Non Performing Loans (NPLs) of Development Finance (DF) sector registered a growth of 1.6 percent to reach new historical level of Rs 165 billion at the end of first quarter of current fiscal year mainly attributed to the prevailing economic slowdown, power outages, flood and domestic law & order situation.

According to State Bank of Pakistan's Development Finance Quarterly Review September 2011, in the prevailing environment characterised by severe energy crisis, poor law and order situation and challenging economic conditions, the banking trends remained intractable which restrained the offtake of credit to private sector.

With these hurdles the DF sector witnessed slowdown in the last few quarters and its outstanding amount witnessed a decline of 0.4 percent on YoY basis and 1.1 percent on QoQ basis.

Total outstanding of DF fell to Rs 818.4 billion in September 2011 from Rs 827.2 billion in June 2011.

The detailed analysis show that the fall in total DF portfolio at the end of the September 2011 is largely attributed to SME sector which saw a decline of about 8.3 percent as compared with the preceding quarter of June-11.

Moreover, while SME finance and housing loans continued to decline, agricultural credit, microfinance and infrastructure finance all recorded positive growth both QoQ and YoY basis.

In addition, the decline in aggregate DF loans is owed to both demand and supply factors and on the supply side, banks' risk appetite remained subdued, particularly given the opportunity offered by aggressive government sector borrowings.

Similarly, the demand was constrained by unfavourable economic conditions.

According to SBP, after witnessing some decline during March-June quarter Non-Performing Loans (NPLs) in DF sector saw a rise of only 1.6 percent and amounted to Rs 165.1 billion in September from Rs 162.5 billion in June.

The detailed analyses revealed that in the previous quarter March-June NPLs of DF sector fell by 0.8 percent to Rs 162.5 billion in June from Rs 164 billion in March.

Of the total NPLs of DF sector, SMEs share stood at 59.1 percent, agricultural 21.8 percent, while the remaining 19.1 percent pertained to other DF sectors.

The trivial rise in NPLs is in line with the overall rising trend in the economy.

During the period under review, the total NPLs of the banking industry rose by 6.1 percent at the end of the period under review primarily due to the corporate sector.

Following the declining trend in the DF portfolio, the number of outstanding DF borrowers declined by 0.5 percent at the end of September 2011 as compared with June-11.

This was also in line with the overall decline in the number of borrowers of the banking industry as it saw a decline of 1.8 percent, QoQ basis.

According to SBP, in view of the prevailing economic slowdown, power outages, domestic law & order situation, natural calamities and overall shyness of the industry towards the sectors the total outstanding portfolio of the banking industry saw a decline of 2.9 percent QoQ basis.

At the same time DF sector was not an exception as it too posted a decline of 1.1 percent.

"However, despite the prevailing adverse conditions, there still exists a strong reason for a positive course of action to take place since the huge potential of the DF sectors itself is a highly motivating factor to encourage the stakeholders to tap on, and consequently develop it for the benefit of economy and their own business interests," the SBP said.

However, it would be unrealistic to expect a change that could bring drastic improvement in the overall economic situation in general and DF sectors in particular.

The State Bank, on its part, has taken various important initiatives for the development of the DF sector that will cause positive impact on the availability of funds for the sector and its overall development in the long run.

Some important initiatives include improvements in Credit Guarantee Scheme for Small & Rural Enterprises, Refinance schemes for flood affected districts, Microfinance Credit Guarantee Scheme, Refinance Scheme for Revitalisation of SMEs, and Scheme for Modernisation of SME, Cluster Profiling Surveys, Introduction of Branchless Banking, Mortgage Refinance Company and Capacity Building/Awareness Programs for the stakeholders.