The calendar year 2005 was the boom year for Pakistan's banking sector in which the banks almost doubled their (pre-tax) profit from Rs 52 billion (2004) to Rs 93.8 billion (2005).
Many people may attribute this boom to the reform process which was under way in the banking sector since 1997. If one deeply examines the factors resulting in such huge increase in the profits, he will, inter-alia, come across the following:
(a) Squeezing of the depositors by paying them interest at a very marginal rate despite the regulator's -State Bank of Pakistan's (SBP's) directive to raise the interest rates and share their profits with the depositors.[The news items appearing in the press rather give the impression that the banks are cartelling to resist the SBP's directive].
(b) Charging interest at the high rates on the personal loans and more particularly the loans against the credit cards.
(c) Fixing minimum balance requirement; and if the balance in the account falls below the prescribed limit, the depositor is required to pay monthly penalty. The different banks have prescribed limits for minimum balance and the different rates for monthly penalty. This was done with the concurrence of the SBP. This scheme has the dual objective; firstly the increase in the earnings and secondly showing the small depositors the doors of the banks.
In case a few strangulating steps mentioned above constitute "reforms", one should be convinced that the banking sector's profitability has been increased by the reforms process.
SBP, unlike the commercial banks, is not a profit-earning entity. But if one examines its accounts for 2005-06 [FY-06], he will notice that it is far ahead of the commercial banks in this context. Its (SBP and subsidiaries) profits have increased from Rs 31 billion (FY-05) to Rs 68 billion (FY-06)- an increase of over 119 percent. The major contribution in the income is interest amounting to Rs 69.9 billion out of which Rs 34.933 billion comes from Market Treasury Bills and Rs 23.982 being the interest earned on reserves.
OTHER INCOME HEADS ARE: (a) commission Rs 441 million, exchange gain Rs 4.376 billion, dividend income 1.974 billion.
ON THE EXPENDITURE SIDE, THERE ARE 3 MAJOR HEADS: (a) Note printing Rs 2.431 billion, (b) agency commission Rs 2.190 billion and (c) general and administrative expenses Rs 6.957 billion.
LET US NOW UNDERTAKE ITEM-WISE REVIEW OF THE INCOME AND EXPENDITURE:
INTEREST INCOME ON MARKET TREASURY BILLS [MTBS]:
The income under this head is Rs 34.933 billion. SBP has accumulated a very large stock of the MTBs - Rs 514.5 billion as on the 30th June,2006. This is because SBP has been meeting the entire financial (fiscal deficit) requirement of the Government since FY-04. Not only that, the SBP has also been arranging funds to the Government to liquidate the commercial banks' debts. In FY-04, government's borrowing from commercial banks amounted to Rs 3.7 billion as against Rs 60 billion borrowed from SBP. In FY-05, SBP lending to the Government stood at Rs 155.6 billion out of which a sum of Rs 83.8 billion was used to retire commercial banks' debts. In FY-06, SBP's holdings of MTBs increased by Rs 185.508 billion out of which Rs 70.9 billion was used towards fiscal deficit while Rs 64.1 billion was used to retire commercial banks' debts; it is not clear for what purpose the balance sum of Rs over 50 billion was borrowed by the Government.
SBP's annual report for FY-06 indicates that the above policy will continue during the current fiscal [FY-07]too.
One of the SBP's priorities is/ should be to contain/reduce the inflation through formulation and the enforcement of effective monetary policy. The economists as well as SBP's own reports admit that government's borrowings from the central bank are inflationary. It is not understood why the SBP had allowed in the past/still allowing sacrificing its objective of reducing/containing inflation by aiding the government in easy enforcement of the fiscal policy by undertaking inflationary borrowing from the SBP thereby saving the borrowing cost. Since the profits of the SBP are transferable to the government, borrowings from the SBP indirectly become cost free.
INTEREST INCOME ON FOREIGN EXCHANGE RESERVES:
Pakistan's foreign exchange reserves as of 30th June,2006 aggregate to Rs 689.881 billion (Note 6 page 121 vol.II SBP annual report for FY-06) on which interest to the extent of Rs 23.982 billion (Note 35 ibid) which works out to 3.47 per cent only. As per the information gathered from the website www.1loansusa.com the U.S Treasury rates prevailing during July, 2005-June,2006 were as under:
The interest rates had started climbing in the immediate aftermath of July,2005.Even if the reserves were invested in the safe mode of the U S Treasuries, income accrual would have been much higher.
