Road to solvency

The global financial crisis has left countries wary of collapsing banking systems. Consequently, a global trend of countries beefing up the health of financial intermediaries is emerging.
Even though, the local banking industry managed to escape the great banking crisis three years back, the State Bank of Pakistan has remained in the forefront in advancing and enhancing their risk absorption capacity.
To guard against the financial and operational risk, the central bank has paid attention to increasing the level of capital on the banks balance sheets. This criterion would certainly help boost the capability of the local banking industry to qualify for Basel III enhancements.
Therefore, SBP through its BSD Circular No. 07 dated 2009, made it compulsory for the banks to raise capital (Minimum Capital Requirement) in a phased manner to Rs10 billion at the end of 2013. The banks are now required to meet MCR of Rs8 billion by the end of the current year.
Despite huge strides made by banking industry, the latest data compiled by SBP revealed disappointing figures. Out of a pool of nearly 46 banks and DFI; 11 private and 6 public banks did not have adequate capital to meet the MCR compliance standards, as of 31, March, 2011.
When asked about the status of non-compliant banks, an official at SBP confidently commented that "most of the non-compliant banks are in the process of issuance of right shares, profit capitalisation or merger with other banks", adding that "several banks have shown progress in increasing their capital and have submitted a well defined capital enhancement plan."
The best part is that the existing MCR compliant banks formed nearly 87 percent share of the asset base of the banking sector.
The non-compliant banks, though asserted that targets are tough but relatively achievable. They criticised the regulator for setting equal target level for both large and small banks since smaller banks are wrestling with lower margins and high operating costs.
The current MCR is the revised version of MCR policy issued in 2008, under which banks were required to meet MCR of Rs23 billion by the end of 2013.
This regulatory condition must be a big hassle for smaller banks, but increase in the MCR would strengthen balance sheet of small banks and promote stability in the industry.

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MCR for Banks/DFIs

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Minimum paid-up capital     Time

 (free of losses)          frame

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Rs 6 billion                2009

Rs 7 billion                2010

Rs 8 billion                2011

Rs 9 billion                2012

Rs 10 billion               2013

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