The non-performing loans (NPLs) of the banking system witnessed an astonishing rise of 64.8 per cent during CY08, reaching Rs 359.3 billion by the end of the year. This is the biggest increase in a single year since CY97, says SBP Financial Stability Review 2008-09, which was released on Wednesday.
According to the report, the NPLs to loans ratio increased by 290 bps, from 7.6pc in CY07 to 10.5pc by end-CY08.

As per SBP statistics, 31 out of 40 banks with asset share of 89.7pc in overall assets, recorded an increase in the NPLs to loan ratio. This suggests that the increase in NPLs is fairly widespread and is driven primarily by cyclical factors i.e. generated by the economic cycle instead of structural weaknesses in the banking system.

The report says that irrespective of the reasons, the substantial rise in the volume of NPLs has had an adverse impact on the financial performance of the banking sector, given that it required banks to create provisions amounting to Rs 105.9b during CY08, which was Rs 46.0b higher than the provisioning amount of the previous year.

“This is despite the concession given by SBP to consider the benefit of 30pc of the forced-sale value (FSV) of collateral for calculating provisioning requirements, as against the more stringent requirement for CY07. The effect of this benefit remained marginal as most of the banks could not fully meet the requirements of the directive before the finalization of annual financial statements. Nevertheless, latest available statistics suggests that some of the leading banks, taking a conservative stance, are not fully availing the FSV benefit”, report said.

“The distribution across banks indicates that 4 banks with asset share of 5.3pc have this ratio in excess of 50pc. In the previous year, there were only 2 specialized banks in this category with an asset share of 2.1pc only”, report asserted.

The report further stated that it is encouraging to note however that 29 banks, with asset share of 86.2pc, have their net NPLs to capital ratio at less than 19.4pc (average for the banking industry). Moreover, none of the big five banks have this specific ratio in excess of the industry average.

The report noted that implementation of the minimum capital requirements in a phased manner continues to strengthen the capital base. The aggregate risk-weighted capital adequacy of the banking sector as of end-CY08, despite the inclusion of the capital charge for operational risk under Basel II requirements, remained at the CY07 level of 12.3pc against the minimum requirement of 9.0pc.