Banking sector reforms

Speaking at a seminar organised by the Management Association of Pakistan (MAP) on 15th September, the Governor of the State Bank of Pakistan stated explicitly that the five-year banking sector reform programme initiated in 2000 was successful in meeting the desired objectives.
At the start of the reforms, the financial sector was hugely dominated by the state-owned banks, but under the policy of privatisation, the government has transferred the management of all public sector banks, save National Bank of Pakistan (NBP), to the private sector, and even though it is still in government control, 23 percent of NBP shares are now held by the general public. The reforms had thus helped break the linkage between the financial institutions and political interests by ensuring that only honest and competent bankers hold top slots in banks.
Change of ownership also means that privately owned banks act in an independent atmosphere but under a very vigilant regulatory regime. The State Bank had also formulated a criteria for the appointment of directors of the banks, to promote talent and integrity in the banking profession, but there were only a few individuals in the country who could meet the criteria. The donors and international agencies were so impressed with our achievements that they had termed the country's financial sector as one of the healthiest and soundest in Asia.
The SBP Governor also highlighted certain other achievements in the banking sector. Disclosure law had been upgraded and strengthened under which the banks are bound to publish quarterly reports, enabling the depositors to know the financial health of the custodians of their money. The State Bank had asked the banks to lay down a well-defined policy for writing off loans. Names of the all those people whose loan accounts had been settled were to be made public. However, wilful defaulters would not be spared and 107 such cases had been referred to the NAB.
Some 66 percent of the Rs 220 billion non-performing loans had now been recovered and the asset quality of the banks had improved considerably. During 2003-04, commercial banks had made profits to the tune of Rs 40 billion. For the consolidation of their business, the banks would increase their capital base to Rs 2.00 billion by the end of 2005 from the existing Rs 1.00 billion. The Governor also dwelt at length on the need to encourage SMEs, higher availability of consumer credit, agricultural financing and its healthy impact on the economy.
However, Dr Ishrat was critical of the human resource base in the banking sector, though he was pleased with the headway in e-banking. At the start of the reforms, there were no automated teller machines (ATMs) but now there were 700 ATMs in the country which were likely to at least double by next year. Besides, out of 6000 bank branches, 2000 had already gone online.
The list of achievements recounted by the Governor at the MAP seminar is thorough and impressive. Of course, the banking sector in Pakistan has overall made great strides during the last few years almost in every field but, in our view, it would have been more gracious if the Governor had also acknowledged the brave efforts made by his predecessors to set the ball rolling and initiate the reform process despite heavy odds before 2000.
To start with, the grant of autonomy to the State Bank, which to a large extent made the reform process possible in the later years, was not handed to the Pakistan's central bank on a plate. Monetary policy reforms, including interest rate liberalisation and discontinuation of credit ceilings, were also undertaken prior to 2000, and by no means it was an easy task. Even the problem of infected portfolios was first highlighted by the Moeen Qureshi government and then taken up by the State Bank with full vigour.
The idea of privatisation of nationalised banks was also conceived and put into practice before the year 2000. In fact, most of the policies followed subsequent to 2000 were initiated and adopted after a great deal of study and struggle in the earlier years.
It, however, goes to the credit of the present Governor that he continued to adhere to the reform process and in certain cases managed to refine the policy mix with a great degree of success. Besides, in certain fields the progress was almost autonomous and bound to happen in any case. For instance, the increase in ATMs and headway in e-banking was largely due to the advancement in technology. The State Bank could only facilitate such processes but cannot really claim the credit for such advancement.
Also, one cannot totally overlook the fact that the State Bank has not so far been able to ensure that the benefits of reform process reach all the stakeholders. Yes, the profits of banks have increased enormously in the recent past as stated by the Governor but depositors are still getting a raw deal in the shape of a negative rate of returns on their deposits. For the long-term health of the economy, it would be better for the State Bank to ensure that a larger part of profits is shared with the depositors.
The Governor also talked about the enhancement in capital base of the banks to Rs 2.00 billion to consolidate the banking sector, but as pointed out by our editorial on 16th September such a policy so carries certain major risks. Besides, if this policy was so essential, it should have been easily put in place much earlier.
On the issue of inflation, the State Bank has been somewhat slow but thankfully, it seems to have lately realised the gravity of the situation and has consequently raised the yields in the treasury bills auctions steadily to keep the inflationary pressures in check. How far it would succeed in containing inflation in the coming months, only time could tell.