Husain_PolicyConsid

8/8/2019 Husain_PolicyConsid

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Policy Considerations before BankPrivatization Country Experience

Dr. Ishrat Husain

Governor

State Bank of Pakistan


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Outline

Background

Rationale

Modalities Pre-Privatization Activities

Case Studies


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Privatization of Banking Sector in Pakistan

Background

Financial sector significantly altered in early 1970s with

nationalization of domestic banks under the Banks

Nationalization Act 1974.

The Pakistan Banking Council was set up to act asholding company of nationalized commercial banks and

to exercise supervisory control over them.


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By end of 1980s, the pre dominance of public sector in

banking and non bank financial institutions together with

instruments of direct monetary control was contributing

to financial repression, financial sector inefficiency,crowding out of private sector and deteriorating quality of

assets.

SBPs role as a central bank had been considerablyweakened due to the presence of Pakistan Banking

Council. Duplication of supervisory role was diluting

SBPs enforcement of its regulations over nationalized

commercial banks


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Pre-privatization structure of Banking

Sector (1990)

Banks No. Assets Deposits Equity

Amount

(Rs.

Billions)

Share

(%)

Amount

(Rs.

Billions)

Share

(%)

Amount

Rs.

Billions)

Share

(%)

State-

owned

7 392.3 92.15 329.7 93 14.9 85.6

Private - - - - - -

Foreign 17 33.4 7.84 24.9 7 2.5 14.4

Total 24 425.6 100 354.6 100 17.4 100

Source: Financial Sector Assessment 1990-2000, State Bank of Pakistan


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Privatization of Banking Sector in PakistanAt the onset of the 90s, the Banking Sector in Pakistanwas dominated by the public sector banks which werecharacterized by

High Intermediation Costs Over-staffing andOver-branching

Huge portfolio of Non performing Loans

Poor Customer Services

Undercapitalized

Poorly Managed / Narrow Product Range

Averse to Lending to SMEs/Housing & Other Segments

Undue Interference in Lending, Loan Recovery & Personnel


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Rationale for Privatization in Pakistan

Privatization process initiated in the early 1990s as part of

economic reforms programme

Establishment of Privatization Commission in 1991 for

disposing state owned enterprisesMission statement of Privatization Commission

Privatization is envisaged to foster competition, ensuring

greater capital investment, competitiveness and

modernisation, resulting in enhancement of employment

and provision of improved quality of products and services

to the consumers and reduction in the fiscal burden.

Privatization Policy announced in 1998


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1. Reduction in fiscal deficit

Fiscal deficit reached a high of 8.5 percent of GDP in

1987-88. Loss making making public sector

enterprises were a burden on the national exchequer.2. Increase in the efficiency levels

Efficiency levels of public sector enterprises were low.

Production costs of public enterprises were high as a

result of political interference.

3. To foster competition

State owned units when sold to different parties

would result in healthy competition in different

sectors of the economy.


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4. Broad basing of equity capital

Privatization would result in strengthening and

deepening of capital market when some percentage of

shares of public enterprises are sold to the publicthrough stock exchange.

5. Releasing resources for physical and social

infrastructure

More funds available for development projects.Privatization of loss making enterprises would give

govt. more fiscal space


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Modes of Privatization adopted in Pakistan

The Privatization Policy of 1998 outlined the

following modes of privatization:

Total disinvestment through competitive bidding

Partial disinvestment with management control

Partial disinvestment without managementcontrol

Sales/ Lease of assets and property


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The Privatization Process

1. Identification

2. Hiring of a Financial Advisor

3. Due Diligence

4. Enacting Regulatory and Sectoral Reforms

5. Valuation of Property

6. Pre-Bid and Bid Process

7. Post-Bid Matters


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Steps taken for preparing banks for

privatization1. Amendment in Banks (Nationalization) Act 1974 in

1990.

2. 11,101 workers out of 39,277 were relieved from HBL,

NBP and UBL.

3. 1646 branches of NCBs allowed to be closed.

4. Rs. 46.6 billion injected as equity to recapitalize thebanks.

5. NPLs worth Rs. 47.4 billion transferred to CIRC1

atdiscount for disposal.

6. Tax refund bonds issued to NCBs amounting to Rs.6.5 billion issued

1 Corporate and Industrial Restructuring Corporation established in 2000 for acquisition of

NPLs.


