New turn for Saarc banking

Saarc Finance Ministers, Regulators to discuss common banking in october

After agreeing on a free trade agreement early this year, finance ministers and regulators of South Asia will discuss ways of integrating banking operations in October.

The meeting would take place when they assemble in Washington for the IMF-World Bank autumn meet, a senior banker said here today.

"The integration of the banking sector in the Saarc region will be discussed by finance ministers and central bank governors in October at Washington," the State Bank of Pakistan governor, Ishrat Husain, said while looking forward to meet his Indian counterpart YV Reddy.

The move is part of the economic cooperation among Saarc countries "" India, Pakistan, Sri Lanka, Bangladesh, Nepal, Bhutan and Maldives.

Although Saarc nations agreed on creating a free trade zone, there is virtually no way to ensure flow of capital and funds through the banking channel across the border.

"As a practical measure, we should begin with the process of harmonisation of the banking sector," Husain said.

To start with, he said the banks in the Saarc region could explore ways of ensuring uniform prudential regulations, benchmark parameters for financial strength, build financial infrastructure such as payment and settlement system.

"Bank branch opening by the South Asian banks in each other's countries should be facilitated and encouraged. Payment and settlement system should be linked in order to expedite transfer of payments across the borders," Husain said.

Stressing on uniform banking norms for the Saarc region, Husain said "the consolidation of financial information of banks operating in various countries of the region should be made mandatory so that cross-border risks are fully understood."

At present, capital adequacy norms on the basis of risk-weighted assets and classification of non-performing assets vary in South Asian nations.

"The practice in each country can be evaluated and brought in line with international standards," Husain said. The Pakistani central bank governor identified three pillars for harmonisation of banking sector in Saarc "" market structure, regulatory framework and the institutional autonomy of the central banks.

On market structure, he said interest rates should be market-determined, reserve and liquidity requirements should be lowered, abolition of "directed lending," liberal branch opening and closure policy, revamping operations to remove excess manpower, easing entry norms for banks and the privatisation of banks.

On the regulation side, Husain said banking regulations should ensure that only good banks enter a country. Banks would also have adequate capital investment and less risky assets.