Apr 20 - 26, 2009

The monetary policy which is to set the new discount rate as well as the interest rate for April-June of the current fiscal year, the downward revision of the minimum paid-up capital requirements for the banks and of course the race for acquisition of RBS operations in Pakistan, are some of the interesting developments in the banking industry of Pakistan.

The review of the monetary policy by Syed Salim Raza, the governor State Bank of Pakistan, has become a focal point of the private sector as business community is attaching hope that the central bank would now change its instance of tightening of the monetary policy following declining trend of the inflationary pressures which have come down from 25 percent to 17 percent at present.

When this correspondent asked him to comment on the possibility of reducing the interest rate during a conversation in the sideline of a meeting recently, the governor indicated that the interest rates were already on the decline if Kibor rates were followed.

During a brief talk, the governor did not say in clear terms about the cut in the discount rate for the banks yet the current situation depicting a pick-up in official foreign exchange inflows coupled with healthy foreign exchange reserves as well as improving current account balance, all are indicative of the softening of the monetary policy for the next quarter.

Though the financial circles are attaching hope for a reduction of 400 basis points in discount rate yet the IMF has suggested holding on the current level for the time being until further reduction in the inflation.

It is however interesting to note that the tightening of the monetary policy hardly contributed towards containing the inflationary pressures as against the low commodity prices, which really helped controlling the mounting price inflation. However, the international donor agency is in favor of keeping the policy rates at its current level.

It may be recalled that Pak rupee had depreciated by almost 28% in 2008 due to a high current account (C/A) deficit and depleting foreign exchange reserves. The Pak exchange rate depreciation against US Dollar and Japanese Yen resulted in the price hike of Pakistani automobiles which are essentially depending on imports of important components from Japan.

On the back of low commodity prices especially the petroleum products, the lower import bill has also turned the current account balance positive for the first time since 2007, with a USD 146million surplus posted in February.

These positive developments have not only provided a floor to Pak rupee stability but also have paved the way for a cut in the interest rates.

It is being assumed that the external inflows are to improve considerably as the World Bank has committed to release $2 billion by June this year while Asian Development bank will be providing $4.4 billion enabling the government to spend on key infrastructure projects including power, roads and irrigation.


Pakistan was rightfully attaching high hopes for a reasonable financial support from the friends of Pakistan who met in Tokyo on April 17 during which a cumulative assistance worth $5.44 billion was committed for Pakistan.

The United States announced that it would provide $1 billion over two years, subject to approval from Congress, while Japan pledged the same amount a day earlier. The international community is worried on economic meltdown in Pakistan and eager in supporting financially popular theme of eliminating Al Qaeda and other militant groups.

While pleading the case of Pakistan, President Zardari said: "We are willing to fight. Despite the fact that I lost the mother of my children, I have taken up this challenge, as the President of Pakistan ... to lead Pakistan out of these difficult times, 'If we lose, you lose. If we lose, the world loses.'"

Pakistan, it may be mentioned, is central to US President Barrack Obama's plan for South Asia, which includes Afghanistan. Though the financial assistance committed by the friends of Pakistan does not fully compensate what the country has lost in the war on terror, yet whatever is committed is needed to be used more intelligently to support the sinking economy of Pakistan.


The change of hands in Royal Bank of Scotland (RBS) Pakistan operations is also an interesting development. So far, Habib Bank, Muslim Commercial Bank, and JSCL (Jehangir Siddiqui) have unveiled their interests to acquire RBS Pakistan operation while more parties have also shown interest to jump into the bid.

The deal has its significance in a way that RBS is the 14th largest bank in Pakistan in terms of its assets and deposits in the banking industry.

In case, HBL succeeds in acquiring stakes it would become the largest bank by surpassing even the asset size of NBP, while MCB would remain at 4th position whereas its difference with UBL which is the 3rd largest bank in Pakistan will reduce to Rs53billion only from Rs151billion currently on the basis of assets.

However, from industry point of view the transaction may become more significance if any small and medium size bank acquires RBS because this would provide the level playing field to a medium size bank along with helping in reducing the concentration ratio of the banking industry. Both macro and micro pictures provide more value addition in the case of merger between RBS and JSBL.

The transaction if goes in favor of JS bank, it will upgrade JS Bank as the 14th largest bank from its current standing at 27th position.

Since the HBL and MCB already hold a huge network of 1,468 and 1,040 branches, respectively, the addition of 79 branch network of RBS may not add any further value to these two large banks. This acquisition could require these two large banks to close some of their outlets in order to avoid branch overlapping at any similar location.

The JS Bank is currently operating with only 39 branches, since it would be time consuming as well as a difficult task for the JS bank to open 79 new branches besides allocating the respective resources. In case, the JSCL acquires RBS then the deal would add more value to JSBL relatively.

It is interesting to note that RBS's 30% advances are in consumer segment as compared to much lower penetration of these banks in this segment. Since RBS has sound technology and quality human resource whosoever be the lucky one would definitely bring value addition to its existent quality of services.


The central bank realizing the tough economic conditions has revised down the minimum paid up capital requirements for banks of Rs23 billion to Rs10 billion by December 2013.

This must give a great relief particularly to the smaller banks under pressure and were looking for mergers with other banks for meeting the target minimum paid up capital limit set by the State bank.

The State Bank of Pakistan has decided to revise downward the minimum paid-up capital (free of losses) requirements (MCR) for banks. This decision has been taken in view of the general global slowdown in growth and capital accumulation by financial institutions and representations from shareholders.

Now the banks are required to raise their minimum paid up capital (free of losses) to Rs 10 billion by December 31, 2013 instead of earlier set limit of Rs 23 billion, says BSD Circular No.7 of 15th April, 2009.

The banks will now be required to raise their minimum paid-up capital (free of losses) to Rs 6 billion by December 31, 2009, Rs 7 billion by December 31, 2010, Rs 8 billion by December 31, 2011, Rs 9 billion by December 31, 2012 and Rs 10 billion by December 31, 2013.

It may be recalled here that according to the instructions issued earlier (BSD Circular No.19 dated the 5th September, 2008), the banks were required to raise their MCR to Rs 10 billion by December 31, 2010, Rs 15 billion by December 31, 2011, Rs 19 billion by December 31, 2012 and Rs 23 billion by December 31, 2013.

While capital adequacy ratio standards will continue as previously and all banks/ DFIs shall be required to increase CAR to 10% from December 31, 2009 irrespective of their CAMELS-S rating, till further instructions.

Branches of foreign banks (FBs) operating in Pakistan are also required to raise their assigned capital (net of losses) to Rs. 10 billion within the above prescribed timelines. However, those foreign banks whose head offices hold paid up capital (free of losses) of at least equivalent to US$300 million and have a CAR of at least 8% or minimum prescribed by their home regulator, whichever is higher, will be allowed with prior approval of the State Bank to maintain assigned capital. The Foreign Banks operating with up to five branches are required to raise their assigned capital to Rs.3 billion latest by 31st December 2010.

Moreover the foreign banks operating/desirous of operating with 6 to 50 branches are required to raise their assigned capital to Rs. 6 billion latest by 31st December 2010.