KARACHI, March 17: Non-performing loans (NPLs) of the banking system fell to Rs222.7 billion at end-December 2003 from Rs247 billion showing a decline of Rs24.3 billion. These figures cover all bad loans of banks and development finance institutions the principal or markup on which remained unpaid for more than 90 days.

In the last quarter of 2003, gross NPLs of all banks and DFIs recorded a reduction of Rs5.4 billion coming down to Rs222.7 billion at end-December from Rs228.1 billion at end-September.

The State Bank released the latest data on NPLs on Wednesday making it clear that this has been compiled under the revised methodology "according to which unrealized markup does not become part of NPLs."

Under the revised methodology for recording and classification of NPLs coverage of data has been enhanced by including NPLs of overseas branches of Pakistani banks in the total NPLs of the banking system.

Besides, "rescheduled and restructured NPLs are not excluded from the total NPLs unless they have become regular by meeting the criterion of one year satisfactory performance."

Out of the total Rs222.7 billion NPLs at the end of 2003 the NPLs of state-run banks stood at Rs86 billion down substantially from Rs95.6 billion a year earlier. The NPLs of local private banks including privatized banks stood at Rs66.4 billion down from Rs69.6 billion.

Bankers say a key reason for the NPLs of state-run banks showing a large decline of Rs9.6 billion in their NPLs in 2003 was that the status of UBL had changed from that of a state-run bank to a privatized one.

At end-December 2003 foreign banks reported NPLs of Rs3.8 billion down from Rs5.2 billion at end-December 2002. Specialized banks that carried Rs64 billion NPLs till the end of 2002 managed to contain the same at Rs54.1 billion at the end of 2003. But DFIs reported a negligible fall in their NPLs the stock of which fell to Rs12.6 billion from Rs 12.8 billion.

SBP data also show that all banks and DFIs made a combined cash recovery of Rs32.2 billion or about 14.5 per cent of the total NPLs during 2003 of which Rs8 billion recovery was made in the last quarter.

The data shows that whereas gross NPLs of the banking system stood at Rs222.7 billion at the end of last year net NPLs (i.e. the NPLs against which provisioning had not been made) totalled Rs79.3 billion. At the end of 2002 net NPLs stood at Rs97.2 billion.

Thus net NPLs saw a reduction of Rs17.9 billion in 2003. At Rs79.3 billion net NPLs were equal to only 7 per cent of net advances at end-December 2003 whereas at Rs97.2 billion net NPLs were 10 per cent of total net advances at the end of 2002.

A press release issued by the SBP provides an insight into how the new methodology for recording and classifying non-performing loans was developed. The SBP undertook "a detailed exercise to ascertain the banks methods and practices for recording and reporting of loans and advances; accrued markup and non-performing loans.

"The exercise revealed that banks were following divergent practices particularly in case of recording unrealized markup on NPLs. Some of them were charging their customers markup on markup which was a clear violation of the Supreme Court rulings and the SBP regulations on this subject.

"Others were adopting calculation procedures which were clearly detrimental to the interests of the borrowers. In some cases contractual rates of markup were changed arbitrarily without proper disclosure or seeking the consent of the borrowers and then penal rates were imposed on the top of it.

"These methods wrongly inflated the value of the assets and size of the non-performing loans by aggregating this unjustified amount of accrual of markup with principal amounts."

Instances have come to the notice of the SBP "where the accrued markup represented as much as ten times of the original principal amount thus placing an undue burden on the borrowers capacity to settle the NPL."

On the other hand several banks with overseas operations did not report the full current market value of their foreign currency NPLs thus understating the total volume of NPLs. "It was also discovered by SBP inspections that some banks were reporting only the overdue portion of the loans and not the entire loan amounts in NPLs. Similarly, the rescheduled and restructured loans were subtracted from the total NPLs."

It was against this backdrop that the SBP after consultations with the Institute of Chartered Accountants of Pakistan and Pakistan Banks Association has issued guidelines for reporting NPLs to the banks and DFIs under the revised methodology. The SBP has placed the details of this methodology on its website, says the press release.