proposal is under consideration to raise the minimum paid-up capital
for commercial banks to Rs6 billion. The State Bank of Pakistan has
already raised the minimum limit and all the banks are required to
raise their paid-up capital to Rs2 billion by 31st December 2005.
Raising this limit by three-fold over the next three years seems an
However, some of
the banking sector analysts are of the view that the enhanced limit is
aimed at reducing the number of commercial banks. For some time it has
been felt that 'Pakistan is an over-banked country and the number
should be reduced to around a dozen only'. And the objective can only
be achieved through mergers and acquisitions. The increase in paid-up
has led to exit of a number of foreign banks from Pakistan. However,
this also increased the number of local banks. And the only way to
reduce the number is forced mergers.
analysts are also of the view that if one compares the paid-up capital
of five 'big banks' with rest of the lot, the difference is colossal.
This gives some of the big players an edge over the others. There are
also too many branches, which only add to the operating expenses. In
the shrinking spreads environment, the return to depositors has become
negative. And if the return has to be improved
operating/administrative expenses have to be curtailed.
The deployment of
technology, rising number of ATMs, credit and debit cards and offering
of variety of Interest-based services no longer require such a large
number of conventional branches. Therefore, the number of branches,
particularly in the urban areas, has to be reduced drastically.
However, some analysts do not subscribe to this theory. They say,
"There may be too many branches of a bank in some of the urban cities,
but the number of branches is 'too small' in rural areas. Therefore,
banks should increase the number of branches in rural areas rather
than reducing the number."
have their own point of view. They say, "Opening up of branches is not
an easy task as it involves a lot of investment. Banks open branches
in the areas offering potential, both in terms of existing business
and also future growth. We are not a charitable organization or a
social service entity. The rule of tub is that the branch should be
self supporting, at least. We are accountable to our shareholders as
well as accountholders. If the return on deposit is low, the client
would not like to keep their money with us. And if the dividend payout
is low, no investor would like to buy the shares of our bank. However,
this simple logic is either not understood by the critics or they
criticize the policy only to achieve political mileage".
behind raising paid-up capital is aimed at strengthening the
commercial banks. The demand for fund is on a constant rise. The
borrowers need larger amounts because now capital intensive industries
are being established. The existing paid-up capital often becomes a
constraint. The banks have to comply with prudential regulations and
to also maintain required capital adequacy ratio. This clearly demands
that minimum paid-up capital requirement should be raised. Therefore,
one should only talk about the timeframe and the minimum limit.
Lately a number of
banks have announced Right and Bonus issues to meet the minimum
paid-up capital requirement. The banks are also expected to follow the
same practice to meet Rs2 billion requirement by 31 December 2005.
Investors have responded to such announcements in a very positive
manner. However, they suggest that to meet the future demand, the
central bank should insist on Right Issue rather than allowing the
banks to meet the requirement through issue of Bonus Shares. Right
Issues will not only help in raising the additional capital but would
also help in expanding shareholders base.
Some of the
critics are of the view that persistent increase in capital will
dilute the earnings of shareholders. However, some analysts say, "The
shareholders are much better off compared to the depositors. While the
depositors are being paid pathetically low return, the shareholders
get much higher dividend. The policy being followed by the banks is
discriminatory. As such, both the depositors and the shareholders
contribute cash, which is extended to borrowers. The return on deposit
should also be close to the return on equity."
There is no doubt
that the minimum paid-up capital requirement of commercial banks
should be increased. It will help them in raising their credit
extension limit to meet the growing demand for fund by the private
sector. It will also increase the free float of banks and help in
containing skyrocketing of their share prices. On top of every thing,
the market appetite is high and Right Issues, if properly priced, it
will get a good response from the investors. However, the time frame
must be decided after consultation with the commercial banks.