Presiding over a meeting of the heads of all commercial banks and development finance institutions (DFIs) on 26th January, 2015, Governor, SBP, Ashraf Mahmood Wathra, took stock of the overall performance of the financial system and offered advice on important issues relating to the banking industry. He urged upon the banks to rationalise "average spreads", which continued to remain high, warning them that the SBP shall "review the position by the end of June, 2015 and may take regulatory measures to lower the spreads." Banks were also asked to focus on private sector lending and deposit mobilisation. Discussing the conditions of Islamic banks, Wathra advised them to reward their customers appropriately in line with their surging profits. Quality of services should also be improved at the institutional level by taking all possible measures. Foreign exchange-related services, in particular, should be improved for small customers. "The staff needs to be appropriately trained and products developed to assist public in the easy execution of their genuine foreign exchange transactions such as fees or medical expenses," Governor observed. Banks should also discourage import of non-essential items by reviewing their internal credit policies and facilitate exporters to the maximum to promote the economy. Ashraf Wathra was also critical of the performance of the banks' existing representative offices abroad. Banks should perhaps consider subsidiaries in foreign countries as "exchange companies", which may further help the inflow of home remittances. Talking about the IT security management, Governor stated that banks must strengthen their back-up support and improve security measures. Banks were also advised to ensure round-the-clock services of their ATMs for general public and discourage the incidence of banking frauds with the involvement of bank staff. "Banks are responsible for their staff and signatories who authorise transactions," he added. On its part, the SBP could help train human resources of banks at different levels at NIBAF and IBP.
It is good to see that Governor, State Bank was able to highlight so many issues in a single meeting with the presidents/CEOs of the financial institutions, which were agitating the minds of the banks' clients for a long time and needed to be resolved for providing better service delivery and uplifting the role of deposit mobilising institutions in the development of the economy. Obviously, higher spreads between the deposit and lending rates (exceeding 4.5 percent most of the time) have been a great handicap both in mobilising higher savings in the economy and encouraging private sector investment. So far, the SBP has largely relied on moral suasion to bring home the fact that such a situation is against the larger interest of the economy. It seems that the patience of the central bank is now running thin and some regulatory measures may be taken to lower the spreads below or at around 4.5 percent at the time of promised review sometime in June, 2015. The advice of the Governor for easy execution of genuine foreign exchange transactions, especially for the small customers, is particularly welcome since banks are usually reluctant to offer such services on various kinds of pretexts and customers have to generally resort to informal channels to meet their requirements. This is not only expensive for the customers but also risky at times. Improvement in ATM services, particularly during holidays, is also direly needed. The SBP circular on "guiding principles on fairness of service charges levied by banks" issued on 27th January, 2015 may be instructive in this connection wherein banks have been instructed to ensure fairness and transparency in determining charges of various products and services to enhance the confidence of customers in the banking industry.
Though the thrust of Governor's overall advice was well-directed, yet a part of it may either fall on deaf ears or could hardly be effective in yielding the desired results. For instance, banks are not likely to focus on private sector lending until and unless government securities with relatively high rates of returns (RORs) and no risk are abundantly available in the market. Management of banks is always more concerned with maximisation of profits for their equity holders rather than the impact of their behaviour on the direction of the economy. If the SBP wants such a shift in banks' lending preferences, it must persuade the government to reduce or eliminate its borrowing from the banking system or prescribe a limit on government borrowings so that more financial resources could automatically be released for the private sector. In a similar vein, it is incomprehensible how the banks could discourage the import of non-essential items when these are legally allowed in the country. Of course, government could meet the same purpose by banning the import of such commodities or readjusting their tariff rates. Also, banks cannot improve the security on their premises merely by their own efforts if the law and order situation in the country continues to be precarious and robbers continue to operate without any fear from law enforcing authorities of the government.