State Bank drafts proposals to regulate banking

KARACHI (April 23 2003) : The State Bank of Pakistan has drafted proposals to regulate commercial banking in the country and would introduce laws pertaining to acquisition of shares, restricting their investments in the equity market.

These are only proposals, and the central bank has asked comments on prudential regulations to be submitted by April 30.

The central bank would prepare proposals separately on investments, corporate and credit financing etc, and posting these information on transparent manner through its web site.

These proposals have been sent to Pakistan Bankers Association and Federation of Chambers of Commerce and Industry and are open for public debate and comments.

The central bank, after receiving comments and suggestions from the private sector, banks and institutions, would adopt such measures, which are at par with international standards.

It says that banks shall not own shares of any company in excess of five percent of its own capital base.

Total investments in shares by a bank shall not exceed 20 percent of its own capital base, provided that these conditions 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 these limits shall regularise their position within one year from the date of issuance of these regulations.

Banks shall not hold shares in any company, whether as pledge, mortgage 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 or 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 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.

A banking expert said that following the 1930 crash the US Federal Reserve has restricted banks to have ownership in industries and insurance business, but, in contrast, Japan and Germany removed this restriction and their capital markets saw huge chunks flowing both ways and banks owned industries and insurance houses.

The measures through prudential regulations revealed that the central bank wants to balance the situation.

The step is being taken to put cap on banks' investing in equity market as they would use depositors' money, affecting their savings, said Khalid Iqbal Siddiqui, research analyst at Invest Capital Securities in Karachi.

The central bank wants banks to focus on lending, rather than equity investment, Siddiqui said.

The share market plunged by 3.5 percent on Tuesday on central bank's plan to restrict banks, an analyst said.

Banks are among the major players of the share market and investment from them boosts sentiment of retail investors, he said.

According to a conservative estimate, investments from top four banks, at present, are around Rs 10 billion.

A leading trader said that these steps are not new. Banks were already maintaining their limits and working as per their exposures.

If these regulations pertaining to non-banking financial institutions were announced it would have an adverse impact as their investments some time touch 40 percent of their own capital base.

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