4.0 Data Analysation
This chapter shows the finding of the study in order to address the research questions and accomplish the objectives of this dissertation. Core issues are impact of privatization on the non performance loans. Nonperformance loans are on the trend of bad loans, profit and liquidity and loan interest and income. Even privatized banks played good role enhancing the profitability and reduce the nonperformance loan. This chapter cover the identification and causes of the non performance loans. This chapter is crucial for the entire study
4.2 Privatization of the Banking Sector in Pakistan
There were 24 commercial banks conducted their business in Pakistan from 1990. Most of the banks were public sector which was catering the most of banking needs of the economy. From this figure it has been observed that most of the banks were out of control in operation and other department due to not applying proper strartegy and channel to put its effective measurement in to actions. It has been analyzed during the process that nationalization banks have undue interference in lending, loan recovery and personal issues, averse to lending to SMEs. In order to save the country economy, it is important to conduct and apply strategy with high influences to the economy.
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Here two public sectors of the banks have undertaken which have been privatized in order to analyze the impact of privatization at the micro level. These two banks can get us better proposal of the impact of change on the performance. Banks which are thought to be undertaken are Muslim Commercial Bank and Allied bank.
4.3 Muslim Commercial bank
On April 6 1991 twenty six percent of shares were sold at a price of fifty six per share. This was the first bank got into the privatized from the public sector. Federal government of Pakistan suspended of the nationalization provision of the banks Act 1974 except for the session 5(6) for a period of six months. . Agreement between the National Group and Government of Pakistan in February 19, 1992, further twenty five percent of shares were accessible to the public. National Group of the Pakistan put his hands forward to buy twenty four additional of MCB shares to reach on the fifty percent of shareholding of the total shares. In January 2001 and 2002 further shares were purchased for the 1.3 billion of rupees.
4.3.1 Impact analysis of privatization
Following of MCB privatization, there has been seen the development in the performance. End of 2003 twenty eighth of percent of assets of nationalized commercial banks were found a healthy growth in the assets of the bank. Advances and deposits of MCB has been seen a growth and development with advances and deposit at 26.7 and 26.5 percent respectively in 2003.
Nonperforming loans have been declined significantly as percentage of total advances during the 2003 which were under the consideration reaching eleven percent of gross advance. This is not because of old and public sector but it was given hard and strong administration to the banks in order to bring growth and reduce the nonperforming loans. The figures come to close to two percent if net NPL ratio for the bank is in use that can compares NPL ratio very favorable for the entire banking system at 5.5 percent. If we see the bank profitability of the bank, it has improved the significantly.
Muslim Commercial banks started practicing the art of implementation and continuously changing market place, strategies, missions, and creative objective and direction to follow on in order to get higher return and higher growth for the economy and for the MCB. Before the privatization banks faced high challenges and rough routine without any ambiguous goal to achieve. Bank Management considered forming products and bank business in order to produce satisfactionary profit growth. MCB performance after the privatization has been seen quite attractive.
4.4 Allied Bank Limited
Allied Bank Limited was second one of the privatized bank in the public sector. MCB was bought from the strategic buyer but through an Employee of Stock Ownership Plan on September 1991 ABL was privatized where twenty six percent of shares were purchased by the Allied Management Group at a price of seventy rupee of per share.
Always on Time
Marked to Standard
Impact analysis of privatization
Performance improvement of ABL has been observed and analyzed not as fair, good like as MCB is after the privatization. It has been observed from the ABL financial indicators that its post privatization has deteriorated the system of banks and its growth. Marginal improvement has been analyzed in term of deposits and assets but later years it started getting declined. Nonperforming loans of ABL is the most alarming development as total loans reached from sixteen percent to forty four percent. It looks that loan can worsen the position of the bank. It is very important for the new management of ABL to bring down the NPLS in order to accomplish and objective of the privatization to bring prosperity, growth and development towards country economy. Management itself failed to address the NPL drastic increase that has suffered the profitability of ABL. Banks made quite huge losses during the years. Banking failure was due to unable to meet the obligation of creditors and depositors because it becomes the victim of the too illiquid and insolvent in the time to meet the liabilities. Even ABL fails economically on the decline of the assets and market value of its value that is fewer than the market value of its liabilities. One of the failures in time of privatization of ABL was not to fulfill the demand of depositors. Most of the influence causes found in the ABL failure was very poor management, without direction, under the capitalization and huge portfolio of the Non Performance Loans and high intermediation costs.
4.4.1 Analysis of Nonperformance loans trend in ABL
To establish the trend of nonperforming loans during the period is given under the consideration has been analyzed. Table given below shows the non performing loans over the five years of the bank. Depict the trend of non-performing loans of the bank over the
Past five years.
A bad loan is articulated as a percentage of total loan portfolios during the period and referred to Non-performing loans ratio.
