Banking system's NPLs surge Rs19b

KARACHI - Total volume of Non-Performing Loans (NPLs) of the banking sector has increased by Rs 19 billion during second quarter (April-June) of calendar year 2009.
In the period April-June 2009, NPLs stood at Rs398 billion as against of Rs379 billion witnessed during January-March 2009 that depicted an increase of Rs18.7 billion on quarter-on-quarter basis.
Comparatively, this increase is significantly lower than incremental NPLs of Rs67 billion and Rs34 billion, respectively, recorded in the previous two quarters.
Driven largely by individuals and the textile sector, the NPLs to loans ratio has surged by 11.5 percent by the end of June 2009 and remained unchanged since end-March 2009.
State Bank of Pakistan (SBP) has released banking sector non-performing loans data for the period ended on Jun 30, 2009. According to the data, net NPL rose by Rs2 billion to Rs119 billion as against Rs117 billion as on March 31, 2009.
SBP further indicates that increase in NPLs in other sectors such as automobiles and electronics and transmission of energy are also significant. Weak growth in textiles and sharp decline in the demand for and production of automobiles (40.4 percent) and electronics (36.0 percent) during July - May, FY09 explain the rise in NPLs and fall in credit utilisation of these sectors.
The FY09 trends in private sector credit show a steep fall relative to last year; the private sector borrowed Rs18.9 billion only compared with Rs408.4 billion in FY08. The Q4-FY09 alone shows a contraction of Rs57.2 billion.
Risk aversion on the part of banks in an environment of rising NPLs, driven by the decline in economic activity, also affected the supply of credit.
Rise in NPLs and the consequent banks reluctance also explains the low extension to the private sector. It is important to note that Non-Performing Loans have remained a key risk factor for the sector that was the major reason for 24 percent decline in sector profitability in Q1-2009.
Banking experts say the slowdown in NPLs growth bodes well for the future outlook of the banking sector and is likely to reduce the quantum of provisioning in the upcoming quarter. Therefore, the year of 2009 would still remain a difficult year for the banking sector with sector earnings likely to decline by 5 percent.