By Muhammad Bashir Chaudhry
Jan 27 - Feb 02, 2003 



The United Bank Limited (UBL) was privatised last month and its management entrusted to the strategic investors. Its Board of Directors has reportedly constituted a number of committees to prepare a new corporate plan and to tackle the impact on earnings due to reduction in interest rates in Pakistan. The committees would also suggest ways for speedy capacity building and investment. Faced with the challenge of 2003, the new management is understandably exerting all energies to turn the bank into a profitable organisation.

The UBL is not alone that is confronted with lower interest rates. All other banks and financial institutions are sailing in the same boat. Moreover, the lenders should be concerned more with their intermediation margin, which is still exorbitantly high, to the determent of the depositors. Perhaps there are some other areas as well that need careful review and remedial steps to bring the bank out of existing difficult situation. In the circumstances, the UBL management may consider adopting 2003 as the Year of Consolidation and critically review all its existing activities/functions systematically. This would show weak areas needing improvement as well as activities where UBL has considerable strengths over its competitors for beneficial exploitation in the years to come. The main areas for review at UBL, or for other banks including the ones recently privatised or formulated after merger of different institutions, are the following:

DEPOSITORS' CONFIDENCE: Top priority of the new owners and the management may be the restoration of confidence of the depositors in the institution. Quality service with fair return to all depositors can be a good beginning. Profit is often computed by the banks using minimum six-monthly balance as the base. This is simply cruel to the depositors. Profit may be computed using daily product basis. In case the basis for determination of profit due to any reason is tilted more towards the bank, it may be corrected. Normally, the depositors expect the net profit rate, accruing to them after paying of Zakat and the deduction of withholding tax, to be higher than the rate of inflation in the country. The depositors may be provided statements of accounts on timely and regular basis. The depositors should have the confidence in the bank system and for that all complaints may be attended at senior level on priority basis. All bank employees, while dealing with the depositors, should practice 'the customer is always right'. Deposits of fixed nature, carrying profit rates that no longer are viable to the bank, may be allowed to run to maturity and pay all due profit. This would show that the bank honours and fulfills its commitment. Any attempt to cleverly pay out such transactions before maturity on the basis of flimsy grounds will only create bad image for the bank.

EMPLOYEES' MORALE: Motivated employees are the main capital of any bank; in addition to the capital contributed in cash. On privatisation it is usual that all employees are apprehensive as to whether their service would continue or they would be fairly treated. An assurance to this effect from the top bosses would lay the foundation of trust. New management would naturally make changes to achieve its goals. As long as the employees feel that there would be no discrimination in higher training, promotion or lay off and the merit would be the only criteria, things are expected to work smoothly. At some nationalized banks, the managements were paying much higher salaries to certain newly appointed 'experts' in certain grades than old and experienced hands working in the same grades. This has been a big disappointment for the existing officers. This practice may be reviewed and changed at the earliest. May be, there are other similar discriminatory steps that had upset existing officers and staff. All such measures need to be suitably amended for providing benefits to all.



EXPORT AND IMPORT BUSINESS: Trade finance is one of the key functions of a bank and large revenue is derived usually from this activity. However, even if a few transactions are handled with less care, the bank may be exposed to big losses as well. Matters such as the branches that are allowed to handle trade finance, the officers who have been delegated the powers, past record of trade finance related problems by branch/officers, the counter parties in all the problems of trade finance transactions, etc. need to be studied and necessary changes will be made in the personnel or in the procedures.

CRITICAL ANALYSIS OF DEPOSITS: The bank might be having deposits that are only short-term and the funds so raised may have been utilized in making long-term loans or investments. This mismatch needs to be corrected, the sooner the better. Deposits may have been raised on special rates that were higher than the going market rates at that time. In order to save the cost, such deposits need to be identified and rolled over as soon as the contract allows for that. If the proportion of time and demand deposits shows wide variation from the industry average, the same may be investigated and corrected. Borrowings, if any, by the banks may also be analysed as to interest rate and exchange risks. Net overall gain on each such loan may be computed to know the efficiency of the borrowings and the utilization of the funds in bank operations.