During the period, ratios show the huge sums of the bank's loans were non performance due to bad management and wrong decisions to undertake. There was resource available to the banks to take on in order to make its plan and implementation very strong and effective. One of the interviewee response when the bank came under the shadow of privatization, it took months to make it effective its plan and control on the effects of nonperforming loans. If we look at the 2007 it has got recorded lowest ratio of nonperforming loans. One of the credit manager in MCB told regarding a report where loan on agriculture specially cotton loans granted in 2007 where weather conditions made it worse in poor yield for the banks which made repayment problems for the agriculture sector. Due to recession and sales went down that turned people, who had loans dues were not able to repay therefore it was one of the reason banks made its way unsuccessful to get repayment from lenders. In this way the non performing loans created more sophisticated to impact on the banks existence. Certain measures has been put forward in place by the management which can result in general falling trend of nonperforming loan ratio in order to improve the loan portfolio quality of the bank. Falling trend of nonperforming loans can be progressed when business who have borrowed the money have got the effective and good rate of return in order to pay their interest and principle back before the loan get matured therefor banks had got very effective strategy in the 2003 to 2004 to pay the loans to the businesses with good business plan with this development that business will not fall in to losses but profitability chances are a lot that can result decrease in nonperforming loans.
The signification performance of the ABL has been coupled with improved loan recovery and monitoring. Most of credit specialist were hired with this ambition to minimize the deteriorate the loan which beefed up its credit staff strength. In 2007 significant declined the trend of nonperforming loans because of management embark on highly computerization programmers with this intention that this system would monitor and put pressure on the recovery of the loan in order to get its non performing loan ratio declined. Bank is with huge non performing loans since many years; most of top new executives were on top position and experienced who are capable of improving the quality of loan portfolio by minimizing the non performing loans ratio therefore falling of nonperforming loans were found out during the period.
4.5 Bad Debts and Loan Interest Income
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Predominate source of income for the bank is loan interest income.
As seen in the graph that bank loans portfolio generated to consistent increase in the interest income. Bad debts charges have been reduced and erode a substantial amount of bank loan interest and income. If we look at the table it shows that bad debt charges have been reduced during the period given. One of big sector caused bad debts within the bank was ineffective loan recovery attributed to understaffed credit offices, inadequate logistics and agriculture sector loan. Ratio of bed debts to loan interest income keep declining because of highly experienced staff and improved loan monitoring and recovery supported by the increased credit staff. From 2006 it has been seen that bad debts have been decreasing with this indication that effective measures were put into place by the top and experienced management in order to reduce bad debts charges and improve its interest income. It has been deduced from the earlier analysation that the total income earnings of the bank during the period have been negatively impacted on the huge reduction in loan interest income. Overall impact of bad loans was negative on loan interest income.
4.6 Operating Profits and Non Performing loans
This analysis determines the impact of nonperforming loans provisions on the profit of the bank.
Nonperforming loans has causes high trouble to banks in term of operating profits of the banks by 52.45 percent to 55.83 percent respectively. It has depicted not only the MCB but all the banks of the world the great impact NPL on the profits. MCB is also one of the banks affected but if we look at the financial crisis of 2008, where Lehman brother's banks not only profits went down but this bank also collapsed due to high provision of nonperforming loans dieses. Higher the nonperforming loans the higher the expected losses will be recorded that caused the banks losses. Reason behind this was caused by commencing the Management program of abolition it books in order to get better the asset value of bank by making colossal provision of bad debts. The result has been shown that banks profit can be negatively impact if higher nonperforming loans are shown as a expenses in the profit and loss account. Banks experienced management and policy implications for management department can determine to improve the loan portfolio in order to predominate source of interest income of the bank in order to increase the operation profit.
4.7 Analysis of the Impact of Bad Debts on Lending Funds (liquidity)
Customer deposits are source the banks depend upon to create loans. If banks grant loans and incapable to recover the interest and principle of loan granted, that would lead to diminish the accessibility of funds for the lending. This would affect the SMEs especially when loans are not available as a source of funding.
If we look at the table, non performing loans charges funds have been reduced on the availability of lending in the years. Amount has been used for creating loans at the bank base rate if total loan interest income would have been earning on such funds according to financial analyst of MCB. Since the interest income was lost due to nonperforming loans it affected the financial performance of the bank. During the period incidents of Nonperforming loans impacted unenthusiastically on the liquidity of the bank which resulted insufficient funds for the lending. During the interview, liquidity problems occur to banks due to non performing loans, it was decided by the management that there would be provisional bank on loan disbursement. Liquidity risk can occur when the mounting ratio of NPLs badly concern the lending rate. It is one of the main grounds of sluggish stimulation of sick element in the country. This can cause slow down in industrial efficiency and economic activity. These situations will forces managers to change high mark up on loans and pay minimal return to the depositors. If we look at the ASEAN countries, they suffered from national and social unrest, low industrial output, illiteracy, poverty and massive unemployment. It is very important for the banks sector to improve the quality of loan portfolio by increasing effective strategy in actions to prevent from nonperforming loans. . Poor return on deposits discourages savings, which are already very low. The ASEAN countries also suffered from massive unemployment, poverty, illiteracy, low industrial productivity, national income and social unrest.
