Banks capable of absorbing market shocks, says SBP
In a press statement issued by the central bank on Tuesday, Dr Akhtar said the capability had been achieved through a continuous financial reform process pursued over the past few years. “There should not be any cause for concern about the stability of the banking system in the coming days,” she said.
The statement comes at a time when the developed world is in the grip of a financial turmoil and even large banks are facing a serious liquidity crunch, causing stocks exchanges the world over to nosedive.
The SBP governor said that Pakistan’s banking system was showing a “strong performance and holds a promising outlook”.
Dr Akhtar said that investor’s confidence in the banking system remained unshaken and they had injected an additional capital of about $500 million since 2006 that coupled with retained earnings improved the banks’ capital base.
The banking sector, she said, had strong capital adequacy, well above the minimum requirement. “The capital adequacy ratio is 12.1 per cent as of June 2008 which is well above the international benchmark.
“The non-performing loans ratio and the ratio of non-performing loans to capital are also quite low and within acceptable ranges.
“The (net) infection ratio in June 2008 has improved to 1.1 per cent from 1.6 per cent in December 2006, signifying that the banks have set aside more reserves out of their earnings to cover the increase in non-performing loans. Accordingly, the non-performing loan coverage and capital impairment ratios have also improved,” the SBP governor said.
Pakistani banks, Dr Akhtar said, largely focussed on conventional lending and remained unexposed to sub-prime credit instruments in the international market. The lending and investments of banks were subject to stringent prudential SBP regulations which prohibited the banks from clean lending and investment in low-quality assets.
She said banks were required to recognise loan losses and provide for these losses in line with the established best practices.
According to the SBP governor, the State Bank’s on-site inspection and off-site supervision wings kept a close watch on the state of each bank and the banking system, to avert any risk to the banking system’s stability.
In 2007, she said, SBP made loan provisioning requirements more stringent to create adequate cushions, enabling the banking system to withstand any potential credit adversity. An analysis of the system suggested that it could withstand any number of shocks without losing its solvency, Dr Akhtar said.
Referring to some recent pressures on money market rates, she said that these mainly pertained to the “seasonal factor of cash withdrawal for Eid”. In order to meet their requirements for Eid preparations, depositors tended to withdraw large sums from the banking system, creating a liquidity crunch for a few days after Eid. This situation, however, reverses in due course of time as the funds ultimately return to the banking system.
“Public at large should cooperate and should help in channelling liquidity within the formal system.” The SBP governor also urged banks to launch aggressive deposit mobilisation efforts.