Banks capable of
absorbing market shocks, says SBP
KARACHI, Oct 7: The resilience of Pakistan’s banking sector will
enable it to absorb market shocks and adverse macro-economic
conditions, says State Bank Governor Dr Shamshad Akhtar.
In a press statement issued by the central bank on Tuesday, Dr
Akhtar said the capability had been achieved through a continuous
financial reform process pursued over the past few years. “There
should not be any cause for concern about the stability of the
banking system in the coming days,” she said.
The statement comes at a time when the developed world is in the
grip of a financial turmoil and even large banks are facing a
serious liquidity crunch, causing stocks exchanges the world over to
The SBP governor said that Pakistan’s banking system was showing a
“strong performance and holds a promising outlook”.
Dr Akhtar said that investor’s confidence in the banking system
remained unshaken and they had injected an additional capital of
about $500 million since 2006 that coupled with retained earnings
improved the banks’ capital base.
The banking sector, she said, had strong capital adequacy, well
above the minimum requirement. “The capital adequacy ratio is 12.1
per cent as of June 2008 which is well above the international
“The non-performing loans ratio and the ratio of non-performing
loans to capital are also quite low and within acceptable ranges.
“The (net) infection ratio in June 2008 has improved to 1.1 per cent
from 1.6 per cent in December 2006, signifying that the banks have
set aside more reserves out of their earnings to cover the increase
in non-performing loans. Accordingly, the non-performing loan
coverage and capital impairment ratios have also improved,” the SBP
Pakistani banks, Dr Akhtar said, largely focussed on conventional
lending and remained unexposed to sub-prime credit instruments in
the international market. The lending and investments of banks were
subject to stringent prudential SBP regulations which prohibited the
banks from clean lending and investment in low-quality assets.
She said banks were required to recognise loan losses and provide
for these losses in line with the established best practices.
According to the SBP governor, the State Bank’s on-site inspection
and off-site supervision wings kept a close watch on the state of
each bank and the banking system, to avert any risk to the banking
In 2007, she said, SBP made loan provisioning requirements more
stringent to create adequate cushions, enabling the banking system
to withstand any potential credit adversity. An analysis of the
system suggested that it could withstand any number of shocks
without losing its solvency, Dr Akhtar said.
Referring to some recent pressures on money market rates, she said
that these mainly pertained to the “seasonal factor of cash
withdrawal for Eid”. In order to meet their requirements for Eid
preparations, depositors tended to withdraw large sums from the
banking system, creating a liquidity crunch for a few days after
Eid. This situation, however, reverses in due course of time as the
funds ultimately return to the banking system.
“Public at large should cooperate and should help in channelling
liquidity within the formal system.” The SBP governor also urged
banks to launch aggressive deposit mobilisation efforts.