Jan 23 - 29, 20

Last decade has seen many positive developments in the banking sector of Pakistan. The policy makers, which mainly comprise of the State Bank of Pakistan (SBP), Ministry of Finance and related government and financial sector regulatory entities, have made several notable efforts to improve the regulation in the sector.

As a matter of fact, commercial banks in the private sector in Pakistan came into existence mainly to supplement the performance of public sector banks and to serve the needs of the economy better. At one time, the banking sector was one of the best in the region whereas a number of international banks started their operations in Pakistan. It would not be wrong to say that a few banks have established an outstanding track record of innovation, growth and value creation.

As the public sector banks are merely in the hands of the government, most of the banks have no real incentive to make profits and improve the financial discipline. Private sector banks are controlled by the private lenders with the approval from the SBP.

Pakistan started reforming banking sector in early 1990s; the current structure of the country's financial sector is the result of several policy shifts and developments. The efficiency of public sector banks is relatively low as compared to foreign and local banks. Since year 2000, more than 40 transactions of mergers and acquisitions have been executed within banks and between banks and non-bank finance companies whereas financial institutions also entered into those areas where they were never interested e.g. insurance, asset management, brokerage, leasing, and financial advisory by incorporating separate wings under their umbrella.

It is important to note that commercial banks in Pakistan witnessed nine percent growth from Jan to Jun 2011 after a gap of three years, which was mainly because of unprecedented high foreign remittances, improved external account and better export margins. Supply side bottlenecks, high interest rates, and lower inventors' confidence in recent weeks remained at the heart of lower appetite for bank's credit. Consequently, commercial banks are following their risk-averse strategy while issuing fresh loans to local businesses. They prefer to increase their exposure in the risk-fee high yield government securities rather than venturing into risky lending opportunities.

Due to overall current fragile economic situation, banks in Pakistan consider credit risk as their key challenge. Rise in nonperforming loans (NPLs) was observed across the entire banking system. Banks have to book heavy provisions against their bad loans especially related to the textile sector in last few years. However, an encouraging aspect is that the provisions in absolute terms have been declining since 2009, which in other words shows that things are improving. The credit mix of banks has also changed over the time. Banks are now more focused in dealing with public sector borrowings for budgetary support for financing needs of public sector enterprises (PSEs) and commodity operations.

In short, the fear of NPLs' has forced the banks to shift their investment priority; different options are available to tackle with this critical problem, which include reducing the existing NPLs and curbing their further build-up, exploring avenues of recovering NPLs for recovering smaller loans in particular, increasing the number of debt recovery tribunals, and complete ban on generalized loan waivers.

Unlike private sector banks, culture of blackmailing in public sector banks exists to some extent. This is also another major area, which prevails in a number of public sector banks and adversely affects the efficiency of the employees. Besides public sector banks, sometimes private banks also face pressure from the state to fund the projects of government's choice e.g. issuance of loans and letters of credit to rental power plants.

Another challenge facing Pakistan's banking sector is a large number of loss making branches overstaffed and the archaic methods of operations mostly in public and small private banks; which is affecting the efficiency of the sector. To cope up this problem, banks should close up loss making branches and staff should be adjusted accordingly. Here it doesn't mean to lay off staff but utilize them productively.

SBP is keeping interest rate on the higher side to control the inflation in the country. However, banks should work closely with the SBP in reducing the interest rates. High interest rates are also becoming a reason for bank defaults as high cost of financing is badly affecting the repayment capacity of the customers, though Pakistan has witnessed highest interest rate of 20 percent in October 1996, which is considerably high as compared that of to today. One of the reasons of high inflation is low rate of savings by the individuals. There are some suggestions, which can help bringing improvements and reducing inflation and interest rates.

* Banks should increase the rate on saving accounts and reduce the spread as well;

* Banks should provide educational loans at the lower interest rate with ease and without much documentation;

* Internet banking facility must be made available in all the banks and branches and each section of every bank should be computerized even in rural areas;

* More ATM coverage should be provided for the convenience of the customers and there should be no limit on cash withdrawals on ATM cards. Most of the times, ATM machines don't have cash which should be addressed permanently;

* 24 hours banking should be introduced to facilitate the customers who may not have a free time in the daytime;

Banking sector is improving by leaps and bounds but still a lot can be done. The foreign and local private sector banks are using innovative marketing methods to attract individuals and companies. In the emerging financial environment, two aspects have become important: one is the better corporate governance and the second is innovativeness and development of competitive edge through imagination. Proper and efficient relationship staff having knowledge for one stop banking, customer friendly atmosphere, and better rate of interest are the need of the hour. Banks have shown resilience whereas banks are also offering a broader range of deposits, investments and credit products through diverse distribution channels including upgraded branches, ATMs, telephone, internet to meet the customer expectations.

It is also the right time to take suitable and stringent measures to get rid of NPL problem. An efficient management information system should be developed. The bank staff involved in sanctioning the advances should be trained about the proper documentation and solvency pre-assessment and motivated to take measures in preventing advances turning into NPLs.