45626 Getting Finance in SouthAsia 2009 Indicators and Analysis of the Commercial Banking Sector Kiatchai Sophastienphong Anoma Kulathunga Getting Finance in SouthAsia 2009 Getting Finance in SouthAsia 2009 Indicators and Analysis of the Commercial Banking Sector Kiatchai Sophastienphong Anoma Kulathunga Washington, D.C. © 2008 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: feedback@worldbank.org All rights reserved 1 2 3 4 5 11 10 09 08 This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The findings, interpretations, and conclusions expressed in this volume do not nec- essarily reflect the views of the Executive Directors of The World Bank or the governments they repre- sent. The World Bank does not guarantee the accuracy of the data included in this work. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202- 522-2422; e-mail: pubrights@worldbank.org. ISBN-13: 978-0-8213-7571-6 eISBN: 978-0-8213-7572-3 DOI: 10.1596/978-0-8213-7571-6 Library of Congress Cataloging-in-Publication Data Sophastienphong, Kiatchai. Getting finance in South Asia 2009 : indicators and analysis of the commercial banking sector / Kiatchai Sophastienphong and Anoma Kulathunga. p. cm. Includes bibliographical references. ISBN 978-0-8213-7571-6 -- ISBN 978-0-8213-7572-3 (electronic) 1. Banks and banking--Asia, South--Case studies. 2. Microfinance--Asia, South--Case studies. 3. Finance--Asia, South--Case studies. I. Kulathunga, Anoma. II. Title. HG3270.3.A6S66 2008 332.1'20954--dc22 Cover design by Drew Fasick. Contents Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .ix Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .xi About the Authors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .xiii Acronyms and Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .xv PART I: ANALYSIS 1. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 Development Dimensions and Micro Indicators . . . . . . . . . . . . . . . . . . . . . . . .4 Access to Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 Performance and Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 Financial Stability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 Capital Market Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 Market Concentration and Competitiveness . . . . . . . . . . . . . . . . . . . . . . . . . .6 Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 The Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 Development of Benchmarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 Interpretation of Ranks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 The Role of Microfinance in South Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 2. THE GETTING FINANCE INDICATORS: COUNTRY PERSPECTIVE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 Bangladesh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 Access to Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 Performance and Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 Financial Stability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 Capital Market Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 Market Concentration and Competitiveness . . . . . . . . . . . . . . . . . . . . . . . . .17 Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 Access to Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 Performance and Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 Financial Stability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 v vi Getting Finance in South Asia 2009 Capital Market Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 Market Concentration and Competitiveness . . . . . . . . . . . . . . . . . . . . . . . . .23 Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23 Nepal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25 Access to Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26 Performance and Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26 Financial Stability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27 Capital Market Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28 Market Concentration and Competitiveness . . . . . . . . . . . . . . . . . . . . . . . . .29 Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29 Pakistan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31 Access to Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31 Performance and Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 Financial Stability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 Capital Market Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 Market Concentration and Competitiveness . . . . . . . . . . . . . . . . . . . . . . . . .34 Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35 Sri Lanka . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37 Access to Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38 Performance and Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38 Financial Stability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39 Capital Market Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40 Market Concentration and Competitiveness . . . . . . . . . . . . . . . . . . . . . . . . .40 Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40 3. COUNTRY RANKINGS ON THE GETTING FINANCE INDICATORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43 Overall Rankings on Development Dimensions . . . . . . . . . . . . . . . . . . . . . . .43 Individual Rankings on Micro Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46 Access to Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46 Performance and Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46 Financial Stability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47 Capital Market Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47 Market Concentration and Competitiveness . . . . . . . . . . . . . . . . . . . . . . . . .47 Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47 4. AN INTERNATIONAL PERSPECTIVE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51 Benchmark Comparison (2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51 Access to Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51 Performance and Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52 Financial Stability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52 Capital Market Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54 Market Concentration and Competitiveness . . . . . . . . . . . . . . . . . . . . . . . . .54 Contents vii International Comparison of Financial Ratios--Benchmark Countries (2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55 International Comparison of Financial Ratios--Comparator Groups (2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58 5. FINDINGS AND OBSERVATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63 Access to Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63 Performance and Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64 Financial Stability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64 Capital Market Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64 Market Concentration and Competitiveness . . . . . . . . . . . . . . . . . . . . . . . . . .64 Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65 Benchmarking and Comparability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65 PART II: INDICATORS 6. COMPILATION GUIDE FOR THE GETTING FINANCE INDICATORS FOR SOUTH ASIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69 Access to Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69 Performance and Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .71 Financial Stability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .73 Capital Market Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .75 Market Concentration and Competitiveness . . . . . . . . . . . . . . . . . . . . . . . . . .76 Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .78 7. METHODOLOGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .79 Data Compilation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .79 Choice of Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .79 Method for Country Rankings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .80 Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .80 8. MAJOR POLICY DEVELOPMENTS IN THE PRUDENTIAL REGULATIONS OF SOUTH ASIA, 2005­06 . . . . . . . . . . . . . . . . . . . . . . . .85 Bangladesh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .85 Implementation of the New Capital Adequacy Framework (Basel II) in Bangladesh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .85 Prudential Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .85 Other Policy Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .87 India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .88 Implementation of the New Capital Adequacy Framework (Basel II) in India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .88 Prudential Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .88 Other Policy Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .91 viii Getting Finance in South Asia 2009 Nepal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .92 Implementation of the New Capital Adequacy Framework (Basel II) in Nepal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .92 Prudential Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .93 Other Policy Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .95 Pakistan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .96 Implementation of the New Capital Adequacy Framework (Basel II) in Pakistan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .96 Prudential Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .97 Other Policy Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .100 Sri Lanka . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .100 Implementation of the New Capital Adequacy Framework (Basel II) in Sri Lanka . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .100 Prudential Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .101 Other Policy Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .102 9. INTERNATIONAL BEST PRACTICES IN CORPORATE GOVERNANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .105 Organisation for Economic Co-operation and Development . . . . . . . . . . .105 Basel Committee on Banking Supervision . . . . . . . . . . . . . . . . . . . . . . . . . . .105 APPENDIXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .109 Appendix 1. Getting Finance Indicators for South Asia, by Country and Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .110 Appendix 2.a. Getting Finance Indicators for benchmark countries, 2001­06 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .132 Appendix 2.b. Benchmark Countries: Data Sources and Notes . . . . . . . . . . . .138 Appendix 3. Corporate Governance Matrix: Questionnaire Responses, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .139 REFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .145 INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .149 Foreword The Poverty Reduction, Economic Management, Finance and Private Sector De- velopment Unit of the World Bank's South Asia Region has embarked on a regional initiative to develop standardized indicators to measure the soundness and perfor- mance of the financial sector in the Region. In the first three phases of this initia- tive, the Bank developed Getting Finance Indicators under the categories of access to finance, performance and efficiency, corporate governance, and financial stabil- ity. These categories represent different dimensions of financial sector develop- ment. Under these dimensions, micro indicators were compiled to assess the finan- cial performance and soundness of the banking sector in five different countries in the region--Bangladesh, India, Nepal, Pakistan, and Sri Lanka--against its pru- dential regulations and against its South Asian peers. To provide a more holistic perspective of getting finance in South Asia, and to improve the understanding of the financial systems in the region, two more dimensions--capital market develop- ment, and market concentration and competitiveness--are added in this current volume. Another important enhancement is the compilation of benchmark indica- tors for selected high-income Organisation for Economic Co-operation and Devel- opment (OECD) member and nonmember countries, and a comparator group of Asian countries. This enhancement provides an opportunity to assess the perfor- mance and soundness of the South Asian group in a global perspective. Data on these indicators have been compiled and analyzed only for the commercial banking sector for the six years from 2001 to 2006. This report, Getting Finance in South Asia 2009, published annually by our unit, reaffirms the World Bank's commitment to working with developing mem- ber countries to promote financial sector development and create financial sys- tems that are sound, stable, supportive of growth, and responsive to people's needs. This program has enabled the Bank to initiate a dialogue with the supervi- sory authorities in South Asia to improve their data collection efforts, which will in turn strengthen their off-site supervision work. It also provides the impetus for the Bank to expand its monitoring and evaluation work. The Getting Finance In- dicators, and the country rankings that are based on them, are expected to become an increasingly important reference tool for the Bank in monitoring and evaluat- ing development objectives and outcomes in its financial sector operations. These indicators should also prove to be a valuable tool for financial sector supervisory agencies in South Asia. The updated indicators, country rankings, and bench- marks should better equip these agencies to monitor the health of their respective ix x Getting Finance in South Asia 2009 country's banking system and to assess its robustness and sustainability relative to others in South Asia and in more developed economies. Ernesto May Sector Director Poverty Reduction, Economic Management, Finance and Private Sector Development South Asia Region Acknowledgments Kiatchai Sophastienphong (senior financial sector specialist) and Anoma Ku- lathunga (consultant) acknowledge the invaluable contributions of many individ- uals to this report. We gratefully acknowledge the comments, guidance, and encouragements from Simon Bell (sector manager, SASFP) throughout the series. Several members of World Bank country teams facilitated the research and operational visits and commented on the study, including Shah Nur Quayyum (financial sector analyst), Shamsuddin Ahmad (senior financial sector specialist), A. K. M. Abdullah (finan- cial analyst), and Sadruddin Muhammad Salman (extended term consultant) for Bangladesh; Niraj Verma (financial specialist) and K. R. Ramamoorthy (consul- tant) for India; Sabin Raj Shrestha (financial sector specialist) and Lalima Maskey (program assistant) for Nepal; Isfandyar Zaman Khan (research analyst) for Pak- istan; and Sriyani Hulugalle (senior economist) and Lohitha Karunasekera (team assistant) for Sri Lanka. We offer them special thanks. We thank the representatives of central banks and other authorities who partic- ipated in this study, including the following from Bangladesh Bank's Department of Offsite Supervision: Md. Golam Mostafa (deputy general manager), Debaprosad Debnath (deputy general manager), M. Zahir Hossain and Ashok K. Karmaker (as- sistant directors); from Nepal Rastra Bank's Bank Supervision Department and Bank and Financial Institution Regulation Department: Surendra Man Pradhan (executive director), Bhisma Raj Dhungana (director), and Pralhad Thapa (deputy director); from the State Bank of Pakistan's Banking Surveillance Department: Jameel Ahmad (executive director), Lubna Farooq Malik (director), Muhammad Javaid Ismail (senior joint director), Salman Ahmed (junior joint director), Naushad Kamil (junior, joint director), Rizwana Rifat (assistant director), Abdul Samad (assistant director), and Muhammad Rizwan (assistant director); and from the Central Bank of Sri Lanka's Bank Supervision Department: P. Samarasiri (di- rector), A. A. M. Thassim (deputy director), and H. D. Ajith (senior examiner). We are indebted to Ahmad Ahsan (lead economist); Pipat