The central bank had produced a list of major borrowers who managed to get Rs47 billion written off. - File Photo

KARACHI: The State Bank on Wednesday reported that the non-performing loans of the banking industry surged to an alarming Rs629 billion reflecting the poor performance of the economy. The loan defaults are rising despite the cautious approach adopted by the financial institutions while lending to the private sector. In fact, the private sector had been net retiree of the loans during the first four months (July-October) of this fiscal year.

The central bank data showed that the default of banks and Development Finance Institutions (DFIs) reached to Rs629.5 billion.

The NPLs of all banks reached to Rs613 billion from Rs494 billion in November 2010, an increase of Rs119 billion, which is alarming as banks have been making huge adjustments (provisioning) in their balance sheets against the defaults for the last four years.

This is also surprising that banks advances to private sector have come down to the lowest level as they have been investing most of their liquidity into the government papers.

However, it is significant that the economy performed historically low during the last three years, which is posing survival threats to new business ventures. Bankers also argued that high interest rates were hurting the entire industry.

In November 2010 the policy rate was increased to 14 per cent, which translated into 16 to 20 per cent interest rate for the trade and industry barring the business community from seeking loans for expansion and remained limited to their working capital needs.The State Bank estimated last year that the NPLs could surge by another Rs50 billion due to flood while the reported NPLs due to flood had reached Rs42 billion.

The tight monetary policy succeeded to stop flow of loans towards private sector but failed to curtail the ever increasing defaults.

The default has been a controversial issue as some banks have been involved in lending to favourites that ultimately defaulted. The Supreme Court had also taken notice of loan write-offs, which is made when hope dies for the recovery of defaulted loans.

Last year in October the banks issued notices to the defaulters in line with the directives of the Supreme Court which had asked the State Bank to direct all banks to serve notices to main borrowers who had gotten their loans written off.

The central bank had produced a list of major borrowers who managed to get Rs47 billion written off.

The State Bank does not provide write-offs list to keep informed the shareholders of the banks.