KARACHI, Sept 8: Banks have decided to resist the State Bank’s new move, which directs banks for 100 per cent provisioning against the Non-Performing Loans as they fear erosion of profits up to Rs40 billion in next four years.

The State Bank issued a draft circular to all banks on Friday proposing for 100 per cent provisioning against the NPLs, which shocked the banking sector.

“Banks were not consulted before this decision of 100 per cent provisioning of loss account,” said a banker not wanted to be quoted. He said banks were minutely reading the possible impact of the SBP’s decision.

Bankers said they would not allow the SBP to out rightly impose its decision on banks and would resist it. The draft circular has been sent to the banks for discussion before giving it a final shape.

The draft circular says that the new provisioning method would be implemented from December 31, 2007. However, bankers and analysts believe that if the draft was implemented; it would be implemented in phases. Bankers said that the phased implementation would dilute the impact of 100 per cent provisioning.

“Based on this four-year phasing assumption, we expect the banks will get a cumulative hit of around Rs38bn (net of taxes) (Rs25bn on existing loans and Rs3.3bn on new loans in each of the next four years) on their earnings over a period of four years,” said Atif Malik, researcher at JS Research.

He said it would result into an annual impact of Rs9.5bn.Since banks ’total profitability in 2008 is expected to touch Rs140bn, the net impact of this new provisioning requirement could reduce post-2007 banks ’ annual profits by 7 per cent.

As per the latest numbers, the size of total NPLs of the banking sector stands at Rs184bn. The State Bank in its latest quarterly report said that the banks’ NPLs have started increasing against a four-year declining trend .

All top Pakistani banks will be hit by this new provisioning methodology and some of them including Habib Bank and National Bank would face serious dent in their size of earnings.

When asked why the SBP suddenly introduced this draft without consulting the relevant stakeholders, most of the bankers were of the view that the SBP wanted to see strong balance sheets of the banks. They said it could be a part of the better risk management, which is essential under the Basel-II agreement.

Banks in Pakistan are in the process of implementing Basel-II agreement, which demands stronger balance sheets and improved risk management system in the banking sector.

The foreign banks operating in Pakistan have shown greater responsibility and the impact of new SBP decision would bring little change in their earnings as the coverage of provisioning is the highest (86 per cent). Local banks would face the real brunt of the decision.

There is a little chance that the foreign banks would resist the SBP provisioning draft, while the local banks, who will be the real recipient of the impact, would resist hard. The top five Pakistani banks, which have the majority share of the banking sector, would resist more.