The growth rate of the banking sector achieved during last few years is not sustainable. The era, in which low rate of returns to depositors, high banking spread and huge loan – loss provisions, will not last long. The bonanza of large remittances from abroad may also not continue for an indefinite period. In any case, the present rate of domestic savings is just not enough for sustaining the GDP growth rate of even six per cent. To increase the rate of savings, the policies of banking sector will have to be restructured which would significantly reduce its profitability.
In case of a major external shock, the remittances from expatriates may slow down, the rupee will depreciate at a faster pace, flight of capital will re-emerge and foreign exchange reserves may evaporate in no time. In such an eventuality, the inflation rate would go up which would enhance the cost of production. The industries would become un-competitive and many industries will close down. A larger number of banks’ advances would therefore, become stuck-up. All this could pose serious risks for the banking sector. This needs immediately attention of the banks and SBP.
During last few weeks the Pakistani rupee has depreciated very rapidly and the foreign exchange reserves of the country have also gone down at an accelerated pace. The advisor to the prime minister on finance said on October 8, 2008 that a cartel of few banks is involved in the recent rupee depreciation, thereby, creating some liquidity issues in the country. This is indeed a very serious charge and it is hoped that in coming weeks serious action would be taken against the board of directors, presidents and concerned senior executives of these banks.
In view of the facts stated herein above, the following statement of the governor SBP made on March 4, 2007 is simply beyond comprehension:-
“Banking sector has played a key role in supporting real sector development whose performance and macroeconomic stability have together reinforced banking sector performance.”
Time has now come to change the policies of banks so that they are able to play a positive role towards the development of the economy.
The banking spread should be not more than 3.5 per cent and banks must normally pay a positive rate of return to depositors. At least 100 more branches of First Women Bank should be opened in next three years or so. Foreign Direct Investment in the banking sector though privatisation or merger / acquisitions should not be allowed.
It needs to be recognised that for all practical purposes banks, supported by SBP directly or indirectly, have during last eight years or so:
1. Discouraged savings and encouraged consumption.
2. Managed transfer of over a trillion rupees from the poor and the middle class to the rich and the powerful.
3. Enlarged the gulf between the rich and the poor.
4. Discouraged real industrial production and genuine exports.
5. Encouraged casino culture, speculative culture and hoarding culture etc.
6. Contributed to large trade and current account deficits.
7. Fuelled inflation.
8. Encouraged un-professionalism, corruption and culture of write-off.
9. Facilitated improper utilisation of loans and advances.
10. Denied banking facilities in some rural areas.
11. Discouraged small depositors.
12. Exploited all the depositors.
13. Enhanced saving – investment gap which is having negative impact on the economy.
14. Contributed to the rapid depreciation of rupee against the US dollar as also to the flight of capital.
The following are therefore, some recommendations for improving the health and dynamics of Pakistan’s banking system:
(i) Banks from January 1, 2009 should be directed to pay a minimum rate of profit of one per cent above the inflation rate to all their saving bank account holders. The banking spread should not be allowed to exceed 3.5 per cent.
(ii) The banks’ consumer finance scheme should be restricted for house loans only. SBP should give specific mandatory targets to banks for allowing micro- finance. A strategy should be designed by SBP for opening branches of commercial banks in rural areas at a faster pace. More financing at an accelerated pace should be allowed to landless haris and for providing them loans for purchase of buffalos etc.
(iii) Foreign Direct Investment in the banking sector through privatisation or merger / acquisitions should not be allowed.
(iv) At least 100 more branches of First Women Bank should be opened by the end of 2011.
(v) To reduce the power of the banks, a corporate debt market should be developed. This step will foster competition in the financial sector. The transparency must also be ensured in stock markets which is seriously lacking at present. Announcing bail-out packages without adequate safeguards and transparency would be counter-productive and damaging.
(vi) The cash reserves requirements should be applicable to all types and maturities of deposits.
(vii) The list of defaulters as on June 30, 2008 along with the list of advances of over Rs.0.5 billion and above written-off during last eight years should be published. The advances written-off on unprofessional considerations including those written off under SBP circular no. 29 of 2002 should be re-examined for recovering back along with up to date mark-up.
(viii) Action must be taken against the banks who were involved in the recent Rupee depreciation against the US dollar.
(ix) The rate of mark-up on export finance scheme should not be less than the yield on six months treasury bills.
(x) A high powered Commission should be appointed to look into various malpractices in banks/ DFIs since 1997 including write off, rescheduling of advances, appointments on considerations other than on merit, sale & purchase of properties, exorbitant expenditures, improper utilisation of banks’ advances, and jugglery in annual accounts and role in the stock exchange scandal of March 2005. The Commission should also investigate the role of SBP in:
(a) Stock exchange scandal of March 2005.
(b) Supervision of banks.
(c) Write-off advances.
(d) The motives of the issuances of circular no.29 of 2002 referred to above.
Remedial and reformatory measures must be taken in the light of the findings of the commission. This would go a long way in improving the health, dynamics and culture of Pakistani and foreign banks operating in Pakistan as also in reducing the possible risk of the emergence of crisis in the banking sector in Pakistan.
This article is based on research, analysis and annual reports and conclusions have been drawn based on factual data. There is no conscious attempt to either single out or target any specific bank. The section being produced here is part 5 of 5 parts; the remaining parts will appear one by one in consecutive weeks in the Business and Finance issue. (Concludes) — Editor