SBP committed to developing, diversifying financial sector

KARACHI- The State Bank of Pakistan is committed to develop and diversify the financial sector to enhance its
role in supporting the countrys economic growth.
State Bank of Pakistan (SBP) Governor Syed Salim Raza said this while delivering his keynote address at a
Prize Award Ceremony of the Institute of Bankers of Pakistan here on Thursday.
Pakistan is currently standing at a juncture where long-term investment in infrastructure is crucial to facilitate the
process of economic growth, he said.
Salim Raza said that developing bond markets and enhancing the capacity of public-private sector borrowers to
issue long-dated local currency denominated debt securities is high on the countrys policy agenda. Among
other factors, the presence of the requisite investor base is crucial for the development of both the primary and
secondary markets in debt securities, he said and added that the regulatory environment should provide the right
incentive framework to encourage both individual and institutional investors to invest and trade in debt
instruments.
The SBP governor opined that the banking sector, which enjoys virtual monopoly in providing financing to all
sectors of the economy, could play a contributing role in the development of the debt market. He said the central
bank has a crucial role in promoting secondary market trading of debt securities by improving the effectiveness
of monetary policy implementation.
Development of the term structure of interest rates depends on regular issues in the primary market, increased
trading activity in the secondary market, and providing ease of entry and exit to both the issuers and the
investors. Regular auctions of Pakistan Investment Bonds (PIBs) since May 2006 is a step in this direction,
Salim Raza observed.
He observed that banks in Pakistan have been able to withstand the headwinds from the weakening
macroeconomic fundamentals since FY07. Now that the economy is poised for a remarkable turnaround, the
banking sector has an even greater role to play in supporting the real sector by meeting its financing needs, the
SBP governor added.
He said that Non-Performing Loans (NPLs) of countrys banking system are expected to stabilize with the
improvement in macroeconomic fundamentals as the recent macroeconomic pressures which eventually led to a
slowdown in economic growth in FY09, indicate that the increase in NPLs of the banking system is largely of a
cyclical nature. The sensitivity analysis undertaken at SBP suggests that the banking sector is well placed to
withstand credit risk shocks of a modest nature, Salim Raza said and added that the provisioning coverage
ratio of around 70 percent at end March 2009 also shows a prudent and proactive approach towards credit risk
management.
He said that in response to the emerging dynamics in the macro-financial environment, SBP has rationalized the
Minimum Capital Requirement (MCR) and the time period in which it needs to be implemented, thus providing
the much required breathing space to the banking industry in this difficult macroeconomic environment.
Salim Raza emphasized that banks need to make concerted efforts to ensure a sustained deposit growth by
tapping the un-banked market, increasing financial penetration and facilitating the process of financial
intermediation.
The SBP Governor observed that banks loan portfolio is highly skewed towards big sized loans. Classification
on loans by account size indicates that only 0.5 percent of total bank borrowers with loans size of more than Rs
10 million are using 71.7 percent of banks loan portfolio, Salim Raza said and added this indicates high
concentration risk in the banking sector.
Sensitivity analysis of concentration risk in banking sector suggests that the default of the three largest fund-
based exposures can cause the aggregate Capital Adequacy Ratio (CAR) to fall below the minimum
requirements. These risks can be easily managed in the presence of well-developed capital markets, he
added.