May 11 - 17, 2009

It was often said by many critics that commercial banks as well as State Bank of Pakistan have been acting a little orthodox. However, Pakistan's commercial banks have largely remained immune to the recent financial crisis emerging from the US and engulfing the entire world. It is partly confinement of Pakistani commercial banks to their core activities and partly because most of the lending backed by collaterals.

It is also on record that none of the banks in Pakistan faced the situation where the government or the central bank has to inject equity to save it from bankruptcy. However, fully cognizant of the prevailing difficult conditions the central bank revised the timeframe for meeting minimum paid-up capital requirement. This in no way shows any weakness or compromise but only relaxation of condition keeping in view the prevailing adverse working environment.

A review of the 2008 financial statements of commercial banks hints towards two factors 1) higher non-performing loans and 2) bearish equities markets adversely affecting their bottom-line. The positive point was that most of the banks conveniently absorbed the two shocks. However, in an attempt to confine potential losses banks made minor adjustment in their investment and credit policies.

Commercial banks drifted away from lending to private sector to investing in treasury bills and Pakistan Investment Bonds. This was partly because of shift in investment policy and partly because of subdued credit demand of the private sector. This shift was due to stringent monetary policy stance followed by the central bank and to keep the interest rate high.

Hike in non performing loans was partly because of downturn of the economy and partly because of higher interest rates. However, many of the banking sector experts do not agree with those who say that higher interest rates are responsible for the rising delinquency. They say all those industries indulging in excessive borrowing do face difficult situation but still financial cost constitute only a small percentage of total cost of doing business. The real issue is bad cash flow which does not allow the borrowers to undertake normal business activities.

Circular debt syndrome faced by companies belonging to energy sector pushed many of the blue chip companies into red. As KESC and other GENCOS did not make timely payment to oil marketing companies, refineries and even exploration and production companies had to resort to excessive borrowing to keep their business running

A timely probe into the stock market crises, particularly the recent one shows impact of heavy indulgence of banks in the equities market. The experts have contrary opinions, while some believe that banks should actively support equities market others strongly oppose this move. The first group believes in offering of the leverage products by the banks, whereas the others simply oppose this. The second group says that some of the banks have as high as 35% of shareholders' equity invested in the equities market, which is besides the 'seed money' invested in asset management companies.

The gradual closure of DFIs in the country has also put pressure on the commercial banks to extend medium and long-term loans. To begin with the two activities demand entirely different mind set and also the funds having long term maturity. Historically, in Pakistan bulk of the deposits have less than one year maturity and against this lending for three and more years could prove disastrous. Two types of institutions i.e. leasing companies and modarabas have been extending medium term financing. Ideally, the banks should extend credit lines to these entities rather than extending medium term credit directly.

The common complaint is that despite banks enjoying around 7.5% spread also charges excessive fees and commission. Many of the banks claim to offer online services but also charge heavy fees. For example Rs55 are charged on the withdrawal of cash even from a branch located in the same city. Some of the banks charge annual renewal fee on debit and credit cards and also on cheques of other cities. Some also charge fees on dividend warrants. Now the number of ATMs and transaction conducted on these machines has attained substantial volume therefore, there is no need for charging Rs15 fees, if an ATM of another bank is used.

Banks are making millions of rupees from account holders who are unable to maintain minimum stipulated balance. One fails to understand the logic of insisting on opening 'basic account' and also charging fees if number of transactions and amount exceeds stipulated quantum. The condition of minimum balance should be abolished immediately. It is also suggested that competition commission should also look at this because it is a case of cartelization.

The issue of payment of minimum return on deposit also needs to be probed. The general complaint is that banks use one or the other pretext to avoid this payment or reduces it to the least simply with the jugglery of words. It is being said that instead of paying of average balance the return is paid on the lowest balance maintained during the period.

The purpose of highlighting these complaints is only aimed at convincing the central bank and the banks to come up with policies which offer incentive for saving. The larger the deposit size the more banks could lend.

It is also suggested that mark up on agri loans and credit to SMEs and micro enterprises should be reduced. All the banks should contribute one percent of their total deposit towards a fund to be used for extending credit line to micro finance banks. This extension should be interest free. So far bulk of the population has remained excluded from the banking system. Convincing individuals to maintain accounts and also pay through cheques will bring all the money into the banking system, which is kept in pillows at home.