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Smaller bank should merger quickly

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Financial sector requires mergers and restructuring and infusion of capital and human resources

Apr 03 - 09, 2000

The merger of smaller banks in the private sector suggested by the State Bank of Pakistan (SBP) and the possibility of forced retrenchment of over 11000 bank employees out of government owned banks has caused a stir specially among the lower cadre staff in the financial sector of Pakistan.

The senior members of the management of the three major banks owned by the government neither have denied nor confirmed the reports about retrenchment creating a sense of uncertainty among the banks employees. However, the most significant development is the signal given by Dr. Ishrat Hussain at a recent meeting held at the Institute of Bankers about the merger of the smaller banks in Pakistan. The governor was so firm of his views about the merger that in a sense he warned that if banks do not go for mergers on their own the State Bank may take regulatory steps to force them to do so.

It may be recalled that responding to the financial policies of the government, various small banks were established by the private sector in 1990s. Currently 10 such banks are operating in the country. They are including Askari Bank, Bank Al-Habib, Prime Bank, Sonerei Bank, Metropolitan Bank and Indus Bank. Among these small banks, Askari and Bank Al-Habib has managed to attract large deposits as compared to other contemporary small banks. According to a senior banker most of the smaller banks are operating either on community basis or doing business with selected clientele while majority of the customers has hardly an access to these banks. Under these circumstances, the plea for merger makes a good sense. The governor expressed the hope that the market players will carry out voluntarily and mutually agreeable mergers and consolidations, he remarked. But if this does not happen the regulators will have no option but to discharge their responsibilities through appropriate regulations.

It is time for smaller banks to go for mergers because "small private banks are too weak either to withstand exogenous shocks or to manage risks prudently or to capture the market share from large established banks.

He was of the view that financial sector requires mergers and restructuring and infusion of capital and human resources and technological up gradation to come up with fewer but stronger institutions.

The aggregate paid-up capital of all banks and other financial institutions minus house financing companies in Pakistan was only $1.8 billion. The capital base of National Bank of Pakistan is only $326 million whereas the State (National) Bank of India has announced plans to raise its capital base by an additional $2.5 billion.

Justifying the policy of merger, the government observed that generally speaking if a private bank fails it should be allowed to die. But practically speaking, the government and the central bank cannot afford the collapse of banks because apart from political considerations, systemic risk is with bank failures. He said that sudden and unexpected demise of one bank could have a domino effect leading to collapse of other banks or of the system as a whole. Hence there is a need for mergers. The proposed consolidation and mergers has to do with future strategy of participating in exports of financial services.

Although the events of 1998-99 did cause a setback by politicizing top bankers in the nationalized banks we still have an impressive pool which can be harnessed and mobilized to penetrate the market for financial services particularly in the Middle East, Central Asia and Africa.

Dr. Ishrat also advised the bankers to move away from investing only in government paper or public sector securities or other risk free instruments. Instead of concentrating simply on textile, sugar, cement and other saturated industries they should finance other new, non-traditional manufacturing and service oriented areas.

The SBP chief said that repayment record of small and medium business is much better than that of larger borrowers adding that the government had committed itself to helping expand small and medium enterprises. We in the financial sector have to align our products, services and outreach to unleash these enterprises and tap their potential.

This not only makes good business sense for the banks and non-and financial institutions but also means increased purchasing power in the hands of a large segment of population. This purchasing power will then translate itself into higher demand for goods and services produced in the country.

The governor, who said that the measures that SBP has taken to discharge its duties as watchdog of financial sector more efficiently, however the task to supervise the merger of the smaller banks is extremely delicate and requires extra ordinary care in carrying out the whole process. The process of putting two organizations together demands a situation of compatibility of the two sides so that the union could prove long lasting and result oriented. The PPP government during its first tenure had decided to retain only five major banks and the remaining smaller banks were taken over and merged into the five banks. As a result of this Habib (Overseas) Bank and Standard Bank were merged into Habib Bank while Bank of Bahwalpur was merged into United Bank. The Commerce Bank and Union Bank were merged into Habib Bank and Premier Bank was merged into MCB.

The Central Bank should also take the whole exercise in the light of the past experience when smaller banks were merged into large public sector banks and a number of banking professionals hurt in the process had left the country. It is also expected that the exercise for merger may be carried in such a way that it would not give an impression of shift in government's financial policy, which is one of the major concerns of the foreign investors in Pakistan.