BANKING SECTOR UNDERGOING 'REFORMS' FOR MORE THAN A DECADE

Banking sector has reduced accessibility to small depositors at a very large scale.

A.M TALHA
Apr 16 - 22, 2007

ACCESS TO BANKING FACILITIES

The banking sector is undergoing 'reforms' for more than a decade. Whether the reform process has provided more public accessibility to the banking facilities or have these facilities been curtailed is the subject matter of this write-up.

The criterion for judging the increase/decrease in the public accessibility could possibly be (a) increase/decrease in the bank branches, (b) increase/decrease in the number of accounts- both the depositors'/ borrowers' accounts, and (c) availability of credit to the public at large, expansion in the field services, etc.

The number of bank branches has reduced from 8130 (as of 30th June, 1998) to 7412 (as of 30th June, 2006) as per the 'Banking statistics'/annual report for 2005-06 published by the State Bank of Pakistan (SBP).

The number of deposit accounts has sharply fallen from 29,772,355 (as of 31st December, 1998) to 26,321,700 (as of 30th June, 2006). The borrowers' accounts have, however, increased by 2,597,083 from 2,184,417 (as of 31st December, 1998) to 4,781,500. Table 'A' containing the (size-wise) details of small deposit/loan accounts is appended:

TABLE A: ACCESS TO BANKING SMALL CUSTOMERS

ACCOUNTS FOR
AMOUNTS.

NUMBER OF ACCOUNTS DEPOSITS
31-12-1998

30-06-2006

ADVANCES
31-12-1998

30-06-2006

Less than Rs 1000

893,634

-

101,375

-

Rs 1000-2000

1,050,931

-

19,428

-

Rs 2000-3000

1,068,743

-

14,275

-

Rs 3000-4000

1,464,197

-

12,343

-

Rs 4000-5000

1,867,802

-

16,122

-

Rs 5000-10,000

9,892,190

6,881,300*

72,012

138,700*

Rs 10,000-20,000

7,424,754

4,440,900

290,712

592,000

Rs 20,000-50,000

3,438,360

6,760,800

799,431

1,412,600

TOTAL

27,100,611

18,083,000

1,325,698

2,143,300

Source: SBP annual reports. * Deposits/ advances of less than Rs 10,000.00

It can be seen from Table 'A' that the banking sector has reduced accessibility to the small depositors at a very large scale. The number of accounts for amounts up to Rs 10,000 has gone down from 16,237,497 (31-12-1998) to 6,881, 300 (30-06-2006)- a reduction of 57.62 per cent. The number of accounts for amounts up to Rs 50,000 has come down from 27,100,611 to 18,083,000 during this period - a reduction of 33.27 per cent. Why has this situation arisen? Did the public become disinterested in banking? Certainly not! The banking sector, pushed into the hands of private sector, as a part of 'reform' made deliberate attempt to show the small sized customers its doors by adopting different policies, inter-alia, including: (a) making such deposits almost zero-rated (b) fixing minimum balance requirement and failing to comply with that, recovery of monthly penalty from the depositors. The minimum balance limit/amount of penalty differs from bank to bank.

The above policy of pushing the small customers out of the threshold of the banks has the blessing of the SBP. Although SBP Governor has off and on been asking the banks to share their huge profits with the depositors by allowing reasonable rate of return on deposits and its (SBP's) periodical reports have also been emphasizing the need of paying positive return, such tenets have so far proved mere rhetoric as the large sized banks holding over 60 per cent of the deposits are not prepared to listen while the SBP is not prepared to take regulatory steps to safeguard the interest of the depositors. Lately, a few of the large banks have announced higher rate of return on certain category of deposits but the coverage given is very marginal.

As indicated earlier, the number of loans/advances accounts has risen by 2,597,083. How has this happened? In the aftermath of 9/11, the U.S.A. and some Middle Eastern governments took anti-money laundering measures which compelled the remitters abroad to send money through banking channel which enormously increasing deposits in the banks which they (banks) were unable to lend. The excess liquidity with the banks resulted in sharp decline in the lending rates and consequently the banks squeezed the deposit rates making the deposits almost zero-rated. At this stage, SBP came to the rescue of the banks by allowing lending to the small borrowers for cars/ consumer durables including electronic items/ personal expenditure through credit cards and house building / repairs/purchase etc. This was termed as consumer finance. Out of [additional] 2,597,083 borrowers mentioned above, 2,476,352 fall under 'consumer financing' category. Thus net expansion in the number of borrowers for productive use would be 120,731 during 1998-2006 which is not very significant number when judged in the purview of the claims of the fast growth in the economy and the fact that there has been sizeable expansion in the number of borrowers in the agricultural sector.

