Banking through the history

Achieving new milestones at a faster pace

By and large Pakistan has one of the most robust commercial banking systems of the world. It is mainly due to a very vigilant regulator, prudent players and excellent clients. One can point out a few bad incidents, regulatory lapses and failure in compliance but all these were there because the ruling junta tried to facilitate the favorite ones, else sponsors of none of the commercial banks were ready to see that the interest of depositors was hurt at any stage.

Commercial banks along with insurance, industries and even educational institutions were nationalized due to era of Zulfikar Ali Bhutto; to stop exploitation of general public by much talked about 25 rich families’. But the time proved that not only consumers were fleeced but employees were also exploited. Above all, entrepreneurs started shifting their capital to other countries. After having burnt the fingers the nation once again decided to undertake, liberalization, reregulation and privatization policy.

In early nineties when the Government of Pakistan decided to grant permissions to a dozen groups some of the experts termed it highly imprudent approach but time has proved that the decision was right. At that time of granting this permission half a dozen nationalized banks were operating in the country as against over two dozen foreign banks. Now the situation has completely reversed as the number of foreign banks has reduced to less than half a dozen and number of banks listed at local stock exchanges exceeds two dozen.

A point to be highlighted is that these private banks had started operations with Rs200 million paid up capital and now the minimum capital requirements is Rs10 billion. Most of the banks have already met this requirement and some are still struggling. While some of the sponsors are not ready to let their enterprises go into the hands of their competitors, others can’t find a buyer due to huge accumulated losses.

Standard Chartered Bank that had more than 150-years history of operations as foreign bank in this part of the world finally opted not only to get listed on local stock exchanges but also acquired Union Bank and merged it into SCBP. SAMBA Group of Saudi Arabia acquired majority stake in Crescent Bank and Faysal Bank took over operations of Royal Bank of Scotland (RBS), which has acquired Pakistan operation on ABN AMRO Bank. The Bank of America and American Expresses also bid farewell to Pakistan and Temasek Group of Singapore also acquired majority stake in NIB Bank, which also acquired PICIC Commercial Bank and its holding company PICIC, one of the finest DFIs of yesteryears.

While it may not be right to say that those foreign banks that acquired majority stake in Pakistani banks, NIB Bank has a contrary story. Its management often boast of having largest paid up capital of over Rs103 billion but after netting off accumulated losses and discount on issue of fresh capital the size of capital reduces to slightly more than Rs14 billion. For the year ended December 31, 2012 it has posted earnings per share of Rs0.004 as compared to that of Rs0.34 for the year 2011. Under the prevailing situation it may take decades to clean the slate and pay any dividend to the shareholders. It share having face value of 10.00 is being traded below Rs2.50 at local stock exchanges.

Many of the banking sector experts are upset with the shrinking spread, which has recently done down below 7 percent. One of the demands is that the central bank should bring down floor from 6 percent to 5 percent (the minimum interest rate to be paid to depositors). This condition may be pinching smaller banks but ‘Big Five’ are still making tons of money. According to the sources privy to information average cost of fund of MCB is around 3.5 percent, the lowest in the industry. If this bank can mobilize low cost deposits why can’t others do the same?

As such commercial banks are be biggest beneficiaries of huge government borrowing that too at a very rate and being completely risk free. This has also saved the commercial banks from making provisions against non-performing loans and making efforts for recovery. Now they just relax in offices, submit bids in the auction of treasuring bills auctions held fortnightly. Many of the banks have either completely closed down consumer finance departments or are running these with rudimentary staff. Whatever, business is being undertaken could be termed ‘watta satta’ just to comply with the regulatory requirement, meaning one bank obliging employees of other banks and vice versa.

The central bank is fully cognizant of the prevailing situation and two of its initiatives deserve specific mention: 1) financial inclusion and 2) branchless banking, most of the details have been covered in the previous issue. Yet another initiative worth mentioning is lending to farmers with the aggregate amount exceeding Rs300 billion. Further increase in amounts lent is possible if banks are able to ensure that the funds are deployed to improve agriculture rather than buying real estate in urban areas and expensive cars.

Another constraint in enhancing lending to the farmers is lack of insurance cover and delay in payment by insurance companies operating in the public sector. The point to be remembered is that the central bank is willing to reimburse the premium amount pertaining to small farmers but banks are not availing the opportunity, may be because they are not disbursing amounts among small farmers but feudal lords.

Involving micro finance banks and cellular companies is expected to help in promoting financial inclusion program. It has two advantages: 1) gradually all the transactions will be documented and 2) this enhanced documentation will help in boosting overall size of the economy as well as collecting more revenue, as such telecom companies have emerged the biggest tax collection agents, at an average consumer pays over 20 percent tax on utilizing telecom services. The amount could be further increased by auction higher spectrums (G-3 and G-4). This will on one hand help in attracting huge foreign direct investment but also improving quality of services being offered by telcos.