KARACHI, Sept 15: Non-performing loans (NPLs) of banks, especially that of local private banks, have started picking pace which negates the market vision that private banks are more prudent to NPLs.

The first quarter increase in NPLs was much higher than the corresponding period of last year while the credit growth of these banks was significantly lower during this period.

The State Bank’s latest report showed that the NPLs of all commercial banks went up to Rs142.823 billion with an addition of Rs8.311 billion during January-March 2007.

This was much higher than what the total NPLs of all commercial banks added during the corresponding period of last year. Data showed that during the first quarter of last year NPLs increased by Rs2.7 billion.

Local private banks increased their NPLs by 7.801 billion to Rs100.126 billion during the first quarter of 2007. The growth in NPLs was much ahead of last year’s NPLs when it added just Rs1.4 billion.

It is commonly believed that credit cards or personal loans were the main reason of piling up of NPLs but the default of credit cards and personal loans was within single digit. Experts said the NPLs mostly belonged to corporate sector which enjoy huge write-offs also.

Foreign banks were the least affected with this NPL shock and they maintained their much lower level of NPLs. The SBP data showed that foreign banks added only Rs103 million to their NPL account to make the total as Rs1.345 billion.

While the stock of NPLs is on the rise, the recovery shows poor performance of banks.

To stimulate the recovery process, the State Bank came with a proposal last week which puts banks in a difficult situation. The SBP issued a draft circular which will be effective from Dec 31, 2007.

The circular asks all banks for a 100pc provisioning against their NPLs. This could sharply reduce banks profitability as they would have to cut profits for 100pc provision of their NPLs stock.

According to the draft, the provisioning requirements are lower for substandard (25pc) and doubtful (50pc) categories while highest for loss (100pc) category.

Bankers said the next calendar year will be more difficult for banks when the circular will be effective. They said either they would be ready to show less profit or they would restructure their recovery system with new teams to accelerate the process. Higher recovery could produce much better results for the banks.

NPLs have been termed a menace for banking sector but at the same time, these are acceptable in the wake of failure of business.