Many of banking reform objectives attained, 66 percent NPLs recovered: Ishrat

Five-year banking reforms programme that was initiated by the State Bank of Pakistan (SBP) in March 2000 would be completed next year, while test system for bankers promotion would be introduced soon. State Bank of Pakistan (SBP) Governor Dr Ishrat Husain stated this at a seminar on banking reforms that was organised by the Management Association of Pakistan here on Wednesday.
A large number of bankers and businessmen attended the seminar. Ishrat said that the banking reforms roadmap was initiated to overcome the vices that existed in the nationalised banks, including bureaucratic attitude, overstaffing, poor customer services, high ratio of loan default (80-90 percent) and high tax rate for the banking sector that has affected its profitability.
According to him, many of the objectives have been attained in the last four years. Apart from the National Bank of Pakistan (NBP), all the nationalised banks were privatised and professional management was brought in. To introduce corporate culture in the largest bank of Pakistan, 23 percent of NBP's share were sold in the stock markets.
The philosophy behind the reforms was to allow private banks to work independently in a competitive environment. However, they would work under a very vigilant regulatory authority in order to protect 28 depositors of Pakistan.
The reforms also managed to de-link banks from political masters, who in the past used their positions, to appoint their man to senior banking positions to serve their vested interests.
He said, "We have managed inoculate corporate governance in the banking sector. Moreover, it was ensure that only banks that showed integrity and competency were given banking licences, and to send a clear message to other financial institutions that the central bank had cancelled licences of those banks that were not committing irregularities.
There were banking laws in the country that conform to the international standards, but unfortunately it lacks implementation."
Dr Ishrat informed the audience that a criteria has been formulated for the appointments of bank's chief executives (CEs) and board of directors (BoDs), allowing talented and able professionals with the capacity of taking wise decisions in induction in the senior banking positions.
He said that those who will not meet the laid down criteria, the SBP would not allow them to hold such positions.
He admitted that the banks were facing difficulty in finding such people who comply with the criteria, thus, the banks were facing human resource problem.
"Moreover, learning from the 1960 private banks' experience, the SBP has placed a condition that not more than 25 percent of a board member could be from one family.
Secondly, the central bank has debarred the appointment of directors for brokerage house to avert clash of interest.
They have also developed guidelines for BoD under which it would only formulate banking policy and supervise bank management, while it would refrain from interfering in the banking affairs," he added.
He said disclosure law has also been upgraded and strengthened, under which a bank was bound to publish quarterly reports, thus, the depositors would be aware of the financial health of their banks.
It has also been made mandatory for a bank to get credit rating from either of the country's two credit rating agencies, which would help the people in choosing a bank.
"The SBP has asked the commercial banks to devise a well-defined policy for writing-off loans and any loans to be written off against the policy would be held accountable. Under the directives of the central bank, names of all those people whose loans have been settled should be made public.
The word write-off was not a dirty word, as it occurs all over the world. As many as 80,000 individuals and industrial units, who were circumstantial defaulters had availed of loan settlement facility under the SBP Circular BPD-29.
It was imperative that the banks clear their balance sheets of loans. However, wilful defaulters would not be spared and 107 such cases have been referred to the National Accountability Bureau (NAB). In all 66 percent non-performing loans (NPLs) have been recovered," he said.
The SBP governor also said that for consolidation of the banking sector in Pakistan, by the end of 2005, the banks would increase its capital base to Rs 2 billion from the existing Rs 1 billion.
He said that the banks' asset quality and quantity have also significantly improved since the reforms were introduced. Last year, the commercial banks earned profits of Rs 40 billion, he added.
Dr Ishrat said although consumer financing was only contributing 7 percent of the banks' portfolios, it benefited 37 industries, hence, creating jobs. In the past, consumer financing was ignored, which meant ignoring the middle class, which was the backbone of the country.
However, this neglected area of banking has improved by extending loans to the consumers. Banks' mortgage schemes have made a significant mark, as for the first time the middle class has been given a chance to own a house that they could not even think in the past.
This has also gives jump to the construction-related industries and in the process creating more and more jobs.
He was pleased to note that the commercial banks have started agricultural credit and it was picking up pace, which is success of the banking reforms. In the past, the banks rather paid penalty to the SBP than sanctioning agricultural loans.
He said that agricultural lending had increased from Rs 32 billion to Rs 85 billion, while the number of borrowers had enhanced from 40,000 to 1 million, and in the next five years it was expected to hit 3 million figure.
"The significant increase in the agricultural loan would give a boost to the agriculture productivity. The boost to the agriculture sector could be judged from the fact that we now have to import urea and tractors.
Moreover, for the facilitation of farmers, the commercial banks have restructured the repayment loans. Instead of repaying lump sum loan immediately after the crop season, now they have the option of repaying it in three years with the condition of making partial repayment in one year.
This would help them in selling crops at their price and in addition farmers' purchasing power would increase. Nevertheless, this has created demand for durable goods in the rural area," he said.
He said, "Small and Medium Enterprises (SMEs) credit needed improvement and must be on the similar line of agricultural loaning. It must be realised that 90 percent of employment were generated in agriculture, SMEs and construction industries.
The commercial banks need to change its attitude on the matter by changing the SME loan criteria from "collateral base" to "cash flow base", thus analysing the potential of a SME and its ability to repay the loan on its working."
He appealed to the bankers to forgo "lazy man banking and seriously think on the proposal, as SME financing was a success story.
According to him, the commercial banks have also made headway in e-banking. At the start of the reforms, there were zero automated teller machines (ATMs) and now there were 700 ATMs across the country and it was expected that it would be more than double by next year.
Moreover, out of 6,000 bank branches, 2,000 have gone online and by the end of the banking reforms programme 80 percent of them would be online. This has brought down the transaction cost.
Dr Ishrat was critical of the human resource base in the banking sector and said that it was worrisome, as there was a shortage of proficient and professional bankers in the country.
He criticised that hiring and promotion of bankers were not made on merit, which was affecting the efficiency of banking and, thus, depriving talented bankers from the job.
He prescribed test for promotion of bankers, which would allow talented bankers to senior posts, while it serves as "continuing of education".
"In this regard, the Institute of Bankers Pakistan (IBP) has been asked to devise test system in consultation with the Pakistan Bankers Association (PBA)," he added.
To redress the grievances of banking customers, the SBP has constituted a banking ombudsman and Azhar Hameed has been appointed as ombudsman. He said that they were encouraging the depositors to lodge their complaints with the banking ombudsman.
On Textile Vision target, he said that the target of $4 billion has been achieved this year.
To a question, he said that the land prices in Punjab have jumped up due to multiple ownership of plots, however, to tackle the problem the Punjab government should computerise the land record, which would bring transparency. Moreover, the government should also release more land for housing schemes, he added.
Speaking on the occasion, Bank of Punjab (BoP) Managing Director Hamesh Khan highlighted the progress the banking sector has achieved. He said that the banking sector was making a shift from corporate finance to other segments, especially on the SMEs and consumer financing.
He said that this shift was expected to preserve declining margins, it also exposes the banks to higher levels of risk. He said that the performance prospect of individual banks would be the function of many variables, including improved customer services; product innovation; focus on agriculture, SME and consumer financing; upgraded human resources; promotion of e-banking and stringent corporate governance.
He said the banking sector is facing low capitalisation; limited expertise in risk management; non-performing loans; declining margins; capital adequacy issues; limited to credit for agriculture and SMEs loans and decline in bond prices due to inclining trend of interest rates.
Dr A.R. Kemal of Pakistan Institute of Development of Economics (PIDE) also spoke on the occasion.