Whatever, we have developed in past five, six years, we would consolidate it in the next couple of years so that these reforms could well adjust in the banking system, says SBP Director Banking Policy Muhammad Kamran Shehzad

June 27 - July 03, 2005

Banking sector is set to maintain the success stories in the next fiscal as well despite rising interest rates but this time depositors will also be in a win-win position as the rates, which were at rock bottom, now offer an amenable investment opportunities to them, the banking regulator believes.

"The performance of the banking sector will be equally good in the next fiscal year (January-December) but the depositors would be the foremost beneficiaries as there is an increase in PLS accounts," State Bank of Pakistan's Director Banking Policy Muhammad Kamran Shehzad told PAGE.

As the market-driven mechanism has taken over the reigns of banking sector which has attained an irreversible degree of maturity after a decade-long crisscross, beginning since the introduction of first phase of reforms in 1992.


The reforms were initiated in 1992 and were given yet another boost in 1997. These reforms entailed privatisation of banks in the next four to five years and allowed market-based system to run the sector. "We introduced Karachi Interbank Offered Rate (KIBOR), we facilitated mergers and amalgamations, provided guidelines to banks and empowered board of directors under the raft of new prudential regulations," Shehzad said. "Now the system is going on very smoothly and reliably. Now the need of the hour is that instead of brining second generation of reforms we should consolidate whatever we have achieved in result of reforms," he added.

"It has always been tough for a growing sector to experience first four, five years after reforms are introduced," Shehzad said. And this happened here too. During the process of privatisation we laid off over 40,000 employees offering them golden handshakes. We replaced top executives from public sector with professionals from private sector and we set out targets for them. But the process hit a setback in 1998 when the country went for carrying out nuclear tests, which gave a big blow to the industry.

"There was already a backlog of past 40-50 years which further went worse during the two decades of nationalisation (1974-1994), so it was quite an uphill task to bring the things back into order," he said.


Whatever, we have developed in the past five, six years, we would consolidate it in the next couple of years so that these reforms could well adjust in the banking system and the present growth could be furthered and no one could reverse it, he said.

In other words, we could also say that we would be learning lessons that where and what kind of mistakes we had made and pin point faults and loops, if any. "Its time to learn lessons." In fact the core catalyst is the prudential regulations, which we have devised over a period of time and now the State Bank would step up further.

"Our strategic plan is that in the year 2006-07 we would increase requirement of capital further and will introduce some more restrictions," he said.

However, in addition to reforms and well laid-out prudential regulations, some external factors also helped banking sector grow in the past three or four years.

"International circumstances after 9/11 favoured us. They not only stopped capital flight but reversed the process and now we have inflow of about four billion dollars of workers' remittances due to increased check and balances of monetary transactions abroad. Our exports almost doubled the size of over 14 billion dollars.

"The most significant impact was on interest rates, which were on rock-bottom level and never ever had gone so low in the history of the country," Shehzad said and added no development activities could take place in a country on higher rates.


But now the market forces are driving the rates higher again. Whether the rising rates could again push the growing banks into swamps of non-performing loans? The State Bank director says No. "NPL was an intriguing legacy in the history of our banking sector. That began with the beginning of the political setup in 1985 and the national commercial banks were grossly misused," Shehzad said. The cyclical effects of those political loans came after a decade, as much of those loans were long terms. In 2001 that was on peak but the new management which was from private sector and market oriented, made provisions for the NPL and devised strategy. "Now the political influence has been marginalized," Shehzad said.

Chances of NPL are also sparse because of presence of KIBOR, he said. It offers three-month, six-month and even three-year benchmark rates and helps lenders and borrowers to evaluate their risk assessments. Earlier there was only minimum and maximum caps on interest rate, which kept the rates volatile. Now, every body knows market behavior and it is very much predictable.

"Currently we have mere 3.8 percent NPL, which is even low to international standard provisioning of five percent. On the peak it was 16 percent.

"We have also advised banks to make provisions on their portfolios to hedge defaults and we believe there would not be new defaults." Nevertheless, some impacts could come on personal loans, whose size is around Rs.25 billion, he said.

"Our banking sector is now quite matured running over seven thousand branches and smaller banks are fairly giving competitions to the bigger banks in accordance with the market-based mechanism," he said. Other phenomenon, which did not allow NPLs to set in, is that now 80 percent banking is in private hands.

National Bank of Pakistan, Industrial Development Bank of Pakistan, House Building Finance Corporation and partially First Women Bank are currently held by the public sector.

"80 percent of about Rs.1087 billion are deposited with the private banks now," a proud director said.