KARACHI: The banking sector is the backbone of an economy. The News spoke to the chairman of the Pakistan Bank’s Association (PBA), Muhammad Aurangzeb. He shared some insights into the current financial situation, the recent credit letters crisis, as well as the measures undertaken by banks during the coronavirus pandemic. Here are some excerpts from his interview.
Following are key excerpts of The News interview with Chairman.
Q. Has the PBA been effective in fostering the advancement and interest of the banking industry?
A. There are more than 50 members of PBA, including commercial banks, microfinance banks, and development finance institutions. We must consider the banking industry in the context of financial services because one feature of it is that banks take deposits and lend money to customers, a practice known as financial intermediation. Second, increasing the services side of the business refers to how banks provide services and what their turnaround times are.
When it comes to what banks did during Covid, the financial sector had an important impact. Very good policies were introduced by the SBP, but the banks were the ones who actually put them into effect. The banks made sure that throughout such difficult times, the services would not be disrupted. We could have done a better job of communicating the services that banks provided in Covid. I think the industry’s overall profile and messaging need to be improved. In order to show how the banking sector helps the national economy and the general public, PBA must convey its case clearly.
Any economy’s backbone and its engine and propeller is the banking sector. Banks are regulated entities and crucial businesses. Although they are unable to shut down their branches through shutter-down strikes, banks believe that when they speak with government officials or the FBR, they should be factual about what has occurred in other countries and what is currently taking place in Pakistan in terms of tax rates on banks. Top among the issues facing the banking sector is taxation. Banks want a level playing field in terms of tax rates, just like the other sectors of the economy.
The governors of the SBP have all been very kind to the PBA and meet every three months to discuss problems with the PBA. The PBA meets with the government occasionally. The PBA is not a lobbying platform, but it will continue to interact with the regulator and the government as it now does.
Q. What recent initiatives has the PBA undertaken?
A. PBA has undertaken the Electronic Know Your Customer (eKYC) initiative on behalf of the industry. The implementation of this platform will boost efficiency at participating banks, improve client satisfaction, particularly at the time of account opening, and reinforce anti-money laundering controls in addition to promoting financial inclusion. With the use of the platform’s blockchain technology, banks will be able to standardise and exchange customer information across a decentralised, self-regulatory network with their permission. This would serve as a support platform for Pakistan’s banking sector, enabling all participating member institutions to assess both their current and potential customers by using information and data from other banks’ “Consonance” systems.
Once completed by a member bank, the eKYC data can be used by other banks for customer due diligence, reducing the time and expense associated with onboarding new customers and enhancing the account opening experience for customers. In the next six to nine months, this programme will be launched.
The credit scoring model for lending to unbanked or informal sector borrowers is another initiative being taken by the PBA platform. This programme is for undocumented workers, such as domestic workers, who lack a wage statement and so do not have access to loans from financial institutions. When calculating credit scores for prospective borrowers with low formal incomes, banks will use the amount paid in rent and electricity bills. The Mera Pakistan Mera Ghar Housing Finance Scheme, also known as the Government Markup Subsidy Scheme, which was put on hold last year for fiscal reasons, was where this approach was initially developed and tested. Now, this methodology should be applied to many asset classes rather than only low-income housing schemes. This will become effective this year.
The digitisation of banks is a hot topic in order to achieve financial inclusion. Digitalisation has made this possible rather than brick and mortar, but there are also risks associated with it, such as hacking and other fraudulent activities. Banks and other institutions cannot deny that they have been the target of cyberattacks. Although each individual bank is responsible for its own cybersecurity, the PBA platform should be used for industry-wide simulation exercises that test how banks will respond to cyberattacks.
Q. Why is the banks’ investment-to-deposit ratio rising while their advance-to-deposit ratio is decreasing?
A. Banks’ overall advance-to-deposit ratio is more than 50 percent. We deal with clients in every sector, including the government and private individuals. The primary cause of the government’s large bank borrowing is a lack of fiscal discipline, which is also highlighted by the IMF in its latest report.
In order to increase revenue, the government must broaden its tax base and include currently untaxed sectors such as real estate and the retail. The potential from untaxed and undertaxed sectors is estimated to be between Rs1.5 and 1.7 trillion, according to the Pakistan Business Council study.
