Commercial banks under pressure

Marginal increase in deposits is an improvement over the decline in the corresponding period last year

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.