March 29, 2008	Saturday	Rabi-ul-Awwal 20, 1429

KARACHI, March 28: It seems that banks’ golden era is over as the entire industry is facing high level of defaults with the two best customers — textile and consumers — have been denying paying back the loans.

The banks, which found consumer financing (including individuals) the biggest new avenue to extract more money, responded negatively compared to all other sectors.The Non-Performing Loans (NPLs) of the banking sector shot up by over 20 per cent during the year ended on December 31, 2007.

“The gross NPLs of the banking industry rose to Rs170 billion in 2007 compared to Rs141 billion in 2006 and this is 6.5 per cent of the gross advances,” said Mohammad Imran, head of research at First Capital Equity.

He said last year the gross NPLs were 5.8 per cent of the gross advances.

This is surprising for many people, who believe that the banks are under tight regulation of the State Bank and their record profits showed that their efficiency has increased tremendously during the last five years.

However, the huge write-offs, rising NPLs, massive increase in salaries and perks of directors of banks, highest banking spread in the region and negative return to the depositors are the real picture of the efficiency of the banks. They have been making record profits at the cost of depositors’ money.

Only last year, the banks showed 20.5 per cent growth in the NPLs. The NPLs had been termed as the curse of the political influence of 1970s and 80s. Now 90 per cent banks are in private sector and they are free of political influence, still the NPLs are mounting.

“These NPLs are the loans given to the favourites or it is clearly a result of inefficiency of banks depriving the depositors from real return on their hard-earned money,” said another analyst.

The consumer financing, which started in 2001, showed astonishing growth and acquired the second place after textile in terms of disbursement of advances.

However, the consumer financing has started showing negative signs at the time of maturity of the payments.

“The NPLs of this sector recorded a growth of 111 per cent in 2007 as the total NPLs jumped to Rs18.6 billion from Rs8.8 billion in 2006,” said Imran.

The main reason for this galloping default in consumer financing were the huge defaults in the auto sector. The banks do not provide separate data, which may indicate the amount of default in the auto sector.

Analysts believe that the higher lending rates to the consumer sector were causing massive defaults and the banks would see more defaults in this sector.

The banks have not been investing for any long-term projects, though the corporate sector is still the largest borrower. This has limited the options for banks. Either they are investing in risk-free government papers, including Treasury bills or advancing for consumer financing.

The trend in the banking sector is more visible through the fact that in 2001 banks advances for consumer sector were just 2.1 per cent, which has now reached 14 per cent.

Textile, the largest industrial sector of the country, is also showing rising trend of defaults. Being the largest borrower (total advances of Rs565 billion) having largest contribution of 30 per cent in the overall NPLs, the textile sector added Rs10.4 billion during 2007. “The highest increment (in absolute terms) was witnessed in the textile sector, where NPLs increased by Rs10.4 billion (25%) to Rs51 billion,” said Imran.