THE combined gross non-performing loan portfolio of the country’s banks and DFIs increased marginally by 2.6pc or Rs22bn to Rs866.7bn at the end of March on a quarter-on-quarter basis from Rs844.7bn at the end of December, according to new State Bank data. This appears in line with the broader trend observed in the recent past — a result of the contractionary monetary policy pursued by SBP until Covid-19 forced it to slash the cost of credit by 625bps to 7pc from March to June last year to support the economy and businesses. The central bank also announced other measures, including a debt relief scheme, to “preserve the solvency of the borrowers and enable them to cope with the temporary economic disruptions” caused by Covid-19. These concessions have helped businesses remain liquid, warded off potential defaults and kept the bottom lines of banks and DFIs healthy. The banks and DFIs have also moved aggressively to cover their infected portfolios by increasing provisioning against their bad loans. Hence, the net provisioning by banks and DFIs has increased to 88.3pc of the infected portfolio in December from 81.4pc a year ago. Some lenders have also done heavy ‘subjective classification’ at the cost of their profit to hedge against potential future defaults caused by Covid-19.

This indicates the banks’ fear regarding the ability of borrowers to service their loans when deferred payments become due from next month. Though there’s little evidence about the possibility of major defaults, the increasing number of infections is already keeping lenders from aggressively chasing defaulters. SBP data shows that recovery decreased to Rs21.2bn in the January-March period from Rs49.2bn during the previous quarter as the ongoing pandemic and slow vaccinations exacerbated the overall economic uncertainty because of the pandemic. How matters will pan out in the next few months, and how the pandemic will affect the economy and the behaviour of borrowers who have managed to get their loans deferred or restructured is anyone’s guess. It is hoped that the country’s financial sector will get through the worst without any major injury.

Published in Dawn, May 11th, 2021