STATE BANK OF PAKISTAN

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Transforming Public Sector Banks
Views on Public Sector Banks PAKISTAN EXPERIENCE
STATE BANK OF PAKISTAN
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Legacy And Nature of Problems ? Macroeconomic
Environment/Financial Sector

• Extensive Set of Direct Controls
• Dominance of Public Sector Banks and FIs
• Policy Aimed at Directed / Subsidized Lending
• Hidden Losses / Inflated Profits
• Questionable Accounting Practices

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Legacy And Nature of Problems ? Macroeconomic
Environment/Financial Sector

• Poor Disclosure Standards
• Failure to Address Legitimate Credit Needs of
  Various Productive Sectors in the Economy
• Stifled Growth in Vital Sectors
• Crowding Out of Private Sector as Public Sector
  Pre-empted Bank Financing
• Loan Default Cases Languishing In Courts

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Legacy And Nature of Problems ? Public Sector
Banks

• High Intermediation Costs
• Over-staffing and Over-branching
• Poor Customer Services
• Undercapitalized
• Poorly Managed / Narrow Product Range
• Averse to Lending to SMEs/Housing Other
  Segments
• Undue Interference in Lending, Loan Recovery
  Personnel

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Reform Strategy

1. Transition to Market Based Allocation of Credit
2. Liberalization of Financial Sector
3. Minimization of Governments Role
4. Improved Corporate Governance Practices
5. Strengthening of the Legal Regulatory Framework
6. Convergence to International Standards and Best
   Practices
7. Gradual and Measured Policy Institutional
   Changes
8. Filling in Resources Skills Gap
9. Instilling Market Discipline
10. Legal Judicial System Reforms

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Outcomes Results Financial Sector ?
Strengthening Corporate Governance Practices and
Internal Controls

• Separation of Management and the Board
• Fit and Proper Test of Board Members Senior
  Management of Banks
• Limit of 25 Representation on BOD by Majority
  Ownership
• Prohibition on Concurrent Representation on BOD
  of Banks and Brokerage Houses
• Independent Audit Committee of the Board

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Outcomes Results Financial Sector ?
Strengthening Regulatory Supervisory Capacity

• CAMELS-S
• Minimum Capital Requirements
• Continuous Off-Site Monitoring-CAELS
• Adoption of IAS and Other Standards
• Compliance with Core Principles
• Mandatory Credit Rating
• Market Based Monetary Credit Policy

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Outcomes Results ? Strengthening Regulatory
Supervisory Capacity

• Prompt Corrective Actions
• Cancellation of License
• Change in Ownership and Management
• Debarring of Two Audit Firms
• Raising Nominal Capital Requirement
• Removal of Restrictions on Consumer Financing
• Enactment of Enabling Laws
• Tax Relief on Mortgages
• Reduction in Corporate Taxation

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Outcomes Results ? Public Sector Banks -
Progress

• Privatization
• Three Commercial Banks Already Privatized
• One DFI Liquidated
• Partial Divestment (20) in One Bank
• Public Sector Share in Banking to Decline to 20
• Private Sector Boards
• Resolution of Non-performing Loan Stock
• Appointment of Professional Management
• Time Bound Restructuring Plan
• Rationalization of Staff / Branches
• Strengthening of Systems Internal Controls
• Augmenting Capital Base
• Diversification New Products and Services
• Merit Based Recruitment System

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Outcomes Results ?Promoting Competitive
Environment

• Easing of Entry Barriers / Licensing
• Reduced Taxation on FIs
• Liberalization of Foreign Exchange Regime
• Product Diversification
• Liberalization of Branch Policy
• Strengthening of Capital Base
• Promoting Mergers and Acquisitions
• Separation of Banks Non Bank Financial
  Institutions
• Payment / Settlement System
• Developing Long-Term Paper
• Capital Market Reforms
• Phasing Out of Mandatory Concessional Credit
  Programs
• Greater Transparency Disclosure

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Lessons For Other Developing Countries

• A Long Term Vision and Road Map has to be
  Sketched Out Before Reforms are Initiated
• It Takes Almost a Decade of Consistent,
  Uninterrupted Efforts to Bring About Sustainable
  Reforms
• Autonomy and Competence of the Regulators has to
  be Ensured Both in Legal Substantive Ways
• Macroeconomic Environment has to be Conducive and
  Supportive
• Public Sector Banks Cannot Be Improved in the
  Absence of Overall Financial Sector Reforms
• Political Will to Take Unpopular and Tough
  Decisions Such as Large Scale Retrenchment is
  Sine Qua Non For Success
• Strong Professional Management is Required at all
  Levels of Decision Making in Restructured
  Financial Institutions
• Proven International Best Experiences Rather Than
  Ideological Rhetoric are The Best Guide For
  Building up Support and Implementing Reforms

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Thank You