Non Performing Loans (NPLs) of the banking sector declined by Rs 3 billion during the third quarter (July-Sept) of this calendar year (CY17) supported by an ease in monetary policy stance. According to current NPLs statistics, the stock of NPLs of all banks have been decreased by Rs 3 billion to reach Rs 611.813 billion during July-Sep 2017 compared to Rs 614.816 billion at the end of second quarter April-June 2017.

The State Bank of Pakistan (SBP) believes that the ease in monetary policy stance has led to improvement in the repayment capacity of the borrowers and accordingly resulted in some decline in NPLs. "With support of cash recoveries that outweighed the fresh NPLs and seasonal reversals of agricultural NPLs and upgrade of some classified loans has largely contributed to lower NPLs at the end of third quarter," it added.

The detailed analysis revealed that during the period under review, NPLs of public sector banks and local private banks moved up, while NPLs of specialized banks posted a decline of Rs 9.3 billion to Rs 49.96 billion at the end of third quarter. Similarly, NPLs of DFIs and foreign banks remained almost stable at Rs 15.86 billion and Rs 2.9 billion, respectively at the end of September.

According to SBP''s quarterly performance review, the significant risk dimension, ie, the asset quality has improved due to reduction in NPLs and enhanced provision coverage (provision-to-NPLs). Aging of NPLs shows that most of the current level of the NPLs corresponds to the period of build-up witnessed in CY09-CY12.

With decline in classified loans, various asset quality indicators have also improved and NPLs to loans ratio has decreased to 9.2 percent in Q3CY17 compared to 11.3 percent in Q3CY16. The current level of NPLs to loans ratio is lowest since Q4CY08.

With improvement in provisions coverage (provisions to NPLs) ratio to 85.3 percent compared to 83.7 percent in the last quarter, net-NPLs to net-loans ratio has also decreased to 1.5 percent in Q3CY17 against 2.1 percent in Q3CY16.

The SBP said that ease in monetary policy stance, as manifested in lower weighted average lending rates (WALR), has led to improvement in the repayment capacity of borrowers. Further, there is a downward trend in both the number of non-performing borrowers and quantum of fresh NPLs.

In the nutshell, the analysis of banking sector soundness during Q3CY17 suggests that NPLs exhibit seasonality and improvement in asset quality is driven by suppressed addition to the stock of NPLs and even with lower profitability the solvency position of the sector is comfortable and capable of withstanding additional one-off tail events that eroded profitability.

Copyright Business Recorder, 2017