The mishandling of KASB

The imposition of moratorium on KASB Bank has shaken the confidence of depositors in the regulator as a lender of last resort and has disturbed the equilibrium of financial system. There were incidences in the past (post-privatization and deregulated regime) when a couple of banks had worse circumstances than what KASB had. But the regulator came to rescue, instead of asking them to pack their bags.
Allied Bank Limited (ABL) was one of the most corrupt banks and the size of its delinquent assets was more than its healthy portfolio after it was privatized; the SBP took hold of ABL, cleaned it and handed it over to a professional party, which despite not having any prior banking business experience transformed the bank to the top league. In fact ABL’s corporate portfolio is currently cleaner than its competitors. When SBP took over ABL, its equity was negative and today the bank’s total equity plus reserves is Rs73 billion.
A recent example of virtually a doomed bank is that of Bank of Punjab, which was also inflicted by corrupt management and had huge bad debts owing to some willful defaults and excessive risky lending. But the government of Punjab did not only inject equity, but was also helped by the SBP that did not publish its accounts for almost three years. In the end, the bank came out with a clean slate from running tens of billions of losses to an equity base of Rs15 billion by now.
Therefore one can’t help wonder what stopped the SBP from bailing out KASB, whose worries are of lesser magnitude than the above mentioned examples. Who is to blame for Rs40 billion of 12,000 corporate and individual clients stuck in the ailing bank? Why these were not informed six months ago when the central bank scrutinized and decided to put its owner on exit control list? These are the questions that the central bank needs to answer.
One way to proceed now is to use Rs24 billion of liquid investment assets of KASB (T-Bills –Rs16 bn, PIBs-Rs7 bn, listed equity shares and TFCs Rs1 bn) for releasing at least half of Rs40 billion of deposits stuck. Why cannot top five banks having a cumulative investment portfolio of Rs2.6 trillion buy Rs24 billion on the direction of SBP? Or why cannot the government owned National Bank buy the good portfolio of KASB to keep the financial system stable? In 2008, when inter-bank call rates shot up to three figures, NBP lent monies to some banks at 14 percent on the direction of SBP.
Nonetheless, the lesson to learn for depositors is not to be greedy and stop banking upon these small banks, which are offering higher rates to incentivize the marginal costumer. There is a need to advocate this and run public service messages to inform the depositors to look at the balance sheet of a bank before putting their savings in it. But by doing so, the life of small banks would become even more difficult.
Thus, it is not just the KASB that is in troubles, but these issues also have the potential to drain deposits from other banks which are short of minimum capital requirement or are on margin. Two other banks, Summit and Silk, are short of minimum capital requirement. Although, their shortage is of Rs3.5-4 billion each from minimum capital requirement of Rs10 billion (KASB shortage was Rs 9 billion) and have commitments from Middle Eastern investors to pump in equity before calendar year end.
There are some other banks, which are marginally above the minimum capital requirement of Rs10 billion and any adverse year, can push them behind the red line. How would these banks be able to attract deposits when they are all competing on the same turf with the big fishes?
The SBP needs to think out of the box and should restrict a few banks with limited mandate. There is a dual purpose of doing so. One is to make small banks attractive and the other is to enhance the banking penetration. The financial inclusion remains a dream in an economy where only 10 percent of the population has unique bank accounts, while the currency-in-circulation (i.e. money out of the banking system) is double to that of regional countries.
There are two main risk indicators of a bank’s financial health – minimum capital requirement (MCR) and the capital adequacy ratio (CAR). Only 2 percent of banking system is not complying with the latter indicator and that is not a grave concern. A better strategy would have been to redirect banks short on MCR to focus on a region or a sector to create niche in respective areas. The idea is to enhance the outreach of banks, which can be done by redirecting weak banks into specialized area. That would not only reduce banks’ risks, but would also give them exposure in less competitive and untapped market. This has happened in rest of world and Pakistan should be no different.
One example that is implemented is that for Islamic Banks whose requirements on MCR are low while it is high on CAR. This allows banks like BankIslami to grow despite having a capital of Rs5 billion. Similarly, to counter its shortage in MCR, Summit has announced that it will convert itself into an Islamic bank in a due course of time. It’s time for the SBP to mend its actions and start focusing on creating SME banks, trade finance banks, rural banks, mortgage banks and agriculture financial institutions to name a few.
The SBP, under Governor Shamshad Akhtar, had raised MCR requirement to Rs23 billion. This was brought down under Governor Syed Salim Raza to Rs10 billion for universal banking license because the SBP did not want banking to be concentrated in a few hands, and was in the favour of having more banks. But this policy needs to be incentivized through segmentation of banks and dis-incentivize weaker banks, using its regulations as a tool.
There needs to be a correlation between MCR and the banks activities. The SBP could allow banks to work within a limited mandate who fail to meet its MCR requirements but whose CAR is sufficient enough to keep them solvent. This would create niche banks. After all, Pakistan is an underdeveloped country which needs to industrialize. Development banks need not have any reserve requirement. In any case, the panic has to be avoided at all costs for financial stability, and for this the SBP needs to ring fence the weak banks and create the right model for the financial sector.