The passage of Banking Companies (Amendment) Bill 2009 by the National Assembly of Pakistan on 8th February, 2010 could rightly be described as a major development in the history of country's financial sector, which would enable the State Bank to exercise much more authority and control over the banking system of the country.
The Bill, which was tabled by Health Minister Makhdoom Shahabuddin on behalf of Finance Minister Shaukat Tarin, empowers the State Bank to change the management of banks, impose losses on shareholders by writing down their capital, intervene and take control of banks and appoint administrators to manage banks or restructure banks when symptoms of crisis are adequately or fully determined.
In the Banking Companies Ordinance, 1962, in section 14, after sub-section (3), a new sub-section has been added, namely: The State Bank, if satisfied, may require any banking company, through an order in writing, to increase its paid-up capital by such amount within such period and in such manner as may be specified in the order. Notwithstanding any provisions contained in any other law for the time being in force, if the State Bank has determined that a member of a banking company is holding or, is a beneficial owner, of five percent or more shares of a banking company without prior approval of the State Bank or where any percentage of shareholding is or is likely to be detrimental to the interest of the banking company or its depositors or otherwise undesirable, the State Bank may require such member to reduce, divest or transfer to a fit and proper person, his shareholding in the banking company by such amount within such period and in such manner and at such price as may be specified in the order." Under the amendment to section 19 of the Ordinance, the SBP may restrict any banking company from accepting deposits from any class of depositors.
The need for amending the BCO arose because of difficulty faced by the SBP in protecting the depositors' savings in the troubled - now defunct - Prudential Bank. On previous occasions, SBP rescue act in Bank of Bahawalpur was its merger with National Bank. The local branch network of ill-fated Bank of Credit and Commerce, in the 1990s, were taken-over by HBL. Both Mehran Bank and NDFC were merged with NBP. After privatisation, SBP had to go to DFI - Saudi Pak Investment Company joint venture to buy Prudential Bank shares and during the transition SBP could not hold shares and sell them to Saudi-Pak.
Therefore, the proposal was to adopt the Japanese Model, which was employed to rescue banks after recession. Amendment in BCO would now override the SECP Act. The powers being acquired may look draconian. But to provide equity the bill allows an aggrieved party to move the SBP's Central Board of Directors against an order passed by the central bank.
An attempt was made by the authorities to justify the presentation of the new piece of legislation to the National Assembly. According to the stated objectives of the Banking Companies (Amendment) Act, 2009, the recent global financial crisis had clear linkages with weak supervisory regime. The ever-changing dimensions of banking business continue to create newer challenges and risks for bank depositors, regulators and financial system as a whole. Therefore, it was necessary to provide matching tools to bank regulators for corrective measures with a view to maintaining financial stability.
In our view, it is hard to disagree with the rationale behind the proposed amendment to the Banking Companies Ordinance, 1962 given to the parliament. There is no doubt that regulation and supervision of the financial sector is being strengthened in most of the countries through the enactment of new laws in the wake of severe financial crisis that had engulfed almost the whole world in the recent past. In certain highly developed countries, even the emoluments and compensation packages of top bankers are now being questioned and subjected to restrictions of various kinds.
Although financial sector of Pakistan did not face such a crisis, it was deemed necessary to adopt the required precautions and plug any loopholes existing in the system. Seen against this background, the proposed amendments would go a long way in providing the SBP the necessary tools of bank regulation to effectively deal with any untoward development, warranting its immediate intervention in the event of a crisis in any bank. However, it may be mentioned that the existing laws also provided these powers in one form or the other but it was deemed necessary to bring coherence and certainty of measures and give the central bank of the country complete confidence to effectively deal with troubled situations.
In the present scenario, the SBP Act also needs to be suitably amended with a view to allowing the regulator to monitor and supervise cross-holding of large groups. Cross debiting or creating a circular debt within a 'group' - experienced in South Korea needs to be remembered where cross-holdings by 'chebols' were rampant. The roadmap of financial sector reforms provided by SBP in 2007 in this regard needs to be reintroduced and implemented.
While commenting on the proposed amendments, we would especially like to appreciate the provision of imposing losses on the shareholders of banks by writing down their capital. This would make them more responsible and save the government/taxpayers from liabilities arising from the misjudgements of the banks. A more careful attitude of the bankers would also indirectly protect the interest of depositors which is a major cause of concern of any central bank.
However, the State Bank has to assume more responsibility under the proposed amendments. Vesting of more authority would necessarily entail that and any failure on the part of State Bank to meet the stated objectives would pose a threat to its image. However, empowering SBP in absolute terms to exercise control over its balance sheet, means to give it power to say 'No' when it comes to printing notes and to make it accountable to the legislative branch instead of the executive arm, which is a sine qua non or an essential element of the entire exercise.