Pakistan Perspective Challenges to the banking sector
The banking sector, stuck up with chronic issues of loan defaults, high cost of management and services, high interest rate charged from debtors and low interest rate paid on deposits and non-plus professionalism cannot meet new challenges unless these issues were addressed squarely. The story of these chronic issues is well known. It is embedded in the past history of banking sector which stemmed from the over stretched and overdone whimsical decision of the government in the early 1970s to nationalise private banks.

The conflict of interest between the then private banking sector and the socialist government became unbearable for the latter, because the former had refused to fund risky government projects which lacked soundness. Bringing financial resources of the banking sector, then, became imperative for the survival of the socialist government.

The wholesale nationalisation of banks brought new managers who were not professionals in the real sense. They were short on owners' love to protect and increase their assets. The new managers were a group who later proved willing partners to bend the banking rules to grant loans to the elite to serve their masters and their own interests.

The banking sector, under such environment, achieved three negative results.

One, financial resources of the banks were mercilessly diverted to inefficient public sector enterprises and risk-prone financial adventures like the yellow cab scheme. It increased banks' financial liabilities.

Two, banks became an easy targets for public loot and plunder by men of all hues; politicians, influential investors, civil and military bureaucrats and landlords. The loan defaults gradually started swelling and over a period of around two decades, its volume increased to more than PRs240 billion.

Three, the number of staff members inducted and branches opened across the country under expansion programme increased the cost of managing the banks and providing services to the customers many-fold than it should have increased otherwise. It resulted into high interest rate, which gradually climbed from an average of 7-8 per cent to around 20 per cent. But, on the contrary, the deposits' rate was kept subdued. A differential of around 10 - 12 per cent was maintained in favour of banks. Such high rates of interests and low rates of return of deposits deterred both the credit seekers and depositors away from the banks. They thus slipped into unimpressive performance and reached near collapse situation by end-90s.

A vibrant banking sector of the 60s was on the verge of collapse after mid-90s. It was saved by infusion of capital running into billions by the government and WB. To re-invigorate the ailing banking sector was a real big challenge. Downsizing of bank staff and branches was an imperative of re-structuring programme of banks to make them attractive for privatisation. It was executed judiciously with the help of WB. Despite this, privatisation did not pick up the desired tempo. Recent privatisation of UBL after a long lull simply indicated that privatisation, despite its charming rhetoric to deliver and being a panacea for all the economic ills, was difficult to execute.

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