01 November 2004	Monday	17 Ramazan 1425

At the recently held 54th AGM of the Institute of Bankers, the SBP Governor delivered his most realistic statement in several months. It was reassuring to hear him speak out about the ground realities that seem to have lost their significance on Pakistani bankers who thought excess liquidity would last for ever, and interest rates would stay at their historic low in the foreseeable future.

Neither of these expectations was realistic. Interestingly enough, throughout 2002-04, no banker expressed any reservations about the interest rate policy spearheaded by the SBP, or predicted the trends that are unfolding now.

In less than two years, tables are again turning against the bankers for which they alone are to blame. Firstly, they couldn't foresee that rising imports and external payments (part of them the outflow of the windfall liquidity) will weaken the Rupee; since July 1, this year it has already depreciated by 5.27 Per cent against the US dollar-a currency that is falling against all major currencies.

Secondly, they overlooked another major development-projected public sector development outlay (to be higher by Rs60 billion over its 2003-04 level) will increase government borrowing sucking in the supposedly ever-lasting market liquidity, and push up interest rates.

Writing in these columns earlier, this scribe had warned that the un-called for reduction in interest rates during 2002-04, and the aggressive profile of bank lending fuelled by windfall liquidity (courtesy 9/11) was reminiscent of the 1970s post-oil price hike scenario of excess liquidity and falling interest rates, and reckless sovereign lending by US banks. Hopefully, the unambiguous warning sounded by the SBP Governor will now serve as a loud wake-up call for Pakistan's bankers who don't seem to have learnt any lessons from similar indiscretions in the past.

The SBP Governor pointed to a vitally important fact; as a proportion of GDP, the current level of bank credit was too high for regulators' comfort. Well, this scenario has remained the hallmark of Pakistan's economy reflecting on the sense of responsibility of its business community and bankers.

The relationship between bank credit and GDP has gained greater importance now because in the developing scenario of interest rates rising rapidly from their historic lows excessively indebted entities are highly likely to fail, lumbering banks with more bad debts.

A worrying aspect of the current scenario is that the alarmingly high level of bank credit is not driving up the GDP pointing to sustained low productivity of public savings. Bankers don't seem to appreciate that saving is a conscious act of foregoing current consumption in the hope of a more secure and comfortable future. But that isn't anywhere in sight.

Easy availability of credit is fuelling inflation instead of lowering prices because businesses are not passing on the benefits of larger and cheaper borrowings to the savers and bankers, who are on the giving end in this scenario seem helpless, for reasons that defy logic.

The governor's hint about a bankruptcy law being enacted by the parliament was not intended for the bankers to continue what he termed "reckless lending." Presumably, he was referring to the aggressive profile of banks' consumer financing rather than to their commercial financing activities because commercial financing is preceded by a basic risk assessment exercise based on the borrower's track record and future cash flow estimates; consumer financing is based on intelligent (?) guesswork about borrower's sustained repayment capacity.

For very understandable reasons, the SBP Governor favours lending to agriculturalists and entrepreneurs involved in small and medium-sized business ventures because, on the one hand these financing proposals lend themselves to better risk scrutiny and, on the other, compared to consumer finance, result in far greater economic value-addition in terms of output generation and employment creation-the outcomes that spur real GDP growth.

A glaring misuse of deposits has been their deployment in real estate loans. It has been so rampant that the SBP had to forbid extending these loans for purchase of plots because, like shares, plots were being traded in the market for making quick capital gains.

These loans added nothing to the economy in terms of value except facilitating speculation in prices and pushing them up to unbelievable levels. Interestingly enough, the SBP clamp down on real estate loans was criticized by some business quarters.

According to them, with profit rates on bank deposits falling to their current levels, speculation is the only route available to non-resident depositors for earning a reasonable return-a possibility earlier hinted at while the SBP was focusing its energies on cutting down the discount rate and yields on gilt-edged securities.

In the context of low returns on savings, the observation the Governor made relates to the "unfortunate" drop in profit rates on National Savings Schemes that hurt the pensioners. According to him, the rationale behind lowering NSS profit rates was to encourage banks to innovate comparable investment products so that banks could develop longer-life deposit bases to fund housing finance schemes. Banks have precious little to report in this regard while poor pensioners continue to suffer, and the state only feels sorry about the pensioners' lot.

That the profile of competition in the banking sector leaves much to be desired was pointedly referred to by the SBP Governor with special reference to investment banks. They were advised not to "mimic" commercial banks. Instead, they were advised, and quite rightly so, to concentrate on setting up pension and provident funds, mutual funds, and venture capital funds-institutional arrangements whose setting up is now imperative if saving habits are to be revived, and public savings channeled into economically productive venues.

Another interesting observation the governor made relates to banks' joining hands with the state in infrastructure development projects. It is a welcome thought because writing in these columns earlier this scribe had wondered at the rationale behind banks falling over each other to extend auto loans. This tactless trend raised demand for automobiles beyond assemblers' capacity to deliver and criminally motivated distortions in automobile prices. It would have been far better if banks had raised large syndicated loans to setup (with foreign collaboration on BOT basis) overhead rail systems in major cities.

This idea, which had a strong social service dimension, obviously didn't appeal to Pakistani bankers because they have been working overtime on achieving profit targets to the virtual exclusion of all other objectives. This is a dangerous attitude because it would only widen the gulf of social inequalities. The SBP Governor has reason to be disappointed with banks' foot dragging in passing on to their customers the benefits of enormous operational flexibility, freedom of choice and lower taxes afforded by de-regulation of the banking sector.

The evolving concept of Islamic banking came in for special mention in the Governor's address. He was worried that the low returns being offered to depositors by Islamic banks could make this experiment look like a farce. No Pakistani would be overjoyed at such a prospect. The Governor's worries point to yet another instance of bankers either not being in touch with the glaring ground reality-spiraling rise of poverty-or now they only believe in living "today" and flying off to greener pastures overnight. Excessive job mobility of senior bankers reinforces this view.

Admittedly, there are a host of indicators that could dampen confidence in Pakistan's future, the foremost being the government's sole focus on beating terrorism to the virtual exclusion of every other aspect of its responsibility. But to respond by focusing solely on profit to the exclusion of every other outcome of their services makes bankers as guilty as the government, in fact more because they know the ground realities far better than the government, given their enormously widespread access to the people and to their problems.

The apparent lack of a sense of social responsibility among banks should worry the government because, unlike any previous government, the government headed by Mr. Shaukat Aziz strongly believes in the benefits of market liberalization and private sector takeover of some traditional roles of the state. Undoubtedly, some essential services can be provided far more efficiently by a responsible private sector, but a big question mark hangs over the private sector's sense of responsibility. The almost baffling profits some private sector players recorded in 2003 and 2004, so far, don't justify such sincere hopes.

Given the present short-sighted approach of the bankers who don't realize that a strong physical infrastructure base is essential for creating new businesses-their high profit-yielding customers of tomorrow-the Prime Minister may be expecting too much from his old buddies in the profession. Bankers don't seem to care much for the fact that the sitting PM, who belongs to their fraternity, deserves more than what they are used to offering so willingly to Pakistan's politician prime ministers - not all of them famous for their sense of responsibility or competence.