The investment of a part of the reserves through the "Fund Managers" remained controversial during the last two years or so since their appointment by the SBP. SBP never clearly told the public how much income these Fund Managers are bringing for it; nevertheless the press guestimates used to put the same at merely around 2 percent p.a.
It is also not known where these Fund Managers deployed the funds and what remuneration is being paid to them.The amount got invested through these Fund Managers [as of 30th June,2006] is put @ U S $3.366 billion. One expects that the net earnings to the SBP-after accounting for Fund Managers' remuneration- should be substantially higher than the 6 months' U S Treasury rates. However, if the above press guestimates are to be believed, there is no fun in hiring the Fund Managers and paying heavy remuneration to them.SBP staff can put the money in safe modes like U S or like Treasuries.
China's forex reserves have crossed one trillion dollar mark and it is keeping bulk thereof in U S Treasuries. It is not understood why we are worried about the investment of the smaller amount of $10-10.5 billion.
It is observed from Note 6 ibid that the bulk of the reserves were held in the deposit accounts (Rs 490 billion) while merely Rs 196 billion remained "invested". True that this is the position as of the 30th June,2006 but if bulk of the reserves was kept in the bank accounts during larger part of the year instead of being kept in the [risk-free] securities, it may also be one of the reasons for lower earnings.
The exchange gain (Note 38 ibid) has come down from Rs 15 8 billion (FY-05) to Rs 5.5 billion (FY-06). This may be owing to the lesser rupee depreciation of 0.84 percent in FY-06 than that of over 3 percent in the previous fiscal FY-05.
INCOME FROM OTHER SOURCES:
SBP's earnings from dividend is Rs 1.975 billion. This would naturally include the dividend on the share held by it in the Habib Bank Ltd and United Bank Ltd. SBP is holding 60.5 percent shares in HBL.Despite that it is not represented on its Board of Directors. SBP is also oblivious about the earnings from this source. HBL's after tax earning per share for 2005 is 13.86 but it has paid the dividend at Re 1.00 per share. In previous few years, it was argued that the banks, including HBL, could not pay dividend at higher rates as they had to transfer funds to the reserves to meet the Basel II capital adequacy requirement. HBL's adequacy has crossed 9 per cent- it is 9.4 per cent- [as against Basel II requirement of 8 per cent] as per the information given in Banking Sector Review for 2005 issued by the SBP. Is there not the need for the SBP to be vigilant in this context and get its appropriate share of profit on its stocks.
EXPENDITURE SIDE:
The main items of expenditure are (a) note printing Rs 2.431 billion,(b) agency commission 2.191 billion and (c) general administrative and other expenses Rs 6.957 billion.
The expenditure on salary and other benefits [consolidated SBP and subsidiaries] increased from Rs 2.956 billion in FY-05 to Rs 3.181 billion in FY-06 (Note 42 page 137 - SBP annual report Vol.II) which represents an increase of 7.61 per cent. The above expenditure does not include the retirement benefits.
The rationale for this substantial rise is not understood when there has neither been any induction of the employees in the SBP/subsidiaries during FY-06 nor has he salary structure been revised. The pay increase is given every two years which was done in FY-07 effective September,2006. This increase can thus be attributed to the annual increments granted to the employees.
Prior to the commencement of the so-called reforms, the annual increments were fixed in the pay scales themselves and normally one increment was granted annually. It used to be in the exceptional cases that more than one increment was granted. Now the management has free hand and the quantum of annual increment is based on the categorisation of the annual confidential reports. The annual increments are given at 9 per cent, 7 per cent, 4 per cent, and 2 per cent of the last pay drawn. Is there any rationale in granting annual increments at the high rates of 7/9 per cent when pay scales are revised and raise given every two years.
The management in SBP had enjoyed complete liberty in the matter of inducting new staff/ retrenching old one and providing financial benefits to the employees. During the tenure of the previous governor, a large number of Joint Directors were recruited directly [in pre-reform years, these posts were filled by promotions from the lower cadres].During FY-06 [ or perhaps FY-05], the salaries of the 18 directly recruited Joint Directors [ one of them taken from SBP lower hierarchy to give the recruitment a touch of class] were enhanced by 100 per cent without the approval of the Board of the Bank although such a decision required Board's prior approval. But there is no check and balance during this era of reform.
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