KARACHI, Nov 25: In a major move, the State Bank on Tuesday cut the Capital Adequacy Ratio (CAR) to nine per cent, enabling banks to adjust under the prevailing credit crunch and low deposit mobilisation situation.

Higher CAR means injection of more liquidity to improve capital of the banks while banks are already facing severe problem to mobilise deposits despite offering as high as 16 per cent return.

The State Bank has also pushed the deadline of Minimum Capital Requirement (MCR) of Rs10 billion till 2010 and Rs23 billion till 2013 which means banks need substantial amount of liquidity to get this target. Other option is merger or selling which has already started.

In September, the State Bank increased the required minimum CAR for banks and Development Financial Institutions (DFIs) to 10 per cent from eight per cent.

Those banks and DFIs carrying a CAR at that time less than 10 per cent were advised to meet the shortfall latest by Dec 31, 2008.

“Banks and DFIs will achieve the minimum CAR of nine per cent on standalone as well as on consolidated basis, regardless of their CAMELS-S rating, latest by Dec 31, 2008,” said the latest circular issued by the SBP on Tuesday.

Maximum liquidity

Banking experts said the latest move of the SBP was continuation of a series of steps taken to provide maximum liquidity to the banking system, especially after the rising meltdown of the financial system in developed economies and protect the banking system of becoming victim to liquidity crunch.

The circular further said the banks and DFIs will achieve the minimum CAR of 10 per cent and the requirement of variable CAR by Dec 31, 2009.

The variable CAR requirement, based on the CAMELS-S ratings, will be advised to each bank and DFI separately in due course of time.

The CAMEL-S (Capital, Asset equity, Management, Earnings, Sensitivity and System and control) rating is assigned by the State Bank.

The State Bank had earlier advised that the required MCR and CAR could be achieved by the banks and DFIs either by fresh capital injection or retention of profits.

However, it was not possible for banks to get liquidity under the prevailing liquidity crunch.The SBP had put severe punishment for banks not achieving the target set by the SBP in September.

The punishment included cancellation of licence.

“This was such a frustrating situation for banks that entire banking industry except few top banks, were looking for other options for survival of their banks,” said a banking expert.

The earlier circular warned that any bank or DFI that fails to meet the minimum paid-up capital requirement or Capital Adequacy Ratio within the stipulated period will render itself liable to imposition of such restrictions on its business, including restrictions on acceptance of deposits and lending, de-scheduling of the bank, thereby converting it into a non-scheduled bank and cancellation of the banking licence.

“This is a right decision at the right time, like other decisions for generating liquidity in the banking system,” said a banker who said a number of banks were looking for merger and acquisition due to impact of global meltdown of financial system.