The government can cut back on borrowing by privatising state-owned businesses that are operating at a loss. According to the SBP Act, the government cannot request funds from the SBP; if banks refuse to lend to the government, the nation will experience a fiscal default. As a result, the government won't be able to pay its employees' salaries. Therefore, it is simple to claim that banks are only investing in risk-free government securities. This leads to crowding out of the private sector, so in order to lower the fiscal deficit; we must gradually address the underlying problem. As a result, if borrowing requirements decrease, banks will deploy fewer securities and move into the private sector.
Where is the demand when banks want to lend money to the private sector? How can firms operate at such high-interest rates? The private sector is particularly careful when choosing to borrow money and is worried about its ability to return it. I expect that the demand for loans from the private sector will increase in the second half of this fiscal year as a result of the clearing of the backlog of letters of credit (LCs) and the lifting of import restrictions.
Q. Why does the IMF react to the SBP’s refinancing schemes?
A. I think the IMF believes that the SBP’s refinancing schemes lead to distortions. The global lender, in my opinion, wants these initiatives to be implemented or carried out by a separate institution rather than by the government using SBP. Development finance institutions should be established by the government to carry out subsidised financing schemes that would promote transparency and prevent market distortions.
The Temporary Economic Refinance Facility (TERF), a concessionary refinancing instrument, was designed to encourage new projects during the coronavirus 2020 doom and gloom. Under another scheme, the SBP gave funds to the banks so that no businesses would lay off employees. People may have different opinions about whom or in which sectors banks should lend money, but there is little doubt that banks received subsidised funding, and banks were completely free to choose their counterparties. While the pandemic was still going on, certain businesses were set up that used TERF. In Pakistan, banks received funding from the SBP with the bank bearing the counterparty or credit risk. The banking sector could have been in trouble if Covid had persisted for a longer time and the economy hadn’t improved.
Q. What are the banking sector’s opportunities?
A. Two factors make digital transition a top priority for the whole banking sector. The need for financial inclusion comes first. A second digital transformation could reduce the delivery costs for the banks. My request to the central bank is to refrain from using directed lending in order to enhance financing to priority sectors. The banking industry needs to be incentivised to lend money to the SME and agricultural sectors.
Q. What is the PBA’s view on sustainable banking?
A. We should recognise climate change as a source of financial risk because Pakistan is one of the most vulnerable nations to its effects, as we saw during the floods last year. Every bank has a board that determines the bank's medium-term environmental, social, and governance (ESG) goals. Although some banks no longer finance Pakistani coal projects, they go on to finance renewable energy projects like solar.
I believe that the stock exchange will soon begin to play a role in promoting green and sustainable financing, even though the SBP is advising and pushing banks to include ESG principles in their lending strategies.
Q. What do you think about the investigation into banks for manipulating the exchange rate?
A. Due to the nation’s financial crisis, the first and second quarters of the last fiscal year (FY2023) were exceedingly challenging. The government had imposed restrictions on the LCs for the import of certain goods in order to reduce the demand for dollars. The IMF's programme was halted, which dried up the inflows of foreign currency. The enormous discrepancy between dollar supply and demand led to a distortion in the foreign exchange market.
Banks attempted to accommodate import transactions by running short positions. Banks entered short positions when the local currency was extremely volatile and fluctuating because they were pricing in that risk. So, has anyone considered the consequences if banks had been unable to establish LCs for financing imports?
Prior to the IMF deal, international banks refused to confirm LCs for Pakistan’s imports, particularly those of petroleum products. Given the precarious macroeconomic condition of the country and the default risk as determined by credit default swaps, even those banks who confirmed LCs quoted higher rates to Pakistani banks of up to 8 percent. That currency manipulation, was it?
The banking industry was the first to comply with the anti-money laundering, counter-terrorist financing, and financial sanctions laws, even though Pakistan was on the Financial Action Task Force’s grey list. For opening bank accounts, banks have stringent requirements for client due diligence and KYC. Last year, Pakistan was taken off the FATF’s “grey list” thanks in large part to banks’ strict adherence to such rules.
