MGT411 GDB Solution Feb 2015

The State Bank of Pakistan has declared a moratorium on KASB Bank. From the last few months SBP was closely monitoring the bank’s operation as it failed to meet SBP’s Minimum Capital Requirement (MCR). Presently, KASB has a capital of Rs 1.1 billion as against the target of Rs 10 billion set by the regulator for December 2014. The central bank has allowed withdrawal of up to Rs 300,000 and, is of the opinion that 92.33 percent of the depositors can continue to operate their accounts. This is the first time that SBP has taken such a step. Previously, SBP used to remove the Board of Directors, appoint an Administrator and nominate a big, solid commercial bank to run the banking operations of a troubled bank. It appears that SBP is convinced that the management of the bank is professional and sound and it is the failure of bank’s shareholders who have failed to bring in additional capital and maintain the Minimum Capital Requirement (MCR) as required by the regulator under its prudential regulations. The law does empower the Banking Regulator (SBP) to take all necessary steps to protect the interests of creditors i.e. the depositors in a bank. This is not the first time and may not be the last, when SBP is required to step in and protect depositors’ savings. However, SBP also needs to cater to systemic risks in the financial system. KASB Bank’s deposits may be miniscule (0.6 percent) of the total banking deposits. However, the nervousness caused to depositors would be much more. Depositors in other banks that have threshold lower than Minimum Capital Requirement (MCR), desired by SBP or are on a weaker footing may face a rush in withdrawal of large deposits; thus compounding their problem. So the challenge for SBP to maintain stability in the financial/banking system may be bigger than anticipated at present. In addition, since there is no limit on borrowers who now shall be tempted to borrow to the limit from a weak bank may be another problem. SBP is lender of the last resort So what else could SBP do when despite repeated reminders to sponsors/shareholders of KASB Bank to increase the capital did not materialize. Banking is a difficult business; but no financial business is easy either. If profits are large so are the losses – shareholders have 8 to 10 rupees as capital and 92 rupees or more belong to the depositors. This is precisely the reason why the role of a regulator is so important and all-pervasive in banking. In addition, banks unlike other businesses can leverage much more. Country’s constitution and the law empowers the SBP to regulate the monetary and credit system of Pakistan and foster its growth in the best national interest with a view to securing monetary stability and fuller utilization of the country’s productive resources. We hope and pray it continues to do so. So far, no depositor has ever lost any savings when a bank has folded. These simpletons know despite the fact that private banks do not carry any deposit insurance. There have been delays but all depositors including big corporations have got their money back. The fact that no liquidator or administrator has been appointed proves that SBP has faith in the present management in KASB Bank and it is also a testament that shareholders have erected a Chinese wall between the directors and management. The rising of non-performing loans in the bank are the real cause of the loss, which has climbed to Rs 6 billion on a deposit base of Rs 15 billion. This was precisely the reason the present sponsors had floated the idea of breaking KASB Bank into good and bad banks and selling the good bank free from Non-Performing Loans (NPLs) with losses to a profitable bank, which could avail the losses against its profits to lower the tax liability of the acquiring bank. Unfortunately, however, there were no takers of the idea or were not in the knowledge of SBP as it took this unprecedented step on Friday

 Requirements:

 1.      Why there was a need to suspend KASB bank operations against the claim: protection of depositors’ interest? Discuss the risk being faced by the bank.

2.      Does a trade-off really exist between providing protection and depositors’ trust?

3.      If not suspended by SBP, how does a KASB bank ltd. may lead to financial contagion?

Consequently, 92.3 per cent of the bank’s depositors would be able to withdraw their total deposits if they so desired. The rest of them would be able to withdraw up to Rs300,000.

Similarly, the bank’s customers would be free to operate their lockers. And borrowers of the bank would be able to make repayments as per the agreed terms and conditions.

“The SBP would like to reassure the general public that country’s banking sector is stable and strong. All other banks are operating in a normal manner and will continue to serve their customers as usual,” the handout said.

The KASB Bank’s deposits were only 0.7 per cent of the total deposit base of all commercial banks, which stood at over Rs8.7 trillion, it added.

This shows the bank is a very small segment of the country’s banking system, according to the SBP.

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