The reforms in the banking sector- more particularly in the public sector banks- commenced in early 1997 after Mian Muhammad Nawaz Sharif took over as the Prime Minister of the country with the induction of so-called professional management in National Bank of Pakistan, Habib Bank Ltd and United Bank Ltd.
The foremost task of the new management was to recover the Non-Performing Loans (NPLs) and check the unscrupulous activities of the trade unions. While the second object was partially achieved, hardly any progress was made vis-à-vis recovery of the NPLs.
The reform process was continued by the new economic managers after October 12,1999 take-over who claim that they have brought a turn-around in the banking industry. State Bank of Pakistan (SBP) governor had delivered a lecture at the Institute of Bankers in Pakistan (IBP) on the 17th September,2005 in which he had narrated the success story of the banking industry and had also touched a few aspects of the state of the country's economy.
The edifice of the turn-around in the banking industry has been built on: (a) reduction in the lending rates from 15-16 percent p.a. to 5 percent p.a. [which have recently gone up to 8 percent p.a.] (b) banks' profitability on the assets has gone up to 1.4 percent while their profitability with reference to the equity is now 22.1 percent (c) credit to the private sector has grown to Rs 405 billion (d) privatisation of public sector banks etc.
The above is, however, merely one aspect of the issue. To study the matter in depth, one has to dilate on how the lending rates were reduced by the banks? Of course at the cost of 28. 4 million depositors who are being paid a return of around one percent p.a. only in the scenario where inflation rate during fiscal 2004-05 has officially been admitted at 9.3 percent although the depositors should be the first beneficiary of the banks' profits because it is their money on which the banks flourish and earn profit.
It may not be out of place to mention here that prior to October,1999, the banks were on the average paying interest on the savings accounts at around 6.5 percent p.a. One can well imagine how much negative return is now being paid by the banks to the depositors.
One should also examine for whose benefit, the SBP allowed the banks to continue the policy of low lending rates without adequately safeguarding the interest of the depositors and ensuring that reasonable return is paid to them by the banks? Obviously, for the benefit of merely 3.2 million borrowers some of whom are very influential and often get their loans written off or rescheduled without having any intention to repay.
Yet another beneficiary of the low interest rates has been the government itself which used the same for the Treasury bills to cut the budget expenditure.
The big sharks took full advantage of the low interest rates-some times the lending rates were much lower than the inflation rate and made billions of purely tax free income through the stock exchange/ real estate deals depriving the common man of his belongings as would be evident from the stock exchange bust in March,2005.
SBP's own reports a few months back are indicative of the fact that these big sharks took advantage of the cheap bank loans for hoarding wheat. But this aspect is not to be taken into account so long as banks show over 22 percent income on equity.
The second beneficiary of the above policy are the banks themselves as they are going on building up the reserves/ accumulated profit even though the second beneficiary should be the equity holders. Here it will be suffice to quote the examples of two largest banks.
The after-tax profit of National Bank of Pakistan for 2004 was Rs 6.243 billion out of which the bank paid the sums of Rs 984.21 million and Rs 738.628 million on account of bonus shares and cash dividend respectively ( total payouts amounting to Rs 1.723 billion forming merely 27.6 percent of the after tax profit while the reserves and the accumulated profits of the bank at the end of 2004 stood at Rs 20.334 billion.
As for Habib Bank Ltd, the after-tax profit for 2004 was Rs 5.680 billion out of which the bank paid dividend of paisa fifty per share aggregating Rs 345 million only while accumulating reserves and profits to the extent of Rs 13 billion at the end of the year. The regulating authorities including SBP do not ask the banks to do justice to their shareholders although the SBP itself owns 3/4th of Habib Bank Ltd's shares.
The turn-around of the public sector banks including those now privatised mainly owes its origin to the heavy money pored in by the government by obtaining loans from the International Finance Institutions obviously at the cost of common man. The details of the money poured in by the government are given in Table I.
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Table I- Government funding to the nationalised
commercial banks [Rs billion]
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Year Bank Capital Staff exodus cost Towards write-off Total
of loans -
in Middle East -
[2 to 5]
1 2 3 4 5 6
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1997 United Bank Ltd 21.000 @ - - 21.00
1998 Habib Bank Ltd 9.700 - - 9.700
2001 Habib Bank Ltd 8.000 4.500 - 12.500
2003 United Bank Ltd - 1.337 7.200 8.537
2002 National Bank of Pakistan - 6.000 - 6.000
" United Bank Ltd 7.900 - - 7.900
TOTAL 46.600 11.837 7.200 65.637
@ Shares issued in 1998 -
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The pouring of the money in these banks was in the context of making them ready for privatisation. In other words, government economic managers did not want to sell off loss-sustaining entities but wished to hand over the same to private sector in profit earning shape at the public cost. What a decision?
Coming to the macroeconomic indicators given in Table II to the SBP governor's address under review, there is no homogeneity.
Where it suited the governor, GDP related percentages have been mentioned while at other places, absolute figures have been provided.
For instance, tax recovery figures have been given in absolute terms showing increase from Rs 391 billion (FY 1998-99) to Rs 590 billion (FY2004-05) but the tax recovery ratio in terms of GDP has fallen from 13.4 percent to 9.7 percent during this period.
How has the increase been achieved? In a very callous way by increasing the quantum of indirect taxes and more particularly the general sales tax. A comparison of direct/ indirect taxes during fiscal 1998-99 and Fiscal FY 2004-05 (upto March,2005) as contained in SBP's relevant reports is contained in the Table II.
The data for the full Fiscal 2004-05 could not be incorporated in the above Table as SBP's annual report for that fiscal is yet to be issued.It will be seen from the above Table that the share of the direct taxes in the overall collection has considerably fallen after October,1999.
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Table II- Tax collection comparison [amount in billion Rs]
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Category July, 1998- June,1999+ July, 2004- March, 2005@
Amount Ratio to total amount Ratio to total
1 2 3 4 5
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Direct taxes 112.00 36.36% 119.50 29.77%
Customs duty 61.30 19.90% 80.10 19.96%
CED* 62.00 20.13% 36.30 9.05%
Sales tax 72.70 23.61% 165.40 41.22%
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TOTAL 308.00 100% 401.30 100.00%
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