KARACHI: Pakistan may experience fiscal and monetary tightening in 2021-22 because of inflation and higher current account deficit, which have been aggravated by global logistic bottlenecks and rising commodity prices, said Salim Raza, former governor of the State Bank of Pakistan (SBP).

Addressing the CEOs and senior management of banks at the Pakistan Banking Awards held on Friday evening, the veteran banker said banks would nonetheless preserve their earnings growth going forward. “Our banks are well-experienced in managing portfolios and business risks during tightening periods,” he said.

Mr Raza expressed hope that the aftershock of Covid-19 might be over by next year, but warned that it could take longer because the old economy — consisting of energy, metals and commodities — didn’t receive any investment in the last seven or eight years.

“If you take Pakistan’s different business segments and compare them with international competitors, I think the banking sector will rank among the best. It’s got a solid Tier-1 capital position and a very strong return on equity,” he said.

A primary source of funding, Tier-1 capital is a measure of banks’ financial strength consisting of their shareholders’ equity and retained earnings. The average Tier-1 capital for Pakistani banks is 14.6 per cent against 13pc and 16pc for the banks in North America and the European Union, respectively, he said.

Veteran banker calls commercial banking sector a virtual monolith of finance

As for the return on equity, which measures the rate of profit that bank owners receive on their shareholdings, the average value for Pakistani lenders is 14.5pc versus 9pc and 5pc for North American and EU banks, he added.

Mr Raza criticised banks for their lack of exposure to the small and medium enterprises (SME) and agriculture sectors. Against a 14pc share for the two sectors in Pakistan’s total bank loans, the corresponding values for Indian and Chinese banking sectors are between 40pc and 50pc. “Rather than a traditional reliance on collateral and documentation, banks’ credit assessment needs to focus on cash-flow and supply-chain positioning for SME/agriculture incursion,” he said.

Highlighting that government securities took up 53pc of banks’ loanable assets, the former SBP chief said Pakistani lenders drove about 42pc of their overall earnings from risk-free instruments. The share of advances in banks’ loanable assets used to be 70pc in 2002-09, he said. It meant the loan volume would today be Rs4.6 trillion — or 48pc higher than its current level — had the banks maintained their focus on advances, he added.

The share of CASA — non-term deposits with either no or low interest rate — in the country’s banking industry is 78pc versus 44pc in India, he noted. “It’s high primarily because time deposits spread equally between National Savings and banks — both are Rs3.7tr,” he pointed out.

He urged bank CEOs to take the lead in diversifying banking services. “Our commercial banking sector is a virtual monolith of finance,” he said, noting that it should strive to expand into undeveloped business segments like securitisation, bond market, mergers, acquisitions, buyouts and consolidations.

Complaining that the revenue sources of Pakistani banks have stayed the same since the time when “dinosaurs roamed the planet”, Mr Raza complained about limited innovation in the banking sector. “Using artificial intelligence, digital companies can establish payment histories and allocate predictive rating scores for intermediate entities. Factoring credit within supply chains can become a substantial business. Feedback loop from e-commerce gives better rating outcomes than bank models,” he said.

Published in Dawn, October 31st, 2021