Luengnaruemitchai (economist); Anjali Kumar (financial sector operations and policy department); and Priya Basu, Mark Dutz, Varsha Marathe, Kyoo-Won Oh, Henry Bagazonzya, Gaby Afram, and Tatiana Menova (South Asia Region's finance and private sector development unit), all of whom provided invaluable inputs as peer reviewers of the concept note and the report. Finally, yet importantly, we express our thanks to Vivi Zhang (consultant) and Maria Marjorie Espiritu (program assistant), who provided invaluable research, technical support, and typesetting. xi About the Authors Kiatchai Sophastienphong is Senior Financial Sector Specialist, Poverty Reduc- tion, Economic Management, Finance and Private Sector Development at the World Bank, South Asia Region. Recently Mr. Sophasienphong has led the Finan- cial Sector Assessment Program (FSAP) update mission to Sri Lanka; helped to de- sign and implement restructuring and bank privatization programs in Bangla- desh, Nepal, and Pakistan; and guided the dialogue on financial sector issues in several client countries at both the policy and technical levels. He has designed the overall financial sector strategies for these countries and developed a program to implement these strategies. Prior to joining the Bank, he held senior executive po- sitions at the Bank of Thailand (the central bank) and two private commercial banks in Thailand. He also worked as the Senior Financial Economist in the Re- gional and Sustainable Development Department at the Asian Development Bank. In addition to this publication, he recently co-authored the book South Asian Bond Markets: Developing Long-Term Finance for Growth (to be published by the World Bank). His research interests include bank restructuring and privatization, corpo- rate debt restructuring, and bond market developments. He received a BA and an MA in Economics from the University of Cambridge, United Kingdom. Anoma Kulathunga is a doctoral student at the George Washington University Business School in Washington, D.C., and a consultant at the World Bank. Prior to her doctoral studies, Ms. Kulathunga had worked for the Central Bank of Sri Lanka for 15 years. She received an MA in Finance from the George Washington University and an MBA from the University of Sri Jayewardenepura, Sri Lanka. She is an associate member of the Chartered Institute of Management Accoun- tants, U.K. In addition to this publication, she recently co-authored a chapter in Islamic Finance: The Regulatory Challenge (published by John Wiley & Sons). Her research interests include financial sector development, Islamic banking, worker remittances, and international banking. xiii Acronyms and Abbreviations AA Articles of Association ADB Asian Development Bank AGM Annual General Meeting AIG Accord Implementation Group AOF Account Opening Form AR annual report ATM automated teller machine BB Bangladesh Bank BCO Banking Companies Ordinance of 1962 BOD board of directors BPSS Board for Regulation and Supervision of Payment and Settlement System BRPD Banking Regulation and Policy Department CAAP Capital Adequacy Assessment Process CAR capital adequacy ratio CAMEL Capital adequacy, Asset quality, Management quality, Earnings, and Liquidity CBSL Central Bank of Sri Lanka CEO chief executive officer CFO chief financial officer CIB Credit Information Bureau CR Concentration Ratio CRR Cash Reserve Requirement CSO civil society organization CTS Cheque Truncation System DFI development finance institution DMA direct marketing agent DSA direct selling agent ECAI External Credit Assessment Institutions EPZ Export Processing Zone FIs financial institutions FII foreign institutional investor FPSI Financial Performance and Soundness Indicators xv xvi Getting Finance in South Asia 2009 FPT fit-and-proper test FTRA Financial Transactions Reporting Act GAAP Generally Accepted Accounting Principals GDP gross domestic product GNI gross national income HFT Held for Trading HHI Herfindahl-Hirschman Index HMG His Majesty's Government IAS International Accounting Standards IASC International Accounting Standards Committee IFR Investment Fluctuation Reserve IFS International Financial Statistics IMF International Monetary Fund IPDI Innovative Perpetual Debt Instruments IPO initial public offering IRB Internal Rating-Based Approach IT information technology JCR-VIS JCR-VIS Credit Rating Co. Ltd. KIBOR Karachi Inter-Bank Offered Rate KYC Know Your Customer MB Monetary Board (of the Central Bank of Sri Lanka) MF mutual funds MFI microfinance institution MOF Ministry of Finance MRAA Microcredit Regulatory Authority Act MRRU Microfinance Research and Reference Unit NBFC nonbank financial companies NBFI nonbank financial institution NCBs nationalized commercial banks NEFT National Electronic Fund Transfer NGO nongovernmental organization NOC no objection certificate NPA nonperforming assets NPC National Payments Council NPL nonperforming loans NRB Nepal Rastra Bank NRs Nepal rupees OBU Offshore Banking Unit OECD Organisation for Economic Co-operation and Development PACRA The Pakistan Credit Rating Agency PAN permanent account number PLS profit and loss sharing Acronyms and Abbreviations xvii PMLA Prevention of Money Laundering Act PREM Poverty Reduction and Economic Management PRs Pakistan rupees PSS Payment Settlement Systems QIS Quantitative Impact Study RBI Reserve Bank of India ROA return on assets ROE return on equity ROSC Report on the Observance of Standards and Codes RRB Regional Rural Banks Rs Indian rupees RTGS real-time gross settlement system SBL Single Borrower Limit SBP State Bank of Pakistan SEANZA South East Asia, New Zealand, and Australia SEBI Securities and Exchange Board of India SEC Securities and Exchange Commission SHG Self-Help Group SLR Statutory Liquidity Requirement SL Rs Sri Lanka rupees SMA Special Mention Account SME small and medium enterprise TOR Terms of Reference Tk Bangladesh taka US United States of America VAT value added tax WDI World Development Indicators WOS Wholly Owned Subsidiary WTO World Trade Organization Part 1 Analysis 1 Introduction Background Banks play an important role in the economic development process by mobilizing and allocating funds toward productive investments, reducing informational costs, and providing better access to assets and markets through their intermediation process. While the ensuing productivity increases lead to economic development, it is equally important to achieve financial inclusion, because it contributes directly to the income-generating capacity of the underprivileged. Thus, supporting the de- velopment and strengthening of the financial sectors would reduce risk and vul- nerability for the poorest and enable them to participate in and benefit from the growth process. Four years ago, the World Bank launched a regional initiative in South Asia to develop standardized indicators to measure the performance and soundness of the financial sector--the Financial Performance and Soundness Indicators (FPSI), now commonly known as the Getting Finance Indicators. Phases I and II of this initia- tive developed and compiled micro indicators to analyze the banking sector devel- opment in five South Asian countries--Bangladesh, India, Nepal, Pakistan, and Sri Lanka--assessing the sector's performance against the country's prudential regula- tions and against its peers in South Asia. In addition, phase II provided a compre- hensive set of micro indicators for nonbank financial institutions (NBFIs) compa- rable to those for commercial banks (see World Bank 2005b). In phase III, the Getting Finance Indicators covered two additional dimensions of banking sector robustness (access to finance and corporate governance) along with the more tradi- tional measures of financial stability and performance and efficiency. The phase III study used fewer micro indicators in each category than the earlier studies; how- ever, it also provided a time-series analysis, a cluster analysis, and country sound- ness rankings based on the indicators (see World Bank 2006d). In the fourth edition, to provide a more holistic perspective of Getting Finance in South Asia, and to improve our understanding of the financial systems in the re- gion, two additional dimensions--capital market development, and market con- centration and competitiveness--are included. Another important addition is the compilation of benchmark indicators for selected high-income Organisation for Economic Co-operation and Development (OECD) member and nonmember countries and a comparator group of Asian countries. These benchmarks provide 3 4 Getting Finance in South Asia 2009 the needed measure to assess the performance and soundness of the South Asian group from a global perspective. To ensure comparability of the indicators across the region as well as consistent interpretation and analysis, a compilation guide was prepared, setting out the de- finitions and underlying concepts for both the compilers and the users of the in- dicators (see chapter 6). The definitions and methodology for computing these indicators that appear in the previous editions remain the same (see World Bank 2004, 2005b, 2006d). Development Dimensions and Micro Indicators As noted, six dimensions of financial sector development are analyzed: access to finance, performance and efficiency, financial stability, capital market develop- ment, market concentration, and competitiveness and corporate governance. Each category in turn includes six micro indicators, except for corporate gover- nance, for which a questionnaire was developed to assess governance from the four major perspectives of ownership structure and influence of external stake- holders; investor rights and relations; transparency and disclosure; and board structure and effectiveness. For the comparative analysis, data have been compiled for the six years from 2001 to 2006 only for the commercial banking sector. Access to Finance Access to financial services is important in raising the standard of living of the poor and the underserved segments of society. In almost every part of the world, limited access to finance is considered a key constraint to private sector growth (see Beck, Demirgüç-Kunt, and Martinez Peria 2005). This is especially true in de- veloping countries, where people have little influence over policy reforms and where financial sector development often benefits the rich disproportionately. In countries seeking to develop financial markets, it is important to monitor and measure the level of access to finance. This knowledge provides a more bal- anced picture of financial outreach. Hence, it helps policy makers and regulatory authorities better target their development efforts. As an initial step, the study analyzes access to finance using data relating to providers of finance (supply-side data). Building a more complete set of data would require collecting demand-side data as well, but this was ruled out by time and re- source constraints. Access to finance is measured in terms of the physical availabil- ity, access, and use of financial services using the following six micro indicators: · Demographic branch penetration (branches per 100,000 people) · Demographic ATM penetration (automated teller machines per 100,000 people) · Deposit accounts per 1,000 people · Loan accounts per 1,000 people · Geographic branch penetration (branches per 1,000 km2) · Geographic ATM penetration (automated teller machines per 1,000 km2) Demographic penetration indicates the availability of financial services to a given number of people. Geographic penetration indicates physical access to fi- nancial services in a given geographic area, while deposit and loan ratios show the use of such services. Introduction 5 Performance and Efficiency The efficiency of banks is important for the robustness and resilience of the finan- cial sector. The study uses traditional measures of bank efficiency in terms of re- turns efficiency and cost efficiency. Two of the most popular measures of efficiency are used to assess scope for banks' earnings to offset losses relative to capital or assets, sustainability of its cap- ital position, and efficiency in using its capital or assets: · Return on equity · Return on assets Two ratios measure banks' efficiency in terms of staff and operating expenses: · Staff cost ratio (personnel expenses as a percentage of operating expenses) · Operating cost ratio (operating expenses as a percentage of net interest earnings) In addition, two ratios measure the earning strength and overall operating effi- ciency of the banking sector: · Net interest margin ratio (net interest earnings as a percentage of the average value of total assets) · Recurring earning power ratio (preprovision profits as a percentage of the av- erage value of total assets) Financial Stability Maintaining stability in a financial system--that is, avoiding significant disruptions to the system and its functions--is key to achieving low inflation as well as sustain- able economic growth. In a stable financial system, markets function without dis- ruptions, financial institutions can operate efficiently, and asset prices are realistic. To measure the stability of financial systems, the study uses ratios on capital adequacy, asset quality, and liquidity. The capital adequacy ratios (CARs) measure the capacity of a financial institution to absorb losses and, thus indicate the level of its financial strength. The asset quality and liquidity ratios reflect vulnerabilities relating to credit risk and liquidity risk, respectively. The study does not measure market risk, a third source of vulnerability, because of the lack of data across countries and over a reasonable period, a problem also experienced in compiling data for previous studies. Two ratios measure banks' financial strength in terms of its capital adequacy: · Capital adequacy ratio (regulatory capital funds as a percentage of risk- weighted assets) · Leverage ratio (total equity as a percentage of total on balance sheet assets) Two ratios measure banks' asset quality in terms of credit risk: · Gross nonperforming loans ratio (gross NPLs as a percentage of total advances) · Provisions to nonperforming loans ratio (loan loss provisions as a percentage of gross NPLs) The last two ratios measure banks' vulnerability to loss of funds and liquidity mismatch in terms of liquidity risk: · Liquid assets ratio (liquid assets as a percentage of total assets) · Liquid assets to liabilities ratio (liquid assets as a percentage of liquid liabilities) 6 Getting Finance in South Asia 2009 Capital Market Development The development of capital markets is a powerful indicator of the depth of the fi- nancial sector. By allocating funds for viable investment projects, healthy capital markets diversify the channels of financial intermediation, thus providing a coun- tervailing force to the banking business. This would allow perceived risks to be monitored on a continual basis and be minimized. Bond markets provide borrowers an alternative to bank lending as a form of long-term finance and allow a lender to convert illiquid assets into tradable secu- rities. An active bond market allows credit risk to be spread over a wide range of investors and provides up-to-date information about a market player's creditwor- thiness. An active stock market suggests strong economic and institutional funda- mentals. Hence, any shortfall would identify the need for reform measures to achieve higher levels of economic and institutional development. To measure the level of capital market development in terms of depth, efficiency, and liquidity, the study uses the following ratios: · Ratio of domestic bond market as a percentage of equity market capitalization · Ratio of domestic public bonds outstanding as a percentage of gross domestic product (GDP) · Ratio of trading value of top 10 stocks as a percentage of total trading value · Ratio of stock market capitalization as a percentage of GDP · Ratio of stock trading value as a percentage of GDP · Stock market turnover ratio (total value of shares traded as a percentage of average stock market capitalization) Market Concentration and Competitiveness The study examines the market structure