Jan 23 - 29, 20

Commercial banks operating in Pakistan are experiencing paradigm shift not because of any deliberate plan but because of changing ground realities.

Experts say this is the time to sail with the tide and any attempt to move in the opposite direction could prove suicidal. One of the real concerns is that bankers are not using their brains but fulfilling government's appetite for funds. At the end of the day accrued income goes up, lesser are the worries of making provisioning, no fear of entering into any legal battle and no time to be spent on repossessing and disposing the assets.

Till recently meeting minimum paid-up capital requirement was a worry but now it seems that even the State Bank of Pakistan is willing to condone failure in meeting the benchmark. Everyone is fully aware of dwindling stock market, fearing investors and sleeping policy planners and regulators. All seem keener in maintaining status quo rather than making any effort to bring the change. Most relaxed are those involved in investment banking and corporate finance.

Thanks to rising remittances, tons of money made by those involved in agriculture and also those who club all sorts of income under 'income from agriculture' and massive growth in undocumented economy meeting deposit target is no worry. Most of the depositors come with huge foreign exchange to open up foreign currency accounts and get a running finance facility. Lenders are also willing to extend up to 90 per cent because collateral is as good as cash.

However, one of the worries is that accountholders are not willing to lock their fund for longer tenors. Bulk of the deposits maintained with the banks falls in the category of less than 12-month tenor and are rolled over.

It is interesting to note that at times a company borrows from one financial institution only to make a deposit with another bank. Another interesting observation is that an entity borrows money from a financial institution and invests it in the mutual funds managed by its wholly owned asset management company.

With the rising appetite of the government, banks just do not have to bother about 'where to invest the money'. They just have to keep in mind the schedules of treasury bills, PIB and Sukuk auctions.

Since indicative targets are known, they just have to arrange funds and transfer it from on pocket to another.

The latest reports indicate that government borrowing is inching towards Rs12 trillion and out of this more than half consists of local borrowing. Since most of the government securities are acceptable for meeting statutory liquidity reserve (SLR) requirement of the central bank, whatever deposits come in go straight towards buying these securities.

Some of the bankers say that since private sector credit appetite is very low, they are forced to invest in government securities. They are partly right but looking at lending to farmers tells a different story. The central bank allocates a target for every financial institution but some of them prefer to pay penalty rather than lending to farmers. The most shocking was to note that one of the listed banks, having huge foreign stake, have not lent any money to the farmers during last three years.

In an attempt to secure lending to farmers in case of any natural calamity, both the central bank and the commercial banks have been working very closely with insurance companies. In the first phase, a significant percentage of total lending to the farmers has been covered through credit insurance. However, the ultimate objective is to introduce comprehensive insurance for four major crops. The objective could not be achieved so far because insurance companies are demanding creation of a pool with the assistance of the government.

Rising non-performing loans has become a major concern because bulk of the income of banks goes towards provisioning. As a result, neither the depositors nor the shareholders benefit from fabulous spread earned by the banks.

Financial institutions face two types of defaults first circumstantial and second habitual. On top of the list are well connected politicians who have access to power corridors. They acquire loans from banks operating in the public sector with clear intensions of getting these written off one day. This is not some thing new, over the last few decades public sector financial institutions have been used to buy out loyalties.

Over the years, most of the banks have been consistently posting profit, while some others have been incurring huge losses. One of the banks having huge paid up capital and also foreign investment has to face the worst music at the annual general meetings. Its share price has come down to around Rs1.50 from as high as Rs45.

Having failed in turning around, majority stakeholder is keen in getting rid of this bad investment but could not find a buyer. There have been a few mergers and acquisitions but it will take very long to clean the slate.

In an attempt to increase gross revenue collection, the government is contemplating increasing corporate tax on commercial banks to 40 per cent from existing 35 per cent. This move has to be resisted at every level because it is tantamount to penalizing the good performing entities. As such, any increase in tax rate will not affect the loss making banks.

Over the years, experts have been demanding reduction in the tax rate for the listed companies to encourage sponsors of private limited companies to convert their entities into public limited companies.

On one hand, this will help these entities to mobilize money from capital market for BMR and expansion and on the other hand, public will benefit by investing in these companies.