Dec 27, 2010 - Jan 2, 20

A 13.7 percent increase in schedule banks' deposits during the CY-10 against an increase of 11.6 percent the previous year augurs well for our financial system especially when viewed in relation with the much smaller increase of 6.6 percent in CY-08.

Unfortunately, this cannot be taken as an unmixed blessing. While a sustained and improved inflow of workers' remittances played an important part in bank deposit growth, government's unreasonably high borrowings both from the state bank and commercial banks also contributed to the inflated bank deposit figures as the loaned money inevitably returns back to the banking system. Although overall bank advances grew by 5 percent in CY-10, the consistent drop in advances to deposit ratio during the last three years shows that the private sector borrowing has not gained momentum due firstly to banks' focus on government - as a zero-risk borrower - and secondly to state bank's blind insistence on policy rate hikes. In this backdrop, the economy in general and business and industry in particular, can hardly be expected to post any worthwhile recovery during 2011.


PARTICULARS 2003 2004 2005 2006 2007 2008 2009 2010 DEC-10
Deposits 1,793 2,161 2,662 3,000 3,566 3,801 4,243 4,826
Y-o-Y % Change - 20.5 23.2 12.7 18.9 6.6 11.6 13.7
Advances 1,170 1,590 2,044 2,410 2,651 3,141 3,237 3,399
Y-o-Y % Change - 35.9 28.6 17.9 10.0 18.5 3.1 5
% Adv. to Dep. 65.3 73.6 76.8 80.3 74.34 82.6 76.3 70.4

Despite its so-called innate strength, Pakistan's banking sector has failed to contain the size of its infected portfolio. In the wake of suppressed private sector lending, a 6.9 percent increase in non-performing loans during a short period of three months reflects badly on banks' prudence and their ability to resist pressure for political loaning. The ratio of net NPLs to net loans also increased from 3.98 percent to 4.60 percent during the first quarter of FY-11.


Banks/DFIs 30-06-2010 30-09-2010 (based on unaudited data)
NPLs Net NPLs Net NPLs to Net Loans % NPLs Net NPLs Net NPLs to Net Loans %
All Banks & DFIs 475.946 130.425 3.98 508.832 147.557 4.60
All Banks 461.896 125.149 3.87 494.012 142.620 4.50
All Commercial Banks 431.911 114.122 3.64 461.988 131.448 4.28
Public sector banks 115.996 32.104 5.19 122.513 37.620 6.17
Local private banks 308.189 80.369 3.30 331.123 92.199 3.88
Foreign banks 7.726 1.648 1.96 8.351 1.629 1.94
Specialized banks 29.985 11.028 11.57 32.024 11.172 11.87
DFIs 14.051 5.276 11.74 14.820 4.937 11.38

Constantly rising NPLs and increased government bidding for bank credit may put the banks in liquidity squeeze position. They may not be able to open up to the private sector credit demand which still has no signs of greatly picking up, thanks to the state bank's discouraging interest rate policy. The incidence of non-performance is ostensibly very low in case of foreign banks, which have a net NPLs to net loans ratio of less than 2 percent. This shows that the cartel power of banks is not very much effective when it comes to resisting political pressure for spurious loaning. Banks, for a number of years, have managed to inflate and maintain their bottom lines by shortchanging their depositors. Although National Saving Schemes have made a sizeable dent in banks' market share, they seem little perturbed by the situation as foreign remittances and government borrowings are there to keep them afloat.

On merger and acquisition front, SBP has granted permission to a scheme of amalgamation of Atlas Bank Limited with and into Summit Bank Limited (formerly Arif Habib Bank Limited). Meeting of any shortfall to the minimum capital requirement (MCR) of the new entity will be the responsibility of Summit Bank. A swap ratio of 0.45 shares for one share of Atlas Bank has already been approved by the board of Summit Bank.

With the proposed establishment of Sindh Bank, news about more mergers is in the air. The obvious objective of mergers and acquisitions is the enhancement of market share and improvement of financial performance of the acquirer. The objective of improved financial performance may be guided by a number of motives, both sincere and sinister. These motives may include increased financial strength, economy of scale, economy of scope, increased revenue, synergy, taxation, geographical diversification, expansion or retrenchment, resource reallocation, diversification, cross-selling, and last but not least, empire building.

The free market idol Alan Greenspan writes in his book The Age of Turbulence: "Mergers, acquisitions and spinoffs are a vital part of competition and creative destruction."

The process in itself would not appear to be unethical or inhuman and could easily be digested as the dictate of forward-moving time. The motive behind a takeover and the circumstances under which it takes place determine the genuineness - or otherwise - of a particular transaction. The motive of empire building can never be justified under the pretext of creative destruction as the former takes place, most of the times, in consequence of a series of hostile takeovers. Mergers and acquisitions essentially result in the concentration of economic and market power. The idea of corporate democracy is in direct conflict with these strategic corporate moves. Corporate democracy demands fair competition that can only be ensured under a broadened and diversified corporate base. Mergers and acquisitions, unless undertaken for some genuine reasons, create monopolies; and monopolies kill competition.

The newly-emerged corporatocracy culture warrants concentration of resources in as fewer hands as possible. The globalization myth, in fact, is a cover to achieve this sinister objective. The corporate greed knows no bounds. It doesn't differentiate between nations and countries. A big corporate fish is ever ready to swallow the smaller ones of the same national and geographic origin. The corporate world carries the stigma of attaining acquisitions by the use of coercive force and even persecution.

In case of Pakistan, the motive behind these mergers may well be the pooling of smaller and weaker banks into a big and financially strong corporate entity with the ultimate objectives of minimising operational risk and safeguarding the interest of depositors. But, how the negative factors associated with such moves are going to be neutralised? Does the central bank have necessary will and power to stop the emerging conglomerates from becoming monopolies?

The following is a quote from the SBP's "Banking Sector Reform Strategy" paper:

"Financial conglomerates present a major challenge for the SBP. It is generally acknowledged that financial conglomeration makes good business sense and should not be stifled by regulation but instead be subject to appropriate regulation and supervision. The challenges imposed by financial conglomerates include the following:

* Unless there is strict implementation of sound banking practices, there is a danger that a bank can become a cheap source of financing to other members of a group without proper assessment and pricing of intra-group exposures and proper management of the risks involved.