NPLs moving up again: State Bank report

KARACHI: The State Bank reported that non-performing loans of the banking system once again increased in the third quarter of the calendar year, reflecting poor performance of the economy.

The SBP issued third quarterly report, ended Sept 30, 2009, as ‘quarterly performance review of the banking system.’

‘The non-performing loans of the banking system, after showing some let-up in the last quarter, again increased during the quarter under review,’ said the SBP report.

The failure of business and poor economy has affected performance of the banking system and banks have to accommodate losses in their balance-sheets, thus slashing their profits.

‘Due to increase in non-performing loans, the net infection ratio increased to 4.1 per cent, the report added.

The very high rate of non-performing loans, which finally ends as write-offs, appeared as a critical issue these days and write-offs are now under scrutiny of Supreme Court.

The report said during July-September 2009 quarter, the overall profitability of the banking system remained fair.

However, earnings were largely skewed towards large and medium-sized banks as bottom line of most of small sized banks was low or in negatives. Banks posted aggregate pre-tax profit of Rs70.1 billion for the first three quarters of the outgoing year with the pre-tax return on assets of 1.6 per cent (1.2 per cent for CY-08), the report added.

SBP’s report said that accumulation of year-to-date earnings and equity injections raised the equity base of the banking system.

‘This growth was also augmented by improvement in revaluation surpluses on equity investments, and the leverage of the system slightly came off,’ it said and added that improvement in eligible capital and reduction in risk weighted assets occurred as banks shifted their asset mix from private sector credit to investments in federal government papers, improved the risk based capital adequacy ratio.

The Sate Bank said the risk-based capital adequacy ratio of all banks operating in the country has improved to 14.3 per cent in the quarter ended Sept 30.

The report said that the banking system shows strong capacity to withstand unusual shocks in major risk factors and chances of any systemic risk remains contained.

‘In the wake of traditional pick-up in the economic activity during the outgoing quarter, credit to private sector is likely to gain momentum,’ it added.

Credit to private sector remained symbolic for the last 18 months. However, borrowing by the private sector started picking up from the 3rd quarter. Banks managed to place their liquidity with the treasury bills and earned risk-free profit.

The advances to public sector set new record while it surpassed the credit to private sector, showing that borrowing from banks was made to accumulate debt instead of making it a catalyst for manufacturing, trading and other economic activities.

The report said that asset base of the banking system, with marginal growth, remained stable during the quarter under review.

The deposits base, which grew significantly during the last quarter, contracted over the quarter under review. On the asset side, decline in advances took place in both public and private sector lending.

However, lending to private sector corporations in power and energy sector actually showed a significant growth while asset base with shift in asset mix from advances to investments and decline in deposit base remained stable.