April 29, 2002	Monday	Safar 15, 1423

GOOD governance is a current buzzword and it cannot be achieved without transparency. As a result, there is a lot of opening up of information on key sectors of economy. Pakistan has also espoused it largely because of international financial institutions (IFIs) which make it a condition of their assistance to ensure assistance to ensure its proper utilization.

The State Bank and the ministry of finance have created their web sites. What is important is not just the availability of information but its scope and quality. An attempt is made here to look at monetary statistics made public by the State Bank. The choice is dictated by the fact that the Bank, as the central bank of Pakistan, is autonomous and as such is expected to be more objective than other government institutions. It is also quite free from the constraint of financial resources to undertake the talks.

Dissemination of information about the financial sector is in the self-interest of the central bank as it can help elicit rational response to its policies. This will so only if the economic agents recognise their need and rationale. That is why all over the world central banks are actively engaged in public relationing so as to educate the public in economic matters. For this, they not only compile and release data about the performance of financial institutions, but also express their views on wider economic issues of national importance. Research studies are undertaken and made public to serve as a background for its assessment and also help others form an enlightened opinion.

This is a dynamic world and quite a revolution has been under way in the financial sector in recent decades. This is quite capable of changing the institutional structure and practices beyond recognition in a very short span of time. This must be fully captured in the reports and statistics emanating from the central bank.

First, monetary statistics for which the central bank is to be the only source. Of these, money supply which is one of the most crucial economic variables. This has to be comprehensive to cover all institutions and means of payment. Recent years have seen mind boggling innovations in means of payment and the world is fast heading towards a cashless computer-based system. This has far reaching implications for monetary management. While retaining the traditional definition for consistency and historical comparison, new measure are developed and this gives an array of money supply data designated as M1, M2, M3... The more developed a country, the longer the list. Some countries, like the USA, have gone as far as to adopt the concept of Liquidity (L) to comprehend liquid financial assets. In Pakistan, the concept of money supply, called Monetary Assets, has not changed. For analytical purposes, the State Bank divides into M1 and M2 and uses it in its Annual Report. Monetary Assets include currency in circulation and deposits with scheduled banks and the State Bank. The ministry of finance has developed M3 to include small saving schemes, prize bonds and residents’ foreign currency deposits. Since this is not owned by the State Bank, M3 finds mention only in the annual Economic Survey published by the ministry of finance..

Perhaps what is more important than the concept is the institutions deposits with whom are covered. The State Bank sticks to the deposits with scheduled banks and some with the State Bank. It is strange that a tiny amount of deposits with the Punjab Provincial Cooperative Bank are included but large deposits with non-banking financial companies (NBFIs) are excluded. Deposits with DFI (excluding IDBP, being a scheduled bank), reported in the State Bank Annual Report,, for 1999-2000 were Rs. 64 billion as of end-June 1998 and Rs47 billion in 2000 (NDFC, Rs31 billion) on the same date. In the Report for 2000-1, this figure is not given.

After the inception of policy of de-nationalization of the financial sector, there is now a whole array of new institutions - modarabas, leasing companies, investment banks, etc. with a significant scale of operations. It is time their deposits are included in Monetary Assets to have a complete picture. Adopting a definition of Monetary Assets is the privilege and duty of the State Bank and it is well placed to do that. Let M3 introduced by the ministry of finance be replaced by the one to be developed by the State Bank. This can start with the now millennium.

In order to explain the behaviour of Monetary Assets over time the State Bank also publishes A Causative Analysis of Changes in Monetary Assets which gives a sectoral break-up to indicate their individual role. The break-up has seen a lot of refinement of the public sector largely to show government borrowing from the banking system for budgetary support in a better light. However, the private sector remains unchanged, even though the situation demands refinement. As a result it gives a destroyed, if not a misleading, indication of the use of bank credit in the private sector. The important factor to be taken into account and to be highlighted is the behaviour of bad debt which has assumed alarming proportions and is increasing. A concrete examples is in order. During 1999-2000, the Analysis shows an increase of Rs26 billion credit to non-government sector of which the private sector accounted for Rs15 billion. At the same time, non-performing loans increased by Rs28 billion and defaulted loans by Rs5 billion. In other words, the use of bank credit for genuine economic activity did not increase but declined. For want of figures of bad debt in the Report this compression cannot be made for 2000—1. This calls for a break-up of credit to the private sector into bad debt and normal use of credit.

A massive amount of bad debt of scheduled banks is a matter of grave concern expressed at the highest level in the country.’ There has been a lot of rhetoric to recover the debt. However, instead of declining this has been on the increase. The State Bank used to devote a section in its Annual Report to this subject to indicate its efforts and the result thereof. This is conspicuously missing In the latest Report. “It is obliquely referred to in the section on Asset Quality and the observation is very interesting.