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Steps taken for preparing banks for

privatization

7. Professional management installed in HBL, NBP andUBL.

8. Boards of Directors reconstituted with private sectorindividuals of integrity and eminence.

9. Promulgation of PrivatizationOrdinance in 2000

10. Introduction of incentive scheme for loan defaulters

11. Committee for Revival of Sick Units


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Role of State Bank in Privatization

1. Analysis of issues, design of restructuring plan of

nationalized commercial banks (NCBs), monitoring

and implementation follow up.

2. Voluntary Separation Schemes for excess labor

designed and implemented with the financial

assistance of the World Bank.

3. Approval of the Chief Executives and Boards of

Directors of newly privatized banks according to the

Fit and Proper test


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Role of State Bank in Privatization

4. Meaningful input on documentation viz-a-viz

Advertisement, Statement of Qualification (SOQ)

and Agreement for sale of shares and transfer of

management.

5. Screening and evaluation of the Strategic Investors

for clearance of purchase of 5% or more shares of

NCBs in order to ensure quality and competence of

buyer.

6. Resolution of the issues raised by the strategicinvestors during the process of privatization.

7. Evaluation of bids


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Banks privatized so far

1. Muslim Commercial Bank Limited26 % shares were sold to the National Group in April 1991 for

Rs. 838.8 million. Another 25 % shares were offered for

subscription to the public in February 1992. Remaining shares

have been divested in January, 2001, November, 2001 and

October, 2002 for proceeds of Rs.1,287.2 million.

2. Allied Bank of Pakistan Limited

26 % shares sold to Allied Management Group (AMG)

representing employees of ABL, in 1991. Another 25 % sold in

1993, resulting in transfer of ownership from government toAMG.

3. Bankers Equity Limited

In June 1996, 51 % shares were sold to LTV Consortium for Rs.

618.73 million


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4. Bank Alfalah LimitedHighest bid of Rs. 1.64 billion received for sale of 70 % shares of

Habib Credit & Exchange Bank Limited (presently BankAlfalah) in June 1997. 2% shares were meant for the employees28% shares sold in block for Rs.1,226.0 million. The shares nottaken up by the employees were also sold. Sale Purchase

Agreement was signed on 13th December, 2002

5. United Bank Limited

51% shares sold in October, 2002. Payment of US$ 176,907,858

and Rs.1,852,500,000 received

6. Habib Bank Limited

Highest bid of Rs.22.409 billion received from Aga Khan Fund

for Economic Development, for sale of 51% shares on 29thDecember, 2003. Transfer to the new owners took place onFebruary 26, 2004.


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7. National Bank of Pakistan

23.2% shares have been divested through IPO/POs in

November, 2001, February, 2002 (Rs.373.0 million) November,

2002 (Rs.782.0 million), November, 2003 (Rs.604.0 million).


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Units privatized to date

( pees in Billion)

1991 to J n

2002

J l 2002 to

J n 2003

J l 2003 to

Jan15, 2004

o ate

Sector o. m o nt o. m o nt o. m o nt o. m o nt

Banking 4 5.6 2 12.9 1 22.4 7 41.0

US $

710

million

So rce: Privatisation omm ission


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Post-privatization Structure of Banking

Sector (March 2004)

Banks No. Assets Deposits Equity

Amount

(Rs.

Billions)

Share

(%)

Amount

(Rs.

Billions)

Share

(%)

Amount

(Rs.

Billions)

Share

(%)

State-

owned14 518.8 18.6 379.3 20.1 22.5 17.2

Private 20 1840.3 66.0 1292.3 68.5 92.8 70.9

Foreign 13 278.4 10.0 198.0 10.5 26.7 20.4

Specialize

d banks23 149.8 5.4 16.1 0.9 -11.1 -8.5

Total 40 2787.2 100 1885.6 100 130.9 100

Source: Banking Supervision Department, State Bank of Pakistan

1 Three small new banks were set up in the public sector during the 90s. These included the First Women Bank, set up

to provide credit to women entrepreneurs; and two provincial banks; the Bank of Punjab and the Bank of Khyber.

2

These include: Zari Tarqiati Bank Ltd, Industrial Development Bank of Pakistan and Punjab Provincial Co-operative


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Case Studies

1. Muslim Commercial Bank

2. Allied Bank Limited


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Muslim Commercial Bank

First bank in the public sector to be privatized

On 6th April 1991, 26 % shares of MCB were sold to

National Group at a price of Rs. 56 per share, for a total

amount of Rs. 2.4 billion.