of the banking sector to evaluate the banking system's proneness to instability and crises. A high level of concentration in the banking industry, by reducing competition and increasing cost, has a nega- tive impact on efficiency: the financing obstacle will be higher and the likelihood of receiving bank financing will be lower. At the same time, a highly competitive banking sector might be more prone to crisis, due to increased fragility resulting from intense competition, than a more concentrated one. Hence, striking the right balance between the two is important for the optimal functioning and stability of the financial sector. To measure market concentration and competitiveness, the study uses three concentration ratios and the Herfindahl-Hirschman Index (HHI). The U.S. De- partment of Justice and the Federal Trade Commission has issued (under horizon- tal merger guidelines) HHI standards,1 which are used by the European Union, the United States, and many other countries, as a measure of market concentration (see U.S. Department of Justice and the Federal Trade Commission 1997). Also, both simplicity and limited data requirements make the K-bank concen- tration ratio one of the most frequently used measures of concentration in the empirical literature (see Al-Muharrami, Matthews, and Khabari 2006). The six micro indicators used are as follows: · HHI · K-bank concentration ratio (K = 3) ­ based on assets · K-bank concentration ratio (K = 3) ­ based on deposits · K-bank concentration ratio (K = 3) ­ based on loans Introduction 7 · Ratio of private credit extended by banks as a percentage of GDP · Ratio of commercial banking assets as a percentage of GDP Corporate Governance Sound corporate governance creates an environment that promotes banking effi- ciency, mitigates financial risks, and increases stability and therefore the credibil- ity of financial institutions. Developing countries have much to gain by improving their corporate governance standards, still mostly in the development stage. The basic principles of sound corporate governance are the same everywhere: fairness, transparency, accountability, and responsibility are the minimum standards that provide legitimacy to banks, reduce vulnerability to financial crisis, and broaden and deepen access to capital. Corporate governance scoring is challenging and must be approached with care. Unlike other forms of financial analysis, where quantitative measures can provide "hard" benchmarks to guide more qualitative aspects of analysis, assess- ment of corporate governance is largely a qualitative exercise (see Standard & Poor's 2004). A questionnaire was developed to assess sound corporate gover- nance in terms of ownership structure and influence of external stakeholders, in- vestor rights, transparency and disclosure, and board structure and effectiveness. The good governance practices outlined by the OECD serve as the basis for the questionnaire developed to assess the corporate governance of South Asian coun- tries in this report (see chapter 9). In February 2006, the Basel Committee on Banking Supervision also issued a guidance paper on corporate governance artic- ulating the eight principles to enhance corporate governance for banking organi- zations, and to guide the actions of the directors, managers, and supervisors of a diverse range of banks (see chapter 9). Corporate governance is assessed through a series of straightforward questions, and no definitions or guidelines are pro- vided in the compilation guide for those questions or the resulting indicators. Be- cause the collection of data for the corporate governance analysis was confined to this simple questionnaire, the observations on corporate governance in this report should be viewed as preliminary at best. The Methodology For this study, just as for the earlier studies, South Asia is represented by Ban- gladesh, India, Nepal, Pakistan, and Sri Lanka. Annual data on the commercial banking sector of each of the countries were compiled for the six years from 2001 to 2006. These six years of data are analyzed to evaluate the performance and soundness of the financial system in each country. A simple-average ranking method is used to aid this evaluation process. (For more on collection of data, choice of indicators, and ranking methodology, see chapter 7.) The compilation of comparable data for a set of financial sector soundness indicators in South Asia was an important contribution of the phase I and II re- ports. These time-series financial data, coupled with a comparative study of the prudential banking regulations of South Asian countries as well as international best practices, provide a useful tool for supervisory authorities. This would enable them to assess their prudential norms relative to those of their regional peers and of more advanced countries so that they can bring those norms, and their coun- try's financial indicators, in line with international best practices. The third edi- tion of Getting Finance in South Asia added another useful tool to supplement 8 Getting Finance in South Asia 2009 those already available to supervisory agencies in the region--that is, a ranking of South Asian countries based on a selected set of financial and corporate gover- nance indicators that reflect the soundness of the financial system. In this fourth edition, two new development dimensions--capital market de- velopment and market concentration and competitiveness--should provide a more holistic perspective of Getting Finance in South Asia. Another important enhancement is the compilation of benchmark indicators for selected high- income OECD member and nonmember countries and a comparator group of Asian countries. These benchmarks help the supervisory authorities identify in- dustry and international averages, trends, and any significant variations to these norms. Once such variances are detected, the supervisory authorities should be prompted to determine the cause and to identify corrective action. The rankings and analysis presented in this report are based mainly on the data gathered from each country. Thus, the findings, interpretations, and conclusions in the report depend on the accuracy of these data as well as on the indicators se- lected. The results of the analysis should draw attention to the importance of sound corporate governance, broad access to finance, and stable, efficient, and well-performing banks for maintaining a sound and robust financial system. An unstable financial system entails heightened risk of financial crisis. Thus, a stable financial system, which shows promise of diversification by developing cap- ital markets and welcomes fair competition, has the capacity not only to prevent financial crises from occurring but also to contain the effects of those that do occur and prevent them from spilling over into the real economy. Rather than serving as a reference, this and similar studies should prompt the regulatory au- thorities in South Asia to reflect on their country's position within the dynamic international financial arena and make timely adjustments needed to stay ahead of the game. Constant surveillance and monitoring of the structural trends in fi- nancial markets are needed to identify early warnings of the onset and potential impact of financial instability. To assist such surveillance, through this exercise, the World Bank seeks to compile the financial data, analysis, and benchmarks needed for monitoring risks to domestic financial stability. Development of Benchmarks Benchmarking helps a country to view its performance relative to its peers in the region and internationally. They are particularly useful as diagnostic tools to assess a country's performance and capabilities relative to international standards to identify gaps to improve performance; however, they are not well suited to describe the unique characteristics of the financial systems under consideration. While benchmarking, by itself, does not improve performance, it can be used in formu- lating strategic decisions. In this study, comparable data for selected high-income OECD member and nonmember countries--including Australia; Canada; Hong Kong, China; New Zealand; Singapore; the United Kingdom; and the United States--are compiled to serve as the benchmark. The choice of countries was based on two considerations: (1) standard-setting countries in the case of OECD mem- ber countries; and (2) for nonmember countries, members of South East Asia, New Zealand, and Australia (SEANZA).2 The choice of countries was also affected by the availability of data. For this benchmark group, data have been compiled for the six-year period from 2001 to 2006 only for the commercial banking sector. This data compilation Introduction 9 was confined only to financial data; corporate governance information was not gathered (for underlying data, see appendix 2.A; for data sources, see appendix 2.B). For each indicator, the high (low) values of these seven countries were se- lected as the benchmark range. However, data for Hong Kong, China and Singa- pore were removed as outliers from geographic branch penetration ratio and geo- graphic ATM penetration ratio because of their unique positions as international financial centers and their small land areas. These benchmarks provide an op- portunity to assess the performance and soundness of the South Asian group in a global perspective. Interpretation of Ranks South Asian authorities actively pursue financial reform measures to build stable financial systems that are resilient to economic shocks. In this process, they have pursued many things--including policy changes, technological changes, market infrastructure improvements, and prudential guideline revisions--that would en- sure safety and soundness of the financial system through greater transparency and accountability. They have initiated action to implement Basel II capital frame- work in the near future so that banks are able to strengthen the link between regu- latory capital and risk management. Furthermore, all South Asian countries have attempted to introduce corporate governance guidelines. The positive effects of these reforms are discernible. Overall progress is commendable for most countries. Analysis of the Getting Finance Indicators confirms that commercial banking sectors in Bangladesh, India, Nepal, Pakistan, and Sri Lanka have made great strides in some dimensions (returns, capital adequacy, and market concentration), whereas other dimensions (credit quality, provisioning, and access measures) need further improvements to compare well with the benchmark groups. Rankings of these countries aid the evaluation process to pinpoint areas in which performance is strong and areas in which improvements are most needed. India leads the region in overall ranking-- indicating they lead the financial sector development efforts among the South Asian countries--followed by Pakistan, Sri Lanka, Bangladesh, and Nepal. How- ever, rankings differ in each of the six areas assessed. On access to finance, Sri Lanka ranks at the top (0.93 of the composite score3), followed by Bangladesh, India, Pakistan, and Nepal. Over the six-year period, Sri Lanka improved its financial outreach by providing physical access to financial services and encouraging their use. Except for geographic branch penetration, Sri Lanka leads in all access indicators. Access is lowest in Nepal. On performance and efficiency, the top ranking goes to Pakistan (0.80)--due to higher returns, better earnings power, and somewhat lower costs--followed by Sri Lanka and India. Bangladesh and Nepal share fourth place. All the countries have enjoyed good returns resulting from wider interest rate spreads and in- creased credit volumes. Nepal still faces effects of negative regulatory capital; how- ever, it leads the group in operating cost efficiencies. In addition, Bangladesh con- tinues to be straddled with high operating costs, although returns appear to be reasonable. On financial stability, India leads the region (0.89)--denoting superior capital position, better liquidity management, and improved credit quality--followed by Pakistan, Sri Lanka, Bangladesh, and Nepal. All countries except Nepal recorded higher CARs. Pakistan has the best provisions ratio. Nepal still faces 10 Getting Finance in South Asia 2009 negative regulatory capital and its liquidity position should be monitored to avoid a collapse of market liquidity. The area on which South Asian countries need to focus most seems to be capi- tal market development. India ranks at the top (0.91), followed by Pakistan, Sri Lanka, Bangladesh, and Nepal. Except for India, all other capital markets are at de- velopmental stages. When compared with other countries, South Asian markets have relied less heavily on bond financing than equity financing. This factor is not readily observable with the selected indicators, however, as the bulk of the securi- ties represents government debt. One other reason is the continued reliance on bank financing. Market concentration and competitiveness category is led by India (0.89)-- signifying healthy competition in the banking sector--followed by Bangladesh, Nepal, Pakistan, and Sri Lanka. Except for Sri Lanka, all other countries have low market concentration ratios. On the HHI, Sri Lanka is classified as moderately concentrated with the top three banks accounting for more than 50 percent of all assets, deposits, and loans. Private credit is high in most countries and needs care- ful monitoring to reduce the possibility of increased credit risk. Rapid expansion of bank credit to the private sector, if not coupled with prudential credit risk management systems, would make banks vulnerable if economic activities slowed down. This vulnerability happens when banks try to meet the increasing demand for credit during economic boom times by changing the composition of their asset portfolios and by increasing external borrowings, thus reducing profit mar- gins (see Hilbers, Otker-Robe, and Pazarbas¸ioglu 2006). This fact is especially sig- nificant to South Asia because bank credit is the main source of financing for the private sector ahead of either equity or bond financing. As expected, commercial banking assets as a percentage of GDP are significant in all countries. Finally, on average, South Asian countries show the most efforts and improve- ments in corporate governance. Pakistan takes the lead (0.84)--indicating sig- nificant reform efforts in this area--followed by India, Sri Lanka, Nepal, and Bangladesh. India, Pakistan, and, more recently, Sri Lanka, have issued detailed guidelines. Still, all countries need to review their corporate governance guidelines and strengthen them in areas such as stakeholder rights, disclosure of beneficial ownership, transparency and disclosure, and adherence to international stan- dards. Enforcement of the corporate governance guidelines by the supervisory au- thorities also needs attention. Overall, when comparative data over the six-year period are examined, it is ev- ident that South Asia is showing commendable progress in making its banking systems more efficient. The Role of Microfinance in South Asia Because of comparability and data issues, the analysis is limited in coverage to commercial banks and ignores a range of other deposit-taking financial institu- tions, such as post office savings schemes, cooperative banks, microfinance institu- tions, and so on. Therefore, the interpretations and the general applicability of the findings on access to finance dimension is limited only to the commercial banking sector. For example, the microfinance movement, as a medium of financial access, is a significant feature in the economic structure of South Asia. Box 1.1 illustrates the significance of this important aspect in South Asian financial inclusion. Introduction 11 Box 1.1 Microfinance in South Asia Overall, microfinance has been established as a significant percent of the overall credit requirements of low-income part of the economic landscape of South Asia. By 2005, families. In Bangladesh and Sri Lanka, coverage was partic- microfinance in the region covered at least 35 million of ularly impressive, with