Time to redefine strategic plans in changing environment

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 lending rates.

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 2000.

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 deposit rates.

Financial Sector Profile

As on 31 - 12 - 1999

Sector No. of Institutions No. of Branches No. of Employees
NCBs/DNCBs 6 6,704 72,722
Specialized Banks 4 527 10,705
Private Banks 15 557 10,746
Foreign Banks 20 83 4,101
Total 45 7,871 98,274



Position of financial sector

As on 31 -1 2-1999

Sector Assets Market Share Deposits Market Share Equity Market Share
NCBs/DCNBs 943,206 54.42% 769,060 63.54% 34,717 29.35%
Specialized Banks 109,663 6.33% 15,516 1.28% 2,234 1.89%
Private Banks 216,309 12.48% 157,343 13.00% 15,785 13.34%
Foreign Banks 252,456 14.57% 183,182 15.13% 24,356 20.59%
Tota 1,521,634 87.79% 1,125,101 92.95% 77,092 65.17%



Liquidity position of Banks

as on 31 -1 2-1 999

Name of Banks/Sector Total Demand & Time Liabilities Liquidity Required Liquidity Maintained Surplus/ (Shortfall) Liquidity Ratio
Banks (6) 750,105 150,021 258,686 108,665 34.49%
Specialized Banks (4) 21,570 4,314 5,105 791 23.67%
Private Banks (15) 155,474 31,167 43,085 11,918 27.71%
Foreign Banks (20) 164,776 32,956 53,380 20,424 32.40%
Total (45) 1,091,925 218,458 360,256 141,798 32.99%