KARACHI, Sept 6: The unprecedented rise in non-performing loans (NPLs) during the first half of the current calendar year is reflected in failure of the industries not able to payback to their lenders.

Commercial banks in their half-yearly reports have shown an addition of Rs26 billion as NPLs pushing the banking sector’s total NPLs to Rs194 billion.

“A slowdown in economy and higher interest rate scenario are the main reasons behind this rising NPLs,” said Mohammad Imran, head of research at First Capital Equities.

State Bank Governor Dr. Shamshad Akhtar in her meeting with the heads of banks on Friday also pointed out towards the problem of rising NPLs.

She asked the banks to closely monitor rising non-performing loans and to keep them in line with international standards.

High inflation at 24 per cent, removal of subsidies on electricity and petroleum products have suddenly increased the cost of doing business forcing a number of industrial units either to close their business or default on the banking loans.

“Non-performing loans of the banking sector increased by Rs26 billion in first half of 2008 as compared to Rs167 billion on December 31, 2007,” said Mohammad Imran in a report recently issued on the subject.

On June 2007, NPLs of the banking sector were at Rs149 billion. “During first half of 2008, out of Rs194 billion NPLs, Rs37.5 billion was placed in substandard category while Rs25 billion and Rs128 billion were in the doubtful and loss categories, respectively,” said the report.

Banks have been forced by the State Bank to clean up their balance sheets by heavy provisioning of NPLs, which drastically reduced their profits but the fresh NPLs will not allow the banks to clean up their balance sheets. The next year balance sheets of the banks would be heavily burdened with the fresh NPLs.

Despite deteriorating political and economic conditions, advances of the banking sector grew by 11 per cent due to which Net Interest Income (NII) of the sector witnessed an increase of 15 per cent to Rs105 billion.

“The growth in banks’ revenue was largely overshadowed by the increase in provisions against the NPLs,” said the report. The asset quality of the banking sector has become one of the serious concerns while looking at the banks’ outlook in tighter monetary environment, it added.

Banking experts and analysts have been warning that continued tight monetary policy with rising interest rates could be counter productive for the economy. Higher lending rates already attach high risk with the credits.

From May to July 2008, the State Bank increased the discount rate by 2.5 per cent to 13 per cent, which translated into much higher lending rates of the banks.

Bankers said they were getting signals that the corporate sector’s income had gone down, while the recovery of consumer loans emerged as the most serious problem for the banks.

Though the average lending rate is still low but the fresh lending carries an interest rate from 15 per cent to 25 per cent. Bankers said that the real interest rate was still negative as the inflation rate was 24 per cent.

Bankers also believe that the NPLs would increase in the coming months mainly on account of rising cost of doing business resulting in business failures.