KARACHI: Moodys investors services has termed decline in textile exports credit negative for Pakistan’s banks.
“Declining textile exports would threaten their asset quality and comes from a sector that is already burdened with a high stock of problematic debt,” said a Moodys report Thursday.
Last Monday, the State Bank of Pakistan released data showing that textile exports in July decreased 14 percent from a year earlier.
The textile industry is a key contributor to the Pakistani economy, accounting for around 9 percent of GDP and more than 50 percent of total exports, and employing more than 40 percent of the workforce, according to All Pakistan Textile Mills Association (APTMA).
However, lower global commodity prices, weak global demand (particularly from China, one of Pakistan’s key textile markets), and a loss of competitiveness owing to the Pakistani rupee remaining stable relative to the currencies of other textile export countries in the region, have curtailed exports. Another challenge is a constraint on the energy supply, which hinders manufacturing output.
The textile sector contributed 13 percent of banks’ total loans as of March 2016. The textile sector presents the greatest source of credit risk to banks, given that 26 percent of loans to the sector are problematic and have the highest nonperforming loan (NPL) ratio among all sectors.
All rated banks most likely will be affected by the exports decline, considering that their exposure to the textile industry ranged between 9 percent and 12 percent as of year-end 2015.
National Bank of Pakistan (B3 stable, caa11) has classified nearly half its loans to the textile sector as problematic. Habib Bank Ltd. (B3 stable, b3) reported an NPL ratio of 28 percent in the textile sector as of year-end 2015, while United Bank Ltd. (B3 stable, b3) had an NPL ratio of 24 percent as of the same date, the report added.
Pakistani banks have been more reluctant to lend to the textile sector and have reduced their exposures to Rs743 billion as of March 2016 from Rs792 billion as of December 2014.
Additionally, the central bank in its latest financial stability report stated that most of the problematic debt in the textile sector is fully covered by loan-loss provisions (being classified in the loss category with 100 percent provisioning).
The implementation of the China Pakistan Economic Corridor2 and the Pakistani government’s developmental spending on energy projects will gradually ease energy shortages, thus increasing the sector’s output.
Pakistani authorities have also announced several relief measures as part of the latest budget to boost exports.
The relief measures include the introduction of a zero-rated tax regime for textile exporters, duty-free import of machinery and expediting the payment of any pending refunds.
This has the potential to help the sector and ease the negative pressure on banks’ loan quality.