The Governor of State Bank, Dr Ishrat Hussain, has contested ADB's remarks that a banking crisis is imminent in Pakistan. This observation was contained in the 'Asian Development Outlook 2004' which apprehended banking crisis in India, Pakistan and Taiwan, unless reforms in the industry are pushed through.
Dr Ishrat, who is in Washington these days, said that the World Bank and IMF have appreciated Pakistan's banking sector being "the soundest and healthiest in the region".
In the meantime, the central bank, in Karachi, has issued a detailed refutation of the various allegations contained in the ADO 2004 about banking sector in Pakistan.
A Washington report says that speaking at a seminar held at the World Bank on Financial Sector Reforms, Dr Hussain said that a recent Financial Sector Assessment programme mission, jointly organised by the IMF and the World Bank, had concluded that Pakistan has one of the soundest and healthiest banking sectors in the region.
Dr Ishrat Hussain said that stress tests exposing the banking sector to various unanticipated shocks revealed that Pakistan's banking system is strong enough to withstand these shocks.
He added that he had only read Pakistan's newspaper reports on this subject and had not read the ADB report. He was therefore not aware of what prompted the ADB to bracket Pakistan with other countries in this category.
SBP'S REJOINDER: Following is the statement issued by the State Bank, from Karachi, responding to various charges contained in the ADO.
ADB'S COMMENT: Lax regulation on provisioning and loan classification:
SBP'S RESPONSE: Our regulations are as per best international practices. They are better as compared to crisis countries in pre-crisis era as well the peer countries mentioned in the news report.
For example, a loan, including agricultural loans becomes NPL when it becomes overdue by 90 days, as compared with Indian practice of classifying loan after overdue of 180 days (for agricultural credit, one year).
LOW CAPITALISATION RATIOS: SBP's Comments: Capitalisation requirements for banks in Pakistan are as per international standards.
Capital adequacy ratio for the commercial banks was 12.1 percent as of December 2003, which is far higher than Basel Capital Accord requiring level of 8 percent.
SBP has also raised the minimum capital requirement to Rs 1 billion (over $17 million), consequently, a number of financially weaker and/or smaller banks have consolidated/merged thereby reducing the chances of systematic risk.
LIMITED EXPERTISE IN RISK MANAGEMENT:
SBP'S COMMENTS: The expertise of the banks in Risk Management has improved through SBP imposing higher requirements in this area and through induction of professional risk managers and intensive training of the bank staff.
In 2003, to make the regulatory framework more risk focused (for all types of risks) and to cover diverse areas of banking, three sets of Prudential Regulations--for Corporate Commercial banking, SME financing, and Consumer banking--were issued by SBP.
SBP also has also taken the initiative to prepare Pakistan's banks for Basel Capital Accord II by issuing comprehensive guidelines on Risk Management in 2003.
Furthermore, SBP is finalising the introduction of capital requirements, on Pakistani banks, to cover market risk.
RISING BAD LOANS/NPLS REACHING ALL TIME HIGH AND CREATING MORE NPLS WHILE DISPOSING OF THE OLD ONES:
SBP'S COMMENTS: NPLs of the banking sector in Pakistan have been on a decline and as of December 2003 were lower by Rs 24 billion against the level of December 2002.
NPL indicators of the stock position of commercial banks below also show significant improvements.
Percentage to loans (Net) in Calendar Year 2001 was 10.3 percent; in 2002, 8.4 percent; and in 2003 was 5.2 percent.
Similarly, the percentage of NPLs to loans (gross) was 19.6 percent in 2001; 18.0 percent in 2002; and 13.6 percent in 2003.
On a flow basis, the situation is even better as gross NPLs for the loans booked after 1997, as a percentage of total loans, is far below 5 percent which is the international standard.
INADEQUATE BANKING SUPERVISION AND REGULATION:
SBP'S COMMENT: After being granted autonomy in 1997, SBP has considerably strengthened its supervisory capacity over the years. It has adopted various practice tools of offsite supervision and onsite inspection and is complying with the internationally accepted core principles on Banking Supervision.
State Bank has also demonstrated its ability to resolve problems of distressed banks.
The sharper supervision of banks/DFIs has earned SBP favourable comments from the World Bank, IMF and other central banks.
To ensure stability of the financial system and safeguarding interests of the depositors, SBP is continuously monitoring the banks, thereby ensuring that sudden bank failure does not lead to a domino effect resulting in systemic crisis.
In pursuance of these broader policy objectives, State Bank of Pakistan, under the provisions of the Banking Companies Ordinance, has taken supervisory actions against Bankers Equity Limited, Indus Bank Limited and Prudential Commercial Bank Limited (Now Saudi Pak Commercial Bank Limited).
WEAK CORPORATE GOVERNANCE:
SBP'S COMMENT: The comment about weak corporate governance in the banking sector is no longer applicable to Pakistan.
SBP has issued detailed regulations and guidelines on corporate governance that comprehensively cover the broad areas of appointment, powers and responsibilities of the Board of Directors, CEOs and external auditors. A comprehensive Corporate Governance handbook has also been issued by SBP which followed it up by organising a conference on corporate governance in October 2003, for the Board of Directors and CEOs of banks/DFIs.
SBP has also issued and enforced 'Fit and Proper Test'--criteria for appointment of Directors to the Board of banks/DFIs, for the CEOs and for the senior management of the banks/DFIs.
RESOLUTION SCHEMES AND BANKING SUPERVISION ARE NOT WORKING PROPERLY:
SBP'S COMMENT: In order to contain the rising trend of NPLs, various proactive measures were taken to reduce the quantum of non-performing loans of banks/DFIs, which included notification of SBP Incentive Scheme of 1997, promulgation of NAB Ordinance to prosecute bank defaulters' cases and to effect recovery from them, constitution of a Committee for Revival of Sick Industrial Units (CRSIU) by the Government of Pakistan in 2000, setting up Corporate & Industrial Restructuring Corporation (CIRC) in 2000 and initiative taken by the SBP in the shape of issuing guideline on write-off of irrecoverable loans and advances in October 2002.
The performance of these schemes/entities is given hereunder:
SBP INCENTIVE SCHEME: 1997: 15,360 cases involving outstanding amount of Rs 9,406 billion were settled by 8 Nationalised Commercial Banks/DFIs up to 16. 2. 1998 and recovered cash amount of Rs 4.165 billion from the defaulters/borrowers.
CRSIU: It has restructured loans worth Rs 45.3 billion and helped revive 170 sick units by allowing waivers and write-offs up to 31.1.2004.
CIRC: As on 31.03.2004, the CIRC has purchased loans worth Rs 46.886 billion from the banks at a discounted price of Rs 5.807 billion and auctioned off 87 units, recovering Rs 2.822 billion.
SBP GUIDELINE ON WRITE-OFF 2002: As on 29. 2. 2004, 51,152 borrowers approached the banks/DFIs to settle their defaulted loans involving an aggregate amount of Rs 89.622 billion under the Scheme.
The banks/DFIs have also settled 49,816 cases involving outstanding amount of Rs 41.966 billion. The Scheme has so far resulted in cash recovery of Rs 3.304 billion.
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