KARACHI, May 18: The banking system has been undergoing restructuring since 1997. The process is still on. The objective is to have stronger banks with improved capital adequacy, asset quality, efficiency and profitability.
To quote an IMF report, “some of the smaller banks are consulting the State Bank to work out the arrangement to meet capital requirements that include mergers with larger banks.”
The State Bank raised the capital requirement to Rs750 million for existing banks effective January 1, 2002, and Rs1000 million by December-end. A few minor banks were unable to meet the new limit.
As the market reports indicate, the January deadline has been extended for June 30 for at least one private bank. Informally, State Bank Governor Dr. Ishrat Husain has been advising weaker banks to merge with the stronger ones.
At least two smaller Arab banks are now negotiating for sale of their branches. An equal number are not inclined to increase their capital. The numbers may shrink. There is some thinking among policy-makers that two weak banks, originating from the same country, should be encouraged to merge into a single entity. Perhaps, they could follow the example of the nationalized commercial banks (NCBs) which have set up joint venture subsidiaries in the UK.
Some Arab banks like Faysal and Alfalah are seeking expansion. Faysal is looking at options to acquire one of the smaller banks. Alfalah is in a bid to buy UBL, although as the latest market gossips would have it, Mian Mansha and MCB would get the third largest nationalized commercial bank.
After having declared the DFI concept dead, the policy makers are not much impressed with the performance of the investment banks. Their utility in current environment has come into question. Investment banks are looking at prospects of acquisition and mergers to venture into commercial banking. Al Meezan acquired Soc-Gen. Al-Faysal Investment Bank has been merged into Faysal Bank. PICIC acquired Gulf Commercial Bank. Yet another investment bank is working on a deal to buy a smaller Arab bank.
As the country is over-banked, the State Bank is not issuing any licence for new commercial banks. It is through acquisition of Soc-Gen that Al Meezan got permission for Islamic banking. Exception has been made for micro-financing banks and institutions. Now, permission would also be given to the banks for funding exclusively small and medium enterprises.
The World Bank is of the view that currently all the private banks can operate profitably within the large spreads that the public sector banks need. Once the NCBs are restructured and privatized, the competition would increase, creating pressures for the number of banks to decline.
A prompt corrective action framework will be critical to ensuring that this decline occurs at the minimal cost to the government, adds a WB report.
As it is, when the banks are sold, says the WB report, the government would have to recognize losses in the banks and DFIs related to shortfall in provisioning and unfunded pension liabilities for the bank staff. Altogether, these could require injection of $4-5 billion of new government debt, reckon the WB officials.
At the Pakistan Development Forum meeting held in Paris recently, the World Bank advised authorities to consider increasing capital adequacy requirement of commercial banks from eight to 10 per cent to encourage merger into larger and less risky institutions.
The World Bank argued that “if an eight per cent figure applies in more developed, less risky markets, a higher figure would be more desirable for Pakistan.” Stronger banks are needed for provision of non-performing loans.
India and Sri Lanka have enhanced capital adequacy requirement from eight per cent of the risk weighted assets to 10 per cent.
Barring those who got licences on political considerations to make the economy over-banked and their number is very, very few, the rest of the private banks have a capital adequacy ratio of 14 per cent, says a head of the bank. This helps cut costs and improve profits. Currently, the requirement is of eight per cent.
The private banks have also been aggressive in raising deposits that increased by 26.5 per cent during six months ending June 2002, as against 1.3 per cent for foreign banks and 2.2 per cent for privatized ones. Only the NCBs secured more deposits, a rise of 38.9 per cent, because of their large country-wide network of branches.