BANKING FUTURE - IN THE MIRROR OF 10-YEAR VISION OF STATE BANK

SHAMSUL GHANI (shams_ghani@hotmail.com)
Sep 15 - 21, 2008

The State Bank governor, in her recent strategy document named 10-year vision, has given our banking sector a roadmap envisaging to achieve a higher and sustainable economic growth besides developing a dynamic, robust and stronger banking system. The credibility of this document does not get high rating when we see in retrospect the role of SBP during the past ten years when our banking sector grew disproportionately and on its own terms. The document can best be taken as admission of past policy failures and willful inaction.

The vision document is riddled with conflicting strategy statements. For example, the document stresses need to position financial markets to:

* Better serve a large segment of population and geography and growing demands for investment and infrastructure.

* Address the exposure associated with emergence of financial conglomeration in the country that poses a systemic risk to banks.

The global financial interventionism has drifted our banking system away from the approach of a larger segment of population and geographical territories. The downsizing verdict forced our banking sector to roll back its expansion programs leaving the majority of misses in a state of banking deprivation. The large branch-network size of nationalized commercial banks was abruptly cut to a disproportionate and shorter size. Vowing to enforce consolidation regime besides maintaining moratorium on new licenses, the SBP is ill-positioned to achieve maximum outreach objective. Its endeavor to swiftly conform to the BASEL-II regime is in conflict with the above stated strategy objectives. Aiming to get rid of smaller banks and financial institutions through MCR condition of a minimum US$300 million by 2013, is tantamount to further strengthening of financial conglomeration. A greater number of market players always create a healthy-competition atmosphere beneficial to both the masses and the economy. The BASEL-II regime aims at creating an oligopolistic financial structure to afford minimum-windows shopping option to global financial institutions. The cartel like behavior of banks witnessed during the last 5-6 years has eroded depositors' confidence in banks and they are committed to part ways with them as soon as alternate avenues of investment are made available to them. Moreover, a divergent not a convergent financial regime ensures a better and stronger financial infrastructure. The restrictive high interest rate policy has already driven away the demand for investment.

The vision document further states:

"Commercial banks now have arbitrarily moved into a conglomerate structure with or without a holding companies framework. By and large banks have acquired stakes in Non Banking Financial Institutions including insurance, brokerage, financial advisory services etc. Financial conglomerates present a major regulatory and supervisory challenge as such structures are prone to contagion risk."

The solution to this dilemma is offered through a radical alteration of the regulatory architecture, after admitting that the current architecture has inherited some serious omissions. SBP now plans to take the role of ultimate supervisor authorized to oversee both financial and non-financial conglomerates.

The vision statement also vows to enforce a Consumer Protection Bill requiring Pakistan Banks Association to adopt a Banking Code to commit banks to fair practices besides nurturing competitive pricing of bank products. The pricing of bank products had never been just until the promulgation of recent SBP directive asking banks to allow a minimum return of 5 per cent to savings account holders.

Banks' profitability increased manifolds in the wake of post 9/11 influx of foreign remittances, foreign investments and foreign aids and grants. However, the major stakeholders and the strategic partners - the depositors - were never taken on board. Amid falling discount rate scenario, returns to depositors were brought down from 15 to 2-3 per cent per annum whereas in rising rate scenario, banks not only raised their future lending rates but also scaled up their rates for existing borrowers taking advantage of the floating rate system. A corresponding increase in the rate of return to depositors never took place during the SBP-rate-reversal process with the result that bank's spread kept moving up to the targetted double digit level.

The following table shows the return on asset / equity position of banks during two successive quarters of 2007.

TABLE - RETURN ON BANKS' ASSETS AND EQUITY

BANKS

BEFORE TAX %
RETURN ON ASSETS, JUNE-2007

BEFORE TAX %
RETURN ON ASSETS, SEPT 2007

BEFORE TAX % RETURN ON EQUITY, SEPT 2007

BEFORE TAX % RETURN ON EQUITY, JUNE-2007

Public sector comm. banks

3.8

4.1

30.4

32.2

Local private banks

3.0

2.9

31.1

29.5

Foreign banks

2.3

2.0

23.3

18.0

Commercial banks

3.1

3.1

30.5

29.7

All banks

3

3

31

30.1

The rate of return on average equity was quite high and at variance with the return in other sectors of economy. It will be observed that local banks earned a much higher return as compared to foreign banks.

This scenario is a rejoinder to the much hyped vision document and the future SBP policy stance. The entire document undertakes to achieve what SBP failed to achieve during its active tenure. With the future of SBP governor not so definite, the document, as stated earlier, should be read as forthright confession of SBP's past infirmities and policy failures.