BIG BANKS WALLOWING IN A COMPETITION-FREE ENVIRONMENT
Jan 3 - 9, 2011
As Pakistan's banking sector emerged almost unscathed from the ordeal of global meltdown, it renewed its faith in the powers of cartelization and conglomeration. Restricting itself to the five major banks, the cartel evolved new risk-management strategies and constructed new policies to become immune from the influence of market forces - competition.
In March 2010, we had 4 public sector banks and 25 local private banks. Basel II mandates - using tools of MCR (Minimum Capital Requirement), CAR (Capital Adequacy Ratio) etc. - phased closure of smaller banks, mostly through mergers, acquisitions, and amalgamations. With this, our financial sector base, already small in relation to the size of economy, is going to narrow down further. The result will be more powers to the cartel members. The small and medium size banks are set to vanish into thin air.
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, which 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. When seen in this perspective, the impending mergers in our banking industry would seem ill-advised. Being a developing and potentially viable economy, we need to have a broader financial base. This is perhaps time to dismantle monopolies rather than to encourage them to surface in one of our most important sectors of economy.
We should take lead from the telecommunication sector revolution that has changed our lives, thanks to the environment of fair competition in which this sector has been allowed to work.
We need to dismantle KESC, Wapda, Pepco and the likes to revitalize our energy and other sectors. Programs to create oligopolies and cartels in the financial sector are going to do immense damage. Instead of blindly following the dictates of US financial systems, the State Bank needs to seek the advice of private-sector local professionals and those likely to be most affected by the impending banks merger scenario.
The ex-central banker and Fed chairman, Alan Greenspan mentions in his book The Age Of Turbulence:
"Financial regulators, in my experience, know far less than private-sector risk managers. Indeed, the open secret about regulation in the free-market world is that regulators take their cue from private-sector practitioners. The Federal Reserve and other supervisory institutions continually seek the advice of the best and brightest risk-management professionals. Basel II, the international consensus on bank regulation first published in 2004, mirrored the risk valuation models of the private markets. Not surprisingly, Basel II is undergoing significant review as the banking industry revises its own standards; new U.S. regulation governing capital requirement, if it comes, will reflect the private sector's already revised market practices."
How far the SBP policies are influenced by the private-sector input should not be difficult to figure out. Despite continuous protest by the private sector, the policy of a sustained interest rate hike is being pursued.
To add insult to injury, banks fail to give importance to the private sector credit requirement by maintaining their entire focus on government lending for non-development purposes.
The recently announced 9-month financial results of the banks show that 98 per cent of the total industry profits have gone to the five major banks. These banks have managed, in the recession-hit economy, hefty increase in profits over the corresponding period of last year: National Bank (20 per cent), Habib Bank (19.5 per cent), United Bank and Allied Bank (14 per cent each), and finally MCB Bank (6 per cent).
The policy structure of the five big banks having a cumulative market share of 85 per cent has four main planks:
* Use of brutal cartel force to maintain a high bank spread through shortchanging the hapless herd of depositors.
* Achievement of sustained deposit growth through focus on ever-increasing flow of workers' remittance and captive accounts of federal and provincial government bodies, organizations and departments.
* Shrewd use of economies of scale to browbeat competition from smaller banks by making it difficult for them to offer a high rate of return to depositors.
* Risk avoidance through investment in zero-risk and high-return government bonds and securities instead of catering to private sector credit needs, which is a risky and-low-return proposition. (Taking care of government's funds requirement for its lavish spending is yet another tactical measure).
In the given scenario, the cartelized banks can rightly be seen as "wallowing in a competition free environment". While good profitability and growing deposits create a positive impression, the poor performance on risk management side raises serious questions about the cost-effectiveness of the operations of these banks. 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 per cent 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 per cent to 4.60 per cent during the first quarter of FY-11. Besides a number of mergers/acquisitions in the offing, Abu Dhabi Group is reported to have sold its 20 per cent stake in UBL to the Bestway group. Pending for State Bank approval, the deal will give management control to Bestway group, which already has 31 per cent interest in the bank. While the news brings good tidings for the Bestway people, the market analysts are a bit puzzled and busy in figuring out the motive behind this sell-off. Should it be taken simply as a strategic disinvestment decision or a preemptive move to keep away from the harm's way in view of some "not so evident" weakness of our banking industry?