The Governor, State Bank of Pakistan, Dr Ishrat Husain, said here on Friday that the corporate tax rate would further come down to 30-31 percent by the next fiscal year. He was speaking as chief guest at a symposium on 'Sustainable Growth in Financial Sector of Pakistan', at a local hotel. Husain said that increase in profits of banks has probably sent a wrong message that it has been achieved by the banks at the cost of depositors' money who were paid nominal return, whereas the banks advanced the same money at higher rates.
He said that banks had shown their progress because of the application of prudence in their dealings, broadening of products base, increase in capital adequacy ratio, gradual decrease in corporate tax from about 55 percent to about 41 percent and now expected to be in the vicinity of 30 percent.
He added that spread has gone down to 2.5 percent, operational costs have been cut, and golden handshake in NBP, UBL, HBL (lowering of headcount) have also brought down spread and appropriate risk management practices.
He flayed all rumours and said that banks did not invest in the capital market the way they were being talked about. They had nothing to do the way capital market behaved in the past weeks, he added.
He said that the banks were prohibited from exceeding their investment beyond 20 percent of their equity. "Their investment is small--about Rs 32 billion. Total size of money with banks is about Rs 2000 billion. Investment of Rs 32 billion is only about 1.6 percent which is much below the limit to which the banks could have gone."
The SBP Governor said that growth in financial sector was well on the right path and all indicators of its progress were showing that it was sustainable.
However, a lot was yet to be done in the corporate governance sector, human resource development, adoption and application of latest in the technology, risk management and cost reduction.
"The processing of a cheque at the window costs about Rs 50 per cheque. Through ATM its cost goes down by one-third, and with e-banking it would go down further." The money so saved would add to banks' profits and would be available for loaning to small borrowers.
In his keynote address, the President of National bank of Pakistan, Syed Ali Raza, said that Pakistan's financial sector stood at the threshold of a new era. "The changing financial landscape will create fresh opportunities: automated and electronic banking products, second generation asset and liability products, M & A activity and greater integration between the financial and capital market."
He said that the form and fabric of the banking sector would continue to change, going forward, as the economy matured, standards of corporate conduct and governance improved and markets achieved more depth and breadth.
He said that prior to the reforms of 1990s, banks were faced with major issues which had threatened viability of the financial sector and extension the country's economy.
He counted the ills that had pervaded the financial sector including a huge spread to over 6.6-7 percent that had disguised the poor financial health of the state owned banks and said that the banking reforms had brought effective results manifested in the vastly improved financial indicators. "Key financial ratios related to capital adequacy, earnings and liquidity demonstrate significant and consistent improvement".
Raza said that the banking sector was highly competent and had diversified its products. "Intermediation costs have come down, capital adequacy has strengthened and liquidity is relatively comfortable", he added.
He said that automation and electronic means of financial transactions were gradually replacing the old system.
Raza said, "Non performing loans have declined. Banks are making increased provisioning for non-performing loans (NPLs), and cash provisions against NPLs have substantially increased, reducing the risk to balance sheets".
He said though the banking sector had come under strict discipline and had realised its effective role in boosting national economy, it has to improve its relations with SMEs and agricultural sector where advances were still below the mark. The accessibility to finance is yet to be increased, he added.
The increased consumer financing has given boost to local markets and in the engineering sector production has gone up. "The money so spent by one purchaser goes into the pocket of another man".
He said that a number of mergers and consolidation of smaller financial institutions had taken place, with the SBP raising the minimum capital adequacy ration requirements of banks from Rs 500 million to Rs 1 billion and later this year Rs 2 billion.
He said that application of prudent practices had brought NPLs from about 40 percent five years ago to 18 percent today. "The falling burden of outstanding NPLs, as well as low increase in fresh NPLs, has helped improve the banking sector performance in last few years. In the year 2000 the uncorrected rate of inflation had reached up to 2.5 percent in the line with international standards."
He said that to sustain the growth the financial sector has to face challenges such as how can banks successfully create product to access the undeveloped or less banked sector eg, agriculture, SMEs, etc; how can the financial and capital markets be successfully integrated; how effectively can banks improve their risk management systems to deliver second generation financial products.
Raza said that banks could move with speed as they are well equipped but critical to this would be the quality of human resources, effective use of technology and very strong marketing and delivery skills.
Senior journalist Javed Bukhari and banker Zafar Aziz Usmani also spoke on the occasion.
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