IN the past few years, banking system has undergone various radical changes. Although the privatization and deregulation have become buzz words, outcomes of reforms are more visible in the banking sector. With the exception of one major bank and some financial institutions, more than 80 per cent of the banks are now owned by the private sector. It is a radical shift.
This has also ushering in a basic change in the overall banking culture which is moving towards a vibrant corporate culture. The atmosphere as a whole is becoming more customer friendly.
Apart from privatization, there are various other factors which have made this change possible. One is the role of central bank which on the one hand has reduced the regulations and direct interventions in the affairs of banks but on the other hand has become more active in strengthening banks’ own systems and controls.
The ‘non-performing loans’ NPL) was a major concern for banks in the previous years. This had hindered their capacity of lending as well as the overall efficiency. This has also changed. Instead of political and social influence of a person, the feasibility of a project and the repayment capacity of borrower have become main criteria of providing finance. Banks have made efforts to recover their stuck-up loans through legal and other means, and they have been provided a venue in the form of CIRC to dispose off their infected portfolio. Thus not only the amount of the stuck-up loans is declining, the amount of cash recoveries has added up to Rs57.9 billion in the bank’s liquidity in the FY04.
The use of information technology has become imperative for the banking system as it is no longer possible for them to survive without providing services in a shortest possible time. This has forced banks to adopt new technology and bring the change in their environment and the attitude.
The liquidity glut has played a major role in this respect. This is a major factor which affected the overall operations of banks. Apart from this previously banks felt easier in investing their funds in the government securities which had both the high return as well as almost no risk.
Apart from this, government adhering to the policy of budgetary discipline has also reduced its borrowings from banks. These factors together have made a lot of funds available with the banking system. In fact, this has changed their overall approach.
Previously their whole emphasis was on the mobilization of the deposits which has now changed to make more advances through various schemes and incentives and also at the very competitive interest rates. Thus it has become a compulsion for banks to seek for new avenues of lending.
Although corporate sector still claim the major chunk of bank Credits, other sectors which previously got no or very little credit have also gained some attention. This is not true only in the case of consumer credit— the volume of which has increased very rapidly in the past few years— but is more remarkable especially in the case of agriculture, which remained neglected to the extent that even the mandatory credit limits prescribed for meeting the requirements of the sector were not honoured.
The banks’ credits have increased enormously in the past years. Overall, Rs325 billion were advanced to the private sector in FY04 which was more than the cumulative net credit expansion in the last four years. There were mainly three reasons for it: decline in interest rates to a record low; various entities in the corporate sector tried to expand or use their existing capacity at a higher level and the new avenues such as consumer finance, agriculture and SMEs etc. explored by the banks.
Especially, the growth in the consumer-financing has been very impressive, whereas the growth in other sectors has remained just normal. It may be due to its small base, but in fact, it has spurred the increase to bank credit. Not only in absolute terms but its share in the total credit is also increasing.
This may be gauged from the fact that its amount grew from Rs48.6 billion in FY 03 to Rs75.6 billion in FY 04 showing a growth rate of more than 55 per cent. It further increased to Rs125.8 at the end of September, 04 showing a further growth of about 22 per cent. Besides, its share in total credit also increased from 5.6 per cent in December 03 to 8.9 per cent in September, 04.
Although the default rate in agricultural loans is very high compared to the other sectors of the economy, the change in the attitude of the banks towards the agricultural finance is very important. ZTBL was the apex institutions for providing this finance. But now about half of the total credit to this sector is being provided by commercial banks.
This may be seen from the fact that ZTBL disbursements increased only two per cent from Rs29.3 billion in FY 03 to Rs29.9 billion whereas the commercial bank credit increased by more than 46 per cent from Rs22.7 billion in FY03 to Rs33.2 billion in FY 04 thus overtaking the ZTBL in this sector.
Although the situation is encouraging, it is not enough for giving any judgment about the soundness of the banking system. So far, all the factors such as macro economic situation, interest rates and the international climate are favourable for the banking business. The real test of the system would only come at the time of a crisis.
