Provisions for bad debts surge to alarming Rs228bn: SBP

[Naveed Yaseen]

ISLAMABAD: The provisioning for bad loans in the country’s banking sector, which ultimately qualifies for write-off, has alarmingly gone up to Rs228 billion till the first quarter of the current fiscal year ended on September 30, official data of State Bank of Pakistan (SBP) exclusively available with The News revealed.

Banks put a certain amount into the clause of ‘provisioning’ for bad loans in order to achieve clean balance sheets and most of the time loans are written off allegedly to please political cronies and their close kith and kin by ignoring outlined merits and guidance of the central bank.

The overall gross Non Performing Loans (NPLs) also shot up to Rs288.372 billion on September 30, 2008 from Rs251.113 billion on June 30, 2008, registering an increase in NPLs by Rs37 billion in a period of just three months of the PPP-led government from July to September 2008.

One major factor for the increase in NPLs is the hike in interest rates by the central bank to tame inflation on agreed conditions of the IMF under the Standby Arrangement (SBA). But officials in Ministry of Finance say that the central bank made prudent regulations last year, which bound the banks not to adjust the amount in accordance with guarantees attached, which basically resulted in increased amount of provisioning. “It is not a bad thing for the banking sector,” they added.

According to official data compiled by the SBP on NPLs, a copy of which is available with this scribe, the NPLs of all banks have increased up to Rs278.151 billion on September 30, 2008 from Rs241.853 billion on June 30, 2008. The NPLs of public sector banks went up to Rs70.745 billion on Sept 30, 2008 against Rs57.657 billion, up by Rs13 billion in first three months from July to September in fiscal year 2008-09.

The net NPLs of public sector banks stood at Rs13.366 billion on Sep 30, 2008 against Rs8.515 billion on June 30, 2008. The NPLs of local private banks shot up to Rs172.643 billion on Sept 30, 2008 against Rs153.631 billion on June 30, 2008, witnessing an increase by Rs19 billion in the three month period. The net NPLs of local private banks increased up to Rs33.145 billion on Sept 30, 2008 against Rs23.416 billion on June 30, 2008.

The NPLs in foreign banks slightly increased and touched Rs1.698 billion on Sept 30, 2008 against Rs1.597 billion on June 30, 2008. The net NPLs of foreign banks were only Rs442 million on Sept 30, 2008 against Rs540 million on June 30, 2008, showing improvements on this account.

The NPLs of specialised banks, official data showed, increased up to Rs33.065 billion on Sept 30, 2008 against Rs28.969 billion on June 30, 2008. The net NPLs of specialised banks increased to Rs12.161 billion on Sept 30, 2008 against Rs7.554 billion on June 30, 2008.

The NPLs of DFIs increased to Rs10.221 billion on Sept 30, 2008 against Rs9.259 billion on June 30, 2008. The net NPLs were Rs2.703 billion on Sept 30, 2008 against Rs1.969 billion on June 30, 2008.

This correspondent sent three questions to the official spokesman of SBP, the response to which is being reproduced here without any change. What are the reasons for increasing provisioning of bad loans despite clear instructions given by the central bank last year?

In 2007, SBP made provisioning criterion more stringent and prudent by removing the benefit of Forced Sale Value (FSV) of collateral. Consequently, banks will now have to create more provisions against their non-performing loans as compared to what they were doing in the start of 2007. Provisioning has also increased due to rise in gross NPLs, which rose to Rs288,372 million by end Sept 2008. In terms of ratio, Gross NPLs to Gross Loans ratio was 8.6pc, while Net NPLs to Net Loan ratio was 1.89pc by end Sept 2008.

The provisioning of bad loans has gone up to Rs228 billion till Sept 30, 2008. Is SBP considering taking more steps to control this situation?

SBP already has in place a number of regulations on credit exposure limits, margin requirement, and loan provisioning, which aim to improve the quality of loan portfolios of the banks. SBP has also set up e-CIB which is a comprehensive credit bureau to facilitate banks to obtain credit information on borrowers.

“Moreover, SBP also carries out inspection of banks and in case irregularities are found in loan disbursement, etc, substantial penalties are imposed,” the statement added. All provisioning and bad loan write-off must be off set against the income of the bank. In rare cases if the capital of a bank starts to erode, SBP instructs the owners’ of the bank to immediately replenish the capital.

The key measure of a bank’s solvency is the capital adequacy and the international benchmark of Capital Adequacy Ratio (CAR) is 8pc. The Pakistani banking system CAR is at 11.8pc as of end September 2008 well over the benchmark. A number of banks have CAR of more than 15pc. As such the provisioning is not threatening the solvency of the banking system.

More recently SBP has introduced an ADR (Advance to Deposit Ratio) limit on banks to ensure that advances are not excessive as compared to their deposit base.

The provisioning of bad loans is increasing especially in the public sector and private sector local banks. What steps are you taking to save depositors who ultimately become victims in terms of increasing spread, as banks recovered their losses owing to provisioning mainly from depositors?

As regulator, the key concern for SBP is to protect depositors’ funds. In this regard nearly all policies are aimed, directly or indirectly, to ensure that deposits are not lost due to any bank’s poor functioning. It is a fact that Pakistani banks have never defaulted on payment to their depositors, and even under liquidity pressures, SBP has taken prompt measures to make liquidity available for deposit withdrawals.

With regard to profit paid to depositors, SBP imposed a minimum floor of 5pc in May 2008 (effective from June 1, 2008).

With a rise in interest rates, the banks are now offering considerably high rates of returns to their depositors on time deposits, and even on PLS deposits.

It needs to be understood that PLS deposits are funds that can be withdrawn at any time by the depositor, this feature necessitates that the bank carry considerable liquidity at all times so that no depositor is refused payment. As such PLS deposits carry relatively lower rates of return.

SBP has given incentives to banks to encourage them to mobilize time deposits and offer good rates to customers. Presently no CRR or SLR is required against time deposits of one year or more. Profit rates on these deposits will further improve, the SBP concluded.

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