As part of the Sale Agreement, a further 25 % of shares

were offered for subscription to the public on 19th

February 1992.

Further shares were sold in January, 2001, November,2001 and October, 2002 for proceeds of Rs.1.3 billion.

Upon completion of disinvestments of 51 % shares, the

application of Banks Nationalization Act 1974 ceased on

MCB


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Financial Indicators (1994-2003)


Banking Supervision Department, State Bank of Pakistan

0

5

10

15

20

25

30

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Assets (% of assets of NCBs)

%

0

5

10

15

20

25

30

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Deposits (% of deposits of NCBs)

%

0

5

1015

20

25

30

1

9

9

4

1

9

9

5

1

9

9

6

1

9

9

7

1

9

9

8

1

9

9

9

2

0

0

0

2

0

0

1

2

0

0

2

2

0

0

3

Advances (% of ad vances of NCBs )

%


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Non Performing Loans as % of Total Loans

(1993-2003)



0

5

10

15

20

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

%


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Return on Assets (1993-2003)



0.0

0.2

0.4

0.6

0.8

1.0

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

%


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Impact Analysis of Privatization

Assets as a proportion of total assets of the nationalized

banks grew from 18 percent in 1994 to over 28 percent

by 2003 an increase of 10 percentage points.

Deposits as a proportion of total deposits of the

nationalized banks increased from 17.6 percent in 1994

to 26.5 percent in 2003.

Advances as a percentage of total advances of

nationalized banks were 17.7 percent in 1990 which had

grown to 26.7 percent by 2003.

NPLs as percentage of total loans varied between a low

of 11 percent in 1997 to a high of 18.6 percent in 1993.


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Allied Bank Limited

Second bank to be privatized in the public sector

On 9th September 1991, 26 % shares were sold to the

Allied Management Group, which represented theemployees of ABL at a price of Rs. 70 per share

On 23rd August 1993, another 25 % shares were sold to

AMG at price of Rs. 70 per share

This resulted in transfer of ownership from Government

of Pakistan to AMG


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Allied Bank Limited

In 1999, it transpired that one of ABLs major

defaulters had purchased about 35-40 % of ABL

shares from employees.

In July 1999, SBP imposed restriction on transfer ofshares from employees to non-employees except on

prior approval from SBP.

On August 3, 2001, the SBP removed the Chairman

and three Directors on the Board of ABL as they werefound to be working against the interests of ABL and

its depositors and appointed new Board.


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Allied Bank Limited

ABL was excluded from list of privatization and the

strategic sale of the remaining 49 % govt. share was

transferred to the SBP.

In February 2004, 6 parties were pre qualified for bidding


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Allied Bank Limited

Financial Indicators (1995-2003)



02

4

6

8

10

12

14

1995 1996 1997 1998 1999 2000 2001 2002 2003

Assets ( of assets of NCBs)

0

5

10

15

20

1995 1996 1997 1998 1999 2000 2001 2002 2003

Deposits ( of deposits of NCBs)

0

5

10

15

20

1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 00 2 0 0 1 2 0 0 2 2 0 0 3

Advances ( of advances of NCBs)


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Allied Bank Limited

Non performing Loans as % of Total Loans(1993-2003)



0

10

20

30

40

50

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

%


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Allied Bank Limited

Return on Assets (1993-2003)



-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

1

993

1

994

1

995

1

996

1

997

1

998

1

999

2

000

2

001

2

002

2

003

%


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Allied Bank Limited

Impact analysis of privatization

Assets as a percentage of total assets of nationalized

banks increased from 9.6 percent in 1995 to 12 percent

by 2002.

Deposits as a proportion of total deposits of

nationalized banks grew from 9.8 percent in 1995 to

14.3 percent in 2003.

Advances as percentage of total advances of

nationalized banks peaked at 15.5 percent in 1999 but

declined to 11.2 percent by 2003.

NPLs as a proportion of total loans jumped from 16.1

percent in 1993 to 43.8 percent by 2003


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Lessons Learnt

The Allied Bank was not transferred to a strategic

investor but employees. This approach proved to be even

worse than public sector ownership. Efforts are underway

to transfer the majority share to a private sector financialinstitution through competitive bidding process.

In contrast, MCB was sold to a group of private

strategic investors who have turned around the bank and

improved all indicators including improved service to

customers, technology upgradation and cost efficiency.


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Thank You

Husain_PolicyConsid

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