The State Bank requires all banks to raise their minimum paid-up capital, free of losses, to Rs10 billion by December 2014. PHOTO: FILE
Following the $6.6 billion loan approval by the International Monetary Fund (IMF), the State Bank of Pakistan (SBP) is expected to come up with a plan by December 2013 to ensure that banks comply with the minimum capital adequacy ratio (CAR) requirement.
In line with the Memorandum of Economic and Financial Policies (MEFP) signed with the IMF, the central bank is going to ask all private and public-sector banks that do not currently meet the requirement to raise capital latest by December 2014 to achieve the minimum CAR of 10% of their risk-weighted assets.
A measure of a bank’s capital, CAR is expressed as a percentage of its risk-weighted credit exposures in order to protect depositors and maintain soundness of the financial system.
Although the MEFP did not name any bank, a review of financial statements of Pakistani banks suggests that at least one public sector bank and three private sector banks have a CAR of less than 10%.
Most banks publish their CARs only in annual financial results at the end of every financial year. Going by the latest annual results available, state-owned Bank of Punjab has the CAR of 7.7%, which makes it the only bank in the public sector that does not meet the minimum CAR requirement.
In the private sector, as many as three banks have their CARs less than 10%, according to the latest annual financial results. These banks are Summit Bank (4.6%), KASB Bank (1.1%), and Silk Bank (5.7%).
According to an analyst covering the banking sector for a leading brokerage house of the country, Silk Bank is currently on the lookout for foreign investment so it can raise capital for meeting the CAR of 10%. “Silk Bank has got strong sponsors. I think they’ll soon be able to find international investors,” an analyst said while requesting anonymity.
As opposed to Silk Bank that is reportedly eying foreign investment, the analyst added that Summit Bank is more likely to be merged with another bank. “It came into existence after the merger of three banks. Now it is expected to be acquired by another bank with a high CAR, such as MCB Bank or Habib Bank (HBL).” MCB and HBL have CARs of 14.7% and 15.8%, respectively, as per their latest annual financial results.
Minimum capital needs
Other than addressing the CAR issue, the IMF has also asked the State Bank to prepare a detailed plan for “recapitalisation, consolidation or liquidation” of nine banks that fall below the minimum capital requirement (MCR) by the end of December 2013, according to the MEFP.
The State Bank requires all banks to raise their minimum paid-up capital, free of losses, to Rs10 billion by December 2014.
Speaking to The Express Tribune, AKD Securities CEO Farid Alam said asking all banks to set aside Rs10 billion to meet the MCR will discourage small banks and leave the field open for big banks only.
“This condition makes no sense. There are boutique banks all over the world, so why can’t we have the same?” Alam said. He added that asking small banks with Rs20 billion of deposit base to come up with Rs10 billion to meet the MCR is unjustifiable. “Modaraba leasing companies and investment banks have already disappeared. If banks are also subjected to such policies that ensure the survival of only the big banks then banking will soon be a field for the big players only,” Alam observed.
Published in The Express Tribune, September 21st, 2013.
Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.
COMMENTS (1)
Comments are moderated and generally will be posted if they are on-topic and not abusive.
For more information, please see our Comments FAQ
“Modaraba leasing companies and investment banks have already disappeared" It's not yet over. As far as I know SECP has plan to revive this sector in light of recommendations by NBFIs reform committee who's report is already out.