It reads, “Although the banking system is infected with a large volume of non-performing loans (NPL) its severity has stabilized to some extent. This is not to say that the problem of NPLs has taken a secondary position. Unfortunately, it still remains the most dominant factor affecting the earning capacity of banks.”

The Quarterly Report for Sept. 2001 has a section on non-performing and defaulted loans. This gives a graph on the trend of these loans but no figures. This is accompanied by the remarks: “There was a rapid growth in both non-performing loans (NPLs) and defaulted loans (DLs). This was due to better monitoring of delinquent loans and stricter classification requirement. As mentioned in earlier reports, the increase in NPLs is not driven by the actual incidence of bad loans at the margin. NPLs touched the peak of Rs286 billion in October, 2000 and have effectively tapered off since then. Despite the addition of Rs15.6 billion in NPLs during Q1-FY02, the outstanding stock declined mainly due to cash recoveries, deletion and write-off worth Rs17.0 billion. Defaulted loans, on the other hand, declined in August 2001 after increasing in July 2001. The reason for the increase can be traced to an increasing awareness that certain loans could not be salvaged, and bank’s decision to act accordingly.”

To put together disparate elements of cash recoveries, deletion, and write-off conceals rather than reveals anything. Write-off and cash recoveries are poles apart for their impact on banks balance sheet. Write-off is a dead loss to banks whereas cash recovery is beneficial. Thus lumping them together is simply unfair. Any one interested in the soundness of banks would like to know the amount of write-off and cash recoveries separately. The credibility of monetary statistics is compromised when there is a significant difference in the figures compiled and used at different places in the State Bank documents for the same subject. For this, one need not use a fine tooth comb. Some inconsistencies are quite apparent. Let us take a simple item in which it is least expected, that is capital and reserves of schedule banks. The position indicated in scheduled bank’s position based on weekly returns is quite different from the one given in the previously quarterly but now half-yearly scheduled banks in Pakistan, liabilities and assets. For June, 2001, the weekly returns statement puts capital (pride up) and reserves at Rs88.6 billion whereas the half-yearly statement gives capital, Rs83.9 billion and reserves, Rs45.3 billion, adding upto Rs 129.2 billion. The difference is so big, persistent and pertaining to a balance sheet item which changes only rarely that it cannot be explained by difference in timing, the last working day of the week and the end-month. On many occasions they coincide.

Institutional changes in the financial system are not reflected in banking statistics. The State Bank Statistical Bulletin and Annual Banking Statistics give the traditional break-up into commercial banks and specialised banks. It was in the Annual Report for 1998-99 that the new institutional set-up was recognized. In the analytical portion of the Report, scheduled banks were divided into (a) nationalised commercial banks, (b) privatized commercial banks, (c) specialized banks, (d) private banks, (e) and (f) foreign banks. However, in very next report old classification reappeared. In has come back in the latest Report, not as a regular feature but in the context of a study of performance ratios upto C2000 as a new chapter under The Banking System. The State Bank should not be so diffident about the new very useful classification and would be well advised to adopt it as a regular feature to cover all aspects of banking. Old NBFIs and new financial institutions like modarabas, leasing companies, investment banks, etc. should also added to the list of groups to give a complete picture of availability of institutional credit.

Some statistical series published by the State Bank contain a lot of unnecessary detail but miss the most crucial element. The break-up of bank advances according to interest rates is the prime example. The rates are given with an interval of 0.25 per cent and the table stops at 16.00 and above which accounted for, in case of private sector, no less than 29.4 per cent as of end-June 2001. At the time of dear money supply, this was as high as 56.5 per cent. There is often a controversy about the rates charged and borrowers’ claim of high charges. This table does not serve its purpose of resolving such issues. There will be no loss if the interval is increased to one per cent to provide the crucial rates of more than 16 percent. Such a change has been made but only upto 3 per cent. and not above.

Some date compiled by the State Bank is made public so late that it does not serve the purpose. The fact is that many users are not even aware of its existence. For instance, a balance sheet analysis of non-financial companies registered at the Karachi Stock Exchange is prepared and its timely availability would help investors to evaluate objectively the worth of scripts for a judicious decision. The latest analysis available to the public pertains to 1998. A lot of water has flowed under the bridge since then. The original idea was to make the analysis for individual companies available as soon it was ready but over time the order has changed and now the overall analysis of the whole group is published first and of the individual companies much later as if just for record without any practical use.

Currently financial sector reform is under way for which the World Bank has provided financial support in a big way. As part of it, the State Bank should take a fresh look at the whole range of statistics compiled and published by it which would certainly help the bank itself in formulating realistic policies, apart from other important uses by the public. For this the bank should not take a strict legalistic view of its jurisdiction but realise its role as the major depository of economic information, particularly that relating to financial institutions. It should not be an inter-departmental exercise within the Bank, but should also associate important users of the statistics like academic, Pakistan Institute of Development Economics and other research set-ups in the country. The IMF should be too happy to provide technical assistance for this.