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| 19 April 2004 | Monday | 28 Safar 1425 |
State Bank report: some unanswered questions
The State Bank of Pakistan (SBP) has recently issued its report for the second quarter of the fiscal 2003-04, highlighting the developments in the economy during July-December, 2003.
The report speaks of the improvements in the economic environment as indicated by the record high exports, sharp rise in imports of machinery and inputs, surge in capacity utilization, strong growth in tax revenue ( despite the absence of major expansion in the tax net) and above all, the record growth in the net private sector credit. We take this opportunity to review a few aspects of the report:
Credit off-take: We shall begin with high credit off-take by the private sector. It is said that the private sector has availed of credits from the banks because of sharp reduction in the interest rates. The report puts the credit expansion at Rs136.3 billion (para 6.1-page 65).
However, in the footnote on the same page, the figure has been put at Rs134.8 billion. Again, in the monetary policy statement(MPS) issued by the SBP in early January,2004 the net credit expansion during the first half of fiscal2003-04 (H1-FY04) was placed at Rs156.8 billion. Why these different figures?
It has been mentioned in the report that agricultural sector is also getting cheaper loans. In the first quarterly report covering July-September,2003 period, it was mentioned that this sector was getting loans at the rate of 11 per cent per annum which was much higher than the rate at which commercial/industrial sectors are getting bank loans.
The current report does not indicate how much reduction has taken place in the interest rates on agricultural loans. Another important issue is about the quantum of loans being made available to the rural sector and the qualitative / quantitative coverage.
As for the coverage, it has been mentioned in the report (page 20) "that out of 6.6 million farms, only one million farms do have access to the institutional credit. Therefore, the future growth in agricultural credit mostly depends upon the outreach of the banks and the innovations they bring in the field".
It will be seen that merely 15 per cent of farmers have access to the bank credit and the fortunate people will obviously be the big feudals. It can, therefore, be safely concluded that small farmers stand deprived of the bank credit and have to fall back upon the middlemen for their credit requirements at exorbitant rates.
There are also reports that the influential feudals obtain loans from the banks at lower rates and advance the amount to small farmers at higher rates. So do the present economic managers have chalked out plans for providing credit to the uncovered small and poor farmers? This will obviously require expansion of banks' branch-network in the rural areas while the present economic managers and their predecessors had all along followed the policy of closing down the bank branches and "unloading " the bank officials at lower level and employing highly paid employees in the cities at the diktats of our economic masters i.e. International Monetary Fund, the World Bank, etc. So, will it be possible for the present economic managers to take a "U" turn in their policies for the benefit of the majority of the country's population?
As for quantum of credit made available to the agricultural sector during H1- FY04, a table containing necessary details is appended: It will be seen from the above table that the sector which is contributing 25 per cent to the GDP got credit expansion of paltry sum of Rs6.7 billion during the first half of the current fiscal.
It is also doubtful if the Zarai Taraqqiati Bank has in fact made cash recoveries of the old loans and resorted to fresh lending of the like amount or slightly more or bulk of its operations remained fastened to the rescheduling of the previous debts owed by the influentials.
It may be interesting to note that the credit expansion in the agricultural sector is approximately one fourth of the credit expansion on account of personal loans (Rs24.1 billion) under credit cards, for purchase of automobiles, electronic goods, housing finance etc. (See page 53 of the report).
| Agricultural credit expansion July-December, 2003 (Million Rs) | |||
| Banks | Disbursement | Recovery | Net expansion |
| Zarai Taraqqiati Bank | 13,450 | 13,024 | 426 |
| Commercial banks | 15,046 | 10,203 | 4,843 |
| Domestic private banks (DCBs) Punjab Provincial |
1,274 | 777 | 497 |
| Co-op. Bank | 3,057 | 2,132 | 925 |
| Total | 32,827 | 26,136 | 6,691 |
It may be mentioned here that in the MPS referred to above, credit expansion in the agricultural sector was put at Rs11 billion during July-November,2003 period. It is not understood why this figure stands reduced to Rs6.7 billion only in the report for H1-FY 04.
