Fiscal and monetary tightening likely in 2021-2022, according to former SBP governor – Journal
KARACHI: Pakistan could experience fiscal and monetary tightening in 2021-2022 due to inflation and a higher current account deficit, which have been made worse by global logistics bottlenecks and rising commodity prices said Salim Raza, former governor of the State Bank of Pakistan (SBP).
Speaking to CEOs and senior management of banks at the Pakistan Banking Awards on Friday night, the seasoned banker said banks will nevertheless preserve their profit growth in the future. “Our banks have good experience in managing portfolios and business risks during times of tightening,” he said.
Mr Raza expressed hope that the Covid-19 aftershock could be completed by next year, but warned it could take longer as the old economy – made up of energy, metals and commodity – has not received any investment in the past seven or eight years.
“If you take the different business segments of Pakistan and compare them to international competitors, I think the banking industry will rank among the best. It has a strong Tier 1 capital position and a very good return on equity, ”he said.
The primary source of funding, Tier 1 capital is a measure of the financial strength of banks made up of their equity and retained earnings. Pakistani banks’ average Tier 1 capital is 14.6 percent compared to 13 and 16 percent for banks in North America and the European Union, respectively, he said.
Seasoned Banker Calls Commercial Banking a Virtual Monolith of Finance
As for return on equity, which measures the rate of profit bank owners receive on their stocks, the average value for Pakistani lenders is 14.5% versus 9% and 5% for North American and European banks. , he added.
Mr Raza criticized banks for their lack of exposure to small and medium-sized enterprises (SMEs) and agricultural sectors. Against a share of 14pc for the two sectors in Pakistan’s total bank lending, the corresponding values for the Indian and Chinese banking sectors are between 40pc and 50pc. “Rather than traditionally relying on collateral and documentation, banks’ credit scoring should focus on positioning cash flow and supply chain for the SME / agriculture foray,” a- he declared.
Noting that government securities occupied 53% of banks’ loanable assets, the former head of the SBP said Pakistani lenders derive about 42% of their overall income from risk-free instruments. The share of advances in banks’ loanable assets was 70% in 2002-09, he said. This meant that the lending volume would today be 4.6 trillion rupees – 48% more than its current level – if the banks had maintained their focus on advances, he added.
CASA’s share – term deposits with no interest or low interest rate – in the country’s banking sector is 78pc compared to 44pc in India, he noted. “This is high mainly because term deposits are evenly split between national savings and banks – both are Rs3.7tr,” he said.
He urged bank CEOs to take the lead in diversifying banking services. “Our commercial banking industry is a virtual monolith of finance,” he said, noting that it should strive to expand into undeveloped business segments such as securitization, bond market, mergers, acquisitions, buyouts and consolidations.
Complaining that Pakistani banks’ sources of income have remained the same since the days when “dinosaurs roamed the planet”, Mr. Raza complained about the lack of innovation in the banking sector. “Using artificial intelligence, digital businesses can establish payment histories and assign predictive rating scores to flow-through entities. Credit factoring in supply chains can become a big business. The e-commerce feedback loop performs better than banking models, ”he said.
Posted in Dawn, October 31, 2021