KARACHI, Oct 28: The State Bank has raised the minimum requirement of paid-up capital of banks and Development Finance Institutions (DFIs) from existing Rs2 billion to Rs6 billion while the uniform requirement of capital adequacy ratio has also been replaced.
The State Bank issued a circular on Friday announcing the major decisions. The SBP raised the minimum requirement of paid-up capital in a phased manner over next four years from the existing Rs2 billion to Rs6 billion by December 31, 2009.
The banks will be required to raise their minimum paid-up capital to Rs3 billion, Rs4 billion, Rs5 billion and Rs6 billion by December 31, 2006, 2007, 2008 and 2009 respectively, said the circular.
The branches of foreign banks operating in Pakistan will also be required to increase their assigned capital to Rs6 billion in phases by Dec 31, 2009. However, those branches of foreign banks whose head offices hold a minimum paid up capital of $100 million and have a capital adequacy ratio of 9 per cent (determined as per Basel-I or Basel-II Accord) can be allowed to continue to maintain the minimum assigned capital of Rs2 billion.
All such branches of foreign banks will be required to seek specific permission from the State Bank to maintain the minimum assigned capital of Rs2 billion.
The central bank has also replaced the existing uniform requirement of capital adequacy ratio (CAR) with the variable CAR to be based on risk ratings of the banks determined by the SBP annually. While the minimum required CAR for category 1 & 2 banks will continue to be 8 per cent, the banks in category 3 will have to meet the CAR of 10 per cent, those in category 4 CAR of 12 per cent and Category 5 banks 14 per cent by Dec 31, 2006.
The new minimum capital and capital adequacy ratio requirements of banks and DFIs have been finalized in consultation with the Pakistan Banks Association.
“These changes which will be effective from December 31, 2005 have been introduced to prepare the banks and DFIs for implementation of Basel-II and to further strengthen the soundness and stability of the banking system,” said the SBP circular.
The required minimum paid-up capital as well as CAR can be achieved by the banks and DFIs either by fresh capital injection or retention of profits. The stock dividend declared after meeting all the legal and regulatory requirements, and duly reflected in the Annual Audited Accounts will be counted towards the required paid-up capital of the bank and DFIs pending completion of the formalities for issuance of bonus shares.
Any bank or DFI that fails to meet the minimum paid-up capital requirement or CAR within the stipulated period will render itself liable to serious actions as follows:
Imposition of such restrictions on its business including restrictions on acceptance of deposits and lending as may be deemed fit by the State Bank.
Descheduling of the bank, thereby converting it into a non-scheduled bank.
Cancellation of the banking licence if the State Bank believes that the bank is not in a position to meet the minimum paid-up capital requirement or CAR.”
Analysts believe that the latest move by the State Bank might be threatening for several small banks who could hardly manage to increase their paid-up capital from Rs1 billion to Rs2 billion.
However, they said that the steps would strengthen the banking system and would improve the risk management capacity of the banks as the SBP also changed the uniform CAR.
“The State Bank had been advocating for larger banks and is against the small banks as it sees higher risk in small banks. The new steps may be an advised for small banks to merge or make alliance with the larger banks,” said a banking sector analyst.