more than 60 percent of the poor some 270 million families in the region and met some 15 covered by microfinance services. Estimated breadth of microfinance outreach in South Asia Poverty Poor Microfinance MF poverty MF coverage of Populationa ratiob familiesc clients outreachd poor familiesc Country (millions) (%) (millions) (millions) (%) (%) Afghanistan 22 55 2.0 0.12 50 3 Bangladesh 143 50 13.0 16.00 50 62 India 1,100 30 60.0 15.00 35 9 Nepal 26 35 1.6 0.50 45 14 Pakistan 155 33 8.5 0.58 35 2 Sri Lanka 20 25 1.0 2.50 25 63 South Asia 1,466 33 86.2 34.70 41 17 Source: Authors' estimates based on data available from the Asian Development Bank and others. Note: MF = microfinance. a. Population figures from World Bank Web site (updated from 2004 to 2005). b. Poverty information for India and Bangladesh match World Bank information; informed estimates for other countries. c. Poor families are defined as families subsisting on less than government-defined poverty thresholds, using an estimated family size of 5 for Sri Lanka; 5.5 for India, Bangladesh, and Nepal; and 6 for Pakistan and Afghanistan. d. Poverty outreach from EDA Rural Systems Private Limited, India, studies for Bangladesh and India; for other countries, informed estimates based on secondary sources. All six of the larger countries in the region either have which has its own special characteristics, evidence of a microfinance regulation in place (Nepal and Pakistan), mainstreaming remains limited to a relatively small part are considering a draft law (Bangladesh, India, and Sri of total outreach. Lanka), or are actively debating what kind of regulation In some countries, major impediments need to be re- should be adopted (Afghanistan). moved before an inclusive financial sector can develop. In The microfinance movement provides most of the ac- Sri Lanka, especially, the dominating presence of a large cess to financial services available to low-income people government subsidized microfinance programs impedes in South Asia, but it is still largely a separate part of the the growth of well-managed MFIs and even commercial financial system, with few examples of direct service pro- banks that want to enter the sector. In Pakistan, most non- vision to the poor by"mainstream"commercial governmental organizations (NGO), MFIs, and institutions. And, despite the growing discussion about microfinance banks are not profitable, and they do not and enthusiasm for developing a seamless, inclusive charge interest rates that would support profitable opera- financial sector, there is little evidence that this will hap- tions, largely because they still receive significant donor pen to any great extent in the near future. Only in India and government funded subsidies. Recently in India, com- are there significant examples of bank involvement in mi- petition between subsidy-oriented government programs crofinance. This includes the linkage models with micro- and MFIs has resulted in coercive pressure by a state gov- finance institutions (MFIs), the large and growing bank- ernment on financially sustainable MFIs to lower interest SHG (self-help group) links, and involvement in the rates to unsustainable levels.The message this gives to market of large commercial banks such as ICICI Bank, in- banks that might otherwise consider retail products for cluding international banks like ABN Amro and CitiBank. microfinance is obvious. Reforms are needed to remove Also, several local and international social investment impediments of this kind before a healthy, inclusive finan- funds offering debt and equity products are active in cial sector will be able to emerge. India, something that has not taken off elsewhere in the region. But even in India, aside from the bank-SHG model, Source: Excerpts from World Bank 2006e. 12 Getting Finance in South Asia 2009 Endnotes 1. HHI is calculated by squaring the market share of each bank and summing the squares. According to the guidelines, the banking industry is considered as competitive if HHI is less than 1,000, somewhat concentrated if HHI is between 1,000 and 1,800, and highly concentrated if HHI is more than 1,800. 2. SEANZA was formed to promote cooperation among central banks by providing in- tensive and systematic training courses for central bank staffs. Original members were cen- tral banks from Australia, India, New Zealand, Pakistan, and Sri Lanka. The additions were Bangladesh; China; Hong Kong, China; Indonesia; the Islamic Republic of Iran; Japan; the Republic of Korea; Malaysia; Macao, China; Mongolia; Nepal; Papua New Guinea; the Philippines; Singapore; and Thailand. 3. Composite scores range from 0 to 1. 2 The Getting Finance Indicators: Country Perspective The commercial banking sector is the main financial intermediary in many of these countries, with banking assets accounting for more than 50 percent of the gross domestic product (GDP). This analysis covers six dimensions of the financial sector development over a six-year period from 2001 to 2006. The analysis is fur- ther enhanced by the use of benchmarks (for underlying data see appendixes 1, 2, and 3). An update of the major policy developments in prudential regulations cov- ering 2005­06 is also included (see chapter 8). While the previous Financial Per- formance and Soundness Indicators (FPSI) reports discussed the prudential regu- lations of each country in detail and benchmarked the prudential norms of South Asian supervisory authorities against international best practices (see World Bank 2004, 2005b, 2006d), this report provides a detailed comparison of benchmark countries with the South Asian group. Having more than 50 percent of the world's poorest people, South Asia faces the daunting task of developing their economies while eradicating poverty. In terms of income group classification, India, Pakistan, and Sri Lanka are classified as lower-middle-income countries while Bangladesh and Nepal are classified as low-income countries, based on their per capita gross national income (GNI).1 Populations range from 19 million in Sri Lanka to more than 1 billion in India, which accounts for around 75 percent of the region's population and 80 percent of its GDP. Together, Bangladesh, India, and Pakistan account for around 97 percent of the region's population and GDP (see table 2.1). Financial sectors in South Asian countries continue to be dominated by their banking sectors. With the exception of India, capital markets are at early stages of development, hence private sectors continue to rely on bank credit rather than bond or equity financing, for their investment requirements. South Asian coun- tries, however, are making considerable efforts to develop their financial sectors. Bangladesh With a population of around 144.3 million and a GDP of nearly US$61.96 million (2006 data), Bangladesh is the third largest country in terms of these two measures. 13 14 Getting Finance in South Asia 2009 Table 2.1 Key Economic Indicators for South Asian Countries, 2006 Bangladesh India Nepal Pakistan Sri Lanka Population (millions) 144.30 1,109.80 27.70 159.00 19.80 Gross national income (GNI) per capita (Atlas method US$) 490 820 290 800 1,320 Gross domestic product (GDP) (US$ billion) 61.96 906.27 8.05 128.83 26.97 GDP (% annual average growth) 6.70 9.20 2.30 6.60 7.20 Gross dom. investment/GDP 25.00 35.00 30.30 20.00 28.70 Gross national savings/GDP 33.00 33.00a 35.00 17.00 24.80 Equity market capitalization (US$ billion) 3.61 818.88 1.31 45.52 7.77 Equity market capitalization (% of GDP) 5.83 90.36 16.31 35.33 28.81 Domestic bonds outstanding (US$ billion) 7.30 325.68 1.22 32.41 13.71 Domestic bonds outstanding (% of GDP) 11.85 35.94 15.09 25.16 50.84 Banking assets (US$ billion) 32.74 587.38 4.33 50.70 10.30 Banking assets (% of GDP) 52.84 64.81 53.82 39.35 38.20 Deposit interest rate (%) 9.11 7.25 2.25 4.94 11.50 Lending interest rate (%) 15.33 14.25 8.00 11.55 14.64 No. of commercial banks 43 85 18 35 23 No. of specialized banks 5 7 46 10 14 No. of nonbank financial institutions (NBFIs) 28 428b 134c 78d 48e Exchange rate/US$ (year end) 69.07 44.25 71.10 60.92 107.71 Sources: World Bank 2007a, 2007b; IMF 2007b; regulatory authorities. a. 2005 data. b. Deposit-taking nonbank financial companies (NBFCs). c. Includes finance companies, savings and credit institutions, and nongovernmental organizations (NGOs). d. 2004 data. e. Includes finance companies and leasing companies. With a GNI of approximately US$490, Bangladesh is classified as a low-income country. The GDP continues to grow at an average annual growth rate of 6.7 per- cent. Bangladesh continues to be a heavily agrarian economy (19.6 percent of the GDP); however, over the years, the service sector has emerged as the dominant sec- tor in the economy, accounting for more than 52.5 percent of the GDP in 2006. Ex- port of goods and services continues to improve at 19 percent of the GDP. In 2006, Bangladesh had a high gross national savings rate, at 33 percent of GDP, and total debt equaled 35.4 percent of GDP. The market capitalization of listed companies was 6 percent of GDP. The domestic bond outstanding was 11.85 percent of the GDP, at US$7.30 billion. In Bangladesh, commercial banks dominate the financial sector with banking assets of around 52.84 percent of GDP. The country's four nationalized commer- cial banks (NCBs) dominate the banking system, accounting for more than 52.21 percent of assets and operating 65 percent of branches (3,384) in March 2007. In addition to the 4 NCBs, Bangladesh's 43 commercial banks in 2006 included 30 private banks and 9 foreign banks. (Bangladesh Bank 2007b). The Getting Finance Indicators: Country Perspective 15 Figure 2.1 The Bangladesh Banking Sector Demonstrated Lower Concentration 60 1,000 900 50 800 700 HHI 40 600 index 30 500 percentage 400 20 300 200 10 100 0 0 2001 2002 2003 2004 2005 2006 year HHI commercial bank assets K-bank deposits K-bank assets K-bank loans private credit to GDI Source: Data from Bangladesh Bank; see appendix 1, table A1.7. Analysis of the micro indicators of the Bangladesh commercial banking sector suggests that the main focus should be stability (improving the capital base and provisions, improving credit quality, and tightening underwriting standards to bring down nonperforming loans [NPLs]), performance and evaluation (curtail- ing operating costs and improving margins), and corporate governance (aligning local accounting and auditing standards with international best practices and im- proving the corporate governance policy). Banking sector concentration is com- mendably low on all measures, but higher levels of bank credits and assets denote the competitiveness of the banking sector (see figure 2.1). As with most other South Asian countries, Bangladesh capital markets are still at the developmental stage with a weak bond market and low equity market capitalization. Improve- ments in the market infrastructure and regulatory aspects would be needed before Bangladesh can reach its full potential as a reliable long-term funding source. Access to Finance Financial outreach improved marginally between 2001 and 2006. Demographic branch penetration decreased slightly from 4.83 bank branches per 100,000 peo- ple in 2001 to 4.73 in 2006. By the end of 2006, however, demographic automated teller machine (ATM) penetration growth was still low at 0.3 per 100,000 people. The geographic branch penetration hardly changed, whereas ATM penetration increased by nearly 200 percent from 0.91 per 1,000 km2 to almost 2.71 in 2006. On usage of financial services, deposit accounts rose gradually from 231.97 per 1,000 people in 2001 to 255.23 in 2006, and loan accounts per 1,000 people grew by about 8 percent. The deposit mobilization of commercial banks largely re- mains an urban phenomenon. The majority of banking deposits are now held by 16 Getting Finance in South Asia 2009 the private banks, which compete closely with public banks for the major share in the lending market. Lending to the private sector showed increased participation by the private banks, hence the growth. As stated earlier, however, the access to finance measures discussed here applies only to the commercial banking sector. Bangladesh leads microfinance efforts in South Asia with more than 1,000 semiformal microfinance institutions (MFIs) serving more than 22 million people. Funds disbursed through microfinance have reached US$12 billion. These facts underlie the importance of microfinance in the system. The government also has supported this movement in many ways. The establishment of a Microfinance Research and Reference Unit (MRRU) in Ban- gladesh Bank and the enactment of the Microcredit Regulatory Authority Act (MRAA) are some examples. The MRAA is processing licenses for microcredit in- stitutions to streamline their operations. Performance and Efficiency The overall efficiency of the banking system has improved marginally since 2001. Both return on equity (ROE) and return on assets (ROA) initially dropped from 2001 and then improved, except in 2004, when a loss was registered due to the charging of accumulated provisioning shortfall for one nationalized bank. ROE stood at 33.86 percent in 2006, almost a 98 percent increase from the 2001 ratio of 17.12 percent, while ROA almost doubled over the six-year period to reach 1.66 percent at the end of 2006. The improvement in returns was mainly due to the better performance by foreign banks and, to a lesser extent, by private banks. The banking system appears to have made mixed results in cost-efficiency. The staff cost ratio rose over the years, from 44.75 percent in 2001 to 61.39 percent in 2006. The operating cost ratio fell by almost 136.30 percentage points, from 236.78 percent to 100.48 percent in 2006. Bangladesh has the highest operating cost ratios in the region. Gains in overall operating efficiency were reflected in modest growth in both net interest margin (23 percent) and recurring earnings power (52 percent), over the six-year period. State-owned banks reorganization is a necessary condition to improve the overall performance of the banking sector. Financial Stability Over the years, resulting from negative capital position of the state-owned banks, the regulatory capital adequacy ratio (CAR) was below the required level of 8 per- cent. State-owned banks struggled with provisioning shortfall issues and cumula- tive losses over the years, which affected the overall capital position of the commer- cial banking sector. With the restructuring and divesting process under way for the state-owned banks, this trend seemed to have changed in 2006, during which time a 8.33 percent ratio was recorded. The leverage ratio fluctuated around assets at four times its own funds throughout the period, which improved slightly to 5.33 in 2006, denoting improvement in the capital position. In addition, with a view to- ward strengthening the capital base of banks and aligning the banks for the imple- mentation of Basel II Accord, the regulatory authorities have mandated that banks move toward maintaining a capital to risk-weighted assets ratio of 10 percent at the minimum. The state-owned banks hold the majority of the NPLs in the banking sec- tor, which is the cause for their continued provisioning shortfall issues. The gross NPL ratio declined considerably, by 58 percent over the period to 13.15 percent in The Getting Finance Indicators: Country Perspective 17 2006. The provisioning ratio hardly changed over the six-year period and re- mained around 26 percent. These improvements are caused by proactive loan re- covery policies adopted by the banks coupled with more stringent credit require- ments. Regulatory authorities have played their part by improving prudential regulation and implementing the NCB reform program. The liquid assets ratio declined by about 38 percent over the period to 18.67 percent in 2006 from nearly 30.03 percent in 2001, while liquid assets covered the liabilities ratio on almost a one-to-one basis over the years. Liquidity was not an issue for Bangladeshi banks with a Statutory Liquidity Requirement (SLR) of around 20 percent of the deposit base, including a 4 percent Cash Reserve Re- quirement (CRR). In keeping