State Bank of Pakistan—File Photo

KARACHI: The State Bank said that about 77 per cent of the NPLs (non-performing loans) of the banking sector were still classified in the ‘loss category’, bulk of these infected assets carry slim prospects of recovery.

The recently issued Financial Stability Review disclosed that banks during first half of the current fiscal the banks accumulated another Rs31.3 billion in the ‘loss category’ compared to Rs39.8 billion during the same period last year.

“A turnaround in NPLs growth is still out of sight,” said the report.

During H1-CY11, increase in loss category was the most significant compared to all other categories; in fact, NPLs in Doubtful category dropped by Rs7 billion, said the SBP review.

The increase in NPLs during the half year under review was quite widespread, with most of banks witnessing an upsurge in NPLs and only a handful of banks registering a marginal decline.

In particular, the Local Private Banks (LPBs) sustained the most damage, as their NPLs were up by 7.6 per cent (Rs26 billion) during H1-CY11.

Break-up of NPLs in terms of various banking groups reveals that both Public Sector Commercial Banks (PSCBs) and mid-sized LPBs have significantly higher infection ratios than industry averages.

Specifically, infection ratios of 21.5 per cent and 25.6 per cent of PSCBs and mid-sized LPBs respectively suggest increasing level of vulnerabilities of these banks against credit risk.

“If the economic performance continues to be lacklustre, the infected portfolio of PSCBs is likely to surge further,” said the report.

The higher infection ratios of mid-sized LPBs are reflective of their limited choice in attracting quality borrowers. Primarily, it is the larger banks that have better outreach and access to low cost deposits, which allows them to attract more creditworthy though low return borrowers.

Large banks have demonstrated their resilience to the credit risk, whereas smaller banks have proven to be the most vulnerable group.

“The infection ratio of the 5 biggest banks was 12.9 per cent as compared to an infection ratio of 25.6 per cent for the banks ranked from 11-20,” said the SBP report.

Similarly, the infected portfolio of the former group was far better provided for resulting in net infection ratio of only 3 per cent as of June 30, 2011 as compared to 14.2 per cent for the latter group.

“The State Banks said the adverse economic outlook and structural deficiencies in the economy are taking their toll on the debt repayment capacity of the borrowers.

The deterioration in economic indicators as measured by a faltering GDP growth rate has led to a surge in NPLs,” said the SBP.

“Still, the fact that NPLs continue to build up underscores the intractable nature of heightened credit risk.”

Banks have tried to manage higher infections by tightening their credit standards, with significantly restricting their lending to riskier sectors e.g. SMEs and consumer. At the same time, banks have liberally increased their investments in government debt.

“Besides, results of the macro stress tests conducted on banks’ credit exposure of June 2011 suggest the Pakistan’s banking sector remains resilient against major foreseeable shocks,” said the report.