KARACHI Aug 11: The Khushhali Bank’s policies, management and soaring operating expenses are threatening the bank’s future sustainability in its third year of operations, according to a case study on the bank’s micro-financing of the poor.

Concerned over the banks’ performance, the State Bank is stated to have reminded Khushhali Bank to focus on core business on poverty reduction and best practices of corporate governance.

In nine months ending September 2002, the bank earned a total income of Rs50.23 million against total expense of Rs53.7 million, making a pre-tax loss of Rs3.4 million.

The losses have occurred despite the exorbitant 20 per cent interest rates charged by the bank on one-year income-generating\productive loans ranging from Rs3,000 to Rs30,000. No loans have been written off in its 16-month operation ending December 2001.

A case study on Khushhali Bank by Saqib Sharif of College of Business Management reveals that yield on advances are around 20 per cent and on investment around 6.5 per cent an annualized basis. All investments are made in low-yielding approved treasury bills.

The administrative expenses to total income ratio is 91 per cent, which is very high and erodes the operating income of the bank, says the study and adds: “Such a huge expenditure in the initial phase can be detrimental for the sustainability of the bank.” During the quarter ending September 2002, the bank had a negative return on assets of 0.20 per cent. The operating self-sufficiency ratio was only 74.10 per cent, indicating that the bank did not generate enough revenue to meets its operating expenses. Khushhali Bank started operations in September 2000.

Despite grants for institutional strengthening and funding for lending activities on reimbursement basis, the bank is showing losses. “This shows a lax attitude on part of the management,” says the study.

The income-revenue gap can also be explained partially by the composition of the external assistance coming from the Asian Development Bank. Of the total loan of $150 million ADB credit line, $70 million is earmarked for micro-finance services while $80 million is for building of Khushhali Bank institutional capacity.

Though the ADB loan given to the government is repayable in 30 years, including a grace period of eight years at one per cent service charge, Khushhali Bank lends at 20 per cent interest to its borrowers.

In two years of the bank’s existence ending September 2002, its borrowers numbered nearly 46,000 and the average loan size was Rs9,420.

Khushhali Bank’s operating costs are increasing rapidly due to costly operating assets and salaries of staff with low efficiency. Unlike Grameen’s case, branch competition and autonomy are minimal. The rapid pace of expansion is not synchronized with institutional capacity growth as not all the branches are fully operational, lacking adequate systems and manpower. The branch structure could become unmanageable and un-sustainable, particularly in the absence of support systems. The existing operating and service levels are not sustainable. Despite this handicap, the bank plans to open more branches.

The study concludes with the following observation: The Khushhali Bank management lacks vision and has very little exposure to micro-finance sector.

The staff is mostly on a somewhat adhoc basis and a majority of them lack banking and finance experience. Most of 31 branches of Khushhali Bank are not operational. They are extending micro-credit services without deposit mobilization.

Clients with 2-3 credit cycles are not interested in banking with Khushhali Bank because the poor borrowers face difficulty in maintaining savings accounts with commercial banks. The bank does not offer any advisory services to its clients and has no linkages with other financial institutions.

To quote the CBM study, the bank’s current asset quality is strong, as 87 per cent comprises earning assets. The capital to asset ratio is 90 per cent. The return on assets and net interest margin are 13.02 per cent and 36.38 per cent, respectively. The portfolio at risk is Rs3.88 million and constitutes only 0.90 per cent of the total outstanding advances.

The bank, however, needs to explore new avenues of investment (now locked in T-bills with poor yields) for better returns. Investments could be made in long-term Pakistan Investment Bonds.