with the international trends and guidelines, Bangladesh Bank has decided in principle to adopt the Basel II. Given the complexities involved, how- ever, Bangladesh Bank has adopted a mix of standardized and foundation Internal Rating-Based (IRB) approaches to guide the minimum capital requirement, and the process is ongoing. The bank has already issued guidelines on managing core risks in banks. It is expected that these measures will show results through in- creased capital positions in the future (see chapter 8 for more details on Basel II adoption by Bangladesh). Capital Market Development Capital market development in Bangladesh is still in its early stages. The domestic bond market of Bangladesh is composed almost entirely of government borrow- ing. This market--which happened to be the smallest in the region--showed to be around 17 percent of GDP throughout the six-year period under considera- tion. The bond market, at almost three times the size of equity market capitaliza- tion, showed that the equity market is still very much in the development stage. Equity market capitalization to GDP had almost doubled over the period from 2.57 percent in 2001 to 5.41 percent in 2006. However, this is the least developed market compared with other stock markets in the region. A market liquidity around 1 percent and low stock market turnover of around 0.20 times denoted the relative inefficiencies inherent in smaller markets. Fewer players, as shown by the high top 10 stocks turnover ratio, dominated stock market. However, this ratio has been declining over the years from 59.16 percent in 2001 to 39.68 percent in 2006, by almost 33 percent. To achieve diversity in the funding options for the private sector in their invest- ment activities, it is expected that Bangladesh capital markets would grow rapidly in the future. In fact, progress had been made in the stock market in the latter part of 2007. Developing benchmark bonds, expanding the investor base, improving the market infrastructure, streamlining the regulatory framework and guidelines, and managing the market distortions created by government savings schemes are some of the issues that need to be addressed to jumpstart the capital market devel- opment process. Market Concentration and Competitiveness The banking system had better results in market concentration. All the concentra- tion ratios have declined over the years. The Herfindahl-Hirschman Index (HHI) declined by almost 348.1 points over the six years. Bank concentration ratios on assets, deposits, and loans have all registered significant declines of 29 percent, 18 Getting Finance in South Asia 2009 30 percent, and 26 percent, respectively. These ratios indicate a lower level of con- centration in the market, and therefore, further room for expansion. On the other hand, private credit extended by the banks increased from 24.33 percent in 2001 to 34.45 percent in 2006. The commercial banking assets-to-GDP ratio has been increasing from 50.35 percent to 55.43 percent in 2006. Because of the disproportionate reliance of bank credit by the private sector, the increase in the bank credit should be monitored carefully. Corporate Governance Corporate governance is still in its early stages in Bangladesh as it is for other de- veloping countries. To strengthen corporate governance in banking, Bangladesh Bank issued several prudential regulations and guidelines over the years. Some of the major directives issued cover the following areas: · Qualifications of bank directors and chief executive officers (CEOs) · Authorities and responsibilities of the chairman, board of directors, CEO, and advisers · Limits on the size of the board · Responsibilities of the board · Establishment of audit committees · Disclosure requirements of banks · Establishment of the Basel II Accord · Policy on loan classification and provisioning · Restriction on lending to directors of private banks · Fit-and-proper test (FPT) for appointment of bank directors · Policy on large loans, loan rescheduling, loan write-off, and large loan restructuring · Dividend payments · Loans against share and debentures · Management of core risks in banking These guidelines are still at the development stage. No significant changes are reported from 2005, when the questionnaire was first forwarded to the authorities (see appendix 3.A). Examination of the responses to the questionnaire revealed that more attention is needed in the following areas: the augmentation of guide- lines with legal provisions governing beneficial ownership, the remuneration of directors, and the roles and responsibilities of external and internal auditors. Full conformity with international accounting and auditing standards should be pur- sued. Although the regulatory authorities have started moving ahead with the process, much more needs to be done to infuse the banking system with a corpo- rate governance culture. Given below is the corporate governance analysis of Bangladesh from the previous project. Some issues relating to ownership structure and the influence of stakeholders have been addressed. No individual or family can hold more than 10 percent of the shares of a banking company, and under the Bank Companies Act, banks must dis- close their shareholding structure in their Articles of Association. No legal provi- sion seems to identify a threshold of share ownership to be disclosed to the general public. The government determines the nominations of directors for government- controlled banks, while the central bank regulates the remuneration of directors. The Getting Finance Indicators: Country Perspective 19 The Companies Act protects the preemption rights of minority shareholders. There are no provisions to establish stakeholders' rights. Nor are there legal provi- sions governing the disclosure of beneficial ownership by shareholders other than the requirement that shareholders disclose their portfolios in their tax returns. Investor rights in terms of voting procedures and shareholder meetings appear to be in place. Adequate information is disclosed to shareholders in a timely fash- ion, and they are able to vote in absentia. No rules govern third-party verification of voting. Shareholders may vote on a range of issues including related-party transactions. Special voting rights of individual shareholders other than the gov- ernment are capped at 5 percent of the total votes. In contrast, basic ownership rights need improvement. Shareholders can vote on appointments and dismissals of directors, and in the government-controlled banks it is evident that the government exercises control over such outcomes. A clear dividend policy is in place and structural defenses that can prevent takeover bids are not established. Minority shareholders cannot easily nominate a director, pointing to a need for legal provisions to safeguard their interests in the appoint- ment of directors. Finally, no evidence shows that shareholders exercise any of these basic ownership rights. Questionnaire responses on transparency and disclosure requirements indicate that financial statements are prepared annually and in accordance with local gen- erally accepted accounting standards, which are in material conformity with inter- national accounting standards. Yet other studies on financial reporting and stan- dards have revealed gaps remaining between the two sets of standards (see World Bank 2003). Preparation of accounting and auditing standards in line with the in- ternational standards should be a priority. In addition, audit functions need to be defined in detail. Banks are required to appoint audit committees, but it is unclear whether the committees' mandate in- cludes determining the process for selecting auditors. Contrary to internationally accepted standards, external auditors can perform other, nonaudit services for banks. And while auditing standards are said to conform with international stan- dards, here again other reports point to areas needing improvement (see World Bank 2003). Moreover, provisions that govern the roles and responsibilities of the internal auditor are not established. Responses on the structure and effectiveness of boards of directors show that Bangladesh banks follow a unitary structure, with around 13 directors on average. Minimum qualifications for directors are governed by the guidelines for FPTs is- sued by the central bank. The roles and responsibilities of boards of directors are clearly defined. Compensation policies need to be reviewed, however. Contrary to accepted standards, shareholders have no say on the remuneration of directors, and the board sets the remuneration of the bank's CEO with approval from the central bank. Provisions for performance-based compensation are not included in the re- muneration package of directors. Such provisions are widely accepted as a positive incentive in today's competitive world. In addition, disclosure of the compensa- tion of directors is not required. India India is the largest country in terms of its population (1.1 billion) and GDP (US$906.27 billion), which is the highest in the region. India recorded phenomenal 20 Getting Finance in South Asia 2009 growth over the past few years, and as a result, with a GNI per capita at US$820, India was classified as a lower-middle-income country. The economy continued to grow at an impressive average annual growth rate of 9.2 percent. Services dom- inate the economy at 54.6 percent of the GDP, while industry, agriculture, and manufacturing sectors account for 27.9 percent, 17.5 percent, and 16.1 percent, respectively. India's principal exports are engineering goods, petroleum products, textile, and clothing. As with most other South Asian countries, India also had a high gross national savings rate, at 33 percent of GDP in 2005. In 2006, the market capitalization of listed companies was 90.36 percent of GDP, or US$818.88 billion. The domestic bond outstanding was 35.94 percent of the GDP, or US$325.68 bil- lion. Over the past years, India has remained one of the largest recipients of port- folio investments. In contrast to other South Asian countries, India has a developed capital mar- ket (bond market as well as equity market) and commercial banking system. The Indian banking system plays an important part in economic growth. Banking as- sets account for more than 80 percent of total financial assets and 64.81 percent of GDP. In 2006, India's 85 commercial banks included 28 public sector banks (8 state and 20 nationalized banks), 28 private sector banks (20 old and 8 new), and 29 foreign banks (Reserve Bank of India 2006a). This analysis signifies India's superior financial stability in the banking sector (see figure 2.2) and its capital markets development in the region. Among the six dimensions analyzed, India needs to focus on access to finance (mainly to improve physical access) and improve performance and efficiency, especially in the areas of returns and cost-efficiencies. In addition, corporate governance practices between public and private banks should be harmonized. Figure 2.2 Indian Banks Are Stable and Adequately Capitalized 70 300 60 liquid 250 50 assets 200 40 to 150 liabilities percentage 30 100 20 % 50 10 0 0 2001 2002 2003 2004 2005 2006 year liquid assets ratio provisions to NPL ratio CAR NPL ROE Source: Data from Indian Banks' Association 2006a, 2006b, and 2006c; Reserve Bank of India 2006a, 2006b, 2006c, and 2007; see appendix 1, table A1.8. The Getting Finance Indicators: Country Perspective 21 Access to Finance Indian banks have to improve financial outreach to keep pace with the rapid eco- nomic growth. Demographic branch penetration dropped marginally to 6.37 branches from 6.42 bank branches per 100,000 people in 2006, while demo- graphic ATM penetration in 2006 was a low 1.93 per 100,000 people. Geographic branch penetration improvement over the six-year period was just over 6 percent, while geographic ATM penetration (data available only for the last two years) showed a higher level of increase of more than 20 percent in just one year. The usage indicators increased over the period. Deposit accounts per 1,000 peo- ple increased slightly from 416.77 to 442.87, indicating just a 6 percent increase, whereas loan accounts per 1,000 people grew by about 53 percent. In 2006, the state bank group dominated the lending and deposit markets with 72.9 percent and 75 percent market share, respectively. Private banks accounted for around 14 percent in both markets, and foreign banks accounted for around 6 percent. Indian authorities had taken various measures to improve the physical access to financial services. One such measure is a phased-out program permitting for- eign banks to open branches in excess of the World Trade Organization (WTO) commitment of 12 branches in a year. In addition, they took steps to simplify the Know Your Customer (KYC) procedures and instructed banks to provide basic no-frills accounts to facilitate financial inclusion. Furthermore, they allowed banks to use NGOs, self-help groups (SHGs), MFIs, and civil society organizations (CSOs) to act as financial intermediaries in providing banking services. These im- portant steps would help the Indian banking sector to match financial outreach with its economic growth. The microfinance movement that provides financial outreach to many peo- ple is not included in this study, and thus the above interpretations are relevant only to the commercial banking sector. As of 2006, more than 2.2 million SHGs were operating in India, and the number of families helped by these groups had reached more than 32.9 million families. Their lending portfolio was greater than US$2.57 billion. India also established other major institutions, such as the Na- tional Bank for Agriculture and Rural Development (NABARD), whose primary function is to aid development activities in rural areas. Other institutions, such as rural banks and cooperative credit institutions, also provide financial services, which again are not included in this study. Performance and Efficiency Indian banks have shown increased returns and lower costs; however, when com- pared to the regional performances, India could have performed better given the rapid rates of economic growth the country is experiencing. Returns on both equity and assets increased steadily over the six-year period, except in 2005 when they dropped slightly. In 2006, both returns recorded increases. ROE was 17 per- cent and ROA was 1.31 percent. This increase was attributed to the high demand for bank credit in 2006, which pushed the interest rates higher. The staff cost ratio dropped over the years due to lower wage bill possibly re- sulting from the voluntary retirement scheme offered to the public banks. In 2006, a ratio of 56.9 percent was recorded, which was a 16 percent decline over the years. The operating cost ratio increased over the last year to 75.65 percent. Higher cost of borrowing caused the increase. However, operating cost ratios dropped by about 18 percent over the six years. With regard to the overall operating efficiency, 22 Getting Finance in South Asia 2009 India recorded high net interest margins over the years. Net interest margin ratio improved marginally by less than 1 percent, with a drop in 2005, to 3.01 percent in 2006. The recurring earning power ratio has increased by nearly 38 percent over the six-year period, to 2.2 in 2006. This is low, however, when compared with the region. Financial Stability Among the South Asian banking systems, Indian banks were the most consistent in maintaining the regulatory CAR well above the required 8 percent. In all years, the ratio was maintained above 12 percent. In 2006, the ratio dropped marginally to 12.4 percent. The reasons for this reduction were application of capital charges for market risk, increase in risk-weighted assets due to higher credit growth, and increase in risk weights on certain types of loans by the regulatory authority. The leverage ratio continued to improve, with an average capital of around six times the assets (figure 2.2). These were indicative of India's success and focus on man- aging the risk portfolio. The gross NPL ratio continued to reduce over the period, falling