The Bank of Punjab has significantly strengthened its capital base with capital injections of the provincial government — its majority shareholder — ever since it was hit by a crisis that pushed it on the brink of bankruptcy eight years ago.

But the company’s large outstanding non-performing loan (NPL) portfolio of Rs57bn, which is slightly more than a quarter of the bank’s net advanced of Rs219bn, and over 15pc of its deposits of Rs375bn, remains a drag on its balance sheet.

It is despite that the new bank management has successfully reduced its NPLs by around 30pc, from above Rs80bn, that it had inherited from the previous administration in the last quarter of 2008.

The crisis at the bank, which forced the Punjab government to inject liquidity of Rs10bn in 2009 and Rs7bn in 2011 to keep it afloat, was triggered when some of its large borrowers stopped repayment of loans and depositors started taking their money out of it.

“The public confidence in the bank was severely hurt after the media highlighted the Rs8.4bn Harris Steel scam and disbursement of concessional loans of Rs20bn to the companies owned by its directors,” an executive of the BoP told Dawn, refusing to give his name because he is not authorised to give public statements.

He agreed that part of the defaults were triggered by economic slowdown in the country on the back of a global financial crisis and abrupt increase in world oil prices. But, he insisted, the crisis at the bank owed more to imprudent lending decisions of the management at that time.

“Loans were given to unviable businesses against inadequate securities. That resulted in withdrawal of deposits worth over Rs50bn, exposing the bank to liquidity issues.”

“Ever since restructuring was undertaken by the new management, the company’s balance sheet has improved significantly and accumulated losses have reduced substantially,”

The bank’s report for 2008 shows that the bank was facing capital inadequacy of -14pc (or minus Rs20bn) against the required Capital Adequacy Ratio (CAR) of 10pc to support the risk assets. The bank had a very weak capital structure and it took about two and a half years to agree to a way forward with the State Bank of Pakistan (SBP).

The provincial government had also lent the bank Rs2bn in 2014 to support its capital structure for the purpose of the regulatory capital requirement. The loan is unsecured and subordinated to all other indebtedness including deposits.

The unaudited accounts of the bank for the first quarter of the present year to March show that the paid-up capital and reserves net of losses, but including share deposit money of Rs7bn (provided by the majority shareholder in 2011), stood at Rs20.86bn.

At the same time, the quarterly accounts show that net advances aggregating to Rs20.32bn requiring additional provision of Rs19.39bn have not been subjected to the provisioning criteria as prescribed by the SBP prudential regulations, in view of the relaxation provided by the regulator.

The relaxation was allowed by the central bank on the basis of two Letters of Comfort (LoCs) issued by the Punjab government, undertaking to inject necessary funds to make good the capital shortfall to the satisfaction of SBP.

This undertaking was up to a maximum amount of Rs3.58bn (net of tax at 35pc) and Rs10.57bn (net of tax at 35pc) within a period of 90 days after the close of year 2018; if the bank fails to make a provision of Rs21.77bn or if there is a shortfall in meeting the prevailing regulatory capital requirements as a result of the said provisioning.

“In addition, the government being the majority shareholder and sponsor of the bank, has also extended its commitment to support and assist it in ensuring that it remains compliant with the regulatory requirements at all times,” the quarterly accounts point out.

During the year 2016, the Bank will be required to record further provisioning of 15pc in a staggered manner against exposure cover under the LoCs, according to the unaudited accounts.

As communicated by SBP, going forward, further extension in these relaxations would be considered upon satisfactory compliance of the conditions/requirements of the SBP as well as the bank’s future performance based on the its business plan.

The bank management is confident that the bank will continue its journey towards prosperity as its difficult times are over. “Ever since restructuring was undertaken by the new management, the company’s balance sheet has improved significantly and accumulated losses have reduced substantially,” the anonymous bank executive claimed.

Indeed, the bank’s assets have more than doubled to Rs472.28bn in 2015 from Rs229bn in 2010. Net advances have gone up to Rs219.39bn from Rs110.81bn and investments to Rs176bn from Rs56bn.

The net interest income has surged to over Rs11bn from a loss of Rs562m with pre-tax profit jumping to Rs7.52bn from a loss of Rs6.18bn, as the number of bank branches has increased to 406 helping it to expand its outreach and avail new business opportunities, especially through its 48

dedicated Islamic banking branches, across the country. Another 45 new branches are planned for the present year.

The management is hopeful of improving its profits this year, the executive said as he pointed to the pre-tax profit of Rs2.24bn made by the bank during the first quarter against Rs2bn last year. “We are on the track of rapid growth,” he added, admitting the bank was still playing safe as it preferred working with the government than lending to private projects.

In his message in the bank’s annual report, BoP president Naeemuddin Khan says: “... current financial position of the bank clearly depicts a very bright future ahead. While celebrating the success of the bank, the management also remains vigilant of future challenges.”

Published in Dawn, Business & Finance weekly, August 22nd, 2016