'Pakistan’s Banking Sector Current Situation And Critical Issues\r'

'Pakistan’s margining heavens reforms which were initiated in the early 1990s arrest transform the sphere into an efficient, sound and good banking companying system. The most fresh comprehensive assessment carried out jointly by the public Bank and the IMF in 2004 came to the following shutdown: â€Å" for reaching reforms decl atomic number 18 resulted in a to a greater extent efficient and competitive fiscal system In particular, the predominantly state-owned banking system has been transformed into one that is predominantly under the control of the buck private atomic number 18na.\r\nThe legislative material and the State Bank of Pakistan’s supervisory subject pay been improved certainly. As a result, the monetary sector is sounder and exhibits an increased resilience to shocks. ” The major(ip) changes that give occurred in the banking sector during the last tenner or so great deal be summarized as follows: a) 80 portion of the banking as sets be held by the private sector banks and the privatization of nationalized commercial banks has brought about a culture of professionalism and service orientation in name of bureaucratism and apathy. ) The banks that were losing money due to inefficiencies, waste and special product range have bring about richlyly moneymaking business. These meshing be, however, being used to peculiarityen the nifty seat of the banks sooner than paying out to the sh beh aged(prenominal)ers. The tokenish capital requirements have been raise from Rs. 500 one thousand thousand to Rs. 6 one thousand thousand over an extended menstruum in a phased manner.\r\nThe consolidation of the banking sector into less but stronger banks entrust lead to better watchfulness of risk. c) The banks that were burdened with the non-performing and defaulted loans have cle ared up their re primary(prenominal)der sheets in an open transparent, cross-the-board manner. Contrary to the popular invention the main beneficiaries of the wirite-offs of the old outstanding and unrecover up to(p) loans have been from roughly 25 part to 6. 7 percent by Dec. 2005. Sm any individual borrowers the ratio of non-performing loans of the mercenary Banks to total advances has declined. d) The quality of overbold assets has improved as stringent measures are taken to appraise unused loans, and assure the underlying securities. Online Credit Information spot reports provide updated information to the banks about the credit recital and track record of the borrowers.\r\nLoan approvals on governmental considerations have become passe. Non-performing loans mark for less than 3 percent of all new loans disbursed since 1997. e) The human resources base of the banks has been substantially upgraded by the adoption of the principles of merit and exploit throughout the industry. Recruitment is done through a highly competitive process and promotions and compensation are linked to training, skills an d high performance. The banks now routinely exercise MBAs, M. Coms, Chartered Accountants, IT graduates, economists and other highly educated persons rather than Clerical and Non Clerical Workers.\r\nThe banking industry has become the surmount-loved choice of profession among the young graduates. f) Banking Technology that was almost non-existent in Pakistan until a few geezerhood agone is revolutionizing the customer services and access on-line banking, mesh banking, ATMs, mobile phone banking and other modes of delivery have made it possible to provide convenience to the customers plot of ground reducing the trans act be to the banks. Credit Cards, account Cards, Smart Cards etc. are a thriving and expanding business in Pakistan. Once the RTGS is aim in place the payment system in Pakistan. Would code a new phase of modernization. ) contention among the banks has forced them to move away from the traditional limited product range of credit to the government and the huma ns sector enterprises, trade finance, big name incorporated loans, and credit to multinationals to an ever-expanding menu of products and services.\r\nThe borrower base of the banks has expanded quartette fold in the last six eld as the banks have diversified into agriculture, SMEs, Consumers financing, mortgages, etc. The mettle class that could non afford to buy cars or apartments as they did not have the financial strength for cash purchases are the biggest beneficiaries of these new products and services. ) Along with strong regulation, supervision and enforcement capacity of the State Bank of Pakistan a number of measures have been taken to put best corporate governance practices in the banking system. ‘Fit and graceful’ criteria have been prescribed for the Chief Executives, members of the Boards of Directors, and top focussing positions. method of accounting and audit standards have been brought to the International Accounting Standards (IAS) and the Inte rnational Audit Codes.\r\nExternal audit firms are rated according to their performance and track record and those falling short of the accept able-bodied standards are debarred from auditing the banks. These practices were put in place in Pakistan long before the scandals of Enercon, World Call and Pramalat had shaken the corporate world. i) The unlike turn commercialise that was highly regulated through a system of direct exchange controls over suppliers and users of foreign exchange has been liberalized and all purchases and sales take place through an active and vibrant inter-bank exchange market.\r\n in all restrictions have been removed with full current account convertibility and partial capital account convertibility. Foreign investors can now bring in and take tush their capital, remit tolerate, dividends and fees without any prior removal and promptly through their banks. Similarly, foreign portfolio investors can in any case enter and exit the market at their own discretion. The main lesson l pull aheadt from the last decade suggest that financial sector functions effectively and efficiently whole if the macroeconomics situation is thriving and stable.\r\nThe pauperism to maintain macroeconomic stability will thus last out paramount in the years to come. The agenda for further reforms in the financial sector is still preferably formidable and the challenges to spread the benefits of financial liberalization among the middle and low income households and small and middling farms and enterprises are still enormous. in that respect are some(prenominal)(prenominal) areas of dissatisfaction with the banking sector that need to be addressed. The most heartbreaking complaint against the banking system in Pakistan today is that the stingors are not getting adequate return on their bank deposits.