reflecting the negative trend in the banking sector.

Moreover, upon segregating the data, Rs25bn (16pc) of the total NPLs were classified as substandard, Rs19bn (12pc) as doubtful and Rs113bn (69pc) as loss category. These loans were covered with 17pc, 38pc and 82pc provisions in substandard, doubtful and loss categories respectively.

“The nine-month results imply that commercial banks need to provide Rs24bn excess provisioning for full current calendar year results as per the new directive of the State Bank regarding forced sales value (FSV) of collateral,” said Imran.

On the basis of the provisions provided by the commercial banks against their non-performing loans, the net NPLs to net advances ratio rose to 2.4 per cent.

This ratio was 2.2pc at the end of June 2007 while on end December 2006 it was only 1.7pc.

“The central bank’s timely decision to eliminate the benefit of FSV of collateral will help banks to improve their loan quality and the recovery rate,” the analyst added.