THE six-month moratorium placed on KASB Bank, effective from November 14, has raised a few questions about national banking affairs.

The State Bank of Pakistan has been directed by the federal government ‘to consider reconstruction or amalgamation of the bank’ before the expiration of the moratorium. One hopes that the central bank meets this obligation to the satisfaction of all stakeholders.

Meanwhile, banks, depositors and the financial market have been left with an air of uncertainty despite the fact that the SBP has facilitated gradual withdrawal of deposits from KASB Bank. On November 24, the central bank issued a press release ‘to quell rumours’ and to reassure people that the banking system ‘is stable and strong’.

But the uncertainty lingers on. Bankers wonder whether the SBP would recommend the federal government to place under moratorium any one of the five other small banks that are also struggling to meet the capital adequacy requirement, as it did in the case of KASB Bank. Or will it opt for some other less painful measures?

And many depositors of these banks are perturbed. So far, no bulk deposit withdrawals from these banks have been reported. But officials of these banks say they fear eventually losing some deposits to larger, well-capitalised banks.

By the end of September, the gap between the existing and required equity of five small banks ranged between half a billion rupees to more than eight billion rupees.

Most depositors of these banks, or of any other bank, for that matter, don’t know if their bank is short of the required capital, or even if it is, under what circumstances can the central bank place it under a moratorium.

The action against KASB Bank has opened up a debate on whether this will eventually safeguard the interest of the depositors and be helpful in ensuring a more equitable and sustainable growth of the banking industry

“Extensive media coverage of the KASB Bank issue has raised alarm bells. With every passing day, more and more small bank depositors are making queries of all kinds and seeking our ‘honest advice’ on should they transfer their deposits elsewhere,” says a senior executive of one of the small banks.

Bankers and other people wonder why the federal government had placed KASB Bank under a moratorium and directed the SBP to consider its reconstruction or amalgamation after six months, when at least two major banks had already shown interest in taking over this bank. What went wrong and where? Unless the market gets a clear understanding of it, speculations won’t end, bankers say, while sharing off-the-record theories doing the rounds in the financial market.

“Right on November 14, the SBP ought to have issued a detailed statement informing the people of what options the authorities had and why did they go for the moratorium,” says a former head of the state-run National Bank of Pakistan.

Banks have generally remained well-protected against market shocks and the SBP takes credit for it. But the banking business is too much concentrated in the five or six major banks. In the past, this concentration had made cartel-making possible, forcing the Competition Commission of Pakistan to take action to prevent this.

And, because of this concentration, small banks also have to follow the market trends set by major banks, even if those trends may not be healthy for the growth of the banking system or for the economy. This situation makes it necessary to facilitate faster and sound growth of smaller banks.

Senior bankers say the phenomenal growth of the banking sector over the last two decades has been a result of some tough and controversial trade-offs. They recall that after the mid-1990 banking sector reforms, major local banks and some foreign banks had made lots of money by keeping banking spreads very high. This had become possible only because depositors continued to get net negative returns for a long time.

The introduction of minimum deposit rates for banks some years ago and the linking of the MDR with the SBP’s repo rate last year provided a nominal relief to depositors. But this became possible due to banks’ over-investment in government debt papers, as zero-risk high returns on them makes it easier for banks to earn huge interest earnings even after paying a little higher return to their depositors.

Meanwhile, banks’ advances-to-deposit ratio has fallen to a dismal low of below 50pc. “So, in order to ensure that depositors get a fair return and at the same time banks continue to increase lending to private and public sector companies, the concentration of banking services in a few banks has to end,” remarks a senior banker. “The growth of smaller banks is a must to obtain this objective.”

It is in this context that the action against KASB Bank has opened up a debate on whether this will eventually safeguard the interest of the depositors and be helpful in ensuring a more equitable and sustainable growth of the banking industry.

It’s unclear right now what the SBP will do next; will it invite banks to bid for the takeover of KASB Bank, or will it find some ways for its reconstruction.

But industry sources say a large local bank — other than the two that had shown interest in taking over KASB Bank prior to the moratorium — is now interested in partial or full acquisition of the troubled bank.

Published in Dawn, Economic & Business, December 1st , 2014