This study is aimed to compare the asset quality of public and private sector banks of Pakistan covering the period from 2006 to 2014 using the secondary data collected from the official document issued by the State Bank of Pakistan (SBP). Five ratios were used as a measure of asset quality consisting of Non-performing loans (NPLs) to gross advances, Provision against NPLs to gross advances, NPLs to shareholders’ equity, NPLs write-off to NPLs provision and provision against NPL to NPLs. The independent t-test was used to determine the difference between means of these ratios of both the banks. Tukey’s Hinges formula, Shapiro-Wilk Test and Levene’s Test were used to check the assumptions of t-test along with Welch Test to validate the results of ttest in case of non-homogeneity of variances. The significant difference was noted between the means of two banks in case of first and third ratio with high mean values for public sector banks whereas means of second and fourth ratio were high for private sector banks, however, these ratios were not significantly different. The last ratio of both banks was significantly not different from each other although its mean value was slightly greater for private sector banks. Overall, the asset quality measures of public sector were not favorable which demanded (i). better administration of credit policies, (ii). due assessment of borrower including risk exposure, monitoring, profit and cash flow evaluation and business potential (iii). capacity building and training of credit staff (iv). automation of loan sanctioning and monitoring process (v). improvement of loan collection procedures and (vi). proper care in drafting of loan contract by including the legal covenants and on time initiation of legal proceedings in case of potential loan default.
Keywords: Public sector banks, Private sector banks, Asset quality, nonperforming loans.