Prospects and Challenges in Banking Industry
Khan, Hamesh, Economic Review
Preamble: The banking system of any economy is an undeniable determinant of its growth as it provides an efficient channel that routes funds from surplus sectors in the economy towards deficit ones. During the last decade, the banking sector has gone through a number of changes. The reforms have been implemented in the context of a broader macroeconomic stabilization and structural agenda, providing an essential foundation to financial sector recovery. A major achievement of the reforms process has been the transformation of a primarily state owned and weak banking sector into a healthier market based system, owned by the private sector. This has been facilitated by the restructuring of major banks, ongoing consolidation of the sector through mergers and acquisitions, strengthening of the regulatory regime, and improvements in transparency, corporate governance and credit culture.
An overview of banking sector
The commercial banking sector in Pakistan has come of age and is now well equipped in terms of technology, skills and financial resources to play an effective role in financial intermediation. A few words on the financial sector's scope and scale:
Financial assets grew by 70 percent over the past five years and in CY05 reached Rs. 5.1 trillion ($ & 1billion), equivalent to 80 percent of GDP.
The banking sector grew at a faster pace relative to non-bank sectors and accounts for 71 percent of the financial industry assets.
Banks have aggressively increased their lending portfolios in the recent years with their gross advance percent i.e. from Rs 1.63 trillion in FY04 to Rs 2.05 trillion during FY05. The share of consumer financing in the overall credit portfolio stood at Rs. 213.8 billion during CY05: from Rs. 122.4 billion recorded during CY04, depicting a quantum jump of 75 percent.
Total deposits of all commercial banks stood at Rs. 2.83 trillion at he end of CY05 as against Rs. 2.39 trillion during CY04 i.e. an increase of over 18 percent.
Banking sector profit (after tax) of Rs. 63.3 billion in 2005 is at an all time high surpassing the profit of Rs. 34.7 billion in 2004. Resultantly return on assets increased appreciably to 1.9 percent from 1.2 percent in CY2004, which is comfortably above the relevant international benchmark.
Capital adequacy ratio (CAR) improved to 11.3 percent in 2005 from 10.5 percent in 2004 showing strengthening of the system.
Non-performing loans declined by Rs. 22 billion resulting into a decline in NPLs to loans and, net NPLs to net loans ratios to 8 percent and 2.1 percent respectively, indicating receding threat to the financial soundness of the system.
M2 (broad money) has touched the figure of Rs. 3.41 trillion as on June 30, 2006 showing an increase of 14.54 percent over Rs. 2.96 trillion as on June 30, 2005. This represents additional liquidity of almost Rs. 451 billion available with the banks. Out of total M2 growth of Rs.451 billion, over 88 percent or Rs. 399 billion was contributed by the increase in the Net Domestic Assets (NDA) of the banking system. Net Foreign Assets (NFA) on the other hand increased by Rs. 52 billion approximately as the payment for imports kept the money supply from foreign inflow (remittances and privatization proceeds) in check.
Eighty percent of banking has now come under private management and the already competitive environment has become even more intense. Benefiting from the continuing consolidation process in large banks and the cautious stance of foreign banks, medium-sized private banks have managed to expand their operations vigorously. This has largely been due to continuing improvement in service quality and the expanding geographical outreach.
As at the end of CY05 the banking sector provided employment to 85,469 people (CY04: 81,759) and operated a network of 6,858 branches (CY04: 6,584). In other words, as many as 274 additional branches were opened and 3,710 more jobs were created by the banking sector during CY05. …