Dec 13 - 19, 20

The floods having subsided and WikiLeaks now dominating our lives, the revamping of severely damaged agriculture sector has been put on the back burners. This scribe wrote in one of the recent articles, "We, as a nation, have learned to feed ourselves on animosities and confrontations. Our political leadership has taught us to hate other nations on one pretext or the other. We have become paranoids, always ready to show skepticism about other nations' gestures, no matter how noble those gestures may be. But surprisingly, these very nations are the ones that come to our help in difficult times. Let the waves of floods subside, we once again will take to streets to castigate those who have endeavored to fill our begging bowl." As expected, we are busy in venting our spleen on those who have been nominated in the "leaks" for making comments on our country or its leadership. This we are doing in total disregard of urgent economic issues - immediate rehabilitation of agriculture being one of them.

In developing economies, banking sector takes the role of a powerful catalyst by indirectly supporting social uplift and economic development programs. Directly and actively, it takes the role of a synergist by developing mutually profitable synergies with other sectors of the economy. During the current decade, our banking sector has gone through many ups and downs. Prior to 9/11, our banks were struggling in the era of sagging equity values. The economic opportunities created after 9/11 saw them flourish in style. The banking sector grew due mainly to a favorable environment created partly by global events and partly by the regulating bodies, which allowed the banks to operate on their own terms, in total disregard of the canons of financial justice. Banks' profitability increased manifold during the heydays, and that happened at the cost of their main business partners, the depositors. State Bank's persistent failure to discipline them made the cartelized commercial banks intractable and spineless - ever ready to short-change their depositors.

Carrying around 25 percent of total market capitalization weight, this segment of financial sector appeared shell-shocked by the developments that ensued in the wake of global financial upheaval and domestic political and economic mismanagement. The huge capital outflow engendered by these developments put the banking sector in a severe liquidity crunch position. Having few economic and financial linkages with the global markets, Pakistan's economy in general and its banking sector in particular managed to keep out of big-harm's way. The changed conditions prodded SBP authorities to assume tight monetary stance at a juncture when the country was passing through the worst phase of inflation. Interest rates were raised to control money supply and credit expansion. Interest rate hikes made the banks suffer on deposit front as they failed to raise their deposit rates in line with the market with the result that their customers, already fad up with their draconian attitude, took their money to National Savings Schemes that offered competitive profit rates.

With each upward revision of discount rate, the banks not only raised future lending rates but also scaled up their rates for the then existing borrowers, taking advantage of the floating rate system. A corresponding and equivalent increase in the rate of return for the depositors never took place with the result that our banking spread held the dubious distinction of being the highest in the region. The suspension of new loans and an ever-increasing borrowing rate made the borrowers default in tandem. Non-performing loans started to pile up to put further pressure on banks' liquidity as well as profitability.

Continuously enhanced inflow of workers' remittances did keep the banking sector from going to dogs. On deposit front, they are still growing, though at a pace slower than that of the boom years. The changed scenario made banks to develop a diversified market approach by going for synergies with other sectors of the economy. Telecom & IT sector, being the closest ally in the service sector, got their maximum attention. Synergies developed with this sector proved instant hits. E-banking, mobile commerce etc. became the way of urban life. Banks once again got their bearings. The bank deposits recorded a healthy growth of 10.8 percent during the unfinished calendar year 2010 against 5 percent during the last calendar year.


Deposits 2,161 2,662 3,000 3,566 3,801 4,120 4,325 4,792
Change 20.5 23.2 12.7 18.9 6.6 8.4 5.0 10.8
Advances 1,590 2,044 2,410 2,651 3,141 3,169 3,272 3,373
% Change 35.9 28.6 17.9 10.0 18.5 3.1 3.3 3.1
% Adv. to Dep. 73.6 76.8 80.3 74.34 82.6 76.3 75.7 70.0

The banking sector failed to develop equally successful synergies with the real sectors, particularly the industry, and the agriculture. High interest rates and the resultant higher incidence of defaults drove a wedge between the banks and the industry. The credit flow to business and industry got badly hampered during the last three years in the wake of increased government borrowing from the banking system. The banks too have become somewhat averse to risk taking--as government borrowing is fully secured--and the private sector and the economy are suffering in consequence. The overall credit contraction is reflected in the constantly dropping advances to deposits ratio.

The banks find banking and agriculture sector synergies not as commercially viable as those developed with the service sector. Higher cost of reaching the rural population and feared higher loan defaults force them to keep their focus on urban markets. Agriculture sector that contributes 21 percent to GDP gets a credit share of less than five percent. While banks are expected to make a trade-off between commercial and national objectives, their fears of high rural credit default are not totally unfounded. According to a State bank's press release, Rs32 billion loans out of the total Rs53 billion disbursed to the flood-hit segment of rural community have become non-performing.

No doubt, the banks have to play a highly important role in the development of our agriculture and energy sectors, but the vested interests that are holding these two vibrant sectors captive need to be dealt with first. Only then, we would be justified in looking to the banks for their support to these sectors.