KARACHI: The State Bank has expressed concern over rising quantum of infected loans posing a challenge for the banking industry in the country.
It has, however, claimed that the sector is well established and strong enough to face shocks.“The Non Performing Loans (NPLs) of the system had been showing consistent and rapid increase for the last one and a half years or so and almost doubled since calendar year 2007,” said the SBP’s Quarterly Performance Review of the banking system issued on Monday.
The non-performing loans of the banking industry has reached Rs432 billion, said the SBP report, which observed that NPLs started decelerating during last quarter, Oct-Dec 2009.
“In the coming quarters, the heightened credit risk and rising portfolio of infected loans will remain the major challenge for the banking system,” said the report. However, at the same time it said: “The results of stress tests reflect system’s strong capacity to endure extraordinary shocks in major risk factors and avert the emergence of any systemic risk.”
Increasing infection of advances continued to pose challenge for the banking system.
However, infected portfolio increased marginally by 2 per cent during Dec-09 due to decrease in NPLs of some banks.
Most of the increase came from local banks; among them substantial increase took place in the middle tier and small sized banks. The category-wise breakup shows a shift of substantial portion of partially provided NPLs to loss category, which leads to increase in provisions more than increase in NPLs.
Resultantly, net NPLs decreased by 2.1 per cent. A marginal increase in NPLs coupled with healthy growth in advances led to decrease in infection ratios; NPLs to loans ratio declined to 12.2 per cent, while net NPLs to loans declined to 3.9 per cent.
Improved provisions enhanced the NPL coverage ratio to 71 per cent in Dec-09 from 69.7 per cent in the previous quarter.
The report said, “Accordingly, the infection and capital impairment ratios of the system lowered net NPLs-to-loan ratio came down to 3.9 per cent and net NPLs-to-capital ratio to 18.4 per cent, while the provisioning coverage of NPLs improved to 71 per cent,” it added.
Commercial banks’ lending to private sector during the Oct-Dec quarter of 2009-10 fiscal year (FY10) increased by 4.16 per cent and unlike previous quarters the growth in credit off-take was widely shared by different leading sectors of the economy, said the report.
According to the report the growth in loans was well supported by expansion in deposit base that increased by 6.8 per cent, while due to 10 per cent growth in investments (62.3 per cent Year-on-Year), the asset base of the system increased by 6.9 per cent (16 per cent Y-o-Y), it added.
The deposit base of the system enlivened during the quarter under review and posted growth of 6.8 per cent.
However, stronger credit demand from Public Sector Enterprises (PSEs), pick up in private sector credit coupled with relatively low activity in inter-bank market kept the market-based liquidity under strain for most part of the quarter under the market risk of the system, however, remained moderate.
“The traditional slowdown of first calendar quarter is likely to dampen the growth of banks,” said the report.
It said the country’s banking system has experienced let up in the build-up of credit risk, which has significantly increased over the last six quarters, as the growth in banking system’s non-performing loans (NPLs) substantially pacified during the quarter under review.
The report said that the growth in NPLs of the banking system has slowed down, while lending to private sector increased for the first time in CY09. “Though more than proportionate growth in net mark-up and non-mark up incomes augmented earnings, faster accumulation of operating expenses moderated the Return on Assets (RoA),” said the report.
The SBP report said the stress test results showed that capital base of the system is strong enough to withstand unusual shocks in major risk factors.
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