ASSESSING SBP MEASURES IMPACTS ON BANKS

SHAMIM AHMED RIZVI
June 02 - 08, 2008

State Bank of Pakistan (SBP), last week, announced a series of measures last week aiming to counter inflation and widening fiscal and current accounts deficits and current accounts deficits. Following are the main steps announced by the governor SBP Dr Shamshad Akhtar.

* Discount rate increased by 150 basis points to 12.0 percent with effect May 23rd.

* Increase in cash reserve requirement for all deposits up to one year maturity by 100 basis points to 9 percent while keeping the CRR for deposits by over one year maturity unchanged at 0 percent.

* Statutory liquidity reserve requirement is increased by 100 basis points to 19 percent of the total time and demand liabilities.

* Effective June 1st, all banks are required to pay minimum profit rate of percent on interest bearing checking accounts.

* Effective May 23rd, letter or Credit margins on all imports, except for oil and selective food imports, is being imposed at 35 percent. This is in response to the 44 percent growth in imports excluding the oil and food items.

* Akhtar also said the government should sterilize expected foreign inflows by using them to settle its obligations to State Bank, rather than to finance new expenditure. Retirements of the marketable treasury bills will help reduce the reserve money pressures and in turn reduce core inflation.

Independent economists as well as business and industrial circles are however, highly skeptical and critical of the interest rate hike by the central bank. They are of the view that these steps will not help in containing inflation as has been amply proved by such attempts in the pest. The SBP has increased interest rates four times during the last year by 50 paisas each time and this did not succeed to contain inflation which continued rising alarmingly. The present like by 150 basic points would not only cause on further blow to already crippled industrial sector of the country, they maintain adding that it would achieve only one objective of boosting the profitability of the commercial which started showing declining trend since the beginning of the current year.

Commercial Banks in Pakistan really witnessed a boom during the last 6/7 years-thanks to Shaukat Aziz pro-elite economic policies. He was a banker by profession and during 5 years tenure be may have destroyed the economy of the country for overwhelming majority of the people. But give the devil his due, as a banker he has made the banking as one of most prosperous industry of Pakistan.

Twenty four commercial banks listed at the Karachi Stock Exchange have announced the first quarter financial of 2008 showing a decline of about 18 percent during this period (January - March 2008) the combined profit after tax of these banks decreased to Rs 19.5 billion from Rs 23.7 billion during the same period last year.

How rapidly the banking the banking has prospered during 2000-2006 can be judged from the following table showing that the 5 leading banks of Pakistan-National Bank, Habib Bank, United Bank, Muslim commercial Bank and Allied Bank which were collectively in loss of Rs 2.463 billion in 1999 showed a profit of Rs 84.605 billion in 2006.

TABLE 'A' PERFORMANCE OF 5 LARGE BANKS.

Figures in Rs billion

1
Year / Head

2
NBP

3
HBL

4
UBL

5
MCB

6
ABL

7
TOTAL

Deposits as of 31-12-1999

Remunerative
Un-remunerative 

216.736

211.215

96.262

103.043

56.493!

683.749

(Current accounts)

78.018

40.564

30.871

27.293

36.615

I 213.361

Total deposits

294.754

251.779

127.133

130.336

93.108

897.110

Other borrowings

39.215

48.958

19.533

23.146

10.806

141.658

Grand Total

333.969

300.737

146.666

153.482

103.914

1038.768

Interest paid

20.906

17.985

7.509

9.352

6.953

62.705

W.A.D.H.

6.26 %

5.98 %

5.12 %

6.09 %

6.69 %

6.03 %

Total deposits of scheduled banks Rs 1158.959 billion
Share of large banks in scheduled banks' total deposits 77.41 %

DEPOSITS AS OF 31-12-2006

Remunerative

363.829

364.093

246.391

172.870

149.608

1296.791

Un-remunerative

138.043

95.047

88.687

84.590

56.423

462.790

Total

501.872

459.140

335.078

257.460

206.031

1759.581

Interest paid

13.072

10.590

9.822

2.907

6.125

42.516

W.A.D.R

2.60 %

2.30 %

2.93 %

1.13 %

2.97 %

2.42%

Total deposits of scheduled banks. Rs 2999.895 billion
Share of large banks in the scheduled banks' total deposits. 58.65%
Increase over 1999: Scheduled banks: 158.84% Large banks: 96.14%

ADVANCES (GROSS):

As of 31-12-1999

139.615

180.805

78.738

71.496

58.218

528.872

As of 31-12-2006

348.370

371.365

260.910

206.848

151.705

1339.198

Total advances of scheduled banks 1999: 754.561 Share of large banks. 70.09 %
Total advances of scheduled banks 2006 2409.478 Share of large banks. 55.58 %
Increase over 1999: Scheduled banks 219.32 %. Large banks 153.32 %

PRE-TAX PROFIT

For 1999

0.311

(5.309)

1.253

1.211

0.071

(2.463)

For 2006

26.311

18.840

14.292

18.501

6.661

84.G05

OUTSTANDING AMOUNT OF PROVISIONS AGAINST NON-PERFORMING LOANS (NPLS):

As at 31-12-1999

17.322

26.914

17.499

4.063

2.955

68.753

As at 31-12-2006

32.260

21.932

13.600

8.608

7.671

84.071

Provisions of all scheduled banks 2006 Rs 127.611 billion Share of large banks 65.88 %
Remunerative deposits/ pre-tax profit ratio.

