KARACHI, Dec 27: The State Bank of Pakistan has expressed deep concern over rising non-performing loans (NPLs), which reached to Rs494 billion at the end of third quarter (July-Sept) of this calendar year.
The central bank in its quarterly performance review of the banking system issued on Monday noted that the NPLs grew by 7.4 per cent during the quarter ended September 30, 2010.
It said the recent unprecedented floods and torrential rains coupled with over-the-quarter decline in lending portfolio amplified the deterioration in infection ratios.
“Since these fresh NPLs required only partial provisioning coverage, the system's baseline earning indicators remained positive,” the report said.
During the quarter the lending portfolio of banks registered a decline of two per cent vis-Ã -vis a 2.1 per cent decline in deposits. The report criticised the banks' holding of government papers which blocked the credit off-take to the private sector.
The banks will need to reduce their large portfolio of government papers and lending to the public sector agencies so as to reduce their sovereign exposure to make credit available to the private sector for maintaining the economic growth, and thereby enhance and diversify revenues of the banking system, it added.
The report said the asset base of the banking system contracted by 2.3 per cent to Rs6,626 billion, which was in line with the established trend for the July-September quarter. “The Ramazan and pre-Eid withdrawals and increase in currency circulation during the quarter led to a narrowing of the deposit base,” it added.
The report said the shrinking of the asset base, particularly advances, resulted in a decline in size of the risk-weighted asset (RWA) over the quarter.
However, the higher regulatory deductions from Tier-1 capital reduced the eligible capital as well as risk-based capital adequacy ratio (CAR), which deteriorated marginally to 13.8 per cent, while staying above the regulatory requirement of 10 per cent, it added.
According to the report the deposits base of the banking system declined by 2.1 per cent (YoY growth of 12 per cent). This decline was mainly caused by contraction in inter-bank deposits while customer deposits also reduced.
Segment wise analysis shows that besides commodity finance, lending to SME and consumer also declined while agriculture and corporate segments witnessed a marginal increase.
However, growth in corporate segment lending was manly contributed by public sector corporations as the lending to private sector corporations came down.
Accordingly, the share of corporate segment marginally increased over the quarter. The reduction in working capital finance to both corporate and SME mainly attributed to the reduction in exposures of sugar sector and cotton industries that paid off their working capital borrowings before the inception of next business cycle in outgoing (Oct-Dec) quarter.
The loans and advances of the banking system decreased by two per cent (1.4 per cent on gross basis) during the quarter, however, this contraction mainly resulted from retirement of commodity finance that contributed more than 90 per cent decline in advances as the public and private sector disposed of a part of their wheat and other commodity holdings.
Lending to both private and public sectors saw a proportionate decline during the quarter, which kept their share in overall lending portfolio unchanged.
The report said although the banks are expected to remain liquid; the heightened demand for credit from the public sector will mean that the banks ability to finance additional private sector loans will be predicated upon mobilisation of fresh deposits and retirement of commodity finance by government-owned agencies which continues to be extremely high.