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We have received the below given article from one of our readers (Mr. sankaran srinivasan) which appeared a few months back in Express Tribune on Monday, July 23, 2012. It makes a interesting reading in the context of problems being faced by Indian Banks too. Pakistan being a country, mostly and closedly watched by Indians, even bankers can learn few lessons from such an article. We are giving below extracts from the said article.
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In the light of recently released data by the State Bank in Pakistan, economist, Ali Salman argues that Pakistan's banking system has become unsound. Banks have been swamped with demands of risk free lending from the government, bulging levels of non-performing loans,drying up of genuine business projects and a general risk aversion amongst the bankers.
Pakistan’s financial sector liberalisation in general and
privatisation of banks in particular has largely been hailed by experts on
account of professionalisation, financial inclusion and penetration of banks.
Notwithstanding the usual criticism of a high interest spread and high bank
charges, strong evidences have now emerged which suggest that the banking sector
has become visibly unsound.
The most startling fact is that the
exposure of all banks to non-performing loans has more than doubled since 2006.
The stock of NPLs in public sector commercial banks has increased from 9% to
21%, in foreign banks from 1% to 10.5% and in commercial banks from 5.7% to
15.5%. In the case of public sector commercial banks, the ratio of net NPLs to
their capital is 44%, which was 6.4% in 2006, whereas this is 23.8% in
commercial banks, up from 6.2% in 2006.
The increasing exposure to NPLs has
dampened the profitability of banks as well. Overall, the earnings before
tax, when measured by returns on assets, have decreased by 24% over the last six
years. Certainly, this reduction is much more pronounced in public sector
commercial banks as it has come down from 4% in 2006 to 1.9% in 2012. Return on
equity before tax has been reduced from 35.2% to 26.3% in the same time period.
Another disturbing indicator is the
increasing cost of operations as measured by cost-income ratio. For
public sector commercial banks, this was 31.8% in 2006, which now stands at a
staggering 57.9% in 2012. For foreign banks, this has jumped from 49.8% to
According to the State Bank, the top five banks, which hold
51% of total banking assets and 50.9% of total investments, have parked 82.2% of
their investments in government securities. The foreign banks have parked 99.9%
of their investments in government securities. This trend is common across the
entire banking system. Now imagine that the federal government is ‘slightly’
less credible. Who will repay all this investment with such quality of
That the return to an NPL-dominated regime, which was
characteristic of nationalised banks, will only feed into risk aversion of
bankers should not be a surprise. However, unlike the political pressures which
were usually held culprit for these loans in the nationalisation era, the
deregulated banks should bear the brunt themselves now. It means that the
owners, directors and majority shareholders should be held responsible to this
extent. If a bank fails on this ground, the state must stay away, and unlike
what the Western governments did, must not socialise the costs of default.
Although insurance of small deposits can be a viable consideration.
It is true that the bankers alone cannot be held responsible
for uninterrupted demand of risk-free loans and a shocking absence of business
projects of scale. Probably, the non-availability of business projects can be
explained by poor, expensive and unreliable energy infrastructure. For the
risk-free loans, the political ambitions of the government, always devoid of any
economic wisdom, will be held responsible.
In an economy, where state is considered a source of expropriation by all, this scenario will unfortunately reduce confidence in the private sector and may even pave the way to re-nationalization. The present federal government has single handedly achieved all this in a matter of four year. The records of State Bank of Pakistan bear testimony of this financial suicide. The tax payers and genuine entrepreneurs must stand and refuse to finance the plunder any further that has been orchestrated by rent seekers from all quarters