BANKS are making headlines day after day in these times. Those headlines on the financial pages of newspapers along with their advertisements reflect the very large profits they are making. They are distributing hefty dividends to their shareholders along with bonus shares and unveil their ambitious expansion plans.
The State Bank of Pakistan (SBP) wants to cut its long rope short in parts and make the banks fewer and financially stronger to face their varied risks in these uncertain times. And the banks other than the big ones are not happy about it, particularly those with modest paid-up capital.
The banks which comprise 37 scheduled banks, including their 11 foreign peers with their 6581 branches have had several new horizons open to them in these times. While many of the old avenues of profit have been widening.
Banks now offer very low rates for deposits or savings. In fact, after adjusting for the inflation of 8.35 per cent, depositor gets a two per cent on his deposits, he is a heavy loser. He does not save more but looses more of his savings.
The average cost of funds for banks, which used to be 3.6 per cent in 2002 came down to 1.4 per cent in 2003 and then to 1.1 percent in 2004 in major banks. And in foreign banks, it dropped, in three years, from 5.3 per cent to 1.4 percent. So, the banks have all the funds they need and at a sharply declining rate of interest and have been very happy about it.
At the same time, the interest rate for advances went up to 8-15 per cent depending on the nature of the clients and the purpose of borrowing.
Banks now insist on a large minimum deposit even for savings accounts and heavily penalize the account holders when the deposits go beyond that ceiling.
Plenty of money is afloat with the new money coming in to the extent of $4 billion or Rs240 billion as home remittances now.
The government has been reducing the income tax on bank profit from 70 percent to 35 per cent and the banks are the merry gainers for that.
Increase in thefts, robberies and the rise in the sense of insecurities at home are forcing the people with large funds to keep them at the banks even with nominal rates of interest.
Lending to the private sector has been increasing rapidly and the total in this financial year expected to rise to Rs380 billion.
The banks have been playing in the stock exchange and the State Bank of Pakistan has now permitted the banks to invest up to 30 percent of their funds on stocks and shares. And that is exceedingly profitable to the banks.
As a result, even the new PICIC bank could report a rise in profit of 64 per cent after tax for the year ending September last. And the Faysal Bank could post a rise in profit by 80 per cent after tax in the same period. But after enabling the banks to make profits in various ways, the SBP has come in with some strong financial stipulations which demand a larger paid-up capital for banks and development finance institutions, big and small.
It wants a paid-up capital of banks (net of losses) to be raised from the current Rs2 billion to Rs6 billion in four years by December 31st 2009. In addition, the uniform capital adequacy ratio has been done away with and replaced with a variable ratio. While for the top category one and two, the capital adequacy ratio will be eight per cent, for category three it will be 10 per cent, for category four, 12 per cent and for category five, the ratio will be 14 per cent, which should be achieved by December 2006.
The small and resource wise poor banks will be hit hard by both the stipulations, while the big banks like National Bank of Pakistan with their large reserves and hefty profit earnings, face no difficulty in meeting the SBP demands.
Apart from using the reserves to raise their paid-up capital, the banks can issue bonus shares to the share holders and raise more capital from the shareholders who may have to be content with lower dividends than the hefty payments they have been receiving from their banks.
Nine small banks and a branch of foreign banks have been identified with capital adequacy problems. But in the case of foreign banks, the financial strength of its headquarters can provide some cover. But they have to have the minimum capital of Rs2 billion each. The objective of the State Bank is to have fewer and stronger banks in a country in which the non-performing loans have not been eroding and now stand at Rs201 billion. And that is increasing now because of default of small loans or consumer loans.
Although the demands of the State Bank may not be palatable to many banks, the new stipulations have been drawn up in consultation with the Pakistan Banks Association.
And the new regulations are an effort to conform to Basel two, which the government and the State Bank want to adopt in full, particularly its three pillars: minimum capital requirement, supervisory review process, and market discipline.
The public is concerned more with the number of bank branches in their area than the number of banks in the country.
Small banks which are not able to raise additional capital can merge with other banks as Dr Ishrat Hussain, governor of the State Bank has been urging for long.
Will the people benefit by higher interest on deposits or savings as the new regulations come in to force? Not likely unless the government intervenes as a matter of policy and provides for a more reasonable rate of interest on savings after adjusting for the inflation.
As the demand for private sector loans goes on increasing, the rate for borrowing from banks will go on rising.
With the State Bank and commercial banks, it is a one-way street. What the Central bank demands the banks comply with. And there is no one to plead the cause of the small saver or depositor effectively.
A few banks may face the risk of closing down as a result of the new official policy and some may merge with each other. But the banks will become stronger at the expense of the depositors who instead of adding to their savings through their bank deposits would see them eroded constantly.
BANKS are making headlines day after day in these times. Those headlines on the financial pages of newspapers along with their advertisements reflect the very large profits they are making. They are distributing hefty dividends to their shareholders along with bonus shares and unveil their ambitious expansion plans.
