The easing of the inflationary pressure at home and abroad has favourably affected different sectors of the economy.

Over 13 litres of petrol are available for Rs1,000 now, while transport fares and electricity bills have also reduced.

The lower import bill of crude and vegetable oil would lend comfort to the government’s dealings with the IMF, particularly in the presence of higher foreign exchange reserves.

On the banking front, the decline in the State Bank of Pakistan’s (SBP) policy rate and the concomitant decrease in banks’ lending rates is good news for the private sector.

While primary producing sectors are starved of the general credit, even the corporate sector has now lost its glitter in the eyes of banks because they have found a safe and wholesale outlet for their funds — government debt papers

This situation provides an opportunity to the central bank to again work on the agenda of establishing a banking system that promotes national objectives and priorities.

In the recent past, the SBP has put in place initiatives that promote financial literacy and inclusion, and value-chain systems, to increase the financial outreach of banks to the hitherto unexplored but vital sectors of the economy.

It is high time that the central bank consolidates all such policies to foster a banking system that is equipped with the tools and techniques to cater to the credit needs of the economy’s primary producing sectors. This will not only involve banks in the process of national economic development, but also improve their profits in an era of falling yields on government papers.

Being profit-maximising institutions, commercial banks have a tendency to lend in areas that offer higher returns. But it is the central bank that regulates banks in a manner that the flow of credit is diverted towards priority sectors and for preferred uses.

In the past, the SBP had two opportunities to lay the foundations of a national banking system. The first was the recommendation of the Credit Inquiry Commission of 1959 to ensure the flow of credit towards the primary producing sectors.

However, these recommendations were ignored for about 12 years. This gave birth to a banking system in the mid-1960s that was sound and viable, but which was also marked by interlocked interest and ownership within a few big accounts and in a few cities. This system also fostered a culture of banks offering low rates of return to depositors despite earning bumper profits — a legacy being pursued by our banks even today.

The banking reforms of the early 1970s and the subsequent nationalisation of banks were largely based on the findings of the Credit Inquiry Commission. But these could not provide the desired push in making banks pro-primary producing sectors, since they remained glued to corporate finance in a big way.

Meanwhile, the second opportunity became available after the 9/11 attacks. Owing to a huge inflow of foreign funds, banks were flooded with liquidity, which drastically changed the complexion of domestic banking. Conventional lending rates fell to 3-4pc, while deposit rates were slightly above zero.

For the first time in the history of banking, depositors had to pay service charges on accounts that fell below the prescribed minimum level. The huge accumulation of deposits needed financial outreach in the shape of new avenues of financing hitherto unexplored by banks. These were agriculture and small and medium enterprises (SMEs), which had a market worth trillions of rupees and the borrowers of these sectors were ready to pay better rates to banks on smaller amounts of loans.

But we again made a similar mistake, pushing banks into lifestyle loans and car leasing in a big way, while ignoring agriculture and SMEs. This consumerism provided banks with huge profits. Furthermore, the reduction over over time in the tax rate on bank profits from 58pc to 38pc made banking a roaring business.

However, all these initiatives could not change the banking landscape in the desired manner. While primary producing sectors are starved of the general bank credit, even the corporate sector has now lost its glitter in the eyes of banks because they have found a safe and wholesale outlet for their funds — short- and long-term government debt papers.

As things appear today, interest rates on deposits and investments/advances are likely to see a further downward trend.

What will happen to the banks that are in the habit of earning billions of rupees in profit, even after spending lavishly on salaries, bonuses and other perks?

The ease and comfort of investing in hassle-free government securities would not let banks go to the fields in search of viable small farmer-borrowers or SMEs, where the lending rate is at least 14-16pc — almost double the current rate of under 8pc on Treasury bills.

Fearing a further slide in T-bill yields, banks have already parked billions in long-term Pakistan Investment Bonds. The huge reduction of 20pc in the tax slab on bank profits was primarily meant to ensure efficiency and competition in the banking system. But the banks still prefer to invest in risk-free government papers, rather than going for more lucrative lending to SMEs and small farmers.

The writer is the President of Institute of Banking and Business Learning Lahore.

munir1951@hotmail.com

Published in Dawn, Economic & Business, April 13th, 2015

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