One of the aspects of the SBP pursuing "easy" monetary policy is that it has made the availability of credit very cheap with the exception of agricultural/SME and micro-finance sectors where the economic managers have not been successful so far to bring sizable cut in the interest rates.
So to whose benefit this policy is working? The big corporate and business sectors who are not prepared to pass on a part of the benefit to the consumers. The most injurious axe of this easy policy has recently fallen on common man belonging to the lower strata.
The cheap credit has enabled the unscrupulous elements to hoard the wheat stock and raise its price. This has been admitted by SBP on page 4 of the report under review. Is this simple admission enough? Or else, the economic managers should have acted promptly with the cropping up of the signs of the crisis to remedy the situation? Even though this country has not seen the ideal economic managers at any time but the past economic managers were not so oblivious of the public interest as the present ones are. The SBP could contain the wheat inflation by precluding the banks from granting advances against or for that commodity.
Fiscal sector: The report under review mentions that " anecdotal evidence suggests that unemployment though falling gradually, remains significant (page 4). The SBP bases the claim of fall in unemployment on the rise in income taxes from salaries and wages during H1 FY 04 (See footnote on page 1).
As the bifurcation of income tax revenue under different heads including "salaries and wages" has not been given in the report, it will merely be termed as "claim" without evidence.
It may be added that income upto Rs80,000 annually is exempt from tax. Therefore, if any employment has really generated in lower cadres, it will not be reflected in the income tax recovery figures.
May be that some employment opportunities may have generated in the urban areas in the banks and multinationals where middle order officials from posh areas/families are being paid high salaries and perks ranging between quarter to half million rupees a month but such few opportunities cannot reduce the unemployment prevailing in the country.
It may be worth noting that in the banking sector, lower class staff comprising peons/ drivers etc. is employed through contractors. True that regular employment in these cadres give rise to labour unionism and must be avoided. But who is precluding the banks from paying these officials a salary which may enable them to make both ends meet.
Such employees are usually paid Rs3000 a month or so i.e. less than or equal to one per cent of what is being paid to the officers from posh areas/families. Can the SBP not issue directives to the banks to give proper treatment to such low cadre employees when it is always ready to issue instructions to the banks to squeeze the depositors by levying various types of charges?
The October-December,2003 saw fiscal surplus. In July-September,2003 quarter, there was a fiscal deficit of Rs40.9 billion which at the end of second quarter stand reduced to Rs33.7 billion. But as admitted in the report, it may not prove to be the consistent phenomenon.
Banking sector: The most important aspect of the banking sector which haunts public mind is "non-performing loans" (NPLs). It has been stated on page 72 of the report that the amount of the NPLs has reduced by Rs5.6 billion during second quarter of fiscal 2003-04 (Q2 FY -04) to reach Rs210.1 billion.
It means that at the end of Q1 FY04, the amount of NPLs was 215.7 billion. It is, however not so. In the SBP report for Q1 FY04, the amount was put at Rs230.7 billion. As the public is well aware, the SBP has been feeding different figures of NPLs at different times.
One can take it that the figures change with the passage of time. But the credibility of the data becomes doubtful when the figures as of a particular date differ. A table containing the data of NPLs as of 30th September, 2003 and 31st December, 2003 is appended:
It will be seen from the above table that figures of NPLs as of 30th September,2003 taken from SBP website (column (2) of table)/SBP quarterly report for Q1FY04 (column (3) of table) are similar.
There is a minor difference between these two sets of figures and it is that of classification between public sector commercial banks and domestic private banks. However, the data currently posted on SBP website (column (4) of the table) vastly differs.
Following explanations have been furnished in the footnote to the data currently posted on the SBP website. (a) The data has been compiled as per revised methodology according to which unrealized mark-up does not become part of NPLs as it is kept in memorandum account.
