KARACHI, March 15: Gross non-performing loans (NPLs) of the entire banking system at the end of December 2001 stood at Rs308.5 billion.

This included about Rs82.8 billion taken to suspense account and Rs110.8 billion held as provisions by commercial banks and specialized banks and development financial institutions.

The State Bank disclosed this in a press release issued here on Friday to announce that it has revised its “methodology for monitoring and reporting” of NPLs and brought it in line with the “international practices.”

“It has been decided that instead of the current practice of reporting gross NPLs only, from now on net NPLs i.e. net of provisions and mark-up taken to suspense account, will also be monitored and reported,” says the release.

“This change is necessary because it is the net NPLs which reflect the potential risk to the capital base of the banks,” and, therefore, to the banking system.”

The release says that “the focus of public attention has so far been on gross NPLs which is not the appropriate indicator for risk management purposes.”

“Generally banks in Pakistan are reluctant to clean their balance sheets by writing off even those NPLs which have been fully provided for,” says the State Bank.

“The provision against loan losses and subsequent write off improve the balance sheets of the banks and help reduce the spread between deposit and lending rate.”

“However, given the past misuse of write off for political purposes it is the responsibility of the central bank to ensure that the process is transparent, uniform in its application and driven by objective criteria.”

“One of the factors inhibiting the lowering of average lending rates in Pakistan is the drag of non-performing loans by nationalized commercial banks, DFIs and specialized banks,” says the SBP release.

“While structural reforms in the financial sector will certainly alleviate this problem in the long run it is imperative to clean up aging loans for which the probability of recovery is almost negligible,” says the SBP.

But it makes it clear that “the provisioning or write off does not extinguish the legal claims of the banks on the borrowers. The banks will continue to make best efforts to recover their legal claims despite this write off from their balance sheets.”

The SBP release says that out of Rs308.5 billion gross NPLs as of December 2001, gross NPLs of the commercial banks were Rs194.6 billion and those of the specialized banks and DFIs were Rs114 billion.

It says that net NPLs of the entire banking system that the NPLs net of provisions and mark-up taken to suspense account were Rs114.9 billion which represent 13.1 per cent of total advances of the banks/DFIs.

Net NPLs of commercial banks were Rs76.8 billion or 10.1 per cent of total advances while net NPLs of specialized banks and DFIs were Rs38.1 billion or 32.7 per cent of total advances.

“It is to note that out of the Rs114.9 billion net NPLs, Rs34.2 billion represent rescheduled loans which have yet to meet the condition of one year performance before they may be upgraded to performing loans.”