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State Bank unveils prudential rules for banks

KARACHI (May 02 2003) : The commercial banks to comply with State Bank of Pakistan's (SBP) plan to reduce their exposure at the equity market will have to sell stakes worth 6.9 billion rupees when promulgated.

The State Bank has posted prudential regulations for commercial banks on their web site.

The proposed rules were opened for public debate, the central bank asked suggestions from financial institutions, and other entities to give the final shape, whose period ended April 30.

The central bank proposed the commercial banks shall not own shares of any company in excess of five percent of its own capital base, and the total investments in shares by a bank shall not exceed 20 percent of its own capital base.

The above condition shall not be applicable on Islamic commercial banks and such other banks as the State Bank may specify from time to time.

The banks breaching this limit shall regularise their position within one year from the date of issuance of these regulations.

According to the findings, 21 commercial banks, including the National Bank of Pakistan, the Muslim Commercial Bank, the Bank Al-Falah, the Faysal Bank, and the Meezan Bank have made hefty investment in the equity.

The law, if promulgated, would not have an immediate impact on the equity market, as banks should regularise their position following the announcement of the law.

However, as per the SBP annual reports for the period ended December 31, 2002, nine banks out of 21 are exceeding the prescribed limit, and selling shares worth Rs 6.9 billion.

The paid-up capital of these banks stood at 43.467 billion rupees and equity participation should be around 13.966 billion rupees, but the investment held in the listed companies shares are nearly 16.866 billion rupees, said an analyst.

He said that 20 percent investment in the equity market is the international practice and a regulator all over the world restricts banks to exposure themselves.

The banks in general are using depositors money and wanted to utilise the funds for lending and not for investment in equity market.

A leading trader said there is very low probability that KSE Index will approve these especially at a time when everybody, including central bankers are taking credit for excellent performance in the recent past.

Most of the bankers have assured that they will comment on the rules regarding investment in shares by banks, he added.

As per the draft rules under the heading of acquisition of shares, there are many ambiguities, first of all, the said regulation has talked about shares only with no indication of whether listed or unlisted or both.

Similarly, there is no indication about the fate of investment in mutual funds and Modarabas especially when many banks are heavily invested in NIT units as per understanding.

In the absence of clarity, many banks whose limits are fully exhausted can invest in mutual funds or for that matter create a new fund.

We think that the said rules were constructed with the objective to minimise the risk of banks, and there is need to understand that it is a draft, and will be changed with consultation of relevant parties.

However, some of the seasoned investors are depressed over these proposals and during the preceding week, the market in a single session jolted by 105 points.

Though the index has on the recovery path, but punters are jittery and might ask management of the bourses to extend the time period or at least shelve this plan of restricting banks to make equity investments, said a trader.

The other proposed rules areas follows:

Banks shall not hold shares in any company whether as pledge, mortgagee, or absolute owner of an amount exceeding 30 percent of the paid-up share capital of that company or 30 percent of their own paid-up share capital and reserves, whichever is less.

Exposure against the shares of listed companies shall be subject to minimum margin of 30 percent of their current market value, though the banks may, if they wish, set higher margin requirements keeping in view other factors.

The banks will monitor the margin on at least weekly basis and will take appropriate action for top-up and sell-out on the basis of their board of directors' approved credit policy.

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