4.7.1 Impact of nonperforming loans for the enterprises
Development of NPLs can cause the decline in banks credits, this is one the implication drawn from the credit crunch view. Any banks either privatized or nationalized with high level of nonperforming loans portfolio may turn out to be disinclined to take up new loans and new risks. Banks lending factors and capacity is authorized department who determined the supply of loans and that manipulate banks enthusiasm to offer credit. The less credits banks will deliver the higher the NPLs in bank portfolio. Earning assets growth, capital growth and deposit growth is main element that can be affected by the loan growth. Once the loan growth started, that can harm other enterprises by supplying the credit. One of the employee of the banks said that bank can expand the volume of loans in order to rebalance the asset portfolio with the expansion of asset size. Growth of deposits can move the same direction as the loan growth rate but the loan growth will not be reliable with the development of deposits when the bank is experiencing poor condition ridden by high NPLs. Some time development of deposits will not be consistent with the loan growth. Privatized banks attempt to deal to with non performing loans by adopting higher strategy and higher influences on lending. banks are unwilling to make loans for new customers in order to discourage to build up new non performing loans instead they will switch for treasury bills and government bond as a secure assets. This substitute will be longer effect. Earning asset growth will have great downbeat effects on loan growth as a result of great replacement. Growth of earning assets will be impeded by the credit risk. Banks will have to remain more capital with higher credit risk in portfolio than investing in other assets in order to increase and improve the security arrangement. Bank credit ranking will be diminish by the higher credit risk of bank and it can also lessen their capability to employ in a range of venture. Loans decisions are made at the beginning of the period and nonperforming loans are not recognized until the end of period. According to bank existing non performing loan situation, they make decisions which can be judged at the end of period.
4.8 Factors accounting
There are many respondents given the causes of nonperformance loans not only from the banks website but also from people who are working. Some of the responses had given the reasons of nonperforming loans are similar. Causes of nonperforming loans were the factors given by all respondents. Main causes were identified by the interviewees
Poor weather conditions among others
delayed loan approval,
Ineffective appraisal of credit request,
Diversion of loan,
Respondents rank causes and reason of nonperforming loans given above. The most important factor affecting the quality of loan recovery is ineffective monitoring and credit appraisal therefore respondents ranked both a poor. Second poor ranked which caused nonperformance loans are poor weather for agricultural activities, marketing problems, under financing, diversion of loans and delayed loan approval. Ranked three was lack of business management knowledge. Even other factors that caused nonperformance loan were non compliance and overtrading with bank credit policy.
4.8.1 Poor Credit Appraisals and Ineffective Monitoring
Ineffective monitoring and credit appraisal are ranked the most important in term of issuing loans. One of the phone interviewee expressed that by the credit officers' results in wrong credit approval decisions lead to loan repayment problems. It is because of poor appraisals of credit requests and ineffective analyses of credit risk analyses, cash flow statement and ineffective analyses of financial ratios among others that can provide ambiguous information on the customer's financial position to the approving authority and ability to repay the loan. Loan problems created on poor credit vetting that result delayed loan approval according to one of respondent. Major cause of nonperforming loans is ineffective monitoring by the management. One of the respondents explained that monitoring of loans involve to keep tracking of loan on regular basis in relation to keep track of the loan customers activities in order to ensure that conditions and terms of the facility are compiled in term of loan agreement. This entail off and on sight monitoring. Most of the credit officers should have to perform to visit field visits to find out about customers activities and analyze that customers will be in position to pay back their loan promptly. Due to inadequate resources such as logistics that aid effective monitoring, lack of access roads to customer projects sites, ineffective supervision by management and under staffing can create problem of ineffective monitoring. These resources are very important and essential for the monitoring. Branches with inadequate resource have quite high chances of facing problems of ineffective monitoring that can lead to repayment problems. According to the latest country report of World Bank (2002) nationalized commercial banks are the curse and major problems to handle because of directed credit to companies and individual and political interference. According to Pakistan government NPLs started showing alarming proportions which is 384 billion in fiscal year. It is important either privatized or nationalized banks to look into the monitoring strategy in order to boost up profits and reduce the impact of nonperforming loans. ASEAN countries after the economic and financial crisis in 1997, NPLs begin to amid an expected global recession. Failing to apply monitoring strategy made banks to increase the nonperforming loans. In the middle of 2001, MCB started taking very effective steps to handle the increase trend of NPL. It took several initiatives to assist nonperformance companies and defaulting companies. Due to slow court procedures, ineffective monitoring desire results have not been achieved. Strong monitoring team has been appointed who can force to speed up legal actions against the defaulting companies. The best monitoring system cannot finish but diminish the nonperforming loans.
