Imagine yourself as the newly minted finance minister. Given the unceremonious exit of your predecessor, you are unsure of your tenure.
Regardless, you have high confidence in your abilities. You understand the issues and have your heart set on making structural changes with lasting effects on the bottom of the pyramid rather than the bottom line of the commercial banking industry.
Here are the facts: firstly, we are a cash society with about Rs6.5 trillion outside the banking system — one of the highest in the world. You need a plan to bring this into the system to trigger a multiplier effect on bank lending.
Secondly, due to the imbalance between the country’s revenue and expenses, you are forced to borrow through government securities (treasury bills and Pakistan Investment Bonds, commonly known as PIBs) from commercial banks at a higher rate than the Karachi interbank offered rate (Kibor).
Create a new investment licence for the sole purpose of investment in treasury bills
Your borrowing from the State Bank of Pakistan (SBP) has recently been shut off under the International Monetary Fund (IMF) programme. Your first challenge is that your borrowing is expensive.
Secondly, it has continued to squeeze private-sector lending. For the past three years, banks have grown their government lending portfolio by 16 per cent annually. Meanwhile, private-sector lending has grown by only 6pc annually.
Thirdly, bank boards, inebriated on risk-free investments provided by the government, have totally neglected private-sector lending. There is no real consumer, housing or SME lending. Banks act more like fund managers.
You are tired of the trickle-down mechanism and want to intervene directly at the bottom of the pyramid. Your ambition is to borrow half of what you currently borrow from the banks and shift to borrowing directly from the public, reducing borrowing costs and creating an end play that obliges banks to do their job i.e. lend.
Your first task is to wean yourself off the funds you raise from the banks via treasury bills. You can only dictate the expected remedies once you have reduced your dependence on them. The treasury bill is a 90-day discounted instrument, currently available only to banks designated as primary dealers (to provide liquidity).
In most cases, banks do not provide this high-yielding, risk-free investment to their customers as they offer a lower rate on their deposits.
As the instrument already has a denomination of Rs5,000, you take the bold step of disintermediation of banks. You create a new investment licence for the sole purpose of investment in treasury bills. The regulated entity will conduct a digital know-you-customer (KYC) exercise via the National Database and Registration Authority (Nadra).
Investment will be made digitally with no physical instrument issued. No liquidity will be provided to the end-user as the tenor is 90 days. Unlike the bulk auction that banks participate in, the regulated entity will be allowed to purchase on tap even for a single Rs5,000 investment. The interest rate provided on a savings account is around 5pc per annum. The treasury bill instrument will provide a 6pc return over 90 days. You intentionally provide a rate 1pc lower than what you pay to the banks. To sweeten the offer, you eliminate the 10pc withholding tax for this investor category and impose a cap of Rs1 million per investor. Once you have reached 50pc of your current treasury bill borrowing from banks, you move to Phase II of your plan.
Your first step is to reduce the treasury bill return offered to banks. At present, you provide Kibor plus, which is around 7.59pc. Given that you have already diversified your funding sources, you reduce your borrowing rate by one percentage point. This one percentage point will translate into savings of Rs46 billion in just the first year. The consequential benefit being that once you have demonstrated an alternate source of funding, banks will have to start thinking about private-sector lending.
Their current revenue-cost imbalance will force them to either re-examine private-sector lending or materially reduce their headcount.
Your second step is to now impose a cap on the amount banks can invest in government securities. You create a healthy ratio, which must be maintained between government and private-sector lending.
Your third step is to impose a special tax on government-related earnings. You have provided bank owners with a gravy train for too long and it’s time you clawed back some of the profits they have made from you.
You are aware that discussions like this have been done in the past with no action. You are also aware that the bank boards will never change their position as long as risk-free government lending is available. The fact that your revenue-expense ratio will not change in the future is also at the front of your mind.
You bite the bullet. You are thinking for the country and not a political party. Structural changes require vision and the ability to execute. You believe you have both.
The writer is a technology entrepreneur
Published in Dawn, The Business and Finance Weekly, June 7th, 2021