STATE Bank’s comprehensive annual report for the fiscal year 2002-03 (AR-03) was issued a few weeks back which also contains review about the performance of the commercial banks.

However, since the financial year of the commercial banks closes on the 31st December while that of the State Bank of Pakistan (SBP) on the 30th June, the AR-03 covers only the half-yearly performance of the commercial banks. Therefore, in order to oversee the performance of the commercial banks for the year 2003, it is imperative that a separate paper is prepared by the end of the calendar year. Hence this write-up.

As the SBP’s quarterly report for the first quarter of fiscal FY-04 (2003-04) covering period July-September 2003 has also not yet been issued, the required data even as of the 30th September,2003 is not yet available in the published form. An effort has, therefore, been made to collect the statistics from various sources as of the date closest to the end-December,2003.

The first circular issued by the SBP during 2003 was about the strategy to promote Islamic banking. It is a three-pronged strategy envisaging (a) front-family verdana: establishment of full-fledged Islamic Bank (s) in the private sector, (b) setting up of subsidiaries for Islamic Banking by commercial banks, and (c) allowing stand-alone branches for Islamic banking in the existing banks. So far only one bank i.e. Al-Meezan Bank has been licensed by the SBP under category (a). No subsidiary has been established so far by any bank under category (b). Under category (c), the branches of Muslim Commercial Bank Ltd. and the Bank of Khyber were licensed by the SBP. The Peshawar branch of the Bank of Khyber was inaugurated by the Prime Minister in November 2003.

Since the date the present Governor took over the SBP, he was emphasizing on the merger of the small banks in the private sector which were established during the first tenure of Nawaz Sharif regime with the paid-up capital of Rs500 million. In order to pressurize the owners of the small banks for mergers, the limit of the requirement of the paid-up capital was enhanced to Rs one billion. As each owner of the bank has his own vested interest in running the bank owned by him, the mergers were considered unlikely since the inception. According, instead of undertaking mergers, the owners arranged enhancement in the paid-up capital to the new limit prescribed by the SBP. The only mergers which took place during 2003 were that of a small branch of a French Bank with Al-Meezan Bank and of IFIC bank branch ( a Bangladeshi bank) with National Development Leasing Company Ltd. In the earlier years, National Development Finance Corporation (NDFC) was merged with National Bank of Pakistan (NBP) while the three branches of Bank of America operating in Pakistan and a branch of Emirates Bank International were merged in Union Bank Ltd. as these branches were purchased. The merger of NDFC with NBP was a forced merger undertaken at the diktat of one of our financial master- the World Bank.

No privatization of any bank could materialize during 2003. The United Bank Ltd. was privatized in the last quarter of 2002. The privatization of Habib Bank Ltd. was expected by the close of 2003 but it seems unlikely. Its sale-off may materialize some time in 2004.

SBP issued three sets of new Prudential Regulations during 2003 which will become effective 1st January,2004. These are for (a) corporate/commercial banking (b) small and medium enterprises financing and (c) consumer financing. As general public is more concerned with the consumer financing, salient features of it are given hereafter. These regulations are divided in four portions i.e credit cards, auto loans, housing finance and personal loans for purchase of consumer durables. -The monetary limits for credit cards is Rs 500,000 per person but the banks can increase the limit to Rs two million. It is, however, a very short-term facility. -There is no monetary limit on the loans for the purchase of vehicles. The maximum tenure of the these loans will be 7 years. The loans will cover 90 per cent of the price of the vehicle. Banks can provide loans for the purchase of the second-hand cars as well. -The housing finance loans envisage equity: debt ratio of 15:85. These loans are repayable over a period of 20 years and can be used also for undertaking renovations. The monetary limit is Rs 10 million. -The monetary limit on personal loans for the purchase of consumer durables is Rs 500,000 which can be increased by the banks to Rs one million. These loans are for the duration of five years.

The financial institutions have been moved to these personal loans for the reason that these days they are awashed with excess liquidity. The disbursements of these personal loans are reported to have gathered momentum in the recent past as amount of over Rs 18.5 billion was disbursed in July-October,2003 and may have exceeded Rs 22-25 billion by end-November,2003. The bifurcation of that amount under various categories of personal loans is, however, not available This may have provided some relief to liquidity-awashed banks.

Now let us have a birds’s eye-view of the pros and cons of these personal loans.The housing finance loans are no doubt a productive use of the future savings of the borrowers because they get a tangible asset in their hands and such loans also provide impetus to the domestic industry/ create employment opportunities within the country. This is of course subject to the condition that banks target the really deserving category of the borrowers.

Although the data about the categories of the borrowers so far covered by the banks in the matter of providing the facility are not available, the very limit of Rs 10 million for each individual loan and its availability for renovation etc is indicative of the fact that the target of the regulators/lenders is the affluent ones. The rumours are also there that the banks have excluded the areas where middle class people reside from the ambit of their providing the housing finance.

It is our history that the big borrowers are more in default while smaller ones are prompt in meeting their obligations. So if the banks target the “big” borrowers, they will face the defaults in the coming years.

