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How much is too much for the banking regulator?

Updated March 20, 2017


SBP building is seen in this file image.—AP/File
SBP building is seen in this file image.—AP/File

More than ever before, with the CPEC projects taking off, Pakistani bankers need to break out of the spell of easy money, forego the thrill of speculation and re-focus on the lending business. Will they heed this advice?

Experts think that even if the regulator falters, the evolving conditions would force them to change their ways.

The current environment — where low interest rates and squeezed banking spreads weigh heavily on margins and investment activity is sluggish — is changing. Opportunities thrown up by the CPEC are aplenty and commercial banks are expected to shift towards financing the uplift of the real economy.

“A distinction should be made between the use and abuse of market. Yes, easier said than done”

Some veterans of the banking sector felt the State Bank, at this point in time, must desist from the temptation of micro-managing and focus on evolving policies — that nudge bank performance — and fulfil its role as financial intermediary more effectively by attracting savings and granting credit for economic expansion.

Certain recent moves by the SBP have caused ripples in banking circles. The warnings on opening L/Cs without scrutiny by banks, weak oversight of cash inflows and outflows and more than permitted number of off-shore meet ups has caused anxiety at the highest echelons of commercial bank managements.

On top of this investigation initiated against a top gun for some loss making equity transactions last year in the treasury department of a big bank, and reshuffling of senior management, generated doubts about the health of the industry.

“The banking sector oils the wheels of the economy. It is absolutely necessary to nudge them to make them fit for the purpose. It is a tricky business that requires keen insight and understanding of the market and the economy.

“The great depression in the last century and the financial crisis of 2008 have clearly shown the catastrophic outcome of the absence of proper oversight and ill management of the financial sector. However, too much control would retard progress”, a leading banking expert warned.

“The assumption that banks or private companies will discipline themselves is unrealistic. In private business success is often used to justify means. Regulatory framework and oversight is crucial for the market to deliver”, he said.

“It is, however, equally important not to begrudge profitability. The distinction should be made between use and abuse of market. Yes, easier said than done”, he concluded.

Background research confirmed that the domestic banking industry is indeed on sound footing. Financial experts dismissed rumours swirling in elite circles hinting at a crisis in the making.

According to the quarterly review of the banking sector ending December 2016, gross advances hiked by 10.6pc to Rs410bn against 7.7pc in the corresponding period last year. Major sectors that consumed additional lending were energy, textiles and sugar.

The solvency profile was satisfactory as Capital Adequacy Ratio (CAR) at 16.1pc was above the minimum required level of 10.6pc. Return on assets moderated to 2.1pc from 2.5pc last year while the Net Interest margin (NIM) dipped to 3.7pc from 4.4pc in the same period.

Asset growth propelled at 11.9pc this year against 16.8pc a year before to hit Rs15.8tr. Banks’ investment fell by 1.5pc to Rs7.5tr in the quarter primarily for the decline in investment in government securities.

Deposits grew by 13.6pc to touch Rs11.7tr. The profitability went down by nine billion rupees, from Rs199bn a year before to Rs190bn in the period reviewed. Consequently, return on assets fell from 2.5pc to 2.1pc though asset quality improved with the decline in non-performing loans (NPL) and increase in advances.

Shaukat Tarin, a banker and former finance minister, was not satisfied. In his comments over phone he hammered the need for deepening and broadening the country’s banking base.

“Pakistani banks must focus on product sophistication to cater to the evolving demand patterns of a transformational society. They should look into the demands of small and medium enterprises (SMEs), increase product diversity and expand geographical reach”, he said.

Another senior banker who enjoys great respect for his expertise emphasised the need of capacity building for risk management in commercial banks.

“Internal controls within banks are crucial to check market abuses for sustainability. The front offices of trading operations in commercial banks absorb the brightest but the middle and the back offices are poorly equipped”, he pointed out.

Another banker made a case for increased autonomy of the central bank. “As long the SBP continues to function as a sub department under the ministry of finance its role as a banking regulator will remain compromised.

“Yes there are multiple issues that confront the banking sector as the market grows and becomes more complex. I don’t think the regulator has focused on building capacity to provide the lead”, he said.

Published in Dawn, Business & Finance weekly, March 20th, 2017