Islamabad, Pakistan's banking sector has reported a significant surge in non-performing loans (NPLs), hitting a 14-year high, as financial institutions maintained a cautious approach towards loan book expansion throughout the calendar year 2023 (CY23). The sector witnessed an all-time low advance to deposit ratio (ADR) of 44%, reflecting a restrained lending strategy amid challenging macroeconomic conditions. This conservative stance, however, did not shield banks from the adverse effects on existing loan portfolios, with a notable increase in NPL stock by Rs62 billion in CY23, the largest since CY10, and a rise in the infection ratio to 6.2%.

According to JS Global, the textile sector, which accounts for 17% of the banks' lending portfolio and stands as the largest contributor, played a significant role in the increase of NPLs this year. The sector faced heightened pressures due to rising energy costs and borrowing rates, contributing to 25% of the total NPL accretion observed within the banking universe. The textile segment saw a credit cost of approximately 100 basis points (bp), with an infection ratio reaching 8%.

Despite these challenges, the total credit costs for CY23 were reported to be lower than anticipated, thanks in part to the delay in implementing the International Financial Reporting Standard 9 (IFRS-9). The initial estimates had predicted a credit cost of 100bp, but the actual figures came in below these projections. Looking ahead to CY24, similar credit costs are expected, reflecting ongoing macroeconomic pressures, potential delays in monetary easing, and the anticipated implementation of IFRS-9.