Time to redefine strategic plans in changing environment
By SHABBIR H. KAZMI
May 08 - 21, 2000
The business of foreign banks, which has flourished mainly due to
foreign currency accounts (FCAs), is no longer there. Domestic private banks and Muslim
Commercial Bank have been able to increase their deposit and lending business due to an
elaborate branch network. It is also said that operations of some of the foreign banks in
Pakistan are not profitable and mergers and acquisitions cannot be ruled out.
The composition of money supply (M2) has gone through drastic changes
since 1998. While the shift from resident FCAs was quite dramatic during 1999, the bulk of
converted FCAs eventually showed up in the banking system. Between end-June 1998 to
end-March 1999, the aggregate deposit base fell by Rs 1.31 billion. This nominal
dis-intermediation was not surprising given the developments in the banking system
following the freeze of FCAs.
However, the developments during the first nine months 0f 1999-2000
raise some concerns. Although the frozen resident FCAs continue to be converted, the pace
has slowed down. In net terms, the aggregate deposit base fell from Rs 986.6 billion in
end June 1999 to Rs 972.6 billion as of March 31, 2000.
Unlike foreign and private domestic banks, NCBs have the lowest cost
funds and relatively inelastic deposit base given their network and franchise value.
Nevertheless, since the NCBs also cater to the middle market, this increases their average
Falling inflation rate, the reduction in profit rates of NSS
instruments and cut in discount rate are clear indications that bank lending rates will be
adjusted accordingly. This signal has also been communicated to the financial sector with
the fall in T-Bill rates. Although, the government borrowing from the banking system is
much above what was mobilized during the previous year, the SBP has been able to lower
T-Bill rates in the primary auction from 10.33% in early July 1999 to 7.89% for end March
Although, it is said that average lending rates have also come down but
they have not declined in real terms. The intermediation cost for NCBs and the privatized
banks include provisioning for NPLs and the burden of overstaffing which has virtually
increased the real lending rates. If the government tries to reduce lending rates banks
will only accommodate this by reducing return on deposits. But such a cut in return on
deposit will not help in addressing the problems faced by the sector.
The bulk of bad assets are in the books of government owned banks, be
they NCBs, DFIs or the specialized banks. However, a point to be highlighted is that while
efforts are being made to address NPL issue since the end of calendar year 1997, during
which NPLs increased by an unprecedented Rs 22.5 billion. Over Rs 17.6 billion of this
increase was on account of NCBs. Since that period, the NPL issue has been brought under
control. While NCBs have been able to increase their share in total lending (from 35.1% as
of end 1997 to 38.6% end March 2000) their share of NPLs as a fraction of total loans has
fallen sharply from 31.7% to almost 20% during this period.
Whereas foreign banks have managed to maintain low NPLs level, the
disturbing trend is the increase in bad loans by private domestic banks. Although the
volume of outstanding NPLs is still a significant fraction of total loans, the problem has
been largely contained and does not pose a real threat to Pakistan's banking system.
While the government would ideally want to ensure revival of the
economy by ensuring the private sector to invest on the basis of lower lending rates,
another fall back is that banks will also reduce the return on deposits. Unlike the past
when the government effectively controlled both lending and deposit rates, this is no
longer possible in the era of financial liberalization. A more competitive environment is
the only guarantee to reduce intermediation costs, which will then obviate the need to cut
As on 31 - 12 -
|Position of financial sector
As on 31 -1 2-1999
Liquidity position of Banks
as on 31 -1 2-1 999
Demand & Time Liabilities