Pakistani Bank Branches in Other Countries Record a Massive Increase in NPLs

Pakistani banks operating in different countries have witnessed a rise in Non-Performing Loans of 12.06 percent or Rs. 13.5 billion during 2019 for its foreign operations.

According to the State Bank of Pakistan’s Financial Stability Review, most of these NPLs were concentrated in Gulf Cooperation Council (GCC) states, which faced economic slowdown due to repressed international oil prices.

It is pertinent to mention, the regional GDP growth of GCC countries dropped to 0.8 percent in 2019 from 2.0 percent in 2018. The crude oil prices further dropped in 2020 due to the Covid-19 outbreak which further upset the economic growth of these countries.

The NPLs mostly belonged to electronic/electrical equipment, real estate, and telecommunication sectors. In addition, the Rupee equivalent amount of foreign operations’ NPLs has, partially, escalated due to depreciation of the domestic currency.

It may be recalled that an episode of a surge in NPLs was also observed from March 2008 till June 2012. However, an increase in NPLs during the last couple of years was significantly different from the previous episode. For example, previously, NPLs continued to rise for 15 quarters while in the recent episode the increase in NPLs was short-lived.

Moreover, the pace of NPLs’ growth (particularly during 2008-10) was quite higher. The asset quality indicators such as infection ratio, provisioning coverage ratio, and net NPLs to advances ratio showed a marked deterioration in the previous episode compared to marginal weakening during this episode.

There are 89 branches of Pakistani banks operating overseas in different countries. More than 70 percent of these are operating in GCC states.

With a rise in overall NPLs, the asset quality indicators of the banking sector deteriorated in 2019. The NPLs to gross advances ratio increased to 8.58 percent by end Dec-19 from 7.97 percent by the end of December 2018.

The provision coverage, though still high, reduced to 81.43 percent in 2019 from 83.80 percent a year back.

Consequently, the ‘net NPLs to net advances’ ratio rose to 1.71 percent in 2019 from 1.38 percent a year ago. The credit risk coverage of the capital also reduced with the rise in ‘net NPLs to capital’ ratio to 8.91 percent in 2019 from 7.83 percent in 2018.