NON-PERFORMING LOANS: A BIG CONCERN
Jan 23 - 29, 2012
Financial sector development and economic development are inter-related. No economy can grow and improve the living standards of its population in the absence of a well functioning and efficient financial sector.
Banks in Pakistan account for 95 percent of the financial sector and hence a sound and healthy banking system is directly related to economic growth and development of the country.
Despite difficult economic conditions prevailing in the country, banking sector is showing good performance and registering growth. However, banks are facing problems on account of rise in non-performing loans, rising non-developmental expenditures and competition within this sector.
The modern growth theory identifies two main channels through which the financial sector might affect long-run growth in a country: first, through catalyzing the capital accumulation (including both human and physical capital) and second by increasing the rate of technological progress.
Pakistan has allowed Islamic banking system to operate in parallel with the conventional banking providing a choice to the consumers.
A large number of Pakistanis have remained withdrawn from commercial banking because of their strong belief against riba-based banking. These individuals and firms - mainly middle and low class - will have the opportunity to invest in trade and businesses by availing of loans from Islamic banks and thus expand economic activity and employment.
Several full-fledged Islamic banks have already opened the doors for business and many conventional banks have branches exclusively dedicated to Islamic banking products and services. This has provided new window opportunity to local banks.
There is a growing interest among the banks to upgrade their technology platform and online banking services. During the last four years, there has been a large expansion in the ATMs and at present more than 1000 ATMs are working throughout the country. Progress in creating automated or online branches of banks has been quite significant so far.
The banks have embarked on merit-based recruitment to build up their human resource base - an area which has been neglected so far. The private banks have taken a lead in this respect by holding competitive examinations, interviews and selecting the most qualified candidates. The era of appointment on the basis of connections and recommendations from the politicians has almost come to an end as the private owners want to attract and retain the best available talent which can maximize their profits. This new generation of bankers will usher in a culture of professionalism and rigor in the banking industry and produce bankers of stature who will provide leadership in the future.
To facilitate the depositors to make informed judgments about placing their savings with the banks, it has been made mandatory for all banks to get themselves evaluated by credit rating agencies. These ratings are then disclosed to the public by the SBP and also disseminated to the chambers of commerce and trade bodies. Such public disclosure will allow the depositors to choose between various banks.
Credit cards, debit cards, personal loans, and consumer durable loans are catching up fast. Refrigerators, air conditioners, VCRs, televisions are now available on credit. The consumers are forced to save when a specific amount is cut from their salary every month to pay the installment.
Mortgage financing is helping the middle class families to own apartments and residential houses. For the first time in the history of Pakistan, the middle class is beginning to benefit from the banking system.
On the other hand, microfinance institutions are expanding their branches and providing credit without any collateral or security to poor households. Many people have availed this opportunity, some bought a cow, some bought a milk buffalo or opened a small shop and female borrowers bought sewing machines. They have started income-generating activities and recovery is no problem from the microfinance banks.
The banking system, which had recorded negative returns on assets (RoA) and negative returns on equity (RoE), is now showing impressive RoAs and RoEs comparable to best international banks. Capital base is strong, quality of assets has improved, management practices are sound, corporate governance standards are followed, and risk management is much better.
A private sector owned and managed financial system can provide large benefits to the economy only if some prerequisites are in place. These pre-requisites are healthy competitive, environment, efficiently functioning markets, sound financial infrastructure but most important a strong and effective regulator.
In cases where the central bank or the regulatory authority is weak and not up to the mark in skills, competencies and systems the collusive and anti-competitive behavior of the private sector can create serious systemic problems for the financial sector and for the economy.
The weak capacity of regulator has given rise to cartelization in goods market for sugar, cement etc.
The service standards, product offerings, system improvement, technology transfer and skill upgrade in the domestic banking systems can be facilitated by exposing the domestic banks to competition from foreign banks. The apprehension that the foreign banks will displace the domestic banks in the market place and capture market share is in fact highly exaggerated.
Majority of banks operating in the country are comfortably meeting the new capital requirements as well as the liquidity standards of Basel-III.
Experts believe that banking sector enjoys a healthy capital adequacy ratio of 14 per cent (aggregate) because of 'our highly focused and strict banking supervision policies'. This is a remarkable achievement given the fact that for the last two years the sector has faced a sluggish economic environment and a marked rise in overdue loans, they said adding, it now appears that most banks have sufficient capital buffers to manage moderate shocks in credit and market risks.
'Over the years, our banking sector has witnessed a significant change from a wholly government owned structure to the majority being privately owned,' they said and added that this shift was one of the main factors which led to improved performance of the overall banking sector, which is evident in increased ROA and ROE of the banking industry, and the high growth in banking assets.
With the opening of our banking industry to foreign investors benefits such as new sources of capital, funding, know-how and competition have emerged and this has helped the domestic banks to compete with foreign banks who possessed well established systems and controls, thus improving the overall soundness of the total banking sector and promoting competitive environment, they said.
Keeping in view the increasing reliance on IT systems, most of the large banks have either already shifted to or are in the process of shifting to new core banking application which will specifically cater to the future technology related requirements. However, there is still a lot to be done to further improve the IT systems as well as the procedure for capturing data to better enable our banks to meet the minimum data/ information requirement necessary for the effective implementation of the Basel capital accord advance approaches in a proactive and disciplined manner.
The Lahore Chamber of Commerce and Industry (LCCI) President Mr. Irfan Qaiser Sheikh urged the government to focus on giving boost to economic activity in the country as the GDP growth is the lowest in contrast to economic growth being witnessed by the all the regional states of South Asia.
During the year 2011, the economic activity in the country remained hostage to multiple internal and external pressures and it seems that the phenomenon would continue to prevail if private sector was not taken on board in policymaking process. Two neighboring economies India and China were booming like anything for the reason both the governments strengthened their economic fundamentals and policy framework.
LCCI President said that the worsening security conditions, an acute and unparalleled energy shortage, highest-ever electricity tariff, rampant corruption, low policy implementation rate, huge loss making state-owned enterprises and ongoing political uncertainty are contributing to keep the activity at a halt. A well-tailored policy framework, designed in collaboration with private sector, is needed to bring the economy out of woods.
Mr. Sheikh said that the business community understands that the issues at hand are of complex nature and requires some sort of out-of-box solutions. But, at the same, it knows well that a little attention towards provision of uninterrupted supply of gas and electricity to the industry could pave way for much needed economic activity.
The LCCI President said that the LCCI repeatedly appealed to the government to introduce alternate means of power generation besides tapping huge coal reserves to get rid of costly thermal power but hardly any step was taken by the government.
Secondly, the government should improve investment climate in the country by removing legal and regulatory hurdles that ultimately would rejuvenate economic activity in all sectors of the economy, he said.