REVIEW OF LOANS AND ADVANCES PORTFOLIO: Major portion of the deposits are used in making short-term advances and long-term loans. Long-term loans are also created in case the banks are forced to pay out on the bank guarantees due to failure of the customers. This portfolio needs careful analysis. Loans or guarantees that are showing problems or are in litigation with the bank need greater attention of the senior management. The strategy should be that the good loans are saved from going sour, and problem loans are monitored in such a way that they become regular in payments. This would not be easy and one might not succeed in 100% of the cases, but efforts should be made to reduce the non-performing loans to the minimum. The bank employees handling fresh loans may be properly trained and monitored closely to see that they protect bank's interest, and carry out all operations in full compliance of the State Bank of Pakistan's guidelines and the bank procedures. The officers as well as the senior management must observe all internal controls. Loans may also be analysed as to each category such as export credits, working capital loans, etc. to find out the problem loans with reasons that may be tackled in future operations.

VERIFICATION OF INVESTMENT PORTFOLIO: With a view to diversify operations, banks invest substantial resources in shares, TFCs, government securities and similar such schemes. The availability of certificates in each case may be verified. Shares deposited by borrowers as part of loan security may be kept separate from this portfolio and may also be checked. Divided and return on securities may be collected on timely basis and uncollected amounts may be investigated. Depending on the philosophy of the new investors, new policy on investment should be prepared and put into practice after full debate as to its appropriateness for liquidity and security of the funds.

TREASURY MANAGEMENT: Cash management is a critical activity and must be handled with caution. Liquidity, return and security are the main criteria. The bank must never fail in the maintaining of required balances with the State Bank of Pakistan. The team handling the treasury function should comprise of experienced hands. Front and Back Offices should always be separate and the whole operations should be closely monitored by the senior management. Past earnings record and the fines by the SBP for not maintaining proper balances may be investigated.



BRANCH NETWORK SUITABILITY: Bank branches provide inter-face with the depositors, the customers and the borrowers. Suitably located branches enhance the effectiveness of relationship with the counter parties, and thus contribute significantly towards increased profitability. The new owners and the new management have to assess suitability of each and every branch. Lay out of the banking functions in the branch, furniture, fixtures, computers, colour scheme, interior and exterior, seating of the staff and the public dealing area all make a big difference to the branch operations. Each branch must make positive contribution towards bank profitability. Branches located in rented premises and not in the best suitable location may be shifted first to better locations. The personnel posted in the branches are the bank representatives who come more into contact with the depositors and the customers. The conduct of these employees towards the depositors and the customers and the quality of work would make a big difference. Personnel quality at each branch and at each level needs to be assessed systematically and changes made for better effectiveness. With the introduction of information technology, the number of personnel may also require right sizing in due course of time.

ORGANISATION STRUCTURE: The strategic private investors would oversee the Board of Directors, in addition to the government that still has substantial holding in the bank stock. The Board should be better able to give policy advice to the management if the Board is first briefed fully on the conditions obtaining in different spheres of bank operations. The management hierarchy may have to be adjusted according to the new set up and management style. The Board of Directors may be given extensive exposure to the banking business as is required by the SECP prescribed Code of Corporate Governance. This would enhance their understanding of the challenges and opportunities and how best to add value to shareholders interest while in compliance of the prescribed rules and regulations and also contributing for the welfare of the people and the country. The organisation may be so structured that decision making in all areas is expedited

REAL ESTATE OWNERSHIP: The bank may have substantial real estate property, blocking large amounts of money which otherwise could be put to better uses. Rationale for the ownership of each property should be re-examined. The real estate identified to be surplus to bank purposes may be listed for disposal in a proper manner. The bank may have to formulate clear policy for ownership of branches, particularly the zonal and regional bank offices that serve as image builders of the bank, in addition to their functional utility. The bank may acquire real estate, wherever possible, in settlement of the liabilities of the problem borrowers.

MANUALS, GUIDELINES AND INTERNAL CONTROLS: No bank can succeed and prosper in the long run in the absence of proper guidelines and procedures. Existing guidelines and procedure documents may be reviewed and updated. There may be certain bank operations for which no formal guidelines exist at present. New guidelines may be got prepared for such functions on priority basis. Suitable number of copies of all guidelines, manuals, and procedures might be provided to the concerned officers and branches. The bank employees may be required to be fully familiar with the guidelines and they should be held responsible for strict compliance. The management may put in a mechanism so that all these guidelines are updated periodically.

REVIEW OF CONTRACTS AND AGREEMENTS: The bank may have a number of contracts and agreements due to which it may be deriving certain benefits or might be obliged to offer certain benefits to others. Such arrangements, if any, might be re-assessed as to the need and utility and actions may be considered to protect the bank in future. A clear-cut policy including authority may be formulated for signing of MoUs or contracts in future.