by 71 percent, and was at 3.33 percent in 2006. Provisions ratio improved over the period to 64.2 percent at the end of 2006. Improved credit quality plus stringent recovery and provisioning policies are the reason for the improvements recorded over the years. Banks have made healthy progress in protecting their loan portfolios through these measures. Liquidity was not an issue for Indian banks with the SLR and CRR imposed by the Reserve Bank of India. The liquid assets ratio remained stable at around 40 percent, while the liquid-assets-to-liabilities ratio showed a small reduction. Overall, Indian banks have consistently performed well in maintaining finan- cial stability through adequate capital base, improved asset quality, and better liq- uidity management. Regulatory authorities have taken necessary policy decisions to ensure the stability of the banking system. One such measure is the planned adoption of the Basel II Capital Accord. The Reserve Bank is committed to the adoption of Basel II by the banks. All scheduled commercial banks are encouraged to migrate to the Standardized Ap- proach for credit risk and the Basic Indicator Approach for operational risk under Basel II, no later than March 31, 2009. To move the banks to conform to proposed Basel norms to provide an explicit capital charge for market risk in banking busi- ness, banks were advised in January 2002 to build up their investment fluctuation reserves (IFRs) to a minimum of 5 percent of investment in "Held for Trade" and "Available for Sale" categories in the investment portfolio. Furthermore, in 2004, banks were advised to maintain capital charge for market risk in a phased manner over a two-year period ending March 31, 2006. In addition, to facilitate the raising of capital necessary for a smooth transition to Basel II, banks were permitted to augment their capital funds by issue of innovative and hybrid instruments in Jan- uary 2006. It is, therefore, not surprising that banks are adequately capitalized and stable (see chapter 8 for more details on Basel II adoption by India). Capital Market Development India has a well-developed capital market consisting primarily of equity and debt markets, which have played a significant role in the economic development process. The equity market, which is almost three times the size of the bond mar- The Getting Finance Indicators: Country Perspective 23 ket, is growing rapidly. The domestic bond market represents around 30 percent of the GDP throughout the six-year period under consideration. The equity mar- ket capitalization to GDP has more than doubled over the period, from 29.4 per- cent in 2001 to 82.6 percent in 2006. Market liquidity decreased initially, showed gradual increase over the period, and was around 67.6 percent in 2006. Stock mar- ket turnover dropped sharply from 2.13 times in 2001 to 0.64 times in 2006. This denotes the reduction of market liquidity and reflects negatively on the efficiency of the market. The Indian stock market appears to be a mature market with many players, however, as shown by the top 10 stocks turnover ratio declining over the period from 72.9 percent in 2001 to 32.36 percent in 2006. Similar to other South Asian countries, government securities accounted for nearly 79 percent of the total bond market, and unlike other South Asian coun- tries, the corporate bond market also had around 21 percent market share. How- ever, while the government securities market is relatively well developed, the cor- porate bond market lacks in size and depth. While necessary infrastructure systems have been built over a period, which brings in efficiencies and cost reductions, fur- ther efforts are necessary to develop the bond market to meet the increasing needs of the private sector more efficiently. For example, simplifying primary issuance processes and costs to encourage corporate bond issues, introducing streamlined disclosures and adopting self-registration process for all corporate debt issuers, re- laxing the limits on foreign participation, and relaxing the investment guidelines for banks and key institutional investors to provide flexibility would further stim- ulate the development process. Market Concentration and Competitiveness The Indian banking system proves to be the best in the region on market concen- tration. All the concentration ratios declined over the years. The HHI declined by almost 24 percent over the six years. Bank concentration ratios on assets, deposits, and loans stabilized around 30 percent. On the other hand, private credit extended by the banks increased from 21.5 percent in 2001 to 39.4 percent in 2006, and the commercial banking assets-to- GDP ratio also increased from 61.9 percent to 78.9 percent in 2006. An increase in the private credit ratio is a matter of concern for credit risk. Because it is coupled with prudential credit-risk management systems, however, the banking system in India should be able to deal with the expansion. Corporate Governance Corporate governance in India has improved over the years. To promote sound corporate governance, the Reserve Bank of India had issued comprehensive guide- lines. More recently, in February 2005, the Reserve Bank laid down a comprehen- sive policy framework for ownership and governance in private sector banks. The broad principles underlying the framework were to ensure that ultimate owner- ship and control of commercial banks is well diversified, key shareholders and di- rectors and CEOs pass the FPT, and the board observes sound corporate gover- nance principles. These principles have expanded the transparency and disclosure standards gradually. Corporate governance guidelines should expand further to ensure transparency and fair play. One such area that needs attention is the difference between the 24 Getting Finance in South Asia 2009 governance rules applying to government-controlled banks and those applying to private banks. Since most of the governance rues and guidelines have not changed since the last report, the analysis of corporate governance guidelines and norms in the last report is given below. Understanding the importance of corporate governance in banking, the Re- serve Bank of India, under the guidance of the government, laid out a comprehen- sive policy framework for ownership and governance of private banks in February 2005. These, along with a series of legal and regulatory reforms, have increased the responsibility and accountability of banks. Legal provisions are in place to cover most major issues of ownership structure and stakeholder influence. However, those relating to government ownership and rights and the disclosure of beneficial ownership could be further strengthened. The regulatory guidelines of both the central bank and the stock exchange require disclosure of the shareholdings of promoters as well as the top 10 shareholders in the annual report. The threshold for reporting prescribed by the central bank is 5 percent and over. In addition, private banks are required to disclose holdings of 1 percent and over in their annual reports, to which both shareholders and market participants have access. For public banks, government ownership is disclosed. However, special privileges need not be disclosed because the privileges of the government stem from statute. For private banks, shareholders select the board of directors. In the case of public banks, the government controls nominations. There are provisions for es- tablishing stakeholders' rights, including representation of labor unions on the board of government-owned banks. The preemption rights of minority share- holders are protected by the Companies Act, with any alteration requiring ap- proval by a supermajority (75 percent). Legal provisions governing the disclosure of beneficial ownership of share- holders are available, although no thresholds are prescribed. Shareholders are re- quired to disclose such ownership to the company. Investor rights appear to be in place in terms of voting and shareholder meet- ings. Adequate information is disclosed to shareholders in a timely fashion. Share- holders can vote in absentia, although electronic voting is not permitted. Third- party verification of voting is done. Shareholders can vote on a range of issues, including related-party transactions. Separate guidelines on disclosure of special voting rights and caps on voting rights are deemed unnecessary, as these are al- ready mandated by the Banking Regulations Act. Basic ownership rights, however, need improvement. Again, it is the govern- ment's control of voting rights that needs to be looked into, along with minority shareholder rights in selecting directors. In private banks, shareholders can vote on appointments and dismissals of directors, while in state-owned banks the gov- ernment controls the outcomes. A clear dividend policy is in place. Specific struc- tural defenses that can prevent a takeover bid are not established, other than the requirement that any transfer of shares exceeding 5 percent of total paid-up capi- tal is subject to registration and regulatory scrutiny. However, the central bank re- serves the right to approve such transfers. No specific provision provides for mi- nority shareholders to elect directors in public banks. India appears to be doing well overall on transparency and disclosure. But pol- icy improvements are needed on disclosure requirements, audit fees, and the in- The Getting Finance Indicators: Country Perspective 25 ternal audit function. Financial statements are prepared in accordance with gener- ally accepted local accounting principles, which are in material conformity with international accounting standards. Financial reporting is done quarterly, semian- nually, and annually. Provisions requiring disclosure of audit fees paid to external auditors are not established. The Reserve Bank of India has issued clear guidelines on the appointment of audit committees and has clearly delineated their roles and responsibilities. In pri- vate banks, these committees control the process of selecting external auditors; for government-owned banks, the central bank appoints the auditors from a preap- proved list. External auditors do not perform other nonaudit services for the banks they audit. The central bank has issued clear guidelines on the roles and responsibilities of internal auditors. The internal audit function is performed by bank staff with the required professional qualifications and work experience. But internal auditors face no requirement to report to the board of directors rather than to manage- ment, raising questions about their independence. Indian banks follow a unitary structure for their boards, with around 8­12 members on average. The Bank Regulations Act governs requirements on the qualifications and experience of board members. The roles and responsibilities of the board are clearly defined. However, tasks and objectives are not individually assigned to board members. Furthermore, no provisions exist to institute formal and systematic training for directors, an issue that warrants attention. Since our last study, compensation policies have been reviewed. Effective March 2006, executive directors of the banks will be compensated with perfor- mance-based compensation for achieving targets. Detailed guidelines need to be issued to harmonize the practices between private and public banks. In private banks, shareholders can vote on the remuneration of the board of directors, while in public banks the government has the right to set remuneration. As in most South Asian countries, performance-based compensation for the board of direc- tors exists only in private banks, not in public ones. In addition, while private banks disclose directors' compensation in detail, public banks disclose only the aggregate compensation.2 Nepal In terms of population, Nepal (27.7 million) was fourth, ahead of Sri Lanka among the five South Asian countries. However, it had the smallest GDP in the group with US$8.05 billion. Nepal was classified as a low-income country with a GNI per capita of US$290, which was well below the low-income country average of US$650. In recent years, the economy was characterized by slow growth (at 2.3 percent in 2006), weak output and exports, and rising inflation. Nepal is primarily an agrarian-based economy with 39.5 percent of GDP in agriculture. Services also commanded 39.5 percent, while industry and manufacturing sectors accounted for 27.1 percent and 7.7 percent, respectively. Exports of goods and services were around 18.6 percent. Nepal had the highest gross national savings rate in 2006, at 35 percent of GDP. The market capitalization of listed companies was 16.31 per- cent of GDP, or US$1.31 billion. Similarly, the domestic bond outstanding was 15.09 percent of the GDP, equivalent to US$1.22 billion. 26 Getting Finance in South Asia 2009 With 84.7 percent of total financial assets, the commercial banking system dominated the financial sector. This was 53.82 percent of GDP. The Nepal banking sector consisted of 18 commercial banks--3 public banks, 9 private banks, and 6 foreign banks (Nepal Rastra Bank 2006). The capital markets in Nepal are still at the development stage. This analysis revealed that Nepal is in need of a focused action plan to enhance the performance of its banking sector so that it can participate more effectively in the economic development process. Capital shortfall is a major concern that per- meates into other dimensions of financial sector development--including stabil- ity, efficiency, and capital market development. Nepal should improve the credit quality, tighten liquidity management, reduce NPLs, and further improve cost- effectiveness. It should expand financial outreach further so that more people are able to avail themselves to financial services. Furthermore, corporate governance needs attention from Nepal Rastra Bank (NRB), the country's central bank, along with ensuring compliance with and enforcement of applicable rules and regula- tions. Nepal's bond market is at its infant stage of development and remains dom- inated by government securities. The equity market is not fully developed. How- ever, it is expected that the regulatory authorities would initiate the development efforts on these areas as well. Access to Finance Access indicators have not improved significantly. Between 2001 and 2006, demo- graphic branch penetration declined sharply from 2.09 bank branches per 100,000 people in 2001 to 1.73 in 2006. However, ATM penetration increased markedly from 0.05 per 100,000 people to 0.28. Geographic branch penetration over the six- year period also decreased by about 10 percent, while geographic ATM penetration shows a fivefold increase from 0.08 to 0.48 in 2006. Branch closings due to insur- gency situations were the main reasons for the drop in branch penetration indica- tors, and ATM network expansion is confined mostly to urban areas. With regard to the use of financial services, poor performance can be observed: deposit ac- counts fell from 111.59 per 1,000 people to 110.4 over the period, and loan ac- counts per 1,000 people dropped from 19.45 in 2001 to 10.83 in 2006. The access and usage figures remain low when compared with the regional data. Furthermore, Nepal's microcredit development banks, cooperative banks, and other NGOs that serve the rural poor accounted for around 2.36 percent of the total financial sector assets. These institutions were not included in this study. As of 2006, total deposits and lending by the microcredit development banks amounted to approximately US$12.9 million and US$60.6 million, respectively. Performance and Efficiency Profitability of the entire banking sector was affected by the poor performance of the state banks. Except for these state banks, all other commercial banks were profitable. However, the massive losses incurred by the state banks during the pe- riod coupled with their huge retained losses, depressed the returns on the entire industry. Thanks to the restructuring process of the public banks initiated by the authorities, during the latter part of 2004, this negative trend reversed and public banks posted profits that affected the returns of the entire industry positively. ROE was still negative, mainly due to the retained losses, but dropped from ­93.62 percent to ­43.30 percent--an improvement of 54 percent over the years. The Getting Finance Indicators: Country Perspective 27 Figure 2.3 Nepal's Banking Sector Needs To Be Capitalized; Operating Costs Are Down 40 70 20 60 0 50 operating ­20 40 ­40 30 cost percentage ­60 20 ­80 10 ­100 0 ­120 ­10 2001 2002 2003 2004 2005 2006 year stock market capitalization leverage ratio CAR ROE ROA operating cost ratio Source: Data from Nepal Rastra Bank, and the Securities Board of Nepal; see appendix 1, table A1.9. ROA, on the other hand, was positive at 1.90 percent in 2006, which was an in- crease of almost 162.5 percent over the years. The staff cost ratio continued to decline over the years by an impressive 41 per- cent, while the operating cost ratio was at 25.55 percent. Nepal had the lowest op- erating cost ratios in the region, which is commendable (figure 2.3). In terms of overall operating efficiency, the net interest margin improved by almost 28 per- cent to 2.26 in 2006, while the recurring earning power ratio almost tripled to 2.39 percent in 2006. The public bank reform process that brought about increased interest spread and higher cost-efficiencies can be credited for these favorable outcomes, a trend that has to continue to improve the soundness of the commercial banking sector. Financial Stability In all six years, the Nepal banking sector was unable to meet the regulatory CAR of 8 percent of risk-weighted assets. The CAR during the last six years was negative. This negative trend can be attributed to the huge retained losses of the public banks as well as increased NPLs that resulted in losses in three of the private banks. Except for these three banks, all others had complied with the regulatory requirement. The capital position improved over the past years, and although it was still negative, the capital shortfall was reduced from negative 7.25 in 2002 to negative 1.75 in 2006, a 75 percent improvement. This favorable trend demon- strated during the latter part of the period under review was partly due to the public bank restructuring process. The banks were able to raise capital from the market through rights issues as well. The leverage ratio movement mirrors this positive movement (figure 2.3). 