Feb 25 - Mar 02, 2008

Financial results of commercial banks have started poring in. While some of the banks chose to take a hit by complying with State Bank's revised regulations regarding provisioning others have posted better than expected results. The key to more than immaculate results is increase in core income and record capital gains made in anticipation of end to tax exemption on capital gains.

Almost all the banks are expected to post handsome increase in core income due to hefty available spread. In fact the spread has improved due to persistent increase in interest rate. While the banks have been smart in raising lending rates, directly linked with Kibor, they have been resisting any increase in return on deposits. On various occasions Governor, State Bank of Pakistan, Dr. Shamshad Akhtar has asked commercial banks to improve return on deposits but banks are least moved.

Some of the banking sector experts say that the average lending rates are not as high as being stated by certain quarters. Banks have lent money even below Kibor in the past. As such interest rates are linked with risk involved, higher the risk higher the interest rate. Blue chip companies always enjoy the privilege of borrowing at discounted rates due to their global arrangements as well as strength of balance sheet.

Some of banking sector experts says that lending to blue chip companies below Kibor was a distress move because banks are sitting on tons of money. Despite investing heavily in government securities excess liquidity was available. Another fact is that banks "love" to extend credit to blue chip companies at lower rates because they have "credible" track record but least interested in where the money is used.

The commercial banks charge different interest rates from different classes of customers i.e. corporate finance, consumer finance, agri loans and SMEs and micro enterprises. The reason for the discrimination is difference in risk profile. For example lending to the manufacturing companies is backed by tangible collaterals whereas lending to agriculture sector is against crop, which itself is exposed natural calamities.

Banks hedge their credit risk by asking the client to obtain insurance cover for moveable and immoveable assets, all sorts of collaterals. However, lack of crop insurance has kept the banks away from lending to farmers. At one stage they preferred to pay the penalty to central bank for not meeting agri loan target rather then extending money. Though the situation has changed whereby banks are extending credit to agriculture sector but the interest rate charged is too high.

Domestic commercial banks have remained focus of foreign banks as well investors due to high spread, hardly available any where else is the world. Now most of the big/medium size banks i.e. Habib Bank, United Bank, Crescent Commercial Bank, Bank Alfalah, NIB Bank, Standard Chartered Bank, Habib Metropolitan Bank, ABN Amro Bank have substantial investment of foreign banks. Majority share of Saudi Pak Commercial Bank will be shortly transferred to a Masqati bank.

One of the reasons for the growth of commercial banks in Pakistan is heavy deployment of technology. Initially, investment in technology did not yield the benefit because lack low literacy rate in the country. For example the largest number of ATMs is installed in big cities. The cost per transaction is still high due to lower utilization. However, with the increase in number of transactions average cost per transaction has come down. Banks have been more than smart in charging money for issue of ATM cards as well as Rs 15 per transaction when machine of another bank or member network is used.

As the central bank is following strict monetary policy it is following crawling increase in T-Bills yield. This is proving a safe haven for the commercial banks. Instead of assuming any risk, through lending, banks are gradually increasing their investment in government securities. By following this strategy banks are showing lesser interest in lending to the private sector.

Two important points are evident if one looks at the T-Bills auctions 1) the focus of banks shifted from longer tenors to shorter tenors and 2) there has been increase in yield also. Both the points indicate that now banks are keener in locking their funds for shorter tenors and the central bank is also interested in acquiring funds for shorter tenors. This may be because government is relying on short term borrowing.

One of the weaknesses of Pakistani banks is that bulk of the deposits is of less than one year maturity. It also hints towards unwillingness of the depositors to tie their funds for longer duration. It may not be correct to say that people do not have confidence in the banking system, but certainly indicates the weakness in the system, return on deposits paid by banks does not commensurate with the rate of inflation in the country.

According to some banking sector experts rising interest rates are turning loans delinquent because of shrinking purchasing power of people in general and rising cost of doing of the business entities. This situation prevails because most of the lending is on floating basis or Kibor plus approach.

Commercial banks may have to review their policies due to ongoing investigations of the Competition Authority. The Authority had received complaint that banks have formed "cartel" and fixing service charges arbitrarily. Though, the banks have denied the charges, it is yet to be seen how the Authority responds after hearing the point of view of different holders.