ISLAMABAD, 14 January — State Bank, the Pakistani, central bank, has started reforming itself in order to reforming the banking industry to boost investment.
The State Bank (SB), to begin with, has split itself, and separated its core and public dealing service functions. It will retain only four core functions. It has handed over the remaining functions to its newly created and wholly-owned subsidiary "State Bank of Pakistan Services Corporation" (SBSC) that has just been launched.
The central bank’s innovative Governor Dr. Ishrat Hussain, who masterminded the reform says, the bank will, henceforth, retain only four functions, including: (a) framing and operation of the monetary policy, (b) regulation and supervision of banks and financial institutions, (c) foreign exchange management, and (d) settlement of payments and accounts.
The SBSC established under SB Services Corporation Ordinance, has an authorized capital of Rs.1 billion, 6,100 staff, all drawn from the State Bank itself, and Akram Shah, the SB’s official as its first managing director. It will be responsible for all public dealing functions, including the issue, supply, sale, encashment and handling of government’s prize bonds, a big source of borrowing, and holding of their draw.
The SB is slimmed down and left with 1,000 staff. "It will now be able to work more diligently, particularly in maintaining a vigilance over the banks and the financial sector," Dr. Hussain says. "We were blamed for acting rather late in case of privately owned Prudential Bank and the Indus Bank," that went bust last year, but, "from now onward there will be more emphasis on developing a human resource base in the central bank." SB is widely blamed for its failure to perform its "Inspection Function," check bank fraud, financial wrongdoing, enforce banking discipline, allowing governments to illegally consume $11 billion private forex deposits, and neglecting to protect customer and corporate interests in the past. It also must speed up comprehensive use of IT and electronics, that it now plans to introduce the end of 2002 to electronically receive regular statements from banks and financial institutions. It will help SB to instantly detect any wrong, and take prompt action.
Under the new plan, the state-owned National Bank of Pakistan will continue to function as government treasury on behalf of the SB, where the central bank has no branch. The SB has branches only in 16 major cities.
As part of the SB and government-initiated reforms of banks and the financial sectors, funded by a $250 million credit in 1997 from the World Bank, and another one of $300 million recently, Some 47,000 employees of state-owned banks have been retrenched. The privately owned commercial banks also are slimming down their payroll. Some of the small, privately-owned banks established after the 1991 banking reforms, are not doing well. SB has asked them to merge with more profitable banks.
Besides recessionary situation of the economy, the May, 1998 decision to freeze $11 billion privately owned dollar and forex accounts also had hit the banks hard. The foreign banks that had most of these private accounts were hit the hardest, as that much of their deposit base was gone. It was followed by a rapid depreciation of the rupee parity in terms of the dollar, that led Pakistanis moving their forex deposits abroad, squeezing the banks here further. The banks continue to suffer as a result of defaulted and non-performing loans which, over the last 20 years accumulated, to a hefty Rs.250 billion — close to a quarter of their entire deposit base. In order to recover the defaulted money and improve profits, banks have been unable to significantly cut down the interest rate to borrowers, although these are down from almost 22 percent in mid-1990s to around 14 percent. But, in their bid to improve profits, the banks have constantly reducing the interest or profit rate to depositors, stunting the growth of savings, that continue to be one of the lowest in the world. The SB has slashed its discount rate by 4 percent in the hope that the banks will lower interest rates, but they have not because of their continued inefficiency, excessive staffing, and lack of prudent operations that result in high cost of intermediation.
"There is no justification for the commercial banks, not to lower their interest rates, "says Dr. Hussain. As a result of costly credit, the economy is not coming out of a prolonged recessionary situation, nor any significant new investment has taken place. The economy was additionally hit by drought in fiscal 2001 when growth was 2.7 percent one of the lowest in Pakistan’s history.