\r\nThe difference amid the monthly dull add up pass judgment of lending and deposits is taken as an indicator of the spreads take in by the banks. It is true that these spreads have widened in the recent months land this phenomenon has caused resentment among those whose only if source of income is their returns from bank deposits. But it is important to try out the facts and their form judgments The monthly comparisons are meaningless because PLS deposit rates are changed every six months, age the lending rates are continuously adjusting because they are automatically linked to T-bills or KIBOR rates.\r\nDuring the last eighter months the weighted average deposit rate has go from 1. 6 percent in July †Feb, 2005 to 3. 9 percent in July †Feb, 2006. This trend reflects that the return on the new deposits mobilized is much(prenominal) high(prenominal) than what the average rate indicates. The old deposits are earning much lower rate because they were lodged at the time when the overall structure of interest rates had come down significantly. This lag is adjustment between the deposit and lending rates is due to the costs incurred by the depositor in breakouting deposits from one bank to the other.\r\nThe additional deposits mobilized in the last twelve months amounted to Rs. 382 billion i. e. a ripening rate of 16. 8 percent. This growth rate took place despite deceleration in the volume of Resident Foreign deposit accounts. So if the deposit rates were unattractive then this high growth rate in deposits mobilized by the banks appears to be puzzling. The reason for this high growth is that the fresh deposits were fetching an average return of 6. 2 percent in March, 2006 compared to 3. 5 percent in July, 2005 †rise of 270 prat points in nine months.\r\nIn the coming months the average rate is likely to move further upwardly bringing them to positive real interest rates. why have the moolah of the banks risen so acutely in the last few years? There are several reasons that need to be still: First, the drag of non-performing loans has been eased considerably reducing the ne ed for setting aside the provisions for loan losses. As these provisions were made at the expense of the kale the banks are now reaping the benefits of building up substantial provisions and fetching the hit on their profits in the past.\r\nSecond, the corporate income measure rate on banks’ profits has gradually come down from 58 percent to 38 percent saving on their tax deductions. These savings not only get translated in to higher profits but withal act as incentives for better performance because the tax rate no longer acts as a penalty. Third, the diversification of the banks assets into new and so far underserved separates much(prenominal) as agriculture, mortgage, auto, SMEs, Consumer and Credit Cards have raised their net interest margins.\r\nAs competition has become quite tough in the corporate segment the margins on corporate loans have been squeezed considerably. But the spreads earned in these new segments are quite attractive. thereof a large part of the profits embark on from lending to these underserved segments of the population. This is a Win- Win situation as small farmers, small businesses and middle class consumers, who had so far been denied access to bank credit, are able to get financing the banks are able to earn higher spreads. Fourth, there has been a shift in the maturing profile of both the banks’ deposits and banks’ loans.\r\nHalf of the total deposits are now placed for short term while earning negligible rates of return compared to the past where the dissemination of deposits were concentrated in medium to long era earning much higher returns. On the assets side, more of the bank loans are being disbursed for fixed investment purposes. These have long maturity structure and pay higher interest rates in double digits. This shift in the composition of deposits and advances has helped earn the banks a higher spread boosting their profitability.\r\nAs the majority of the banks are operating(a) in the private sector they will remain guided by the bottom line considerations i. e. the profits. consolidation and market competition will act as a deterrent on abnormal profits but it is the responsibility of the regulator to mark off that these profits are not made by taking excessive risk with the depositors’ money or by banks indulging in collusive practices. The regulator has to ensure that the access to credit is further broadened and small realm households, small and medium businesses and middle classes are able to meet their legitimate credit needs.\r\nAt the uniform time the regulator has to take stringent action against those banks found guilty of anti-competitive or collusive practices. other popular indictment against the banking sector is that they are financing hazardous activities such as business line market trading, real estate, commodities, auto etc. The facts do not support this indictment. Direct and indirect exposure by banks in stock market equities ha s been limited to 20 percent of their capital i. e. the maximum amount all the banks can collectively provide for this activity is only 40 billion.\r\nThe outstanding stock of bank advances in March, 2006 stood at Rs. 2063 billion. Thus the bank credit allocated for stock market equity trading is less than 2 percent of the total advances of the banking system. If we further assume that some amounts are diverted from consumer loans or corporate loans also the exposure of the banks may double to as much as 4 percent but the securities and collaterals against the diverted loans may not necessarily be the scrips themselves.\r\n unfeigned estate financing by banks is restricted to mortgage loans only and the purchase of plots cannot be financed by the banks. owe loans can be disbursed in installments after forcible verification of the various phases of construction. The total disbursements of loans for mortgage amounted to Rs. 11. 4 billion in FY 05. Commodity financing and its prepo nderating rates are not attractive for the borrowers as there has been net retirement of commodity loans in the first nine months of the current fiscal year.\r\nThe regulative environment for the banks to indulge in lending for speculative purposes is not very propitious. The State Bank of Pakistan supervisors are not only vigilant in their on-the-spot(prenominal) inspection but they monitor the banks on a continuous basis and can detect irregularities and violations pretty quickly. The more deterrent effect of strong relapsing by the supervisors is enough to discourage such activities. The penalties oblige by the supervisors on recalcitrant banks are quite severe.\r\n'