4.8.2 Marketing Problems, Delayed Approval, Diversion of Loans
One of the factors that cause nonperforming loans is delayed loan approval. One of the banker indicated that time bound projects like construction, agriculture sector and some other activities has serious consequences. Rigid approval procedures and due to customer inability cause delayed approvals. Liquidity problems and poor credit appraisals can result in delayed loan approval. Second major cause of non performance loans is inadequate financing. Respondents have shown that low account turnover, inadequate financing, liquidity problems and poor credit appraisal can result in inadequate financing. These matters compel customers to approach other banks to raise finance which affect loan repayment. Diversion of loans into activities can account for nonperformance loans other agreed purpose. Due to ineffective monitoring division loan is caused. Due to poor weather conditions, marketing problems and natural disaster such as animal and crop disease and poor rain pattern, flooding can dilute the customers to pay off their loan. It has been found in agriculture a black pot disease which has affected to most of the agriculture products such as rice, floor etc and adverse weather conditions have consequence of failing to pay on time that turn into nonperformance loans. There are shortage and weakness in term of storage facilities and ready maket which cause marketing problems for the farmers, in turn loan repayment problems over the years occur. Tomato and potatoes had marketing problems that result glut in harvesting season according to one of the credit officer expressed. These are the problems causing repayment problems of the loans from the bank.
4.8.3 Lack of Management Skills, experience and Knowledge
Banks get losses of sales income by poor record keeping on sales and stocks due to inadequate business management knowledge. Loan repayment problems occur due to insufficient business management knowledge accounts for overtrading. It has been found out that non compliance and overtrading with the banks credit policy account for non performance loans. Undertaking overtrading strategy for the banks is to expand its operation quickly in order to boost up the profitability. It is possible when match between its activities and financial resources are met otherwise that can result the affect on loan repayment and liquidity problem. Lack of business knowledge and ineffective monitoring can lead to overtrading. Management corruption, narrowed visionary abilities and inefficiencies led to gross mismanagement. When bank find ineffecines, lack of commitment, low market condition, frequency incident of bankruptcy, uncapable management and increasing interference of the state by centrally mandated credit programmers low recovery led bank into crisis and increase the ratio of NPLS which can menace the productivity and creditability of banks, therefore they would prefer to fire and bring top experiences person in order to boost up sales and increase profitability of the banks. According to SBP that in 1995 to 1997 most of the top management destroyed the banks without good decision makers.
4.8.4 Sector with highest NPLs
Agriculture sector is found out the recorded non performance loans within the banks. It is fact that Pakistan is country whose sixty percent of business depends upon agriculture where farming activities are faced up with unreliable weather conditions. Some time the way it rains, it can be analyzed that it is not favorable conditions which result poor yield.
Agriculture infrastructural facilities such as good road, agro processing industries, storage and irrigation system are in lack of farming areas which hinder the farming business that lead to cause of repayment problem. In absence of agro processing factories that can provide ready market and storage scarcity facilities influence the tomato farmers. In this way most of the farmers approached to banks to contract loans. Due to insufficient return in hand, poor market and storage facilities, farmers were not in position to pay back the banks loans they are scheduled to. Bush fires, animal dieses, crop and floods are other problems affect the agriculture sector. Most of the banks core activity is agriculture credit in Pakistan. This sector is heavily threatened by many factors. In order to improve the overall loan portfolio quality of the banks top executive should draw strategy and policy implication to institute measures to mitigate threats.
4.9 NPL progression on the incident of flood disaster
According to recent report from state bank of Pakistan that NPL recently in 2010 in the wake of flash floods has crossed the Rs of 500 billion. Flood have wipeout all the sector banks has granted the loan. One of the member of state banks said that due to the natural disaster in Pakistan NPL in this year with strong prediction can increase by 48 billion rupees. NPL has increase in all of the banks either privatized or nationalized in size of 473 billion in June 2010 due to poor risk management judgment and bad performance by banks. In recent disaster of flood calculation has not yet been done for the losses of business, industry and trade which borrow the money from the banks. Prediction has been made by the bankers that fifty billion rupees are initially estimated. This would cause fatal for the economy as well as for the banking industry in the rising of NPLs. Increasing ratio of NPL would bring banks to avoid extending loans and stop invest in government papers. During the 2009 seventeen billion of rupees were given credit growth to private sectors, in 2010 credit improved by the 113 billion rupees. Due to massive devastation of property, houses and crops caused by the naturally catastrophe which made banks to put cap on lending policy. Now it's time for the government to bailout privatized banks in term of proving liquidity by announcing more relaxation and relief regarding loans in the area of affected.