No doubt loans issued by the banks to companies, individuals play a major role and are key tools to accelerate the business activities in the countries. But it is the moral duty of loans beneficiaries to pay it back honestly according to the settled schedules. The State Bank of Pakistan in its quarterly performance review of the banking system for the quarter ended September 2010, has stressed upon banks to devise strategies to deal with the Non-Performing Loans (NPLs) so that promising businesses, which are facing transitory difficulties due to a constrained macro environment, continue to contribute in economic growth. The report issued by the central bank pointed out that the growth in NPLs, which decelerated during the first two quarters of CY10, grew by 7.4 percent during the quarter under review reaching Rs 494 billion as banks' lending portfolio, to some extent, was effected by recent unprecedented floods and torrential rains. State Bank has responded to the changed and challenging circumstances and rationalised its regulatory requirements on loan loss recognition in respect of advances in flood-affected areas. Asset base of the banking system contracted by 2.3 percent to Rs 6,626 billion which was in line with the trend for the JulySeptember quarter. Shrinking of the asset base, particularly advances resulted in a decline in size of the riskweighted asset (RWA) over the quarter. It is forecasted in the report of central bank that the usual inventory build up, particularly by Kharif crop-based industries, during the last calendar quarter will create additional demand for bank credit. "Although the banks are expected to remain liquid; the heightened demand for credit from the public sector will mean that the banks ability to finance additional private sector loans will be predicated upon mobilisation of fresh deposits and retirement of commodity finance by government-owned agencies which continue to be extremely high." Banks will need to reduce their large portfolio of government paper and lending to the public sector agencies so as to reduce their sovereign exposure as well as to make credit available to the private sector for maintaining economic growth, and thereby enhance and diversify revenues of the banking system.