Expected New Governor of State Bank of Pakistan

The much promised race for the coveted post of Governor of the State Bank of Pakistan has failed to materialise. By all indications so far, it is going to be a one-man run and the acting Governor Yaseen Anwar appears poised to become head of the central bank.

Most banking and financial market analysts believe that he has beaten whatever competition he had initially and emerged as the most viable replacement for Syed Salim Raza who resigned as governor of the bank on June 2, citing “personal” reasons. “Mr Anwar has now emerged as the strongest – and possibly the only – candidate for the top job in the bank,” a senior Lahore-based banker told Dawn last week. The financial markets have been speculating different names – including but not limiting to former SBP Governor Dr Shamshad Akhtar and former special finance secretary Dr Ashfaque Hasan Khan – for the governorship of the bank ever since Syed Raza quit.

Some finance ministry officials say that Dr Akhtar had already turned down the government’s offer while Dr Khan was never approached for the job. Others, whose names had popped up in the market for the job, either did not meet the criteria for the governorship or were not considered competent enough by the authorities.

The banker pointed out that the acting governor had accompanied President Asif Ali Zardari on his recent China visit, which indicated the presidential preference for him for the post. But not everyone agrees with him.

Written Off Loans From 1971 to 2009

The Supreme Court was informed here on Tuesday that Rs 256.66 billion loans to 6,69,819 borrowers were written off in the last 38 years (1971 to 2009) by public as well as private banks of the country. According to a summary submitted by the State Bank of Pakistan (SBP) in the apex court, category wise detail is as under;

Category One:

Loans up to Rs 0.5 million = Rs 213.79 billion

Written off to number of borrowers = 23,445 in the last 38 years.

95 percent were written off during the period of 1997-2009.

Category Second:

Loans from Rs 0.5 million to Rs.2.5 million = Rs 42.871 billion

Written off to number of borrowers = 646,374 in the last 38 years.

Earlier, on December 22, 2009 a bench headed by Chief Justice Iftikhar Muhammad Chaudhry was told that loans of Rs 193. 404 billion to 19,711 borrowers were written off during the last 12 years (1997-till date) by 37 banks operating in the country. According to the details submitted by SBP, top banker which have written off bank loans are as under;

Habib Bank Limited (HBL) = Rs 49.63 billion,

United Bank Limited (UBL) = Rs 38.45 billion,

National Bank of Pakistan (NBP) = Rs 8.54 billion,

Allied Bank Limited (ABL) = Rs 12.17 billion,

MCB Bank Limited = Rs 11.83 billion,

Industrial Development Bank = Rs 11.79 billion and

Zari Taraqiati Bank Ltd = Rs 8.76 billion.

Banks Misleading The Depositors

The Competition Commission of Pakistan passed an order on Friday against four banks for the misleading advertisements regarding higher returns on deposits. The order also said that the advertisements could harm business interests of other undertakings by luring customers away from them.

Salient features of the order are;

Banks which voilated section 10 of the Competion Ordinance include

• Askari Bank Limited
• Habib Bank Limited
• My Bank Limited and
• United Bank Limited

This section prohibits deceptive marketing practices and, among other things, providing false and misleading information to consumers.

The CCP had taken notice of these banks’ advertisements about deposit accounts and associated profit rates.

The CCP had issued show-cause notices to the banks and the bench, after the hearing, held that the advertisements were deceptive because these did not specify the basis of the calculation of the expected rate of return.

The advertisements did not disclose consequences of early withdrawal from such deposit accounts and carried important information in small print.

The CCP order referred to the Truth in Savings Act of the United States, which listed different requirements to be followed when advertising financial goods or services.

After the banks submitted undertakings that they would comply with the directives of the commission, the CCP did not impose any penalty on the banks because they had agreed to withdraw the advertisements.

The CCP order, however, warned the banks that future violations would carry serious consequences, and said that it should serve as guidelines for all banks and other undertakings concerned.

Monetary Policy - November To December, 2009

A cursory look at key macroeconomic indicators shows substantial improvements on multiple fronts. Inflation (YoY) has fallen to 8.9 percent in October 2009 and is expected to remain in the vicinity of 11 percent by the end of current fiscal year. External current account has improved considerably, positively altering its projected trajectory. With government borrowings from the SBP remaining within the quarterly limits, the broad money (M2) has also remained contained along the projected path. The real sector is also showing signs of improvement as the large scale manufacturing (LSM) stage a recovery after a protracted declining phase. However, a close inspection of these encouraging developments together with a pragmatic assessment of prevailing security situation in the country and fiscal uncertainties invite caution and further analysis.

Recent month-on-month inflation changes in headline and core measures continue to be volatile and on the higher side, oscillating between 0.5 and 1.7 percent in case of the former and remaining stuck at 0.8 percent in case of the later. A reassuring fact is that the number of items in the CPI basket showing higher monthly increases relative to an historical benchmark has come down significantly. However, at the same time, the number of items displaying significant inflation persistence has also increased, which indicates the probable entrenchment of second round effects of inflationary process. The poor administration in the supply chain of some food items is not helpful either in positively altering inflation expectations. A higher than projected fiscal deficit for FY09 has also changed some underlying assumptions for inflation outlook in FY10. In addition, the full impact of electricity and gas price adjustments, a necessary part of fiscal consolidation measures, and recent resurgence of international commodity prices, on the back of early signs of global economic recovery, remains a source of uncertainty for inflation outlook.

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RBS Pakistan Acquisition Case - Who Will Win Among MCB and SBP

MCB that signed an agreement on 12th August 2009 with the Royal Bank of Scotland Group plc to acquire 99.37% of the ordinary shares in RBS Pakistan at the cost of USD 85 mn (PkR 7.2 bn) has moved to Supreme Court against State Bank’s decision. State Bank has not yet given regulatory approval to MCB to acquire local operations of RBS.

As per the SBP's sponsor shares circular, sponsors of banks are required to deposit their shares in a blocked account with CDC in order to ensure continued stake/ownership of sponsors/major shareholders in the bank. However, the MCB Bank has not fulfilled the said requirement and sponsor shares of MCB Bank have not been deposited in a blocked account.

Therefore, the central bank has withheld an NOC for the purchase of RBS shares by MCB Bank. However, the SBP did not raise any objection at the time of granting due diligence approval to MCB Bank, after which MCB Bank went into negotiations with the RBS management for the purchase of local operations. The SBP raised objection just after the two parties had finalised the deal. The MCB management had several correspondences with the central bank for the purpose of an NOC.

Normally, in such acquisitions, deal-seeking regulatory approval is the obligation of the acquirer and the seller seeks damages (which in this case is said to be around one billion rupees) upon failure of the acquirer to close the deal. It is believed that December 31 is the deadline provided to MCB Bank to conclude the transaction, which includes an approval from the SBP and the SECP and a mandatory offer from other mandatory shareholders, who hold only 8 percent shares in the bank.