28 Getting Finance in South Asia 2009 The gross NPL ratio decreased by almost 52 percent over the period, to 14.22 percent in 2006. Although the total advances increased over the six years, the NPLs have reduced progressively. Once again, the massive NPL portfolio of the public banks was the root cause. The aggressive recovery procedures adopted as a part of the reforms process had shown positive results. However, the available data show that the provisions ratio declined from 30.59 percent in 2001 to just 4.72 percent in 2006, an 85 percent reduction. This is a matter for concern because the banking system still has large amounts of NPLs. Successful loan recoveries were achieved by the two public banks, which were under professional management during the past four years (2003­06). Banks' liquidity position also poses a concern. The liquid assets ratio dropped over the period from 22.1 percent in 2001 to 9.7 percent in 2006, while the liquid assets-to-liabilities ratio declined during the same period by 60 percent to 19.07 percent in 2006. Because one of the main sources of financial instability stems from the collapse of market liquidity, this declining liquidity position should be monitored with concern. To promote a healthy and sound financial market, NRB is moving toward the adoption of Basel II. NRB has decided that the Nepalese financial market does not warrant advanced approaches like the IRB Approach or the Standardized Ap- proach. Therefore, NRB intends to start with the Simplified Standardized Ap- proach for credit risk, Basic Indicator Approach for operational risk, and Net Open Exchange Model for the Market Risk. Progress has been made in this process, and NRB has prepared a draft capital adequacy framework with detailed guidelines on each of the three pillars, based on the proposed approach, which has been circulated among the stakeholders for review. It is expected that this Capital Framework will come into effect by 2008 (see chapter 8 for more details on Basel II adoption by Nepal). Capital Market Development Nepal's bond market is at its infant stage of development and is dominated by government securities. The sizes of the bond market and equity market are com- parable in terms of capitalization. The domestic bond market was around 14 per- cent of the GDP. Corporate bond market activity is negligible. Equity market cap- italization to GDP increased by 30 percent over the period, from 11.76 percent in 2001 to 15.19 percent in 2006. The equity market is also not fully developed. Few players dominate the stock market, as denoted by the high top 10 stocks turnover ratio. However, this had declined over the years from 83.13 percent in 2001 to 66.5 percent in 2006, by almost 20 percent. Market liquidity was low and hardly changed; as denoted by the low value of stocks traded given as a percentage of GDP--0.59 percent in 2001 reduced further to 0.54 percent. Market efficiency was low, as expected; the ratio was less than 1 throughout the period. Although growth of the capital market would provide additional funding sources to the private sector and therefore aid economic growth, Nepal had not focused on developing the capital markets. Continued political uncertainty had hampered such efforts largely. Nepal will have to (1) develop the infrastructure, investor base, regulatory aspects, and market confidence; and (2) harmonize the tax systems and accounting standards. Having these systems and structures in place would trigger the development process. The Getting Finance Indicators: Country Perspective 29 Market Concentration and Competitiveness Markets are somewhat concentrated in Nepal. On a positive note, all the concen- tration ratios have declined over the years. The HHI was at 949.86, which defines unconcentrated markets by the industry standards, and has declined by almost 613.6 points over the six years. In 2006, bank concentration ratios on assets, de- posits, and loans had all registered significant declines. However, nearly 40 percent of assets, deposits, and loans of the banking sector were concentrated in just three banks, which is a matter for concern. It is interesting, however, that more than 62 percent of the deposits and more than 65 percent of the loans were concentrated in private banks. This is a favorable trend because, with economic upturn, private banks tend to improve their outreach and activities far more efficiently than the public banks. On the other hand, private credit extended by the banks had not changed sig- nificantly over the years and remained at 26.98 percent in 2006. The commercial banking assets-to-GDP ratio was constant around 67 percent. These ratios were indicative of the lower level of economic activity in the market. Corporate Governance Regulatory authorities of Nepal have identified corporate governance as one of the most important aspects in the health of the financial systems. The awareness on the subject is growing fast. As such, NRB has issued guidelines and its bank su- pervision department assessed the corporate governance systems of the banks as part of its on-site supervision. As a result, serious lapses of corporate governance were observed in public banks as well as in several private banks. These were iden- tified as contributory factors for the problems faced by the banks; hence, they were placed under close surveillance. Effective from June 2005, the NRB issued guide- lines as part of the unified directives relating to banks and financial institutions. Some of the important areas covered are as follows: · Code of ethics for directors · Duties and responsibilities of board of directors · Appointment of the chief executive · Code of ethics for employees · Audit committee · Prohibition to extend credit to the directors, shareholders, employees, and firms related to directors, promoters, and shareholders · Prohibition against extension of credit on collateral of assets of directors and family members Despite establishing these directives, the corporate governance situation in Nepal has not changed much since 2005. The issues are the adaptation of the guidelines and effective enforceability. Most of the guidelines should be improved further and banks should strive to incorporate corporate governance as an inte- gral part of their culture. It is hoped that the adoption of Basel II would help strengthen the effectiveness of corporate governance in banks. Important areas for which a greater focus is needed include broadening the investor rights and disclo- sure rights, improving adherence to international accounting and auditing stan- dards, and strengthening the effectiveness of the board. 30 Getting Finance in South Asia 2009 Detailed analysis of the corporate governance presented in the last report is given below: Also needed are greater transparency and disclosure on share ownership and beneficial ownership, and legal provisions for establishing the rights of external stakeholders and minority shareholders. The regulatory guidelines contain no pro- vision relating to disclosure of ownership. Although the central bank requires dis- closure of shareholdings above 0.5 percent, this requirement is seldom enforced. Hence, in practice, the public has no access to such information. No provisions es- tablish the rights of external stakeholders, such as whistleblower rules. Rules or regulations to protect the preemption rights of minority shareholders are not es- tablished. In addition, legal provisions that govern the disclosure of beneficial ownership of shareholders are not established. Clear provisions and guidelines establishing shareholders' rights, including their right to attend and vote at shareholder meetings, need to be formalized. It is also important to examine the practices of shareholders to see whether they in fact exercise their rights. Information is disclosed to shareholders in a timely fashion; shareholders can vote in absentia, by proxy or by post; and third-party verification of voting is permitted. However, shareholders are unable to vote on a range of is- sues, including related-party transactions. Banks are required to disclose special voting rights and caps on voting rights in their Memorandum of Association and Articles of Association. Shareholders can vote on appointments to the board of directors, though the board itself appoints some members. For the government-controlled banks, the government can appoint directors. A clear dividend policy is not in place; instead, the policy is set by the board and approved by the annual general meeting. Specific structural defenses that can prevent a takeover bid are not established, other than the legal requirement for regulatory approval of any transfer of promoters' shares. There is also no specific provision to ensure that minority shareholders can elect directors. Banks' financial statements are prepared in accordance with generally accepted local accounting principles. Other studies have revealed that accounting and au- diting standards are still being issued and do not yet fully conform to interna- tional accounting standards (see World Bank 2005a). Still, to the extent that NRB has issued guidelines, it is safe to conclude that banks are meeting the reporting standards to a certain extent. Financial reporting is done on a quarterly basis, and banks are required to disclose audit fees paid to external auditors. Nepal's auditing standards appear to be at the development stage, as evidenced by other reports (see World Bank 2005a). It is advisable that NRB issue detailed guidelines on the appointment of both external and internal auditors. The central bank has issued guidelines on the appointment of audit committees as well as on their primary roles and responsibilities. But it is not clear whether the audit com- mittees have control over the selection process of external auditors. Moreover, the guidelines do not cover the frequency of their meetings and other pertinent de- tails. They do, however, prohibit external auditors from performing other, nonau- dit services for the banks they audit. External auditors are appointed with the ap- proval of the annual general meeting. Central bank guidelines require the internal auditor to be appointed by management and report to the audit committee. NRB has issued detailed guidelines on the structure of boards and on directors' roles and responsibilities. These guidelines appear to be adequate as long as they The Getting Finance Indicators: Country Perspective 31 are strictly enforced. Banks in Nepal follow a hybrid structure, with boards having five to nine members on average. The guidelines do not specify detailed require- ments for directors' qualifications and experience, although they do outline such requirements for the CEO. Directors are not required to attend any special train- ing on their fiduciary duties and responsibilities. Hence, a systematic training pro- gram needs to be developed. Shareholders can vote on the remuneration of direc- tors. Compensation of directors can be performance based and must be disclosed in detail. NRB has continued to review the relevant legislations and regulations and to improve the financial sector legislative framework. Some new acts, namely, the Bank and Financial Institution Act (2006), Insolvency Act (2006), Secured Trans- action Act (2006), and Company Act (2006) have been enacted. Money-laundering Control, and Deposit and Credit Guarantee Acts are to follow. Passing draft legisla- tion that provides authority to key institutions is important. However, the current political uncertainty situation could delay this process. Pakistan Pakistan is the second largest country in terms of both population (159 million) and GDP (US$128.83 billion). In 2006, the economy grew at an average annual rate of 6.6 percent. It was classified as a lower-middle-income country with a GNI per capita of US$800. Analysis of the economic structure revealed that services at 53.4 percent of the GDP was the dominant sector in 2006. Industry, manufactur- ing, and agriculture sectors accounted for 27.2 percent, 19.5 percent, and 19.4 per- cent, respectively. Export of goods and services was 15.3 percent. Pakistan's gross national savings rate at 17 percent of GDP was the lowest among the five coun- tries. Capital markets are developing fast. In 2006, the market capitalization of listed companies was about 35.33 percent of GDP, amounting to US$45.52 billion. Pakistan had the second largest equity market in the region, after India. The bond market is developing at a lesser pace. The domestic bond outstanding was 25.16 percent of the GDP, equivalent to US$32.41 billion. This consists of mainly gov- ernment bonds, as the corporate market is yet to develop. The commercial banking system dominates the financial sector: banking assets were around 53 percent of GDP. Pakistan had 35 commercial banks in 2006: 4 public sector banks, 24 private banks, and 7 foreign banks (State Bank of Pak- istan 2006a). Banking sector reforms implemented by the State Bank of Pakistan (SBP) had resulted in notable improvements in the soundness indicators. Pakistan leads the region in performance and efficiency as well as in corporate governance (figure 2.4). The areas on which Pakistan most needed to focus were access to finance (improving physical access to banking facilities, encouraging the use of financial services provided by commercial banks, and expanding outreach), capital market development, and market concentration. Access to Finance Pakistan needs to focus on improving financial outreach through its commercial banking sector. Demographic branch penetration is low, around five bank branches per 100,000 people during the six-year period. ATM penetration increased to 1.25 per 100,000 people in 2006. Even the geographic branch penetration had not 32 Getting Finance in South Asia 2009 Figure 2.4 Pakistan Banking Sector