Though not hit directly by the financial crises and global recession of 2008-09, banks in Pakistan face a different kind of challenge.
“Our banking system was working on solid footings with no credit swaps or derivatives or stuff like that. Regulators, therefore, were not after us. They rather facilitated us. For us the challenge was to let banking grow and expand amidst domestic economic slowdown,” sums up president of a local private bank.
On balance, domestic banking business has largely remained unhurt, except for expansion in the volume of bad loans and deterioration in advances to deposit ratio.
“Our success story is obvious. Banks are making more profits. They are expanding the branch networks. Branchless banking is also taking roots. Private sector lending is on the rise. Fresh deposits are being mobilised and new products being designed to facilitate customers.”
Critics, however, point out that qualitative analysis of all such “achievements” brings to the fore some “follies” still being committed by banks. “One has to see where the banks’ profitability is originating from,” asks a former president of state-run National Bank.
“Bulk of the bank profits is coming in the shape of net interest income and that too on the back of over-investment in government treasuries and bonds. Besides, branch network expansion is lop-sided. Despite the fact that rural income levels have risen in the last few years most of the new bank branches have sprang up in cities and towns and not in semi-urban or rural areas. And serious distortions exist in structures of bank deposits and advances. Smaller depositors and borrowers are still being neglected. That is potentially harmful.”
Let some statistics clear the air. In 2008 (when the global financial crisis was at its peak) after-tax profit of the banking industry had come down to Rs43 billion from Rs73 billion in 2007. But in 2010 these profits at Rs65 billion almost returned to the pre-crisis level and then surged to Rs110 billion in 2011.
Banks made profits from two key sources—advances and investment. Whereas till 2008 the stock of net volumes of advances was three times larger than that of investment, a gradual rebalancing was seen from 2009 onwards. In 2009 the stock of net advances fell to a little less than double the stock of net investment, in 2010 it was only 57 per cent higher than investment and in 2011 both became almost equal with net advances being just 10 per cent larger.
Bankers involved in day-to-day operations say the obvious reasons behind this trend (over-investment in government treasuries and bonds and banks shyness towards making private sector loans) represent a basic reality.
“For the economy to avoid fallouts of faltering external sector demand, it was natural for the government spending to remain high. That explains what you call over-investment by banks in government bills and bonds. Besides, don’t forget that 15 per cent of banks’ overall investment is in stocks, mutual funds and TFCs of the private sector.”
Bankers’ also justify their meagre lending to the private sector in the post-recession years to low demand for private sector credit and their enhanced vigilance on the quality of credit to keep bad loans at manageable levels.
Gross volumes of bad loans had shot up to Rs359 billion in 2008 from Rs218 billion in 2007 primarily due to inability of the private sector to service loans due to ill-effects of global financial crisis and recession. Since then bad loans have continued to expand but at a lower annualised rate and due to an additional reason.
“Unlike in the last two fiscal years when bad loans kept rising in after-effects of the economic slowdown amidst weak recovery in the global markets, during this fiscal year bad loans are growing as we go ahead with making new loans as our economy is growing faster than before,” said head of credit division of a large local bank.
Net private sector lending by banks during this fiscal year (up to May 18) is twice the size of the year-ago lending—Rs233 billion against Rs113 billion. “Naturally when you make new loans in a big way part of that becomes non-performing due to various reasons.”
One of the striking features of banking in recent years is that presence of foreign banks has become virtually ‘symbolic’ and local private banks have expanded in several ways. They have opened up new branches, increased their lending, mobilised deposits much faster than state-run banks and foreign banks and reached out to parts of unbanked areas and catered to some of the unbanked categories of customers.
“From 2003 onwards when the financial sector reforms (of mid-90s) had taken roots and started yielding results banks restarted expanding—particularly after the launching of the first Islamic bank.” The number of bank branches thus shot up from 6900 in 2003 to 9700 in 2011.
Some bankers, however, point out that resetting of priorities after the post-global financial crisis has also played a part in larger outreach of banks through setting up of new branches. “It is just a coincidence that after the crisis much of our economic muscle has grown in agricultural areas. That has reflected in branch networks in the areas closer to crop growing regions,” insisted a senior executive of Meezan Bank.
But bankers generally agree that they have a long way to go in diversifying their credit portfolios and in catering more to rural clientele. They also agree that deposit mobilisation from rural areas too has to be accelerated. “In the past few years numerous large-scale industries have either shown very little growth or have regressed. Small and medium enterprises, on the other hand, have sprung up with new-found linkages between rural and urban economy. But banks have grossly ignored the SME sector’s financing requirements,” admitted head of corporate credit of a middle-sized local bank.
“One basic reason for all this is that Pakistan’s banking sector is dominated by a few large banks that set the trends. For others it becomes too costly to go against the trend, whether it is the cost of deposit mobilisation or expenses on lending operations.”
According to the latest statistics, top five banks account for 53 per cent of all customer deposits. They also represent 71 per cent of bank advances made to the public sector and 49 per cent of the private sector. Other banks keep complaining about this domination but only some of them make real efforts to grab a bigger share of the banking business’ pie.