You Said What?: The "War Chest" of Bad Debts

GulfNews Dubai reports on some radical thinking at the NBP, which is described as having the highest level of non performing loans in Pakistan.  Now you'd expect a bank like NBP to have a large absolute number of non performing loans ("NPLs") if for no other reason than its size relative to other banks in the country.  But according to this somewhat dated KPMG study NBP also leads the pack in terms of percentage of loans. 
 

When life gives you lemons, make lemonade is the applicable guidance.  I can think of no other good reason for this remarkable quote. Not that it's a particularly good reason.

"Our non-performing loans are a war chest for our investors," Chief Executive Officer Syed Ali Raza, 59, said in an interview at his Karachi head office.
"We always had a very passive approach to recoveries, of depending only on the courts; now we have a menu of solutions. Recoveries are our No. 1 priority."

AA always considered Non Performing Loans less a "war chest" than "war damage" so it's nice to get a different perspective.

A great way to enhance shareholder value is tighten up underwriting practices to avoid making bad loans in the first place.  Even with a 100% recovery of principal (and somehow I'm guessing that doesn't always occur in Pakistan) the time and effort spent on recovery is a dead drag on return.

Of course, banks can't control external factors - the overall path of the economy, terrorism, foreign competition -- but prudent underwriting can mitigate problems.  The KPMG study suggests some banks have done reasonably well on this front.  And when a bank has a reputation of not collecting its bad debts, it usually attracts the wrong sorts of borrowers.