SECTORAL DISTRIBUTION OF BANK CREDIT

Now let us have a brief look on the beneficiaries of the bank credit. Table 'B' containing the sector-wise outstanding loans/advances as at the end-June, 2006 is appended:

TABLE 'B'- SECTORAL SHARE IN THE OUTSTANDING LOANS AS OF 30/06/2006

SECTOR

NO. OF BORROWERS

OUTSTANDING AMOUNT (BILLION RS.)

PERCENTAGE IN THE OUTSTANDING AMOUNT

Corporate

19,604

1,140.9

52.4

S.M.E.

158,050

356.7

16.4

Agriculture

1,535,112

134.0

6.1

Consumer Finance

2,476,352

296.5

13.6

Commodity operations

5,815

180.0

8.3

Staff loans

70,800

43.3

1.9

Others

42,596

27.7

1.3

TOTAL

4,308,329

2,179.1

100

It can be seen from Table 'B' the largest borrower is corporate sector availing of 52.4 per cent of the bank credit with nominal number of borrower viz 19,604. After tiding over initial difficulties and enactment of separate prudential regulations by the SBP, SME sector has emerged as the second largest borrowing sector with 16.4 per cent share. The agriculture sector, contributing 22 per cent to the GDP, is getting hardly 6.1 per cent of the bank credit. It is general perception that in the agriculture sector, the beneficiaries are big landlords and the funds do not reach the small farmers. There has been phenomenal increase in the quantum of consumer borrowing whose share is 13.6 per cent

CREDIT GROWTH DURING FISCALS 2004-05 AND 2005-06

Table 'C' containing the comparative data of the outstanding advances in various sectors as at the end-June, 2004/ end-June, 2006 is appended:

TABLE 'C'- SECTORAL GROWTH IN THE OUTSTANDING LOANS
[Figures in Rs billion]

SECTOR

JUNE,2004

JUNE,2006

PERCENTAGE INCREASE

Corporate

741.4

1,140.9

53.88

S.M.E.

231.7

356.7

53.94

Agriculture

108.7

134.0

23.27

Consumer

103.2

296.5

187.30

Source: SBP annual report for 2005-06 Vol.II.

The percentage of credit growth in the fiscals FY-05 and FY-06 in the corporate and SME sector is almost equal, which implies that the SME sector has now become an important beneficiary of the bank credit. The consumer credit growth is exceptional. It is believed that the borrowers have started defaulting and the lending banks have hired special staff for making per-force recoveries. Although the consumer loans include loans for construction/repairs/purchase of the houses but there has been very nominal bank lending in this sector.

BANK CREDIT FOR HOUSING

Besides the commercial banks, House Building Finance Corporation (HBFC) is also engaged in providing housing loans. Table 'D' containing details of such loans is appended:

TABLE 'D'- HOUSE BUILDING ADVANCES.

POSITION AS OF

BANKS

HOUSE BUILDING FINANCE CORPORATION.

 

NO. OF BORROWERS

OUTSTANDING AMOUNT [RS MILLION]

AVERAGE LOAN SIZE [RS MILLION]

NO. OF BORROWERS

OUTSTANDING AMOUNT [RS MILLION]

AVERAGE LOAN SIZE [RS MILLION]

1

2

3

4

5

6

7

31-03-2003

2,305

1,931.60

0.838

150,071

18,023

0.120

30-06-2006

21,884

44,290.60

2.024

110,781

18,793

0.170

Source: State Bank of Pakistan's annual report for 2005-06 [Vol.II].

It can be observed that the housing sector has been poorly covered by the banks as the number of their borrowers has reached 21,884. The average size of the bank loans reveals that they have kept the small/medium size customers out of their threshold and are catering to the borrowers from [bit] higher strata of the populace. It is alarming that the number of HBFC's borrowers has sharply reduced during the last three years or so. It appears that the Government is not providing sufficient funds to the Corporation to meet the expanding market demand. If that is the position, Government should do the needful as the Corporation is catering to the requirements of the persons from the lower strata of the society as is evidenced by its average loan size.

MICRO-FINANCE

One of the measures for bringing reduction in the abject poverty is believed to be the provision of small loans to the poor individuals without obliging them to meet the stringent security/collateral requirements prevalent in the banking sector to enable them to start their small business and generate income. In Bangladesh, Grameen Bank has been successfully providing small loans to seven million borrowers. The borrowers are by and large the poor females.