In mid-1990s when the country was facing acute foreign exchange problems, agreements were reached with some foreign banks for arranging loans for the current expenditure against authorizing such banks to collect workers’ remittances during the agreed period and adjust the same against the loan provided by them. This was tantamount to using future earnings for the current expenditure. Like-wise the personal loans-other than housing loans- are tantamount to using up future savings for the current expenditure which is otherwise avoidable in majority of cases.

The ceiling for personal loans for the purchase of consumer durables i.e. Rs 500,000 (which can be increased to Rs one million) is too high. How many electric/electronic goods an individual is expected to purchase? It will result in unnecessary purchases.

It is said that by providing personal loans, demand is being created in the market which will raise domestic industrial production and consequently the GDP. This may be partially true . It may hold good viz-a-viz the autos but in so far as consumer durables are concerned, the market is flooded with the smuggled/imported items and this myth may not prove true as there is no ban on the purchase of foreign goods from out of the personal loans.

To give boost to the domestic industrial production, the appropriate course is to create demand by providing public more employment opportunities on sustainable basis thereby raising the income of the individuals consequently enhancing the purchase propensity. The policy of the government in this context is just the reverse. It is generating unemployment by retrenchments from the public sector entities and if at all a few employment opportunities are generated, they are on the western methodology of one/two year contract basis completely ignoring that our environment is completely different because in the West, the unemployed gets sustenance allowance. In the private sector, job-creating investment is almost non-existent. Therefore, in case the existing policy of halt in job-creation/ reduction in the jobs through retrenchments is not reversed, creating artificial demand in the market by providing consumer-financing will prove very short-lived and may back-fire within half a decade or so when the banks will find loaded with new heap of the defaulted loans.

Now let us examine the developments in the banking sector in 2003 viz-a-viz their basic function of mobilizing the deposits and granting advances. Here, we append Table containing the details of the deposits and the advances as of 28th December,2002/ 28th June, 2003 and 22nd November,2003. It will be seen from the Table that the amount of the deposits grew from Rs 1607.749 billion (28-12-2002) to Rs 1838.928 billion (22-11-2003) depicting an increase of Rs 231.18 billion (14.38 per cent). The advances grew from Rs 1001.118 billion ( 28-12-2002) to Rs 1145.584 billion (22-11-2003) depicting an increase of Rs 144.466 billion (14.42 per cent). It means that the advances formed slightly over 62 per cent of the deposits in end 2002 and 2003.

As per the weekly press releases issued by the SBP, banks’ investment in the government securities including Treasury bills amounted to Rs 532.379 billion (28-12-2003) and Rs 606.739 billion (22-11-2003). These investments form 33.11 per cent of the deposits (28-12-2003) and 32.99 per cent of the deposits(22-11-2003) which indicates that the ratio of investment in government papers to the deposits during 2002 and 2003 remains almost the same.

The deposits increased by Rs 231.8 billion during 28th December,2002 and 22nd November,2003 which is only slightly higher than rupee equivalent of workers’ remittances during January-November,2003 aggregating U.S.@ 3.5 billion (Rs 211 billion @ $1 =Rs 57.50) How to interpret this? Is the growth in bank deposits solely on account of remittances from abroad and the domestic savings have either come to a halt or are the residents refraining from putting their savings in the bank accounts and have shifted their investment elsewhere [ in real estate/stock exchanges] owing to the current monetary policy which has reduced the return on bank deposits almost to zero? The economists and the concerned authorities need to look into the matter in depth.

In the “Business pages” of Dawn dated the 19th December, 2003, a report had appeared suggesting that credit to private sector has expanded by Rs 124 billion during July-November,2003.The data given in the Table indicates expansion of credit by Rs 93.756 billion during 19 weeks period (28-06-2003 to 22-11-2003).

If we add Rs5-6 billion on account of disbursements during the last week of November,2003, even then expansion would remain within Rs 100 billion. Thus there is a difference of about 25 per cent during the two sets of figures. Therefore, either the weekly data furnished to the SBP for compilation of press releases is inaccurate or the data of expansion of the credit by Rs 124 billion during July-November,2003 is discrepant. The concerned authorities may like to reconcile.

The deposits/ borrowings from/ advances to the banks do have significance in the books of an individual banks, but in the consolidated position of all the banks, these are merely contra items and the two sets of the figures should be the same. It is, however, not known why there is a vast difference between the two sets of figures (see Table). Will SBP authorities look into this aspect of the matter.

One of the major problems engulfing the public sector banks is that of the non-performing loans (NPLs). As per the SBP report for the fiscal 2002-03, the volume of the NPLs stood at Rs 227 billion as at the 30th June,2003. However, the latest figure posted on the SBP website puts the quantum of the NPLs as on the 30th September at Rs 252.696 billion. The NPLs have thus risen by over Rs 25 billion during July-September,2003 quarter which indicates 11.3 per cent increase. One is free to view this in the context of SBP Governor’s claim (see his article in Dawn dated 21-22/10-2002) that in the matter of bank advances going bad, we have reached the international standard of 5 per cent and draw his own conclusion.