KARACHI, Jan 19: The State Bank of Pakistan has slashed banks’ exposure limits to individuals and groups to preempt sinking of some banks as some big groups are in serious trouble and their collapse may shake up the entire banking system.

The central bank on Monday revised the exposure limits as percentage of banks’ and DFI’s equity. It means that banks will lend to their borrowers in accordance with their paid-up capital and the limit to lending has been slashed.

Earlier, the banks had exposure limit of 30 per cent of their equity for individuals and 50 per cent for groups having two or more companies.The exposure limit for groups will fall by five per cent annually to 25 per cent till December 31, 2013. However, for individuals, it will remain 30 per cent till 2012 and then to 25 per cent in 2013.

Banking sources said that the vital decision was taken in the wake of information that some large groups were melting and their collapse will badly hit the entire banking system.

“A major group that has total bank borrowings of over Rs40 billion has shown its inability to continue its business that means the banks who lent to the group will face the worst outcome,” said a senior banker dealing with risk management at a local bank.

After the frequent fall of banking giants in the developed economies, countries like Pakistan has also started feeling nervousness.

The textile sector, which is the largest borrower from banks, is the direct victim of slowing demand in the United States and Europe, which are in the grip of strong recession.

The indirect impact of the global recession gripped the auto sector of the country while the sector is also one of the largest borrowers.

The auto sector, which among the major borrowers, had suffered 48 per cent decline in production during July-December 2008 and thousands of jobs direct and indirect — were lost.

“The paid-up capital limit of the banks will be Rs23 billion by 2013 which means even 25 per cent exposure limit for individual or group will be much larger,” said the banker.

However, analysts said the banking industry would be in trouble if the major companies started closing or curtailing their operations with the slowdown in economic activities, the banks would not be able to recover their money.

They said huge provisioning in 2008 was also a clear sign that banks had already feeling the pinch of economic slowdown.

“Export orders from Europe and America shrink to just 25 per cent,” said Aamir Aziz, an exporter of knitwear, adding that 50 per cent workers of his company had already lost their jobs.

Bankers said the SBP took the right decision to protect banking system from any major jolt. Banks with small paid-up capital however would not be able to cater to the requirements of large corporate groups which could be higher than their exposure limit.