**Non-performing loans soar by 115 per cent in 10 years **
Tuesday, October 20, 2009
By Sabir Shah
LAHORE: The non-performing loans (NPLs) of Pakistan’s development financial institutions (DFIs) have soared by over 115 per cent in just 10 years from Rs 185 billion in 1999 to Rs 398 billion in 2009, reveal the figures quoted in this context by the IMF, the World Bank and State Bank.
Simple arithmetic shows that the NPLs have swelled by Rs21.3 billion or 11.5 per cent every year during the 10-year period in Pakistan, which happens to have the world’s 27th largest economy in terms of purchasing power and 48th largest in absolute dollar terms.
The banking sector, therefore, finds itself on the horns of a dilemma as not only the alarming security situation in the wake of the Waziristan operation is due to have ill-effects on the economy in days ahead, but the recent energy curtailment notices given by the Sui Northern Gas Pipelines Limited (SNGPL) to the industrialists for a November 2009—March 2010 period may also prove to be a lethal blow for the industrial sphere and further reduce its capacity to repay what it has borrowed.
Sources in the Finance Ministry have divulged to The News that since a majority of these Rs398 billion NPLS are associated with the ailing textile sector, which has consumed loans to the tune of approximately Rs543.8 billion till October 19, 2009, therefore the chances of recovering these loans which have either been defaulted by the debtors or are currently hanging on the brink of default, seem bleak as of now.
Currently operating with an investment of $6.4 billion, the ailing textile sector possesses a 5.1 per cent share in the Market Capitalization of country’s bourses and constitutes 46 per cent of country’s manufacturing base. As 67 per cent of country’s total banking credit is disbursed to the manufacturing sector, one doesn’t have to be a Malthus or a Ricardo to judge the situation currently confronting the Pakistani economy.
It is noteworthy that the State Bank Governor Syed Salim Raza and the Allied Bank President Aftab Manzoor have both been on the record in recent months, admitting that with the textile sector in dire straits, the NPLs will surge further this fiscal to compound the worries of the banking sector.
While the State Bank Governor had predicted increase in NPLs by March 23, 2009 while speaking at the Lahore Chamber of Commerce and Industry, the Allied Bank Chief had also analyzed a few months ago that since the under-par textile sector was in trouble due to cancellation of orders, the reduced liquidity demand from the banking sector would lead to rising NPLs.
The emerging scenario has also rubbed salt into the wounds of the banking sector in another way because the creditors have primarily kept as collaterals, the presently nose-diving properties and the uncertain stock market shares of the debtors. The risk of the banks is also high because only 0.5 per cent of the total borrowers of the Pakistani banks with loan size of more than Rs10 million are consuming 71.7 per cent of total bank credit portfolio, a fact also recently acknowledged by the State Bank Governor.
Talking to The News, Chairman All Pakistan Textile Mills Association (APTMA) Mian Gohar Ejaz said, “If you remain out of operations for seven months of a year, as has been the case with the textile sector for the last two years, it is impossible to repay the loan and the accruing bank interest. Hence, massive bankruptcies are definitely on the cards now because from next month onwards, the load-shedding of gas will lead to closure of 80 per cent of the textile sector which happens to be the key forex-earner for the country contributing no less than 61.1 per cent ($8.92 billion) towards the export kitty, besides accounting for 8.5 per cent of Pakistan’s Gross Domestic Product (GDP).”
The APTMA chief further remarked: “Currently, one-fourth textile industry is closed due to banking and security issues. It goes without saying that power and gas disruptions during the last two years have pushed this sector towards the wall. And now gas curtailment notices from November 2009 to March 2010 will serve as a final nail in the coffin for the industrial sector, particularly the textile sphere.”
Meanwhile, Chairman Punjab Industrial Estate S M Tanveer observed, “The export of textiles has declined from $10.6 billion of 2007-08 to $9.6 billion in 2008-09, though it was around $11 billion in 2006. I can thus safely apprehend that loan defaults may greet banks in large numbers in near future. Our calculations reveal that over 30 per cent of the 970 textile units are already closed down. And now, the security situation will take its toll as neither would the prospective foreign buyers land on our soil, nor would they take the risk of placing their orders with us.”
Tanveer maintained, “With nearly 40 per cent of the operational textile units badly exposed to circumstantial defaults and with 30 per cent decline in quantity terms across the value chain at this moment, I and my colleagues in business firmly believe that Pakistan would miss its $18.86 billion exports target for the third year in a row. Remember, the 2009-10 export target of $18.86 billion is already 14.66 percent less as compared to the target of $22.1 billion fixed for the last fiscal, when the country had haplessly witnessed its export earnings plunge by over $4 billion.”
Research conducted by this correspondent shows that while the ever-increasing terrorism threat is another factor hampering the business activity in the country drastically along with the persisting energy shortfall, a few steps initiated by the General Musharraf regime have also accounted for this debacle of the banking sector on the loan recovery front.
To mention just one such seemingly ‘imprudent’ step of the Musharraf regime in this regard, the Dr Ishrat Hussain-led State Bank of Pakistan had issued an ‘infamous’ circular called BPD-29 soon after the 2002 elections, courtesy which, not fewer than 50,414 borrowers had managed to get Rs53.45 billion written off ‘legitimately’ under the government patronage.
Instead of launching an effective campaign for recovery of these NPLs, incentives were given to the banks/DFIs in October 2002 for writing off NPLs of the organizations showing “losses” for three years or more.
It may be recalled here that the Supreme Court is already seized of a cases of writing off loans amounting to Rs59 billion by banks in the last five years of the Musharraf era. In October 2007, the Supreme Court had taken suo motu action on the reports of loans waived off, but with the imposition of emergency in the country on November 3, 2007, the case was almost shelved and stands dumped since.
Similarly, the Public Accounts Committee at the National Assembly has also taken a serious note of these written off loans when the Auditor-General had raised an audit objection before the Committee in one of its meetings in not-so-distant past as to how billions of rupees of the public Exchequer were written off.