Pakistan’s energy sector continued to remain the largest defaulter in the repayment of loans to banks in calendar year 2021, as banks’ non-performing loans (NPLs) increased 3.8% (or Rs31 billion) during the year.

“Sector-wise analysis indicates that the rise in overall NPLs (the loans which corporate and individuals fail to repay on time) and flow was mainly driven by the energy sector, which observed an increase in NPLs of Rs20 billion during the reviewed year,” the State Bank of Pakistan (SBP) said in its latest Financial Stability Review 2021.

To recall, energy prices had remained on lower side in 2021 due to partial closure of the world to fight against the then Covid-19 pandemic. Accordingly, the profit margins of energy firms including oil and gas exploration and marketing companies had dipped in the year, it was learnt.

The energy prices, however, increased significantly in the current calendar year 2022. The spike is expected to having improved their profit margins during the year.

Also, one-third rise in NPLs was contributed by increase in rupee value of overseas NPLs which primarily rose due to depreciation in exchange rate. “Rupee depreciated against US dollar by 9.4% during calendar year 2021.”

Electronic applies were also among those failed to repay debt on time to banks in 2021. The pace of growth in NPLs for sugar sector, however, slowed down significantly, according to the report.

On the other hand, textiles and agribusiness sector managed to retire their debt in pending during the year.

“Textiles and agribusiness observed highest contraction in NPLs. Robust performance maintained by the textile sector during CY21 explains healthy asset quality dynamics…Textiles exports increased by 32.4% during CY21.”

NPLs in agri-business sector, unlike previous year, contracted primarily owing to compliance to SBP regulations and better recovery efforts.

“Surge in (corporations’) profitability translated into improved repayment capacity of the corporate sector.”

Persistently low interest rates until September 20, 2021 remained one of the key drivers to boost economic activity. Resultantly, the latest available statistics show that corporate sector’s earnings (after tax) sharply rose by 46.5% during CY21 (year-on-year basis).

Credit risk of the banking sector, however, largely remained muted during 2021. “Stock of NPLs increased by 3.8% as compared to 8.9% in CY20. Over the past three years, NPLs have observed persistent deceleration,” the central bank said in the report.

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Cement sector credit

Cement sector remains a significant borrower of the banking industry. During CY21, this sector posted growth in profitability and operational performance. The fiscal year ended up with healthy growth as the government incentivized the construction activity to revive the economy thus increasing the demand for cement, the central bank said.

“However, demand remained relatively low in the second half of CY21 due to slowdown in construction activities on the back of higher input cost and cut of Rs300 billion in Public Sector Development Program (PSDP) amid the government’s drive to seek fiscal consolidation in the wake of emerging imbalances.”

Banks borrowing

Banks are known for lending money to corporations and individuals; however, their reliance on borrowing from the central bank and from among themselves surged significantly in the under review year.

“Banks’ (net) borrowings rose by Rs1.5 trillion during CY21 reflecting the necessary funding needed to support the balance sheet expansion. More than 50% borrowings pertained to SBP. In addition to the repo and OMO borrowings, increased borrowings from SBP illustrated the impact of TERF (temporary economic refinance facility) funding,” SBP said.

The central bank had launched subsidized loan scheme called TERF for businesses to set up new production lines and/or expand the existing ones in March 2020. The scheme was launched help businesses to continue implementing their investment decisions during Covid-19 pandemic that otherwise impossible.

Commercial banks disbursed Rs436 billion to businesses for new investments under the time-barred scheme TERF.

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Published in The Express Tribune, June 24^th, 2022.

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