THE CONCEPT of intergenerational equity adopts a new significance and meaning in the context of Pakistan’s public sector banks.

Years of poor credit practice, overbearing political influence and customer neglect left the public sector banks with a huge non-performing portfolio, so grave that its extent could not be fully quantified, a large employee base with many layers of bureaucracy. The revenue stream looked healthy in the annual accounts as notional interest on non-performing loans was booked and the equity base reflected in the balance sheet existed only on paper as non-performing advances were not recognized.

The Habib Bank, Pakistan’s second largest public sector bank, has also suffered greatly. In 1997, it had the largest non-performing loan portfolio, highest cost base, greatest number of employees, and highest employee loan size amongst the NCBs. Several branches within the HBL’s large international network were in non-compliance with local regulations.

Such a situation required a multi-dimensional restructuring for revival. The bleeding had to be stemmed and new vigour introduced by way of new products, higher service standards, technology, systems and procedures to resuscitate the corporate and retail customer franchise.

Credit processes have been completely revamped, credit administration strengthened and processes introduced to ensure proper analysis of credit risks before extension of new loans. This allows for continuous monitoring, and prompt reaction to customer requirements. Functionalization of operations led to greater emphasis on business development. Decentralization of decision-making authority has been undertaken to improve client service. Tighter internal controls and audit processes are critical to protect the bank.

As a result of this reorganization, the HBL has reemerged as a leading bank in financing large corporates and projects. It has led or co-led many large financings in this area of banking. The HBL is also promoting SME-financing in Pakistan on a large scale, by setting up a unit with 21 branches. The bank is also making forays into consumer financing. Home remittances are an area of intense focus and the HBL has introduced several products to facilitate speedy delivery of remittances to families of Pakistani expatriates through fully automated remittance processing unit operating seven days a week. The HBL handles the largest share of home remittances and the volume of remittances has nearly doubled over the last year, due to these efforts. It serves a wide spectrum of customers, from the smallest rural depositor to the largest institutions of the country, and its products are designed to meet the needs of this entire range.

Technology and computerization is a focal point and the 225 branches have already been computerized, 90 branches interconnected real time through a state of the art communication network, 61 ATMs set up, and an online branch system launched for greater operational efficiency and higher service levels.

Good corporate governance - greater transparency, strict compliance with reporting procedures of the central bank - is a key focal point for the HBL’s management. The HBL is fully compliant with the SBP’s new reporting format as per BSD 36 of 10 October 2001, which is aligned with international standards of financial sector accounting and requires detailed disclosure. However, certain type of information on collateral is not required.

Under this format, the HBL categorizes its lending to government and public sector entities as non-collateralized or clean lending. The new reporting format also requires provisions against valuation of short-term securities to be taken against equity and not charged to the income statement. It is worth noting that since the end of the year 2001, the loss on revaluation of securities of Rs597m has been reversed into profit of a similar magnitude. It is for this very reason that the SBP does not wish this to be routed through the non-performing loans (NPL) until the sale of such securities.

As part of its efforts to streamline and strengthen its international operations, HBL merged its UK operations with those of ABL resulting in the creation of a new entity, Habib Allied International Bank. A majority holding of 90.5 per cent in this entity requires the HBL to consolidate this entity and the ABL’s share of 9.5 per cent (Rs203m) is reflected as minority interests in the HBL’s balance sheet.

This reorganization and restructuring has not been without a cost. THe NPL of Rs56 billion have been identified and provisions of Rs7.6 billion have been made against these loans since 1999. Continuing its efforts to strengthen the balance sheet, the 1999 annual accounts contained further provisions of Rs9.1bn, which was supported by the government through an equity injection of Rs8 billion. As of year ending December 2001, total provisions against NPLs stood at Rs32billion. The bank continues to strengthen the balance sheet by providing against past NPLs. In 2001, a hefty amount of Rs2.7bn was set aside for provisions. The net outstanding NPLs of Rs24bn are fully secured by independently valued customer collaterals. Having said that, the HBL continues to pursue each and every defaulter in the courts. In 2001 alone, recoveries exceeded Rs3.5 billion.

As is the case with any major restructuring, some positions and hence people were made redundant. In order to limit the social cost of these redundancies, the government and the management of the HBL decided to offer generous golden handshakes to employees willing to take up voluntary retirement. The financial position of the institution, weakened over a decade, could not absorb the entire cost of this restructuring.

It was, therefore, considered appropriate to finance the voluntary separation scheme through subsidized funding from the World Bank to the government of Pakistan. Management capability has also been reinforced. In areas where the necessary skills were not available within the bank, senior managers with experience of international financial institutions have been inducted. Simultaneously, the bank continued to divert significant resources towards the training of staff that had been retained. To improve the motivational level of existing employees, salaries and perquisites of the same have been raised significantly.

Expense control continues to be an overriding priority for the bank. This is notwithstanding the substantial investments in technology and up gradation of branches. For the first time in 2001, overall administrative expenses totalled Rs11.9bn from Rs12.2 billion over 2000. In 2001, total personnel related expenses were Rs8.2 billion, of which the senior most 54 executives accounted for Rs124 million. Cost control is a high priority for the HBL’s management and will continue to be an area of focus going forward.

These efforts towards undoing past mistakes and growing the institution has already started to bear fruit. In 1997-2001, the HBL’s customer deposits grew by Rs78 billion (40 per cent) and loans by Rs52 billion (36 per cent). Total customer income increased by 45 per cent over the same period. Profit pretax, pre provision amounted to Rs4.9 billion in 2001, with net profit after tax and provisions of Rs2.2 billion in 2001, the highest ever in the bank’s history. Therefore, while the decision to reform and restructure Pakistan’s banking sector has been both painful and costly, we hope that this chain of intergenerational inequity has come to an end.

(The writer is the president, HBL).