The methodology adopted by the Grameen Bank is innovative. The borrowers are not required to come to the Bank for borrowing, repayment of loan instalments or payment of interest. The Bank's officials call on the borrowers' door steps and render all these services.

About over half a decade back, Pakistan had also entered into the field of micro-finance. By the end of the calendar year 2005, five micro-finance banks [MFBs] were in the field, providing finance to the small borrowers. There are large prospects of expansion of the micro-finance in the country as the potential clientele may be around 30 million poor people. The SBP has already put in place the regulatory framework for this sector.

The coverage which we have so far [30th June,2006] been able to provide is as under:

MFB branches

112

Service centres

141

No. of borrowers

266,720

No. of female borrowers

51,819

Loans outstanding

Rs 2,739 million

It can be gauged from the above data that the coverage in Pakistan viz-a-viz the micro-finance is very nominal. The proportion of female borrowers is also too low as compared to Bangladesh. Contrary to Bangladesh where micro-finance is being made available in rural areas only, our MFBs are catering to urban areas also. In case we wish to achieve real breakthrough, we shall have to do the serious concerted efforts.

Professor (Dr) Muhammad Yunus, the founder of the Grameen Bank and a Nobel Laureate, had visited Pakistan recently. He was appreciative of the regulatory framework put in place by the SBP but was not satisfied with the pace of our in-the-field progress.

Professor Yunus also offered the services of the Grameen Bank to establish some model branches on 'Build, Operate and Transfer' basis. The Pakistan Government and the SBP should accept the offer so that our bank officials may also learn from the experience of the Grameen Bank.

Otherwise, our banking bureaucracy with aristocratic mindset would hardly endeavour to take the credit and the services to the doorstep of the poor borrowers.

SERVICES SECTOR OF OUR BANKING INDUSTRY

Our banking sector can claim excellence to some extent viz-a-viz the upgrading of the public service sector, but not limited to, introduction of on-line services, ATM services, fast-transfer of funds facilities from one city to another through on-line service thereby eliminating the need of T.T.s/Demand Drafts, etc. At present fast funds transfer facility is limited to the branches of the same bank, but in future the system may be upgraded to cover inter-city/ inter-bank transfers too. This is a very important facility which not only saves time but also relieves the individuals of cash carrying.

UBL CARDS: CUSTOMERS' FIRST CHOICE

The bold initiative of launching the first credit card by any local bank in Pakistan was taken in the year 2005. During that period, only foreign banks had launched their credit cards which were growing at a significant rate. Hence, the real challenge at the time of launch was to create a differentiation from other big players which were already strongly entrenched in the market. Their cards were conventional in nature but their customer base was strong.

To differentiate from other cards, UBL entered the market with the 'Next Generation of Credit Cards' in Pakistan. Leading the way through innovation, UBL introduced the first CHIP based Credit Card in the market offering unique reward options like Roadmiles, Talk Time and UBL Instant Chip Rewards. UBL also established the first CHIP enabled Acquiring setup which ensures the widespread acceptance of our differentiated cards in the market. UBL Cards are one of the most advanced being a Hybrid Card (Magnetic Strip & Chip) and their acceptability is therefore universal.

As a brand, UBL Credit Cards are the most innovative and vibrant in Pakistan. They provide card-members maximum value by offering unique reward options. They are not only Pakistan's and South Asia's 1st Chip Credit Card certified by Europay MasterCard Visa (EMV), but also the first to be launched simultaneously in 9 cities the number has now increased to 11. Rated amongst the top 5 best designed Credit Cards of the world in 2005 by Card Tech USA, they constitute one of the industry's best valued and most popular propositions.

UBL Credit Cards have also set a record as the fastest in the industry's history to reach a figure of 100,000 in Pakistan within just 7 months of launch. After two years of its inception, UBL Cards enjoy a sizeable portfolio of 200,000 plus customers. Amongst the few banks offering credit cards in the local market, UBL Cards set the industry standard and are unanimously acknowledged as the major player.

UBL is one of Pakistan's largest private banks. It has a large presence in Pakistan and in 15 countries around the world. UBL has a growing network of nearly 1,050 branches in Pakistan and over 14,500 employees overall. With a wide-ranging and dynamic portfolio of globally competitive products and services and nearly half a century of a proven track record, UBL is considered one of the leading banks at the forefront of the banking sector.

UBL Consumer Banking Division offers an array of successful brands. Over the last 3 years this Division has launched many successful consumer products across all categories and has achieved leadership status in several, based on flexibility, innovation and an impressive service and quality backup.