Besides, coverage of data has been enhanced by including overseas NPLs of our internationally active banks in the total NPLs. (b) Rescheduled and restructured NPLs are not excluded from the total NPLs unless they have become regular by meeting the criterion of one year satisfactory performance. (c) The cash recovery position represent recovery made against the principal amount of domestic plus overseas NPLs.
If NPLs of the overseas branches of our bank have been included in the revised figures currently posted on SBP website, where are the same reflected (Column 4 of the table)? Perhaps under the head "public sector commercial banks/domestic commercial banks"? Another question: In case coverage to the overseas NPLs has been provided for the first time, it shall mean that SBP had all along been providing incorrect data about NPLs to the nation.
The revised data of NPLs of the specialized banks and development finance institutions (DFI) currently posted on the SBP website sharply reduces the amount of their NPLs (compare columns (4) and (3) of the table) by Rs23.8 billion and Rs9.709 billion respectively. Has this reduction occurred on account of (a) adoption of the revised methodology or (b) repayments by the borrowers or (c) write-offs?
For many years in the past, as per the SBP directive the unrealized interest was debited to borrowers' accounts and was not taken into "interest income" account but was kept in the memorandum account because unless the matter is finally settled between the bank and the borrower, unpaid interest constitutes the liability of the borrower.
As per data currently posted on the SBP website, the figures of cash recovery of NPLs has been given and in the footnote it has been clarified that the recovery relates to principal only.
What is the logic in adopting the new methodology of excluding unrealized interest from the NPLs and furnishing only the figures of cash recovery of principal? To show the reduced figure of the NPLs [the revised methodology has reduced the aggregate NPLs figure as of 30th September,2003 from Rs252.7 billion to Rs228.046 billion] and to create so much confusion that any analyst does not find himself in a position to know the correct figure of NPLs at any given point of time as the data about (a) unrealized interest excluded from the NPLs (b) cash recoveries of interest are not made public? The SBP can always camouflage the discrepancies under the hidden data.
The above assertion is particularly valid because the figures currently posted on the SBP website must not be excluding the amount of the unrealised interest accrued on the non-performing accounts since inception but the exclusion must be in respect of interest accrued with effect from a specific date.
The SBP should, therefore, revise the data format on its website so as to state separately against each item the unrealized amount of interest excluded from the NPLs. SBP should also furnish the figures of the overdue interest realized side by side with the principal amount. To give fair idea of NPLs, the SBP should also furnish the figures of write-offs of the principal/interest on its website.
Unless the above measures are taken, the claims about bringing transparency in data sharing with the public will be meaningless and the NPLs data will rather become a "mess".
| NON-PERFORMING LOANS [Figures in billion Rs] | ||||
|---|---|---|---|---|
| Particulars of banks | As of 30th September, 2003 | As of 31st December, 2003 | ||
| (1) | (2) | (3) | (4) | |
| Public sector commercial banks | 82.063 * | 86.800 ** | 93.612 @ | 85.903 @ |
| Domestic private banks | 64.237 */x | 59.500 ** | 64.647 @ | 66.373 @ |
| Foreign banks | 7.374 * | 7.400 ** | 4.345 @ | 3.739 @ |
| Specialised banks | 76.990 * | 77.000 ** | 53.120 @ | 54.074 @ |
| Sub-total [All Banks] | 230.664 * | 230.700 ** | 215.724 @ | 210.089 @ |
| Development Finance Institutions | 22.031 * | 22.031 * | 12.322 @ | 12.568 @ |
| GRAND TOTAL | 252.695 * | 252.731 ** | 228.046 @ | 222.657 @ |
| •As per SBP website (down-loaded in January, 2004). x Privatised banks Rs 44.159 billion + Private banks Rs 20.078 billion total Rs 64.237 billion. ** SBP quarterly report for July-September, 2003. @ SBP website (down-loaded on 10/04/2004) | ||||
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