1999

0.143%

-

1.30%

1.18%

0.125%

-

2006

7.23%

5.17%

5.80%

10.70%

4.45%

6.48%

The net result of latest tightening measures of the monetary policy is going to be no different from such attempts made earlier. Central Bank increased the interest rate to 12 percent as well as the discount rate by 150 basis points to curtail the monetary growth, fuelling inflation in the country. "This is not the way to handle the situation. You are raising the interest rate on the pretext of containing the inflation but ignoring what disaster it brings to industry at general and export oriented sector in particular", Zubair Motiwala, a known name of textile sector and former president of Karachi Chamber of Commerce and Industry (KCCI) said. Industry people pointed out that cost of production would go up further with the additional of high financial cost, to be triggered by this interest rate hike and apprehended about further uncompetitiveness of the local products in the international market.

"Whether it will help curtail the inflation or not, only the time will tell. However, one thing is sure that interest rate increase would multiply the financial woes of the sector, business community leaders believed about the latest step of central bank. Motiwala pointed out that textile exports would be hit mostly by this new interest rate increase, which was already facing problems due to intense competition in the international market.

Senior vice chairman Standing Committee Credit and Finance, Federation of Pakistan Chambers of Commerce and Industry (FPCCI), Mirza Ikhtair Baig lamenting the discount rate increase said it would further raise the mark up and financial cost of the companies and making the product more uncompetitive.

"Inflation will never be controlled in this way as it is mainly food core inflation and will only be controlled by balancing demand and supply mechanism", Dr Baig argued and said that central bank should have taken the stakeholders of trade and industry before taking such decisions.

KCCI president, Shamim Ahmed Shamsi remarked that if the central bank has succeeded in controlling the inflation through increase in discount rate in past, then it was a right step. But grounds realities suggest that nothing gained from previous tightening of monetary policy as inflation climbed up more, which is because of supply side constraints and other related issues", he noted.

Chairman FB Area Association of Trade and Industry, Idris Gigi and in the present situation when price of all other raw materials went up sharply, the interest rate hike would prove another bombshell for the industrial sector. Meanwhile President of Federation of Pakistan Chambers of Commerce and Industry Tanvir Ahmed Sheikh have expressed serious concern over the present monetary policy of the State Bank of Pakistan.

He said further tightening of the monetary policy by increasing 150 basis points in the discount rate and increase in the cash reserve requirements on the deposits will hamper the ability of the banking sector to lend. The increase in the rate of interest will further increase cost of production and industries will transfer this increment to consumers thus adding to inflationary pressure. FPCCI indicated that the most drastic step is imposing of minimum LC margin requirement on imports. This condition will increase liquidity problems for the industry, engage its working capital, and increase cost of production.

The commercial banks in Pakistan multiplied their profits during the last 6/7 years by exploiting their depositors through cartel like behaviour. There has been a gap of 7 to 8 percent between what the banks in Pakistan were paying to the depositors and what they were charging from their borrowers which has no parallel in the world.

Perhaps for the first time in the history of Pakistan, the newly established Competition Commission of Pakistan (CCP) took notice of this exploitation by the banks. Finding them guilty of cartel like behaviour after a detailed inquiry indenting public hearings spread over many months imposed a penalty of Rs 25million on seven leading banks of the country and Rs 30 million on Pakistan Banking Association. PBA has an appeal the Sindh high court against the CCP order.

In this whole episode, what is more surprising is the role of the State Bank of Pakistan. Being the main regulator of the banking sector, it was, primarily, the responsibility of the state bank to keep on eye on such exploitative practices of commercial banks and protect the interests of the depositors. Instead of appreciating the initiative of CCP highly acclaimed by the general public, State Bank wrote a letter to the Ministry of Finance to asking for an amendment in the law placing commercial banks outside the purview of the Competition Commission of Pakistan. The Ministry, however, did not oblige the State Bank.

In view of general unrest amongst the depositors against the marginal return on their deposit the State Bank has now laid down that the banks would pay a minimum of 5 percent to their depositors but at the same time fixing lending rates at 12 percent thereby keeping the spread of seven percent intact. The State Bank latest tightening of monetary policy may or may not contain the inflation, but it has certainly ensured that the profits of banks remain intact.