|
PAKISTAN’S
BANKING SECTOR
Growth rate, remittances from expats,
and changing economic scenario
By Dr Shahid Hasan Siddiqui
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
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.
|
