Notes

Outline

FINANCIAL SECTOR REFORMS Vision A market based financial sector owned and managed mainly by the private sector but operating under a strong regulatory environment.

"Objectives" Objectives To consolidate the banking sector through mergers, acquisitions, liquidations so that a few but stronger banks provide full range of services. To privatize nationalized commercial banks so that 80 percent of banking assets are in the private hands. To restructure and strengthen non-banking finance companies and make them an integral part of financial services industries. To build institutional capacity of SBP and SECP in becoming effective regulators and supervisor of the financial sector.

"I." I. Restructuring and Privatization  of public sector financial institutions UBL, MCB, AL-Falah Bank, ICP, mutual funds have been privatized, HBL, IDBP, NIT in the process of privatization Major improvements in transparency, governance, credit culture and efficiency of NCBs (reduction in staff, closure of branches, improved cost income ratios) Closure, liquidation, mergers of Development finance Institutions have reduced the number to six from 12

"II." II. Corporate Governance Reforms Fit and proper test for Board members and Chief Executives Compliance with Code of Ethics and Business Practices Independent Audit Committee of the Board Strong Internal audit and controls Limitations on the family membership of Board Conflict of interest safeguards Oversight of the Board strengthened Transparent procedure for selection of external auditors and quality control review

"II." II. Corporate Governance Reforms – Enforcement License of a commercial bank cancelled – the first of its kind Ownership and management changed in two banks Several Directors and bankers debarred from banking profession Two large audit firms blacklisted Changes in the composition of Boards of a few banks ordered

"III." III. Capital Adequacy Minimum paid-up capital requirements raised to Rs 1 billion (about $ 17 million) Risk weighted capital adequacy ratio in excess of 8 percent for the system Subordinated debt in form of Term Finance Certificate (TFCs) allowed as Tier-2 capital

"IV." IV. Risk Management All securities and investments are marked to market continuously Banks allowed to raise funds through long term TFCs to match their long term assets e.g. for mortgage financing Asset backed securitization has been allowed Local currency derivatives such as Interest rate swaps under consideration Credit Information Bureau made on-line Private sector to set up CIBs for consumer loans, etc

"V." V. Technology Upgradation Real Time Gross Settlement (RTGS) under implementation to improve payment system infrastructure E-Clearing house and E-Commerce Shared ATM networks On-line and automated branches by 2004

"VI." VI. Deepening of Capital Market 10 year Pakistan Investment Bonds introduced as the benchmark for corporate bond issues Commercial paper allowed Debt instruments of different tenors and structure are becoming available Significant improvement in observance of internationally accepted standards and codes

"VII." VII. Product Diversification and Innovation Commercial banks encouraged and facilitate to develop new products and services such as Mortgage financing, SME, Rural financial services, Consumer loans, Micro finance Islamic banking allowed to run parallel with conventional banking

"VIII." VIII. Increased Disclosure and  Transparency Quarterly reporting and public dissemination of financial statements Mandatory credit rating for all financial institutions and disclosure to public List of written-offs loans to be published along with the balance sheet Anti-money laundering law being legislated

"IX." IX. Dealing with non-performing loans … (cont.) CIRC set up to acquire non-performing loans and dispose them to third parties Guidelines issued for bank boards to write off old irrecoverable loans in loss category Joint Creditor-borrower Committees in place to settle and restructure potentially but sick viable industrial units NAB acting forcefully against willful defaulters

"IX." IX. Dealing with non-performing loans Flows of non-performing loans contained to less than 5 percent thus improving the quality of assets Provisions against loan losses have been substantially enhanced and cover almost 60 percent of non-performing loans Strict criteria are enforced for classifying loans. Sock of Net NPL/Net advances ratio is down to 11 percent

"X." X. Strengthening Regulatory and Supervisory Capacity Legal and operational autonomy of SBP enshrined in constitution SECP made the sole regulator for non-bank finance companies SBP and SECP have developed management structure, technical expertise, technology and enforcement capacity compatible with international best practices SBP’s core central banking function of monetary policy, banking regulation and supervision, foreign exchange management separated from the retail and ancillary functions

"XI." XI. Legal and Regulatory Infrastructure New and separate prudential regulations being introduced for Corporate, Consumer and SME lending A new foreclosure law for expeditions recovery of stuck up loans has been implemented Banking Courts have been established for speedy disposal of cases A new corporate bankruptcy law is in the final stage of enactment Bank branching policy has been liberalized

"XII." XII. Liberalization of foreign exchange regime All current account transactions can be carried out without any prior approval or restrictions Free floating exchange rate system determine the price of foreign currency vis-à-vis Rupee Partial capital account convertibility achieved Foreign exchange companies established to replace money changers

"Lesson Learnt … (contd" Lesson Learnt … (contd) A long term vision and road map have 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 have to be ensured both in legal and substantive ways

"Lesson Learnt" Lesson Learnt Political will to take unpopular and tough decisions such as large scale retrenchment is sire qua non for success Strong professional management is required at all levels of decision making in financial institutions International best experiences rather than ideological rhetoric are the best guide for bringing about results