Non-Performing Loans

Image via Wikipedia"A loan is Non Performing when payments of interest and principal are past due by 90 days or more, or at least 90 days of interest payments have been capitalized, refinanced or delayed by agreement, or payments are less than 90 days overdue, but there are other good reasons to doubt that payments will be made in full" - (IMF)
Similarly, the foreign banks have also shown a significantly better performance compared with the specialized banks. Unfortunately, the performance of the other private sector banks is only marginally better than the specialized banks. Coupled with the fact that it was these institutions that have outperformed other institutions in credit expansion for last 4 years; it is suggested that these banks ensure better credit appraisal practices and a more stringent criterion for loan processing. Capital to risk weighted assets ratio which was amongst the lowest in the region during 2001, has increased sharply and the current ratio of 12.7 percent exhibits that the domestic banking institutions are adequately capitalized. More importantly, the increase in CAR during the last five years came along with a robust credit growth. Specifically, the banks achieved a higher CAR by raising capital instead of reducing risk weighted assets.
Among all the Asia countries reported in Table 2, India, Malaysia and Indonesia were the only countries that observed a slight decline in CAR during 2006. While the sharp credit growth during the year was responsible for decline in CAR in these the countries, the decline in CAR in India was also contributed by other structural factors. These included the application of capital charge for market risk March 2006 onwards and the increase in risk weights for personal loans, real estate and capital market exposures. The decline in CAR in Malaysia stemmed mainly from sharp fluctuations in the net open foreign currency position (NOP) (following from the adoption of flexible exchange rate regime in 2005).
Non-performing loans to advances ratio in Pakistan has also improved substantially in recent years but is still higher than India and Korea. However, this high ratio does not indicate a concern for financial soundness since most of the NPLs have been adequately provided for. As shown in the Table 2, provisioning has already been done for 77.8 percent of the total NPLs which is indeed quite significant when compared to other economies in Asia. As such, the net NPLs to net loan ratio in Pakistan at 1.6 percent are very much compatible to 1.2 percent in India at end 2006.
The State Bank of Pakistan (SBP) is dealing with the NPL issue in a comprehensive manner through
Improvement in coverage and reporting of NPLsA proactive treatment of the existing stock of NPLsStemming flow of new NPLsImproving the policy and regulatory environment.
The total reduction in NPLs during FY10 amounted to Rs 101.6 billion compared with Rs 96.1 billion in the previous year. Of this, cash recoveries contributed Rs 55.6 billion relatively higher than Rs 45 billion in FY09. The reductions in other sub-categories remained lower than in FY09.