THOUGH often criticised for their cautious lending, banks with agile risk perceptions have in recent years managed to largely sustain their financial viability. They have prospered in a sizeable undocumented economy hit by prolonged de-industralisation, suffering from lacklustre agricultural growth, and frequented by booms and bust cycles.

These include denationalised and privatised banks with a changed mandate to focus on their bottom line instead of socio-economic objectives. The latter were considered as something outside the domain of commercial activity and held responsible, along with bureaucratic stranglehold, for failure of nationalised and public sector banks. This explains government subsidies on credit and the State Bank of Pakistan’s (SBP) concessional refinancing schemes for priority and underserved sectors.

The problem of an over-banked economy was resolved by mergers of weaker banks with bigger robust ones and the exit from the domestic market of certain foreign peers following the global financial crisis of 2007-08.

The banks have also prospered because of huge borrowings by successive governments struggling with chronic fiscal deficits. Investment in government papers is considered a safe investment in a troubled economy.

However, once again a quick pick-up in private sector loans is being witnessed. This is primarily because of enhanced needs for working capital due to rising cost of industrial inputs with inflation rate hitting 8.2 per cent in February.

Going by past experience, some bankers fear that the rising State Bank’s policy rate, now at 10.25pc, carries risk of debt defaults with the economy taking a downturn

Manufacturing accounts for 75pc of the credit off-take while the import of machinery is falling. Private sector loans have jumped by 92pc to Rs600.5 billion during July-February from Rs312bn in a year’s time.

Going by past experience, some bankers fear that the rising State Bank’s policy rate, now at 10.25pc, carries risk of debt defaults with the economy taking a downturn. Under the stability policies, domestic demand and imports are being curbed and incentivised exports are slowing down, recording a negative growth in February. The economy is expected to further slowdown in what the State Bank Governor Tariq Bajwa describes a ‘calibrated moderation.’

In a way, the PTI government is trying to reorient the role of the banking and financial sector in the country’s economic development. Companies are exempted from super tax from July 1. 5pc tax on corporations that do not distribute 20pc of their earnings as dividends has also been abolished. There is some hope that non-banking companies will now seek equity support from the capital market owing to costlier bank borrowing. Capital formation – retained corporate savings and investment – will take precedence over distribution of profits among shareholders.

The incentives announced earlier this month are reported to have encouraged a leading company, Interloop Ltd, to float its shares for public subscription at the bourse though it is generally perceived as an over-regulated capital market.

There is also an opportunity for local entrepreneurs to undertake domestic production of goods whose imports are being curtailed. Another positive development is that monetary and fiscal policies have been reoriented to encourage banks to shift their focus to under-served labour intensive segments considered backbone of the economy. Banks are also fast equipping themselves with fintech to reduce their cost, increase ease of doing business and expand their lending operations.

A strong demand for SME credit is indicated by the participation of 2,000 representatives of SME clusters in the SME financing awareness campaign organised by SBP in Sialkot, Gujranwala and Gujrat. And no less encouraging is that 800 senior bankers took part in the awareness campaign.

But the incentive package for SMEs is not seen enough by World Bank (WB) experts who maintain that piecemeal reforms will not work. A WB policy note suggests that risk and informational asymmetry is worse in young, small and innovative firms. Such firms also lack property and other immovable assets that are easier to collateralise. A database or a collateral registry of movable assets could help in operationalising these reforms. So far the lending to SMEs and housing sector have not shown any significant improvement.

Yet another challenge facing the banking sector, in the realm of organic growth, persists if one were to go by the recently released but delayed 2017 annual report of the Banking Mohtasib Pakistan (BMP). The banks continue to face the same unaddressed core issues emerging out of (customers) complaints, says the report.

The BMP has been constantly highlighting issues relating to internet and parallel banking frauds, bancassurance, ATMs etc while advising banks to be more vigilant and adopt pro-active remedial steps to resolve problems. Skimming of ATM cards is a growing concern because it is the sole responsibility of the banks to protect the customer’s money.

From its inception in 2005 to 2017, the Banking Mohtasib has received some 12,017 formal complaints and resolved 10,608 of them through conciliation and settlement. It is mandatory for the ombudsman to dispose of a complaint received within 60 days but orders were passed only in 1,409 cases. In 2017, 35pc of the formal and informal complaints entertained by BMP pertained to services inefficiency delays/others, 17pc to ATMS, 14pc to consumer products, 11pc to advances, loans and deposits, and 10pc to frauds. Credit cards accounted for 66pc, auto loans for 21pc and consumer loans for 13pc of the total complaints in the consumer products segment.

The BMP recommends that installation of anti-skimming devices should be made mandatory for the ATMs vestibules. The banks are also required to cooperate with each other in a timely manner, locating the point of compromise and promptly informing each other to minimise the continued use of skimmed cards. Parallel banking can be avoided by effective dual control at the bank branches, surprise audits and proper training of the new staff. A clear mechanism needs to be established by banks for selling third party products and the same is required to be constantly monitored.

The mohtasib regrets that the banks’ approach is often not conciliatory or prompt. Banks are more inclined towards lengthy legal procedures instead of providing speedy justice to customers through amicable resolution of complaints. This includes minor cases of small value such as auto loans.

The bank’s management/staff should not forget the dictum that ‘a loyal customer is a treasure’ and the customer satisfaction is a recipe for success of businesses.

Published in Dawn, The Business and Finance Weekly, March 25th, 2019