KARACHI, Dec 2: Banks are facing serious problem of loans default as it has added Rs37 billion non-performing loans (NPLs) to the total figure reaching close to Rs290 billion in just three months.

The banks said it was the failure of consumer financing and the policy of high interest rates that might escalate the problem in next coming days.

The State Bank reported that the total default of banks and Development Financial Institutions (DFIs) rose to Rs288.372 billion till September 2008. A jump of Rs37.259 billion in default was noted during July-Sept.

The default figure is rising despite heavy provisioning made by the banks against NPLs last year and the process is still continuing.

The banks have been forced by the State Bank to clean up their balance sheets by heavy provisioning of NPLs, which drastically reduced their profits but the fresh NPLs will not allow the banks to clean up their balance sheets.

Analysts believe that the next year balance sheets of banks would be heavily burdened with the fresh NPLs.

The cash-starved banks can not afford such high rate of loan default and it could be disastrous for the entire banking system.“The banks are already under crunch of the global financial crisis, while the liquidity problem is mounting pressure on many banks to look for help either from the State Bank or sell their shares,” said a senior banker.

The gravity of the situation is evident from the series of steps taken by the State Bank to protect the banks from liquidity dilemma. Banks liquidity was increased through cut in Cash Reserve Requirement (CRR), Statutory Liquidity Requirement and other steps, including direct injection of over Rs350 billion temporary cash.The State Bank raised policy discount rate to 15 per cent, which was a condition for agreement with the IMF to get approval of $7.6 billion, of which $3.1 billion has already landed in the coffers of the State Bank.

The finance ministry said interest rate could see another increase if the core inflation does not come down from prevailing 18.3 per cent. While briefing the Senate Committee Governor State Bank Dr Shamshad Akhtar said on Monday that the further tightening of monitory system was needed thus endorsing the ministry’s intention to increase interest rate.

Due to higher inflationary pressure and higher return on deposits the banks’ expenses have risen sharply resulting into decline of profits, thus minimising their ability to bear the additional heavy load of NPLs. The banks said under the circumstances the 15 per cent interest rate will further add to the total loan default figures of the banks and the real impact would be felt next year.

Farhan Rizvi, a researcher at JS Company, said the increasing asset quality concerns had forced banks to book heavy provisions for NPLs. According to SBP the total banking sector provisions rose by Rs44 billion until Nov 22, 2008.

“We expect the sector’s provisioning to reach Rs50 billion in 2008 compared to Rs32 billion in 2007,” said Rizvi.

Banking experts and analysts have been warning that the continued tight monetary policy with rising interest rate could be counterproductive for the economy. Higher lending rates already attach high risk with the credits but the government is now bound to increase interest rate instead of reducing it.

From May to July 2008, the State Bank increased the discount rate by 4.5 per cent to 15 per cent, which translated into much higher lending rates by the banks.

“While the banks are offering return on deposit up to 20 per cent, it is natural that they will rent their money at much higher rate to meet the expenses and earn profits,” said another banker adding that it will enhance the loan default rate.