KARACHI - The State Bank of Pakistan has estimated flood-driven initial losses to the banking system under non-performing loans at Rs54 billion, of which Rs34 billion credit damages have been evaluated to the cropping sector of the country. The SBP has also predicted that due to increasing credit risk and the expected slowdown in the recovery ratios from the borrowers, pertaining to flood-affected parts, the NPLs volume of the commercial banks and other lending intuitions would rise further, especially for banks with large exposure to the agriculture sector. Moreover, the assumed higher growth in NPLs could increase the provisioning costs of the banking industry in time ahead. The central bank, however, ruled out the possibility of being affected the financial health and solvency of banking system from the anticipated surge in the bad loans as industrys total private sector advances amount to around Rs3 trillion. According to IMF staff report on Pakistans economy after devastating floods issued on Wednesday, the financial soundness indicators of the banks deteriorated through end-March 2010.Nonperforming loans (NPLs) increased from 12.2 percent at end-December 2009 to 13.1 percent at end-March 2010. The IMF revealed that the risk-weighted capital-to-assets ratio declined from 14.1 to 13.7 percent. An increase in the net NPL-to-capital ratio prompted the SBP to contemplate tightening provisioning requirements, especially in systemically important banks. At the same time, due to the increasing share of t-bills in banks portfolios, bank liquidity remains high and return on assets and equity has improved. It is pertinent to mention here that banks total buildup of non-performing loans (NPLs) had swelled by Rs2.6 billion to Rs460 billion during the second quarter (April-June) of current calendar year 2010, compared with Rs458 billion in the first quarter this year. The Fund report stated that no monetary policy announcements have been made since the floods hit, but the SBP is facing a difficult balancing act. An estimated Rs.2 trillion in t-bills needs to be rolled over this year and there may be higher domestic net financing needs of the government on account of the floods. The report added that domestic private demand will soften and so undermine the already weak recovery in private sector credit growth. These considerations will have to be weighted carefully in deciding on the monetary policy stance in the coming months. The next monetary policy statement is expected in late September. Referring the responds of SBP to the floods, IMF said the central bank has focused on ensuring smooth functioning of the payment system. It has set up mobile banking facilities and made sure that ample currency was available in areas hit by the floods. It is closely monitoring banks with large exposures in the flood-hit areas. It has announced measures to encourage banks to supply sufficient credit in flood-hit areas, especially as the wheat financing season gets underway in October. It is also considering using existing SBP refinancing schemes to encourage credit in flood-hit areas. The SBP is discussing with donors expansion and modification of a loan-guarantee program to support agriculture and small and medium enterprises, the report mentioned. The SBP is considering relaxations in provisioning for loans that have become delinquent because of the floods by allowing a higher for-sale-value of some collateral assets, which are currently zero for real assets. The authorities remain committed not to impose or intensify exchange or trade restrictions for balance of payments purposes, the report showed. It may be pointed out here that the agriculture sector, according to the Ministry of Food, Agriculture and Livestock (MINFAL) preliminary assessments, suffered USD 2.8bn losses due to worst-ever natural calamity.