Pakistan Strengthening capital requirements for banking industry

Karachi, Sept 5 PPI: Pakistan's State Bank Governor, Dr Shamshad Akhtar Friday announced to raise Minimum Capital Requirements (MCR) and Capital Adequacy Ratio (CAR) for locally incorporated banks, DFIs as well as foreign banks in phased manner in order to encourage further consolidation in banking sector.

These policy measures are a critical component of Pakistan's next 10 years financial sector Blue Print. The new government has supported SBP in its long term vision of financial sector reforms.

Presiding meeting of Presidents, CEOs of banks, she said appropriate level of banks' capital is critical for industry to strengthen business prospects as adequate capital buffer helps raise depositors, public confidence, while allowing industry to achieve desired asset growth in line with growing requirements of the country.

SBP decided to raise minimum paid-up capital requirements for locally incorporated
banks to Pak Rupees 23 billion (net of losses) to be achieved in a phased manner by
December 31, 2013. Foreign Banks (FBs) operating in the country are also required to
increase their assigned capital to Rs 23 billion (net of losses) within prescribed
timelines.



However, those FBS operating with up to five branches are required to increase their
assigned capital to Rs 3 billion while FBs operating with 6 to 20 branchges are
required to raise their assigned capital to Rs 6 billion by December 31, 2010
provided their head offices hold paid-up capital (free of losses) at least
equivalent to $300 million and have a CAR of at least 8% or minimum prescribed by
their home regulator, whichever is higher.



Under existing instructions, banks, DFIs are required to have MCR at Rs 6 billion by
December 31, 2009. According to new ones, banks will have to raise their MCR to Rs
10 billion by December 31, 2010, Rs 15 billion by December 31, 2011, Rs 19 billion
by December 31, 2012 and Rs 23 billion by December 31, 2013.



All newly licensed banks will henceforth be required to meet paid-up, assigned
capital requirement of Rs 23 billion before commencement of their operations, Dr
Akhtar added.



The required minimum CAR, on consolidated as well as one standalone basis, was also
increased for banks, DFIs, which will now be based on CAMELS-S Rating assigned by
SBP to each bank, DFI. Those banks, DFIs whose CAR falls short of required ratio are
advised to meet shortfall latest by December 31, 2008.



The required MCR & CAR can be achieved by banks, DFIs either by banks, DFIs either
by fresh capital injection or retention of profits. The stock of dividend declared
after all legal and regulatory requirements will be counted towards required paid-up
capital of bank, DFI pending completion of formalities for issuance of bonus shares.



``We are trying to push for consolidation of banking industry and encourage second
round of mergers and acquisitions. Further consolidation is necessary to ensure
presence of stronger and well capitalized banks that can support diverse financial
services and clients requirements, while adequately managing risks.''



She elaborated 10-year Vision & Strategy for financial sector and focused on issues
pertaining to Deposit Protection Scheme, Consolidated Supervision and MCR. She
welcomed bankers feedback on blue print for DPS to protect small depositors. DPS
increases depositor confidence in banking system, comforts small savers and helps
competitive position of small private banks in relation to large or government owned
banks.



Dr Akhtar said as part of supervisory reform agenda, SBP will move towards
consolidated supervision system in compliance with Basle Core Principles. To allow
for this appropriate structural change in financial sector, regulatory architecture
would be required and legislated for which Banking Companies Ordinance, 1962 is also
in process of being amended.



She stressed on banks to reduce banking spreads which are high as compared to
countries in the region. Banks pointed out that lending rates for corporate sector
were relatively low but higher in other sectors as they factor in risks associated
with businesses.



She asked banks to closely monitor rising non-performing loans and keep them in line
with international standards, work diligently not only to increase their deposit
base but also increase deposit rates for customers benefit. She urged banks to
explicitly publicize real and effective deposit rates while mobilizing such
deposits.



ENDS PPI.