Keeping in view the dearth of quality scrips and
influx of funds to equities market, it is the most appropriate time for
enhancing paid-up capital requirement of commercial banks. The enhanced
capital will further strengthen the financial health of banks and
facilitate them in meeting the growing demand for credit by the private
At present the minimum paid-up capital requirement
for listed commercial banks is Rs 1,000 million. This should be enhanced
to Rs 1,500 million by December 31, 2004 and to Rs 2,000 million by
December 31, 2005. This can be achieved with complete ease as
shareholders' equity of most of the banks was around this amount at the
end of year 2002. Looking the financial results of the banks for the
year ended December 2003 it can be said with complete confidence that
meeting the enhanced capital requirement does not pose any problem.
However, meeting the requirement may be difficult for couple of banks.
These are the banks where there was a management change lately.
RIGHT VS BONUS
The suggested approach for enhancing is to go for
Rights Issues rather than Bonus Shares. According to some analysts issue
of Bonus Shares will help in enhancing capital but it will be only a
book entry, changing the nomenclature of retained earnings. Issue of
Right Shares can only help in achieving the real benefit. This will, on
the one hand, absorb some of the surplus liquidity and, on the other
hand, increase the market float of the sector.
Keeping in view the current quoted prices of shares
of banks, it is also suggested that Right Shares should be issued at
minimum 50% premium. Issue of Right Shares will help in absorbing more
of the prevailing liquidity and also enable the banks to create a
reserve to further boost shareholders' equity. This amount can be
utilized in future for paying dividend.
Some of the critics may argue that enhanced capital
will affect the future dividend payout of the banks. However, a credible
argument in favour of enhanced capital is that the paradigm shift in
banking strategy has already started yielding results, in the shape of
higher earnings. Further fine-tuning of strategy can still yield better
It has often been said in the past that earnings of
banks came under pressure due to massive decline in return on government
securities. However, the critics do not have any sympathy with those
banks, which have been investing very heavily in government securities.
They say, "It was an irony that the return on government securities
was exceptionally high in the past. It was only recently that return
came down. Therefore, banks must look for new and high yielding
investment opportunities rather than complaining about the poor return
on government securities."
Lately some of the banks following pro-active
strategy started investing in equities to overcome 'surplus liquidity
crisis'. However, it raised some concerns and the central bank was quick
in advising the banks to bring down their investment in equities within
the limits stipulated in Prudential Regulations. Banks have been given
the timeframe to meet the requirement. According to some analysts:
"The central bank should have not insisted on asking the banks to
curtail their investment in equities but should have developed better
and more stringent monitoring system".
Saying this these analysts could not resist that the
restriction from the central bank opens new vistas. Instead of crumbling
the banks should establish fully owned subsidiaries to manage mutual
funds. The rational behind flotation of mutual funds is that it will
help in overcoming the twin problems, overcoming 'surplus liquidity
crisis' and meeting the Prudential Regulation requirements.
However, the analysts also suggest that banks should
also be given permission to float open-end mutual funds. It should also
be made mandatory that they create balanced fund, not investing their
entire fund in any one particular area. Managing an open-end fund keeps
the asset management company at its toes all the time.
It is the most appropriate time for enhancing paid-up
capital requirement for commercial banks. The market has higher appetite
and influx of funds to equities market is expected to remain high. In
order to enable the investors to earn modest return on their investment
in equities and also to hedge their investment it is mandatory that
market float of quality scrips should be increased.
The idea is fully supported by acts of sponsors of
commercial banks as some of them have already announced to issue Right
as well as Bonus Shares at the time of release of financial results for
the year ended December 31, 2003. The other should also be convinced to
follow their footprints to further consolidate Pakistan's banking sector
to meet the future challenges. The strong and healthy financial is a
must for accelerating the pace of economic development of the country.