The largest commercial banks in the public sector---Habib Bank Ltd and United Bank Ltd were privatised- rather internationalised as they were sold to the overseas buyers-in end 2003 and end-2002 respectively ie in the close aftermath of 9/11 events.
It is generally believed that the current upsurge in the country's economy is the consequence of huge inflows from abroad as a result of Pakistan's participation in the American fight against the so-called terrorism following 9/11.
The banking community had also been the beneficiary of the large-scale inflows from abroad as bulk of the workers' remittances which aggregate over $14 billion during fiscal years 2001-02 to 2004-05 found their way in the bank deposits. The huge foreign exchange accrued to the banks was sold to the State Bank of Pakistan (SBP) as the banks were not in a position to profitably deploy these funds.
This raised their rupee liquidity abnormally and they were not finding the outlets for domestic lending. In the initial stages (in / around 2002-03 ), State Bank of Pakistan (SBP) carried out "sterilisation" operation with a view to mopping up the excess liquidity from the banking sector. Under the procedure, SBP liquidated its own holding of the government Treasury Bills (T.B.s) against sale of these instruments to the commercial banks.
This operation, however, could not be carried on for long either because of advice ( read command ) of the International Monetary Fund (IMF) or because after all there was a limit on government's borrowings from the banking sector.
The speed with which the deposit base of the commercial banks grew in the aftermath of 9/11 can be gauged from the study of the Habib Bank Ltd (HBL) and United Bank Ltd (UBL).
HBL'd deposits grew from Rs 205.534 billion at end 1996 to Rs 283.445 billion at end 2001, depicting an increase of 37.91 per cent in 5 years' time while the quantum of deposits of the bank stood at Rs 404.629 billion at end 2004, depicting an increase of 42.75 per cent over end 2001 figure within a period of 3 years only.
Likewise, UBL's deposits grew from Rs 106.735 billion at end 1996 to Rs 141.316 billion at end 2001 depicting an increase of 32.40 per cent in five years' time while these deposits increased to Rs 237.054 billion in end 2004 depicting an increase of Rs 67.75 per cent over end 2001 stock in a short period of 3 years only.
We have made comparison with end 1996 data because these two banks were assigned to the "professional" management's in early 1997.
The excess liquidity with the banks, which the SBP was also not in a position to sterilise, compelled the banks to create innovative lending outlets and to also bring down the lending rates. HBL and UBL also developed new products a brief review of which is presented hereunder:
-- The most important product is "consumer" financing under which loans are provided to the individuals for purchase of cars, consumer durables, including electronic items televisions/ refrigerators etc.
The individuals are also granted loans for the purchase/ construction/renovation of the houses. This bank's consumer portfolio stood at Rs 22.3 billion at the end of 2004 which constitutes 13 per cent of the market share.
-- The bank also participates in the loaning in the agricultural sector and its disbursement in this sector during 2004 amount to Rs 13 billion The agricultural loans are granted for tractors, earth-moving equipment, fertiliser, seeds, storage facilities.
The bank's product also include "Haryali Revolving Finance" for a medium term of 3 years instead of finance being confined just to the harvest season.
-- One of the bank's credit segment is commercial banking which includes lending to the Small and Medium Enterprises (SMEs). The bank claims to be the market leader vis-à-vis SME lending with disbursement of Rs 19 billion [The bank has not qualified in its annual report for 2004 that this amount was disbursed in the year 2004 alone].
-- The corporate banking division operates through 10 branches and services over 500 corporate clients. In 2004, the bank's Investment team handled more than 80 per cent of major transactions taking place in the country and completed several high profile mandates as lead managers including acting as advisor, Structuring Agent & Lead Manager for $325 million refinance of Pak Arab Refinery's -JBIC loan.
-- In International banking, the bank handled remittances of $799 million in 2004 out of total inflow of $3.9 billion.
-- The year 2004 witnessed the bank concluding many corporate finance transactions, adding several high quality corporate customers and building a low cost deposit base.
-- The commercial banking continued to combat shrinking spreads and stiffer competition, and yet it delivered an increase in total deposits and doubled the commercial lending portfolio.
-- The Treasury and capital markets further consolidated its core business and simultaneously benefited from the market opportunities to enhance its product range and client coverage.
-- The bank launched a suite of consumer banking products and services- UBL Drive, UBL cashline, UBL Business line etc.
-- The bank launched its Visa credit card which is the first EMV-chipped Credit Card in South Asia besides introducing e-banking services through the launch of " You First Net Banking and click N Remit".
The introduction of the new products, a few of which have been enumerated above and the growth of the economy enhanced the credit needs and the banking sector as a whole and more particularly these two major banks succeeded in substantially broadening their lending base. The comparative data is as follows: HBL's outstanding advances amounted to Rs 117.956 billion at end 1996 which rose to Rs 167.225 billion by end 2001- an increase of 41.76 per cent in 5 years and by end 2004 outstanding advances stood at Rs 258. 306 billion depicting an increase 54.47 per cent over 2001 in only 3 years' time.
