KARACHI: The non-performing loans (NPLs) of all banks significantly increased by Rs22 billion in the first quarter of the calendar year 2021 to Rs866bn, while the recovery remained less than half of the preceding quarter (October-December 2020).

Increased NPLs are a sign of poor banking particularly when the role of the private sector is limited in the banks’ money.

The State Bank’s latest quarterly data issued on Friday showed that despite drastic reduction in the private sector lending in FY20, banks defaults have been increasing while the size of the default amount also increased significantly.

The banks have been using most of their liquidity to invest in risk-free government papers and almost all banks showed increased profits in their balance sheets for CY20.

The last updated data of the State Bank showed that banks have invested Rs10.121 trillion in treasury bills, Pakistan Investment Bonds and sukuk.

It means Rs10tr is not for the growth of the economy — usually government borrowing is used for non-productive purposes.

The commercial banks witnessed highest loan defaults during 1QCY21 which increased by Rs31.78bn to Rs793.5bn. The high interest rates not only discourage borrowers but are also a major cause of rising NPLs. Almost all banks are willing to earn maximum from investing in the risk-free government papers which is why the highly subsidised housing loans with government guarantees it could hardly inch up.

For more than two and a half years the government has been making efforts to boost housing loans with the subsidised rates of 5 and 7 per cent, but banks participation remained extremely slow. Recently, the State Bank announced record 36pc growth (Rs54bn) in housing loans in FY21 but it has no comparison with over Rs10tr investment of banks’ money in government papers.

All banks and DFIs collective defaults increased by Rs22.08bn to Rs866.7bn while all banks’ defaults increased by Rs21.4bn to Rs850.3bn.

Similarly, the public sector banks’ NPLs increased by Rs16.6bn to Rs284.3bn by end of March.

The only improvement was noted in case of specialised banks as their NPLs declined by Rs10.4bn to Rs56.8bn during 1QCY21.

The foreign banks also improved their performance with decline of default amount by Rs38 million to Rs2.44bn; this is the lowest amount of defaults among the banks.

While the quarterly report shows that the commercial banks’ default rate was highest in 1QCY21, the recovery was poor. The commercial banks could recover Rs15.9bn compared to Rs27.4bn.

All banks recovered Rs20.6bn in 1QCY21 compared to Rs47.8bn in 4QCY20. This low recovery and high default would force the banks to adopt more rigid policies towards extending loans.

The recoveries of all kinds of banks were poor during the quarter compared 4QCY20.

The recovery of public sector banks was Rs2.55bn in 1QCY21 against Rs11.06bn in 4QCY20. Similarly, the recovery of private banks was Rs13.39bn compared to Rs16.33bn in 4QCY20.

The specialised banks whose NPLs declined by Rs10bn in 1QCY21 could hardly recover Rs4.6bn compared to Rs20.4bn in 4QCY20.

Published in Dawn, May 9th, 2021