NPLs: When change is cosmetic

The scheduled banks' statistics made available by the central bank on Tuesday last carried one piece of good news: the volume of non-performing loans (NPLs) in the country's banking industry has declined but in a miniscule amount. Yet readers felt betrayed when they detected a mismatch between the newspaper headlines and the content of the reports on the issue.
In real terms, the size of NPL at the end of the third quarter of the current calendar year had turned bigger in keeping with the trend witnessed in recent years. The basic reason for NPL coming down at the end of the July-September period of 2023 was an unusual one. The volume of NPL with the state-owned banks declined by Tk 86.57 billion to Tk 657.97 billion at the end of September last. However, the volume of soured loans belonging to private banks rose by more than Tk 70 billion taka to Tk 815.37 billion during the period under review.
How could the private banks that have been carrying a huge burden of default loans demonstrate such a spectacular performance? Rescheduling, a tool that banks have been using indiscriminately to provide relief to their 'distressed' borrowers or to give their financials a healthy look, made all the difference.
If not all, one state-owned bank Janata regularised loans worth Tk13.7 billion belonging to two large and influential corporate houses through rescheduling. This had made a notable cut in the NPL volume of all public sector banks.
Some large corporate borrowers have their banks or major shareholdings in private banks. Instead of borrowing from the private sector banks, they prefer state-owned banks for borrowing, mainly because exercise of undue sway over those institutions is rather easy. That is why the share of NPL in the total outstanding loans of the state-owned banks is as high as 25 per cent. However, the latest decline in NPL of Janata Bank has pulled down that share to 21.7 per cent. The main reasons for the public sector banks having the huge burden of NPL are irregularities in the sanction of loans and their recovery. Until recently, in many cases, large and influential borrowers---mostly delinquent ones---used to determine who would be chairmen and managing directors of these banks.
However, some private banks are no better than their state-owned counterparts as far as NPL is concerned. According to a newspaper report, around 63 per cent of total NPLs belongs to only 10 banks---five state-owned and five private. The entire loan portfolio of the National Bank of Pakistan is reportedly classified. Three private banks have got 60 per cent of their loans classified.
It does not need any elaboration that the country's banking sector is not in a good shape. It needs to go through major reforms. As things have been proceeding until now, it is difficult to say that the government will subject banks to any drastic reforms. The situation, in that case, might become pretty bad if the current state of affairs continues for some more time.
The government forced a few state-owned banks and financial institutions to buy the major stake in a sinking private bank, formerly Farmers' Bank and now Padma Bank, to keep the latter afloat. However, the repetition of similar acts might prove difficult in the future. So, it is better to streamline the banking sector early. The central bank might also consider the use of merger and acquisition that, many feel, have been long overdue.

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