Commercial banks under pressure
Marginal increase in deposits is an improvement over
the decline in the corresponding period last year
By SHABBIR H. KAZMI
May 21 - Jun 03, 2001
At present commercial banks in Pakistan face some key
issues. These include transformation of the existing interest based
financial system into Riba free system, enhancing paid-up
capital, ensuring recovery of restructured loans and maintaining spread.
However, a drought like situation is also expected to adversely affect
the GDP growth rate, ultimately affecting the repayment ability of
borrowers. Therefore, the performance of commercial banks will largely
depend on performance of economy.
Most of the banks are trying very hard to adjust to
the changed working environment. The merger of ANZ Grindlays Bank and
Standard Chartered Bank, the two oldest players in Pakistan, offers a
large branch network. However, the efforts by a number of banks to offer
innovative services — tele-banking, ATMs, credit cards — is a
strategy to compensate for limited number of branches.
The fact that rupee deposits have only increased from
Rs 992.7 billion to Rs 1,007.7 billion during first half of the current
financial year is not a heartening development. However, even this
marginal increase is an improvement over the 2.7 per cent decline in the
corresponding period last year. Rupee deposits increased by Rs 16
billion in the first half of 2000-2001. This poor mobilization is the
real reason behind the acute liquidity crunch witnessed in December 2000
as State Bank of Pakistan (SBP) tried to meet its net domestic assets (NDA)
target. This growth compares very poorly against the nominal economic
growth of around 5 per cent during this period. It is obvious that in
real terms, Pakistan's banking sector is experiencing financial dis-intermediation.
Although this failure of the monetary transmission
mechanism could be explained by the abrupt increase in T-Bill rates to
defend rupee, the market expected rates to fall after the rupee
stabilized. However, since rates were not reduced subsequently, this
should have been sufficient indication that SBP had increased the
interest benchmark. With the systemic shortage of liquidity on account
of poor deposit mobilization by banks, the central bank could not afford
to signal a reduction in T-Bill rates for fear that it would not be able
to shift government borrowing to scheduled banks and that banks may
reduce deposit rates further eroding their funding base.
The poor growth of deposits and higher private sector
borrowing created the shortage of liquidity in the banking system. The
positive point is that the period ahead shows seasonal retirement of
private sector credit and liquidity crunch may not be as severe.
However, the banks must make the effort to increase their deposit
mobilization on a priority basis.
The US$ 450 million Banking Sector Adjustment Loan (BSAL)
is a continuation of the financial sector reform process initiated in
1991. The core objectives of BSAL were: to further restructure the
nationalized commercial banks and to complete the privatization of the
partially privatized commercial banks. However, analysts believe that
this amount is not sufficient for the scale of exercise that has been
laid out by the programme.
The invitation for Expression of Interest of United
Bank (UBL) and the planned IPO of National Bank are good concurrent
steps to be taken alongwith this exercise. The transaction leading to
UBL's sale will provide the blue print for the future shape of the programme.
The SBP must consider the suggestion made in a report
by KASB. Some of these suggestions are:
Commercial banks, whether public or private sector,
should be required to be listed on the bourses, so that they are brought
under greater public scrutiny and the market values will provide a good
benchmark for pricing when strategic stakes are up for grabs.
Banks and DFIs should be required to publish
quarterly, half yearly and full year reports. All the periodic results
should be made available within three months, with the SBP no longer
having the authority to grant extensions.
Banks should be required to publish gross NPL figures
before adjustment for collateral. Every three years, they should be
required to have collateral independently valued.
Break-up and calculations for the Risk-Adjusted
Capital Adequacy Ratios should be made public in annual accounts.
Advances given to government officials and
politicians or their families should be an appendix to the annual
report, with complete details of the amount and conditions of the
advance verified by an independent auditor.
The Indus Bank and Prudential Commercial Bank
episodes highlight some weaknesses of the central bank. Historically the
central bank responds to a crisis but often fails to read a storm and
its intensity. There is ample room for improvement. A vibrant and strong
financial system is the backbone of the economy of any country.