KARACHI, March 29: The commercial banks are going through “extremely difficult times,” and are facing an “enormous challenge to put excess liquidity into loans,” says a leading banker.
HBL president Zakir Mahmood reckons that “The outlook for the industry is not very optimistic for at least two years — 2003 and 2004.”
The falling interest rates, excess liquidity and low corporate credit demand tend to reduce net profit margins, though the nationalized commercial banks (NCBs) have the advantage of having made heavy provisions against bad debts in the past 2-3 years.
“Investors can never borrow on better terms than now offered by the commercial banks,” says the HBL president and adds “they should give up their wait and see approach.”
The low level of domestic investment is confined to balancing and modernization of existing plants and bank loans are being generally sought for projects worth about Rs50 million.
Mian Mohammad Mansha, chairman MCB and Nishat group of companies, wants “fiscal measures” to compliment” the expansionist monetary policies” as “the country’s real sector continues to be plagued with subdued economic activity and an increase in unemployment.”
In the prevailing banking environment, a leading NCB executive complains that the cost structure of the banks is once again out of line with business levels and squeeze in profits. Quoting mid-week figures, he said one-year T-bills yield 1.80 per cent and six month tenor yield is 1.50 per cent.
And what appears to be of no less a matter of serious concern that after years (since 1997) of banking reforms, retrenchment, cost cutting, induction of modern technology and management, the situation in the NCBs remains fragile and vulnerable to external shocks.
It brings into question the timing of the banking reforms, whether they should have preceded or followed economic revival. Banking is a service industry and its prosperity is deeply linked to high economic growth. There are limits to the benefits that institutional trimming and reforms can bring. In Pakistan, the single-minded focus on fiscal stability has impeded growth.
No less important than the reforms is how they are managed, the timing, speed and the sequence. Reforms brought too early or too late, are extremely damaging.
Although specifics between two countries may differ, there may still be some scope for learning from the Chinese experience, where the first priority went to economic growth. For the past two decades or more, China has introduced market reforms gradually, taking care of their adverse impact by appropriate management of reforms.
By opting for a fixed parity, it has not prematurely liberalized its exchange markets. Liberalization of the capital market does not lead to economic growth. This has also been proved by Malaysia where capital controls helped its economy recover fastest in the aftermath of 1997 East crisis. The Chinese did not rush through with banking reforms and when required, provided fiscal stimulus to spur economic growth.
China also carried out land reforms that helped the most populous country attain self-sufficiency in food grains and to increase domestic demand for industrial growth.
The banks are in for a fundamental change. They are now seeking future growth in consumer banking that is driven by housing finance. They have to develop new products that increase their fee-based incomes, now in the range of 25-30 per cent. They plan to reduce their dependence on interest incomes.
Habib Bank has dedicated 27 of its branches to financing of small and medium sized enterprises (SMEs), with focus on the middle- sized units. The bank sees opportunities for financing construction of silos and storage facilities or setting up freezing plants for export of farm products.
Whether it is financing of agriculture sector or SMEs, the bankers see it as a gradual and progressive process, because of limited management, marketing and production skills of the borrowers.
The only exception is housing finance that has tremendous potentials but needs tax incentives to make financing viable and affordable for the borrowers.