CUSTOMERS AND INDUSTRY DATABANK: No bank can successfully operate these days without strong and updated databank on the customers, borrowers and the industry. For screening of the customers the bank should also have its own record in addition to the CIB reports available from the SBP. Industrial data including import, export, prices, etc. would help the bank respond quickly on any syndicated loan proposal. Without databank and team of experienced credit officers, the bank may not be able to identify and invest its funds in good projects. Pro-active approach for financing the projects from good customers would be very helpful. For this, the bank again needs experienced and knowledgeable credit officers. Normally, good customers trust such officers and in confidence share with them details on projects that are still on the planning stage.



REVISIT CORE BUSINESS ACTIVITIES: In their zeal to make quick money sometimes the banking institutions lose focus and start activities that are not the core activities, to which up to 70 % of the resource are required to be deployment. The bank may review historical record of all activities and the net income accruing to it from each such function. Depending on the profit contribution of activities, manpower and financial resources might be allocated. The management has to ensure that the SBP instructions in this regard are not violated. This does not mean that the banks should not attempt handling related activities that promise substantial income.

FEE BASED INCOME OPPORTUNITIES: Foreign banks make lot of money through fee-based income. For this they have capable staff, databanks on many such projects/agreements and the social contacts with those who matter in the institutions concerned. Due to their worldwide operations, foreign banks can rely on their international staff, if particular expertise is not available locally. The local banks may develop expertise for offering advisory services through their experienced credit officers. If the banks make consortium with foreign banks in such assignments, it would expose the local staff to such new areas and prepare them for future.

CAPACITY BUILDING AND TRAINING: Local banks need to train and re-train most of their officers. They may not be having the desired level of knowledge of market/procedure due to which there were delays or problems. Level of expertise may be raised substantially coupled with the change in attitude for providing better service to customers. They may also need extensive training in the use of computers and the modern communications modes for completing certain time-bound transactions quickly.

LESSONS FROM SBP INSPECTION REPORTS: These reports are useful reference documents for initiating remedial measures. Selected parts of the findings of the reports may be shared with the concerned officers and corrective measures adopted for improvement. In this regard, Management Letters received from the statutory auditors would also be useful. Points raised by them and the replies provided by the management to satisfy the auditors, would serve as a good training material for the senior officers.

RELATIONSHIPS WITH CBA/UNION: The new management of UBL seem to have initiated the process for starting a new chapter of cordial relations with the unionised bank staff after putting an end to the tussle that started some ten years ago. This is good and both the parties should find an amicable solution to the disputes through constructive dialogue. This would give a better image to the bank in the eyes of the customers and as a result both the parties should prosper.

REVIEW OF COSTS AND REVENUES: Profit is the difference between revenues and the costs. For achieving target profitability, all revenue and cost items need to be scrutinized and controlled carefully. Systematic scrutiny of these items might yield surprising results. This process is considered essential as part of the consolidation.

INFORMATION TECHNOLOGY: Computerization is must for efficient services these days. The banks may introduce use of proper information technology including training of its staff to speed up the consummation of transactions. Shortcomings in the manpower, computer hardware and software, etc. in this area might be removed on priority basis.

LOCAL COMPETITION: The banks compete for customers, deposits and income-yielding opportunities. Different teams contribute in this area. The banks must encourage the officers having qualities that attract profitable opportunities to the bank in the face of competition with other banks. This does not mean that the banks would not cooperate with each other in certain other matters when they are fighting for a common cause with the authorities.

EXPLOITING THE NICHE MARKET: Each bank has a niche market, which it serves well and earns substantial revenue out of it. If on analysis it is discovered that there is no such thing with the particular bank, perhaps there is something in the banks that needs correction. All banks sell the same services but they develop their market by selling that service in a particular way and to a particular class of customers. This reduces competition and yields better margin of profits.

INTERNATIONAL ENVIRONMENT: Bank operations are affected by the change in local policies and other developments. Similarly, international developments also have an impact on the bank operations. For example, the coming into force of the WTO arrangements would have definite impact on Pakistani industries. The banks should take notice of all such coming events and plan their loaning and other operations accordingly.



CONCLUDING REMARKS: Banks are growing bigger and competition is getting stronger as time passes. Newly privatized banks and other smaller banks must consolidate their operations well before venturing into new activities in a big way. For consolidation purposes the banks need detailed scrutiny of main areas discussed above, preferably through teams composed of senior officers of the bank along with experienced outside consultants. The teams should have ready access to the Chief Executives and the Board of Directors for exchange of views and for removal of difficulties. In the light of lessons learnt from the consolidation exercise, the banks must develop expertise in different areas and then start modest operations that are spread industry-wise as well as area-wise. Slow and steady progress is more durable and would make the banks stronger.