KARACHI: State Bank of Pakistan (SBP), in response to rumours, here Thursday declared that KASB Bank is being merged with BankIslami; with assurance of security of depositors’ interests.

“Under the current circumstances, merger with BankIslami remains a viable option wherein KASB Bank depositors’ interests would be safeguarded and its problem would be resolved on a sustainable basis,” said SBP’s Chief Spokesman Abid Qamar during a press briefing to clarify SBP’s position on KASB Bank related issues. SBP’s Executive Director, Syed Irfan Ali and Director, SBP’s Banks Inspection Department, Arshad Mehmood Bhatti also assisted him to answer the media queries.

SBP’s Chief Spokesman said four banks including Askari Bank, Sindh Bank, JS Bank and BankIslami submitted their interest to SBP for acquiring KASB Bank.

SBP allowed the above banks to conduct due diligence of the bank. Post due diligence, the above banks came out with an estimated negative equity gap of Rs 12 to 14 billion in addition to the shortfall in minimum capital requirement (MCR) of Rupees ten billion. After conducting due diligence of the bank, apart from BankIslami, the other banks did not register interest to proceed further with the amalgamation transaction.

He said State Bank of Pakistan as part of its mandate is responsible for protecting the interest of depositors and ensuring stability of the banking system. The meaning of issuance of a banking license is allowing an entity to take deposits from general public for onward lending. With authority of taking public money comes responsibility.

SBP as a matter of prudence and fulfilling its mandated responsibilities assesses fitness and propriety of every prospective investor in a bank beyond a defined threshold (currently 5%) so as to ensure that the investor is capable of fulfilling the fiduciary responsibilities and can be entrusted with the license to collect public deposits.

In case of KASB Bank, SBP intends to ensure the payment of over 150,000 depositors with Rs 57 billion and to resolve the bank issue amicably in the best interest of all the stakeholders specially depositors and for the sustainabilty of the banking system at large, he said.

Speaking about historical perspective of KASB Bank, he said the bank has been facing severe capital shortfall in terms of both minimum capital requirement (MCR) and capital adequacy ratio (CAR) since 2009. As on September 30, 2014 the Bank’s MCR (free of losses) was in the amount of Rs 0.958 billion with a CAR of negative 4.63% against the required levels of Rs 10 billion and 10%, respectively (i.e. shortfall of Rs 9.04 billion in respect of the MCR and shortfall by 14.63% in respect of the CAR).

As a result of supervisory process/ assessment by SBP the banks are put on resolution in view of the issues of supervisory concerns. SBP started relevant measures when issues of supervisor concerns were detected in KASB Bank.

Considering the Bank’s weak solvency position and serious regulatory violations, SBP imposed certain limitations on the bank and required the sponsors to inject capital.

However, neither capital was injected by the sponsors nor any serious resolution efforts were made. Rather, the bank failed to comply with the limitations imposed by SBP. Consequently, sponsors and Board of Directors were advised on 3rd June 2013 to sign an undertaking with SBP.

Unfortunately, the sponsors and Board of Directors, despite SBP’s consistent persuasion through meetings and in writing, failed to meet their critical commitment of capital injection.

Ultimately, they were suggested to merge the bank with any of the large banks. However, they failed to do that either.

In 2014, the bank was again given a free opportunity by SBP to merge with any other bank in the market as appropriate. The banks sponsors failed to do the same also.

In addition to deficient capital base, serious governance issues including involvement of sponsors in the day-to-day affairs of the bank in violation of applicable regulatory instructions were noticed, he said.

The bank also transacted business with its related parties/ associated concerns on terms and conditions that were detrimental to the interest of its depositors. The sponsors’ and management’s self serving practices caused considerable erosion in the capital base, asset quality and earning capacity of the bank.

SBP’s Chief Spokesman further mentioned that due to persistent losses for the last five years, KASB Bank’s equity had eroded significantly and was much below the regulatory minimum capital requirement, its capital adequacy as of 30-09-2014 has also turned into negative; technically rendering it insolvent. Because of the weak financial health of the bank and inability of its sponsors to meet capital requirement the State Bank, in the best interest of the depositors and other stakeholders, had to request the Federal Government to place the bank under moratorium.

The Federal Government imposed the moratorium on the bank and also directed State Bank to prepare a scheme of reconstruction / amalgamation in accordance with the law.

In 2010, NASB as a group introduced a restructuring proposal wherein, M/s. Asia International Financial Limited (AIFL) (a Chinese company), would be given 50% shareholding against fund injection in the group holding company viz. KASB Finance Limited.

The injected funds were to be used for capital injection in the bank as well as for purchasing of certain group companies. To SBP’s surprise, in 2014 it was communicated that AIFL’s ownership structure has been changed and now it is being run by Pairdos (Buyer).

The said transfer of ownership without SBP’s approval was in violation of SBP’s existing regulations. However, Pairdos being the prospective beneficiary proceeded with the acquisition of shares without seeking SBP’s fit and proper clearance.

Abid Qamar informed that in view of the financial position of the bank and weak management and board oversight, SBP had few possible options for resolution of the bank. These were amalgamate the bank with and into another bank– reconstruct the bank via capital injection by SBP–and liquidate the bank.

Liquidation, due to its adverse impact on the bank’s depositors and the industry at large was not considered.

With a view to seek resolution of the bank via a market based solution, SBP concentrated on the option of merger of the bank in the larger interest of the depositors and the banking system.

State Bank of Pakistan has noticed that after withdrawal of the petition filed by the sponsors in High Court of Islamabad, rumours have been spread that some Chinese investors have struck a deal with State Bank of Pakistan.

State Bank denies any such deal and clarifies that a Chinese investor approached State Bank through the bank’s existing shareholders.

SBP informed the prospective investor to establish its bonafide and that it has to clear Fitness and Propriety criteria. They were also guided about the position of the bank and information required to be submitted in order to assess their request. However, they could not submit any of the required information. An entity whose beneficial ownership is not clear cannot be entrusted with the license of a bank.

Although the prospective investor under discussion has indicated to bring in some investment by May 13, 2015 but in view of the quantum of deposits of the bank and the Minimum Capital Requirement the committed amount of investment is very meagre. Further, the prospective investor did not share any information about how and from where the funds would be mobilised.

State Bank of Pakistan, always welcomes the Foreign Direct Investment, however, this can be accepted only within the bound of laws and regulations prevalent in the jurisdiction.

State Bank of Pakistan reassures the public at large that it is committed to strengthen the banking sector of the country.

 

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