December 24, 2006	Sunday	Zilhaj 02, 1427

KARACHI: There are no two opinions that the banking sector benefited the most from privatisation and entered into a record profit-making environment from the loss-making era of 1980s and 1990s. When privatisation was geared up, mainly after the installation of the first elected government and the demise of General Zia-ul-Haq government, the banking sector was in focus. It was vital to get rid of the loss-making banks since their losses were met through the tax-payers’ money.

The five large banks had monopoly in the banking sector, but all of them were making losses, mainly on account of huge transaction of politically-motivated loans which were never repaid. This was the right decision to get rid of these banks loaded with over Rs200 billion bad debts.

Five large banks having shares of over 80 per cent of the total banking assets and making losses running into billions were privatized wholly or partially during the last decade. The impact was enormous as the newly-born private banks also emerged to challenge the old guards of the banking industry.

A number of bankers held the views that privatisation of banks was the key which brought boom to the sector and it played a vital role during the last four years in the economic growth of the country. Bankers said the economic growth did not appear in isolation. It was the banking sector which moved side-by-side with the growth and provided record credit to the industries, agriculture and services sectors.

Along with the privatisation, reforms in the banking sector was also an important decision which completely changed the banking scenario, and, in fact, it brought banks into profits despite still existing huge defaults and large provisioning. Reforms in the banking sector were introduced in 1996 while practically enforced after 1999. Banking regulations were made prudent and more transparency was maintained. Banks were forced to protect the public money and avoid losses. The State Bank of Pakistan kept a vigilant eye on the performance of banks.

The reforms allowed a number of small banks to emerge and make their place in the growing economy. The environment was conducive for the banking sector as large banks made record profits while small banks were also in profit.

However, some bankers viewed the situation with a slightly different perception. They felt that with the emergence of small banks, risk factor has increased. First generation banking reforms helped the sector come out of the loss-making situation and establish the sector. But despite record profits, the banks largely failed to introduce diversified products.

The banks are still stuck up with traditional products and are far from the international standard. Banks are also facing criticism that their products are not sufficient to yield better returns to depositors.

The scenario which earns record profits for banks and negative returns for depositors sharply reduced the savings in the country. On the other side, banks require risk tools to save the huge credits it offered to private sector.

This is the area which has been a source of concern for the State Bank as well as the World Bank which pointed out this weakness.

Banking industry has already entered into the second generation reforms in the form of Basel-II accord. The Basel-II specially deals with the risk management and banks have been allowed to set their own targets to adopt the accord by the end of 2008. So far the National Bank of Pakistan is the only Bank which formed a team to implement the Basel-II while other banks were looking for better consultants to deal with the highly complex banking guidelines.

Bankers said currently the consumer financing was the key source of concern as banks made huge loans ignoring the risk involved in this sector. Basel-II may help banks to protect the money they lend, but still most of the banks have not moved to adopt Basel-II.

The fruits of privatisation may disappear if the risk management is not adopted in accordance with the Basel-II. Risk is high as banks have been lending vigorously without proper risk tools.