Pakistan Set To Impose Tighter Capital Standards

The State Bank of Pakistan (SBP) is set to impose tighter capital requirements closer to global standards on the countrys banks, a brokerage house said.

The (federal) cabinet has approved the SBPs recommendation for launching a new capital adequacy ratio for the banks, ING Baring Securities said in a research note on Thursday.

It said the new ratio, to be known as the Minimum Capital Requirement, will require banks to factor risk-weighted assets into their minimum capital requirements.

The new standard would be based on risk parameters similar to the internationally accepted capital standards of the Basle-based Bank of International Settlements, Baring said.

However, the SBP is using slightly different risk weights, it added.

A central bank official, who asked not to be named, confirmed the new ratios would soon be announced, but would not elaborate.

The SBP directed banks in January to submit their existing equity positions and minimum capital requirements, factoring in risk-weighted assets.

Bankers said the planned move would be a step towards enforcing international standards on capital adequacy for banks incorporated in Pakistan.

They said the capital requirement, if enforced properly, would inhibit the growth of banks with low capital bases and big loan portfolios.

The move would restrict liberal lending by banks or force them to raise their capital base to remain within the given capital adequacy ratio, an analyst at a foreign bank said.

The new standards will demand that risk-weighted assets represent not less than eight percent of capital, he said.

Most Pakistani banks calculate capital adequacy as a percentage of total demand and time liabilities without factoring in risk-weighted assets.

The risk-adjusted capital adequacy ratio of most state-owned commercial banks now averages around three percent while most foreign and some new private banks are well above the eight percent level, he said.

If the central bank chooses to strictly enforce the eight percent risk-adjusted capital adequacy requirement, growth for banks will become increasingly difficult without raising fresh capital, retaining earnings or cutting back on lending.

Bankers say capital base already plays a crucial role in determining banks performance criteria, which is deposit size, credit allocation and cushion against non-performing loans.