Banks not rewarding savers: Lawai

In the current recessionary climate the banking sector stands out to be one of the most resilient and ever-flourishing industry in Pakistan. But, despite pocketing huge profits at the end of every year, the country’s commercial banks are not rewarding the savers, the accomplished banker Husain Lawai complains.
Lawai, president and chief executive officer of Summit Bank, is also critical of his counterparts in the commercial banks for investing around 35 to 40 per cent of their deposits in the risk-free and heavily-weighted government securities, including T-bills, PIBs and Ijara Sukuk, instead of 19 per cent prescribed by the banking regulations. Further, the experienced banker also wants the country’s present snail-paced judicial process to be made faster so to decide the fate of hundreds of thousands of recovery suits pending in banking courts for years. Lawai believes that the banking industry in Pakistan is resilient and would remain so in the foreseeable future as is evident from a good spread and relatively better regulatory framework. “It is, however, the most unfortunate fact that banks are not rewarding to savers despite making handsome profits,” the outspoken banker lamented while talking to Profit during an exclusive interview here in his office.
SBP, GOVERNMENT ENCOURAGING BANKS TO INVEST: Asked for his take on the present risk-averse behavior of the commercial banks, the banker said the government and the central bank were responsible for encouraging the profit-conscious banks to invest in the heavily-weighted government securities that had left little or no finances for the growth-oriented private sector in the banking system. The banker said when the sovereign borrower (government) was happily paying a heavy interest rate of KIBOR+3 to the banks, why would the latter take the risk to finance the private businesses in the current recessionary environment.
RESTRICT BANKS’ LOANS TO
NON-PRODUCTIVE PUBLIC SECTOR: The Summit Bank chief wants the State Bank of Pakistan (SBP) to restrict the banks’ massive lending to the cash-strapped government, which from July 1 to January 20 of FY12 borrowed over Rs770 billion from the banking system. Lawai proposes an increase in the prevailing income tax rate to deter the banks from extending excessive advances to the public sector, which uses the borrowed money for non-productive purposes like running of the government.
BANKS TAKE ADVANTAGE OF SBP’S DISCOUNTING SCHEME: Also, the banker appeared critical of the central bank’s scheme that provides the banks with a window to borrow money from the regulator against the government securities they hold. This window, he said, was enabling the banks to save a handsome amount without lifting a finger. “The State Bank after every two months announces its discount rate. We call it discounting, means whenever the banks need they can go to the window and borrow money against the Treasury Bills and PIBs they hold,” Lawai said adding “The banks take advantage of that. It’s a sort of cycle that keeps running.” The instrument, he deems as most important, is that the regulators at SBP must prescribe “a certain limit” for the banks investment in government papers.
BANKS VIOLATING SLR REGULARTIONS: “By regulatory laws we have to invest 19 per cent (in government securities). We call it SLR (Statutory Liquidity Ratio). Like of the total deposits, the banks have to maintain an SLR of 19 per cent in government securities,” he said. “But what we are doing is to investing 35 to 40 per cent instead of the required 19 per cent, so I would suggest the State Bank not to allow 40 per cent investment and restrict them to 25 per cent,” Lawai said. “Why would I, as a banker, lend to an industry at 2.5 or 3 per cent mark-up rate when the Government of Pakistan is giving me (KIBOR plus) 2.75,” he replied to a query on banks’ depleting loans to the private borrowers.
NO ECONOMIC GROWTH SANS CREDIT TO PRIVATE SECTOR: Asked to dwell on the ultimate implications, the banker said the private sector investment would go down that would reflect adversely on the already slow-paced economic growth in the poverty-stricken country. “Unavailability of credit would render the private investors unable to install industries, increase exports and conducting trading activities,” the banker said. According to banking experts, an increase in SLR restricts the banks’ leverage position to pump more money into the economy.
Rs620 BILLION NON-PERFORMING LOANS: REASONS, REMIDEIS: About bad debts of the banking industry, he said the current classified volume of the NPLs was totaling Rs 620 billion, 17 per cent of the banks’ Rs 3.5 trillion total advances. Elaborating on major reasons for the ever-bourgeoning bank defaults in the country, the experienced banker underlined both external as well as internal factors. Globally, he referred to a recessionary climate in the economy while domestically, Lawai said, an uncertain law and order situation, energy crises and frequent changes in the government policies were crippling the borrowers’ capacity to repay the borrowed money.
OVER 0.15-0.75 MILLION RECOVERY SUITS PENIDNG IN BANKING COURTS: Asked for an effective remedy to check the rising NPs, the banker said the country’s judicial process be quickened. The existing laws to decide a recovery suit within 90 days be followed strictly. “But during my 40-year banking experience I never saw this happen. It takes 10 to 15 years at least. So if we make this judicial process faster, you would see the size of NPLs reduced by half within next six months,” said he. Lawai said at present some 0.15 to 0.75 million cases pertaining to recovery of the bad debts were pending in various banking courts of the country that needed to be decided at the earliest.
GO AFTER WILFULL DEFAULTERS: Further, he said the banks should separate the willful defaulters from the genuine ones. “One should go after the willful defaulters, while the cases of genuine defaults be settled through negotiations.” The NPLs of his bank, Summit Bank, were also higher as the sum was a total of the three banks, namely Arif Habib Bank, My Bank and Atlas Bank, which had merged to become the Summit Bank, respectively, in June 2009, Dec 2010 and June 2011. “NPLs of the three banks accumulated to Rs20 billion, but we have done full provisioning to avoid a loss,” he said.
DON’T TIE INTEREST RATE WITH INFLATION: Lawai is also opposed to the tagging of interest rate with inflation saying the practice had little or no precedence in the developed world. “In the UK the inflation rate is 4.2 per cent but the interest rate stands at 0.5 per cent only,” he illustrated. Linking the discount rate with inflation in a country like Pakistan where the supply chain was completely “distorted” was incorrect, said the banker.
CUT INFLATION RATE TO SINGLE-DIGIT : The senior banker views that the central bank should bring the inflation rate down to single-digit, by 8 to 9 per cent, with a single stroke of the pen. “Only this would ensure economic growth as 15 per cent interest margin is very high,” he said.
SUMMIT BANK BUSINESS STRATEGY: Our business strategy focuses more on the trade financing as consumer banking has still not developed in Pakistan and the people need to be educated on the same. He said his bank, though nominally, was providing personal loans to corporate firms, their employees and those individuals having the capacity and resources to repay the loan. Summit Advantage Account, Lawai said, was the unique product his bank had launched to enable its account holders borrow money by 70 per cent against their one-year deposits. Family Saving Account is another special product the bank offers to the family members, including spouses and children, of its account holders by depositing only Rs 5000. “We pay 9 per cent interest rate against the normal 5 per cent. This is to promote family values,” Lawai said. To a query on the possibility of further acquisitions or mergers, the Summit Bank CEO responded in negative saying the bank was focusing more on “organic growth” and would this year add up 35 more branches to its 166 countrywide branch network. He said Summit Bank’ total advances and deposits amounted to Rs 66 billion and Rs 90 billion, respectively.