Similarly, UBL's outstanding loan portfolio at end 1996 was Rs 66.893 billion which the bank could increase to Rs 77.942 billion by end 2001showing an increase of 16.51 per cent only during the long period of half a decade but the portfolio increased to Rs 150.323 billion at the end of 2004 depicting a sharp increase of 92.87 per cent over that of end 2001 within 3 years' period.
An interesting feature of HBL's /UBL's lending operations in 2004 is that the interest earnings on advances did not increase in proportion to the increase in the quantum of advances.
For instance, HBL's advances increased from Rs 183.654 billion in 2003 to Rs 258.306 billion in 2004- an increase of 40.64 per cent but the interest income increased by 11.69 per cent only from Rs 10.016 billion in 2003 to Rs 11.187 billion in 2004. Likewise, UBL's [performing] advances grew by 52.65 per cent from Rs 95.4 billion in 2003 to Rs 145.629 billion in 2004 but the interest income increased from Rs 4.444 billion in 2003 to Rs 6.336 billion ie an increase of 42.57 per cent only.
Since the interest rates had started inching up in the second half of 2004, the percentage of interest income should have exceeded the percentage of the increase in advances.
Why did this not happen and why is the sharp gap in the case of HBL where the interest income rose merely by 11.69 per cent against over 40 per cent increase in advances has become an enigma?
With a view to finding out lending outlets, like other banks, HBL and UBL also resorted to bringing the lending rates to their lowest ebb in the country's history. This was not done at the cost of their profits as the same are on the increase year over year but by squeezing the depositors.
HBL's deposits were Rs 404.629 billion at end 2004 on which the bank paid interest amounting to Rs 3.906 billion which gives the weighted average rate of 0.96 per cent only.
Similarly, during 2004, UBL paid interest amounting to Rs 1.511 billion on the deposits of Rs 237.054 billion which gives the weighted average deposit rate of 0.64 per cent which the President of the bank claims in the annual report "as stabilisation of low cost deposit base."
Non-performing loans (NPLs) are one of the major items of HBL's/UBL's balance sheet. As of 31st December, 2004 the quantum of HBL's NPLs stood at Rs 44.507 billion which depicts a reduction of Rs 3.219 billion over the previous year. But how did the reduction take place: by write off of Rs 2.124 billion. Is it not strange that out of NPLs stock of Rs 44.507 billion, Rs 14.473 billion pertains to the overseas operations which not only depicts increase over 2003 stock (2003 stock was Rs 14.12 billion) but also seems to be quite disproportionate to the quantum of domestic / overseas business.
It may be added here that the "professional" management taking over in early 1997 had inherited NPLs amounting to Rs 35.459 billion only (as of 31-12-1996). With the 8 year hard labour of the professionals, the NPLs have increased to Rs 44.507 billion. UBL's NPLs as end 2004 are Rs 20.541 billion which also show a substantial increase over 2003 stock of Rs 18.916 billion. This is besides write-off of over half a billion rupees during 2004.
While launching the consumer finance products, our banks seem to have perhaps lost sight of the security aspects. SBP on page 3 of its publication "Pakistan: Financial Sector Assessment 2003" has expressed an apprehension that " the absence of a centralised Information Bureau, which maintains the credit history of all individuals availing such loans, continues to pose a problem for the further development of consumer finance" Miss Akram Khatoon, former President, First Women Bank Ltd, has mentioned in her article appearing in DAWN-EBR dated May 30-June 05/2005 that the banks have reported 14,000 default cases of car loans alone.
If we take individual loan amount of Rs 0.4 million, such defaults would aggregate over Rs 5.5 billion. Now that the interest rates have started climbing up, the budgets of the individual borrowers may not leave their repaying capacity intact and more defaults may occur in future years.
It is true that through the availability of finance on account of unprecedented liquidity with the banks, the wheel of the industry also moved to a certain extent adding to the GDP but this also has negative aspects. The creation of demand based on the borrowed funds thereby moving the wheels of the industry cannot prove to be a sustainable phenomenon.
It has to halt in some years when the borrowing capacity of the individuals reaches a saturation point. What will happen at that time is a big question mark? The appropriate long term solution to gear up GDP is to create demand by increasing the income of the individuals through creating more employment's and arranging equitable distribution of the national assets as well as income among the masses.
Our economic managers are not prepared listen to the idea of equitable distribution of national assets/ income.
The making purchases of the items, subject to depreciation, through the borrowed funds is nothing but currently spending future earnings/savings. In a country which has the lowest savings rates compared to the neighbouring countries, spending future earnings/savings for consumer items is a highly undesirable phenomenon.
The Housing asset may have to be judged from a different angle as in that case the borrowing individual shall have a tangible "appreciating" asset is his hands and the acquisition of a house hold even otherwise will be the best use of the future earnings/savings.
But how much attention the banks are paying towards housing loans? As per the Monetary Policy Statement released by the SBP on the 21st July,2005, the credit expansion during fiscal 2004-05 amounted to Rs 390.3 billion out of which Rs 80.3 billion -over 20 per cent- went to consumer finance.
The amount going to the housing sector was merely Rs 17.5 billion- only 21.79 per cent of the consumer finance. There are reports that the banks are not catering to the housing loan requirements of the lower classes.
The bulk of the housing loans are going to the effluent people. SBP should look into this aspect and compile/release appropriate data in this context for public information.