ECONOMIC CHALLENGES TO THE COUNTRY
INCOME OF SMALL BANKS IS SHRINKING, LOSSES MOVING UPWARD
MOUNTING NPLS AND SLOWDOWN IN CREDIT GROWTH REMAIN THE KEY CONCERN FOR BANKS
Nov 19 - 25, 2012
Undoubtedly, the country was facing host of economic issues posing challenges to a number of sectors including the banking sector.
In the aftermath of subdued economic growth, high interest rate environment and surge in non-performing loans, different banks particularly the small banks are forced to restructure their operations to curtail their operating costs and mobilise more deposits to sustain growth in their profits. However, these banks are facing it difficulties to secure deposits resultantly their income is shrinking and losses are mounting.
Due to the increase in non-performing loans, high interest rate and competitive environment in banking sector, some banks are closing down their loss-making branches and operations. This is leading to retrenchment in such banks.
Experts told PAGE that the economic growth has remained subdued over the last few years, private credit is down and provisioning against bad debt is rising. Most small banks cannot sustain profits unless they control their costs or mobilise substantial deposits.
The State Bank, no longer believes it can control inflation through interest rates, hence, it is focusing on measures to help spur economic growth. This shift in policy is backed by a research, which suggests that keeping interest rates high disproportionately affects small and medium-sized businesses. Over the last few years, Pakistan's economy has been hit by low growth and high inflation.
In the current financial year, the net flow of credit to the private sector has been an abysmal 18 billion of rupees. If that isn't significantly increased, Pakistan may well continue down its ow-growth/high-inflation path, experts believe.
Some 10 banks closed down 60 branches across the country during the financial year 2011-12. On the other hand, over the last several years, even the larger banks have tried to trim their workforce per branch to cut their operational costs. Habib Bank brought down the number of staff per branch to 8.8 in 2009 from 9.8 in 2007. Similarly, United Bank reduced its workforce to 12.7 per branch from 13.7, Muslim Commercial Bank to 12.5 from 16.7 and National Bank of Pakistan to 12.6 from 13.
High interest rate effects credit disbursement banks. Small banks are particularly hit by the slow down in credit growth, rise in their provisioning requirements and high interest rate environment due to the smaller size of their balance-sheets. This has spelled disaster for the smaller banks whose income has shrunk substantially due to the slowing economic conditions.
Experts said that mounting NPLs and slowdown in credit growth remain the key concern for banks, particularly the smaller ones which will continue to face difficulties for some time to come.
The poor economic conditions also frustrated plans of some small banks to raise their minimum capital requirement (MCR) limit by the June 30 deadline, forcing the SBP to give them another six months to meet the condition. The smaller banks` spread (difference between the deposit and lending rates) is also smaller as compared to the larger ones because they have to give better returns to their depositors to attract and mobilise funds, experts added. They said the only option for the small banks is to cut their operating costs to sustain profit growth.
However, all banks are not curtailing their operations or rightsizing their work force. There are banks which are hiring new staff and planning to open up new branches. But their business focus is shifting from the urban areas to the rural areas because more income has been shifting to the rural sector in the recent years than in the urban sector. The income in the urban areas is down and employment rising, leading to more competition among the banks for fresh deposits.
On the other hand, businessmen are persistently demanding that interest rates in Pakistan should be in line with the rates prevailing in the other economies of the region. High bank mark-up is the largest cost burden on the manufacturing sector, they said, adding that it is making the domestic industries uncompetitive both in the domestic and foreign markets.
According to them, monetary policy that was followed by the SBP, remained ineffective in the face of supply side inflation. A tight policy stance may not directly address supply-side pressures, as it acts as a barrier to a spill over from cost push inflation to more generalised and entrenched set of inflationary pressures.
Pakistan has the most liberal investment policy in the South Asian region and before the global recession, businessmen showed keen interest to invest in the country. But now the situation has changed! Instability and the rising cost of doing business have deterred both local and foreign investors. In addition, the recent increase in electricity and gas prices, as well as rampant corruption in these sectors, has made the marginally profitable industries non-viable. Also, new industrial units are not being set up, while the old ones are closing down. This will lead to rise in unemployment and suicides. This poses a serious challenge in time to come.
The next few years are being seen difficult for the banking sector unless the banks re-adjusted their operations to the new economic realities and cut their costs to sustain their profits.