ISLAMABAD: The non-performing loans (NPLs) of the banking sector increased by more than 23 per cent during FY19 mainly because of energy, with contributions from public sector and the sugar industry.

Testifying before a parliamentary panel on Monday, the State Bank of Pakistan (SBP) reported that the stock of NPLs in banking increased to Rs768 billion by end June, rising by 23.2pc or Rs144.4bn, from Rs623.6bn in last fiscal year.

The SBP team, led by Deputy Governor Jamil Ahmad, also told the Senate Standing Committee on Finance and Revenue, led by Former chairman senate Farooq H Naik of PPP, that the gross NPLs to total loans of the banking sector also moved up to 8.8pc in June, from 7.9pc a year earlier.

“Most of this increase was due to energy and sugar sectors, as they together accounted for more than 50pc of the rise,” SBP team reported in its presentation. “In energy, most of the rise in NPLs pertained to the public sector”.

The panel was also explained that with increase in fresh NPLs during FY19, provision coverage ratio (provisions for NPLs) declined to 78.4pc by end June, compared to 87.1pc in last fiscal year.

“Consequently, net NPLs to net loans ratio inched up to 2.1pc by end June, from 1.1pc.”

The SBP, however, assured the panel that the current net-NPLs to net-loans ratio was lower than last five-year average of 2.4pc “indicating contained credit at present”. The central bank also noted that several factors contributed to the rise in NPLs. These included overall slowdown in the economy, tightening of macroeconomic conditions and constrained cash flow of the corporate entities.

“Moreover, the late start of sugar crushing season, water shortages and drought conditions affected crop yields, which hindered farmers’ repayment capacity.”

The committee was told that recent increase in NPLs had partly been contributed by loans extended to public sector entities. “SBP has been advising the government to ensure that financial obligations of public sector enterprises and government-guaranteed debt are honoured on timely basis.”

It was informed that the ongoing momentum of countrywide enforcement operations against smuggling of goods including LED TVs was in full swing and registered about 40pc increase in confiscations during 2018-19. The main challenge faced by the Federal Board of Revenue (FBR) had been a ban on recruitment which has now been removed and the prime minister had cleared a comprehensive anti-smuggling plan.

The committee stressed the need for training of forces that have been granted anti-smuggling powers such as the Coast Guards and Frontier Corps. Asked if increases in taxes and duties had contributed to a rise in smuggling of goods, the committee was informed that there was zero tax on raw material.

This was done specifically to encourage industrialisation. The committee encouraged formulation of legislation for this purpose.

Deliberating over the steps taken to get Pakistan out of the Financial Action Task Force’s (FATF) grey list, the committee was informed that the country was committed to align the country with global financial system and position it as a reliable partner in countering global money laundering and terror financing challenges.

Towards this end, Pakistan had formalised Internal Action Plan to revamp legal regulatory and supervising framework.

Financial Monitoring Unit Head Mansoor Ahmad briefed the committee about the legislative revamp in banking and financial systems, institutional reorganisation and capacity building, addressing enforcement e-governance and financial challenges, autonomy of regulatory framework and regimes while ensuring permanency of newly raised structures.

In addition to this, the country was revamping the entire AML/CFT regime. According to FATF assessment, Pakistan has largely addressed five, partially addressed 17 and could not complete five out of 27 action items.

However, he noted that significant progress had been achieved between June and October as the number of largely completed areas increased from two to five while partially finished actions rose from 12 to 17. Likewise, incomplete areas also reduced from 13 in June to 5 in October.

He said Pakistan would show significant progress on the lacking areas by January 23 (deadline for next review).

He declined to be drawn towards political aspects of the global financial watchdog but put on record in writing that “some of the actions reflect ‘moving of the goal posts’ indicating an additional requirement beyond scope of the action items.”

Published in Dawn, November 19th, 2019