KARACHI, Sept 5: The State Bank on Friday raised the minimum capital requirement for all banks and development financial institutions (DFIs) to Rs23 billion to push the sector for consolidation and to encourage a second-round of mergers and acquisitions.

The decision was taken in a meeting, presided over by State Bank governor Dr Shamshad Akhtar with CEOs of banks and DFIs on Friday.

The State Bank also increased capital adequacy ratio to 10 per cent, hoping the move would help consolidate the banking industry.

The central bank had already announced as part of its ten-year strategy that the paid-up capital would be increased to $300 million.

Dr Akhtar said the central bank has decided to raise minimum paid-up capital requirement for locally incorporated banks to Rs23 billion (net of losses) to be achieved in a phased-manner by Dec 31, 2013.

In addition, foreign banks operating in the country are also required to increase their assigned capital to Rs23 billion (net of losses) within the prescribed timelines, she added.

Under the existing instructions, the banks and DFIs are required to have the MCR at Rs6 billion by Dec 31.

According to new instructions, the banks would have to raise their MCR to Rs10 billion by Dec 31, 2010, Rs15 billion by Dec 31, 2011, Rs19 billion by Dec 31, 2012 and finally Rs23 billion by Dec 31, 2013.

Senior bankers said the increase in paid-up capital is a clear message to small banks to wrap-up their businesses and that only banks with giant stature can survive.

A circular of the State Bank said those FBs, which are operating with up to five branches, are required to increase their assigned capital to Rs3 billion while FBs operating with six to 20 branches are required to raise their assigned capital to Rs6 billion by Dec 31, 2010 provided their head offices hold paid-up capital (free of losses) at least equivalent to $300 million and have a CAR of at least eight per cent or minimum prescribed by their home regulator, whichever is higher.

“All newly-licenced banks would henceforth be required to meet the paid-up or assigned capital requirement of Rs23 billion before commencement of their operations,” said Dr Akhtar in a release also issued by the SBP.

Dr Akhtar informed the bankers that required minimum CAR, on consolidated, as well as on standalone basis, has also been increased for banks and DFIs to at least 10pc.

She said all banks are required to maintain variable CAR, which would now be based on CAMELS-S rating assigned by the State Bank to each bank and DFI.

Those banks and DFIs whose CAR falls short of the required ratio are advised to meet the shortfall latest by Dec 31.

The required MCR and CAR can be achieved by banks and DFIs either by fresh capital injection or retention of profits, the governor said and added that the stock of dividend declared after all the legal and regulatory requirements, would be counted towards the required paid-up capital of the bank and DFI pending completion of formalities for issuance of bonus shares.

“We are trying to push for consolidation of the banking industry, and to encourage second-round of mergers and acquisitions,” Dr Akhtar told the participants.

Consolidation is necessary to ensure presence of stronger and well capitalized banks that can support diverse financial services and client requirements, while adequately managing risks, she said.

Dr Akhtar also elaborated the central bank’s 10-year vision and strategy for the financial sector and focused on issues pertaining to deposit protection scheme, consolidated supervision and minimum capital requirement.

The SBP governor welcomed the bankers feedback on the blue print for a deposit protection scheme (DPS) to protect small depositors.

She said DPS increases depositors’ confidence in banking system and comforts small savers and helps the competitive position of small private banks in relation to large banks or government owned banks.

She said that the proposed DPS would be in line with the best international practices.

As a part of supervisory reform agenda, the SBP would be moving towards consolidated supervision system in compliance with Basle Core Principles.

To allow for this appropriate structural change in financial sector, regulatory architecture would be required and legislated for which Banking Companies Ordinance, 1962, is also in the process of being amended, she added.

At the conclusion, Dr Akhtar urged the banks to reduce banking spreads which are ‘high’ as compared to countries in the region. Banks pointed out that lending rates for corporate sector were relatively low but higher in other sectors as they are factor in the risks associated with the businesses.

At the same time, she asked the banks to closely monitor rising non-performing loans and to keep them in line with international standards.

She also emphasised that banks should work diligently not only to increase their deposit base but also to increase deposit rates for the benefit of customers.

She urged the banks to explicitly publicise real and effective deposit rates while mobilizing such deposits.