STATE BANK OF PAKISTAN Transforming Public Sector Banks “Views on Public Sector Banks” PAKISTAN EXPERIENCE

Legacy And Nature of Problems  Macroeconomic Environment/Financial Sector  Extensive Set of Direct Controls  Dominance of Public Sector Banks and FIs  Policy Aimed at Directed / Subsidized Lending  Hidden Losses / Inflated Profits  Questionable Accounting Practices

 Poor Disclosure Standards  Failure to Address Legitimate Credit Needs of Various Productive Sectors in the Economy  Stifled Growth in Vital Sectors  Crowding Out of Private Sector as Public Sector Pre-empted Bank Financing  Loan Default Cases Languishing In Courts Legacy And Nature of Problems  Macroeconomic Environment/Financial Sector

 High Intermediation Costs  Over-staffing and Over-branching  Poor Customer Services  Undercapitalized  Poorly Managed / Narrow Product Range  Averse to Lending to SMEs/Housing & Other Segments  Undue Interference in Lending, Loan Recovery & Personnel Legacy And Nature of Problems  Public Sector Banks

1.Transition to Market Based Allocation of Credit 2.Liberalization of Financial Sector 3.Minimization of Government’s Role 4.Improved Corporate Governance Practices 5.Strengthening of the Legal & Regulatory Framework 6.Convergence to International Standards and Best Practices 7.Gradual and Measured Policy & Institutional Changes 8.Filling in Resources & Skills Gap 9.Instilling Market Discipline 10.Legal & Judicial System Reforms Reform Strategy

Separation of Management and the Board Fit and Proper Test of Board Members & Senior Management of Banks Limit of 25% Representation on BOD by Majority Ownership Prohibition on Concurrent Representation on BOD of Banks and Brokerage Houses Independent Audit Committee of the Board Outcomes & Results: Financial Sector  Strengthening Corporate Governance Practices and Internal Controls

CAMELS-S Minimum Capital Requirements Continuous Off-Site Monitoring-CAELS Adoption of IAS and Other Standards Compliance with Core Principles Mandatory Credit Rating Market Based Monetary & Credit Policy Outcomes & Results: Financial Sector  Strengthening Regulatory & Supervisory Capacity

Prompt Corrective Actions: –Cancellation of License –Change in Ownership and Management –Debarring of Two Audit Firms –Raising Nominal Capital Requirement –Removal of Restrictions on Consumer Financing –Enactment of Enabling Laws –Tax Relief on Mortgages –Reduction in Corporate Taxation Outcomes & Results  Strengthening Regulatory & Supervisory Capacity

Privatization –Three Commercial Banks Already Privatized –One DFI Liquidated –Partial Divestment (20%) in One Bank –Public Sector Share in Banking to Decline to 20% Private Sector Boards Resolution of Non-performing Loan Stock Appointment of Professional Management Time Bound Restructuring Plan Rationalization of Staff / Branches Strengthening of Systems & Internal Controls Augmenting Capital Base Diversification & New Products and Services Merit Based Recruitment System Outcomes & Results  Public Sector Banks - Progress

Easing of Entry Barriers / Licensing Reduced Taxation on FIs Liberalization of Foreign Exchange Regime Product Diversification Liberalization of Branch Policy Strengthening of Capital Base Promoting Mergers and Acquisitions Separation of Banks & Non Bank Financial Institutions Payment / Settlement System Developing Long-Term Paper Capital Market Reforms Phasing Out of Mandatory & Concessional Credit Programs Greater Transparency & Disclosure Outcomes & Results  Promoting Competitive Environment

Lessons For Other Developing Countries A Long Term Vision and Road Map has to be Sketched Out Before Reforms are Initiated It Takes Almost a Decade of Consistent, Uninterrupted Efforts to Bring About Sustainable Reforms Autonomy and Competence of the Regulators has to be Ensured Both in Legal & Substantive Ways Macroeconomic Environment has to be Conducive and Supportive Public Sector Banks Cannot Be Improved in the Absence of Overall Financial Sector Reforms Political Will to Take Unpopular and Tough Decisions Such as Large Scale Retrenchment is Sine Qua Non For Success Strong Professional Management is Required at all Levels of Decision Making in Restructured Financial Institutions Proven International Best Experiences Rather Than Ideological Rhetoric are The Best Guide For Building up Support and Implementing Reforms

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