Munich Personal RePEc Archive

An Analysis of Non-Performing Loans in Pakistan

Ali, Sajid (2006): An Analysis of Non-Performing Loans in Pakistan.

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Commercial banks play a very important role in our economy. In fact it is difficult to imagine how our economic system could function efficiently without many of their core services. There is no doubt in this that they are the heart of our financial system. The very nature of banking especially the commercial banking, with its great reliance on public confidence and its influence on nation's economic life, makes it mandatory that the management of a bank be of a high quality and efficient. By good management, banks are in a position to attain maximum operating efficiency and profitability.

The management of bank's assets must be conducted in a profitable and safe manner. Safety is essential to banking since banks hold billions of rupees of deposits of individuals, businesses, and governments. Profits are also necessary for the successful operations of the banks. And when we think of bank's assets, loans are the foremost and the most important ones that come in our minds. So lending is the most profitable as well as most risky function performed by banks. Therefore, it must be done efficiently and with minimum of loss.

Off course, bank's can never be without risk factor, however with prudent approach, careful analysis of borrower's capacity, and character, following the laid down loan policy of the very bank as well as of central bank precautionary measures, the risk can be minimized. These are the factors, which can reverse the mounting trend of Non-Performing Loans (NPLs) in banks in Pakistan. The changing global and financial environment, rapid rate of technological changes. and intense level of competition has made banks in Pakistan, to upgrade themselves in all spheres of operations to survive and compete even within the domestic market. It is this pressure, which has caused certain financial institution to be closed down and certain others to be merged with the profitable ones.

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