Demonstrated Better Performance and Efficiency 40 100 90 staff 35 80 and 30 70 operating 25 60 20 50 cost percentage 40 percentages 15 30 10 20 5 10 0 0 2001 2002 2003 2004 2005 2006 year staff cost ratio operating cost ratio ROE net interest margin recurring earning power ROA Source: Data from State Bank of Pakistan, and the Securities and Exchange Commission of Pakistan; see appendix 1, table A1.10. changed much over the six-year period at nine branches per 1,000 km2 in 2006. Ge- ographic ATM penetration was 2.44, which had increased slightly. Although this was high, branch distribution had favored urban settings. Hence, objectives of fi- nancial outreach may not be fulfilled. To promote branch openings in rural areas, the SBP has introduced the Annual Branch Licensing Policy, which requires com- mercial banks with 100 branches or more to open at least 20 percent of their branches outside big cities and set up branches in Tehsil Headquarters, where no branch of any bank exists. Usage indicators showed mixed results. While deposit accounts dropped from 195.84 per 1,000 people in 2001 to 171.14 in 2006, loan accounts per 1,000 grew by almost 98 percent. One would have expected both ratios to grow, given the eco- nomic growth experienced by Pakistan over the last few years. Private sector com- mercial banks dominate both deposits and loan portfolios with more than 75 per- cent market share. It is expected, therefore, that private sector banks would spur the growth of deposits and lending to improve the usage of financial services, taking advantage of technological advancements as well as innovative financial products. SBP had directed all commercial banks to provide basic banking accounts and basic banking facilities to the low-income people in Pakistan. In June 2006, to facil- itate the downscaling of financial services of commercial banks, SBP prepared guidelines that include establishing microfinance counters in the existing branches, designating standalone microfinance branches, establishing independent microfi- nance subsidiaries, and developing linkages with other MFIs. Pakistan is one of the few countries in the world that has a separate legal and regulatory framework for microfinance banking. Though in Pakistan the poten- tial market size is huge (around 30 million), the penetration remains low. Despite The Getting Finance Indicators: Country Perspective 33 a substantial increase in the number of borrowers (from 60,000 in 1999 to around a million in December 2006), huge portions of this potential market remain un- derserved (State Bank of Pakistan 2006a). Realizing the need to improve financial outreach, the SBP has taken several im- portant steps in this direction. SBP has targeted future reforms in the following areas: · Increasing the geographical outreach of the banking services and target the un- derserved regions · Increasing institutional and branch outreach and emphasizing products that meet the unique requirements, and as such, increasing focus on previously un- derserved sectors such as microfinance, agriculture credit, and small and medium enterprises (SMEs) · Providing Islamic banking due to its faith-based appeal in increasing the over- all penetration of financial services Performance and Efficiency Pakistan showed strong performance especially during the latter years. Over the six years, ROE almost tripled to 34.06 percent in 2006 and ROA growth was more than fivefold, from 0.60 percent in 2001 to 3.20 percent in 2006 (figure 2.4). From 2005 to 2006, ROE dropped slightly due to increase in capital requirements for the banks. One reason for the banking sector's high performance was the growth of high-yielding assets in its credit expansion. In addition, tax rate reductions over the last years had reduced the tax burden on banks, and this contributed toward higher returns. Staff costs had not changed over the years and operating costs had dropped to 54.63 percent in 2006, which was almost a 40 percent reduction from the 2001 level. The overall efficiency of the system would increase with further reduction of the cost ratios. The operating efficiency of the banking system is improving. Both net interest margin and recurring earning power ratios increased steadily over the pe- riod and were at 4.41 percent and 3.66 percent, respectively, in 2006. These im- provements could be attributed to higher yields and growth in credit. However, high-yielding assets should be monitored with caution to avoid potential credit risk. Financial Stability Pakistan banks maintained the regulatory CAR well above 8 percent. Strong re- turns and fresh capital injections to several banks resulted in this positive trend. Over the six-year period, the ratio increased to 13.33 percent in 2006. Leverage ratio almost doubled to 8.94 percent in 2006. The gross NPL ratio reduced progressively from 19.6 percent in 2001 to 5.7 per- cent in 2006. Similarly, the provisions ratio increased to 81.5 percent, which is the highest for the region. Further examination revealed that NPLs of the private banks had decreased, whereas those for public sector banks had increased. Foreign banks have managed their NPLs well and have minimum amounts. Stringent provision- ing policies and writing off bad loans had kept the total NPL position in check. On the positive side, because private banks dominated the banking sector in terms of lending (at 75 percent), this positive trend in reduction of NPL is expected to con- tinue. The NPL position of the public bank should be monitored continually, how- ever, because any adverse movements in this sector could have a negative impact on 34 Getting Finance in South Asia 2009 the entire banking industry, as public banks hold a significant share of the lending portfolio. Banks' liquidity position was relatively stable and had not changed much dur- ing the six-year period. The liquid assets ratio declined marginally to around 32 percent. In July 2006, the SBP raised the liquidity requirement to 18 percent from 15 percent (on both the time and demand liabilities) and CRRs changed to 7 per- cent of the demand liabilities and 3 percent of the time liabilities (previously 5 percent for both). Even so, the liquidity situation recorded a rise in 2006. This sit- uation should be monitored carefully using measures such as maturity gap analy- sis, to find out the presence of any liquidity mismatches. One other important step toward improving financial stability is the adoption of Basel II. The SBP issued a road map in March 2005 outlining the implementa- tion process of Basel II. In terms of these guidelines, banks initially adopted the Simplified Standardized Approach and went on a parallel run for one-and-a-half years starting from July 2006. The SBP envisaged adopting different approaches under Basel II--the Standardized Approach for credit risk and the Basic Indicator and Standardized Approaches for operational risk from January 1, 2008. The SBP would adopt the Internal Ratings­Based Approach from January 1, 2010, with banks and development finance institutions (DFIs) permitted to implement it sooner if the SBP approves their internal risk management systems. Banks and DFIs would be required to adopt a parallel run of one-and-a-half years for the Standardized Approach starting July 1, 2006, and two years for the Internal Rat- ings­Based Approach starting January 1, 2008. The process is ongoing (see chap- ter 8 for more details on Basel II adoption by Pakistan). Capital Market Development The Pakistan bond market is still at its development stage and is dominated by government securities at around 97 percent (see World Bank 2007b). Corporate bonds have yet to become significant. Bond market capitalization has remained largely unaltered over the period, and accounted for little more than half of equity market capitalization (71.2 percent in 2006). The domestic public bonds-to-GDP ratio decreased by about 30 percent over the six-year period. This indicates im- proved fiscal management by the government. The lack of growth in the bond market should be a concern, however, as this deprives the market of an alternate funding source. Stock market growth was remarkable, with market capitalization to GDP rising from approximately 8.06 percent in 2001 to more than 35.87 percent by end 2006, equivalent to a 345 percent growth. Pakistan had the second largest equity market in the region, after India. Market liquidity denoted by stock trading value to GDP shows a lower liquidity position around 0.03 percent in 2006. The turnover ratio was less than 1.00, indicating lower efficiency. Improvements in the market infra- structure, regulatory aspects, and corporate governance are needed for the devel- opment of capital markets. Market Concentration and Competitiveness Market concentration is significant in Pakistan's banking system. On a positive note, all the concentration ratios declined gradually over the years. The HHI de- clined by almost 307.8 points over the six years, and was at 784.01 in 2006. Bank concentration ratios on assets, deposits, and loans all registered significant de- The Getting Finance Indicators: Country Perspective 35 clines of 25 percent, 26 percent, and 42 percent, respectively. The continued re- duction of concentration had promoted healthy competition and, therefore, effi- ciency of the banking system. Still, however, nearly 40 percent of assets, deposits, and loans of the banking sector are concentrated in just three banks. Moreover, private credit extended by the banks increased over the years and was at 29.3 percent in 2006. Expansion of bank credit should be monitored vigi- lantly to contain credit risk. This is especially important for Pakistan with the re- cent trend in increased exposure to high-yielding assets. The commercial banking assets-to-GDP ratio also increased by 24 percent, from 43.61 percent in 2001 to 53.96 percent in 2006. Corporate Governance Pakistan leads the region in corporate governance scores. The country has taken proactive steps in introducing reforms to improve corporate governance in the banking sector. A handbook of corporate governance had been issued to banks, and Pakistan established the Pakistan Institute of Corporate Governance with the aim of providing training on corporate governance issues and for awareness building.3 Recently SBP had amended two components of the code of corporate gover- nance issued to the banks--the FPT criteria for board members, CEOs, presi- dents, and key executives; and responsibilities of boards of directors and manage- ment of banks and DFIs. They key amendments cover the following: · Broadening the scope of FPT to include sponsors and strategic investors in ad- dition to directors, CEOs, and key executives of banks and DFIs · Approving the entry of sponsors and strategic investors and appointment of directors and CEO, with prior clearance in writing from SBP · Seeking prior approval of major shareholders in writing from the SBP for ac- quiring 5 percent or more shares of a bank or DFI · Further clarifying the scope of the board of directors and management · Increasing mandatory requirement of independent directors and restrictions on family and executive directors in banks · Emphasizing that the board remain independent of the management by focus- ing on policy making and providing general direction of the bank and DFI to oversee and supervise, rather than get involved in day-to-day operations, in- cluding credit decisions Some of the amendments would improve the self-governance; others, such as seeking SBP approval for 5 percent or more shares, need to be reviewed. Other areas to focus on include greater transparency and disclosure, greater accountabil- ity, further disclosures on beneficial ownership, safeguards on stakeholder rights, further improvements to responsibilities of the board, and further emphasis on self-governance for the institutions. Detailed analysis of the corporate governance in Pakistan reported in phase III is as follows: Pakistan has legal provisions covering most aspects of banks' ownership struc- ture and the influence of stakeholders, although the provisions relating to benefi- cial ownership can be further strengthened. The central bank's regulatory guide- lines, the Banking Companies Ordinance of 1962, and the Companies Ordinance 36 Getting Finance in South Asia 2009 of 1984 require disclosure of share ownership, with the threshold set at 10 percent, through means available to both the market and the public. In addition, banks must disclose shareholdings of 3 percent or more to the SBP. Share acquisitions of 5 percent or more require the SBP's prior approval. Government ownership is dis- closed in the same manner. Only the board and the company can appoint bank directors, and their remu- neration is set at annual general meetings. The government, however, can nomi- nate directors of government-controlled banks. Certain provisions exist for estab- lishing the rights of stakeholders such as labor unions, though no details were available for an assessment. The preemption rights of minority shareholders are protected. The SBP requires disclosure of beneficial ownership of shareholders, with the threshold set at 3 percent. However, this information is not available to the public. Investor rights relating to voting and shareholder meetings appear to be in place. Adequate information is disclosed to shareholders in a timely fashion be- fore shareholders' meetings. Shareholders can vote in absentia, though postal and electronic voting is not used. Voting is verified by a third party. Shareholders can vote on a normal range of issues, including related-party transactions. Banks are required to disclose special voting rights and caps on voting rights. Even though basic ownership rights existed, regulatory control over share transactions and management changes need to be reviewed. Appointments and dismissals of directors are subject to vote by shareholders, although the SBP has the power to remove directors and managers. The government can appoint direc- tors to government-controlled banks only by virtue of its shareholdings. A clear dividend policy is in place. Specific structural defenses that can prevent a takeover bid are established, including the requirement that the SBP give prior approval for share acquisitions exceeding 5 percent of total paid-up capital. In addition, the central bank must approve any change in bank management, and in the case of privatization, it assesses prospective investors to determine whether they meet its FPT for owners and managers. All companies are encouraged to protect the inter- ests of minority shareholders. Provisions for transparency and disclosure have met the main criteria, but the internal audit function has room for further improvement. Banks' financial state- ments are prepared in accordance with international accounting standards as issued by the International Accounting Standards Committee (IASC) and inter- preted by the Standing Interpretation Committee. Financial reporting is done quarterly, semi-annually, and annually. Disclosure of audit fees paid to external auditors is required. The SBP issued clear guidelines on the appointment of audit committees and clearly outlined their roles and responsibilities, which include controlling the se- lection of auditors. External auditors were not permitted to perform other, nonaudit services for the banks they audit. The State Bank also issued guidelines relating to internal auditors. Bank staff members who met FPT criteria performed the internal audit function. Internal auditors were independent and reported to the audit committee, though the frequency of such reporting was not defined. Pakistani banks follow a unitary board structure with a minimum of seven di- rectors. Board members' qualifications and experience are governed by the FPT criteria outlined in prudential guidelines. The board's roles and responsibilities are The Getting Finance Indicators: Country Perspective 37 clearly defined; however, its tasks and objectives are not individually assigned and are left to be defined by the board. While the code of corporate governance issued by the Securities and Exchange Commission (SEC) of Pakistan recommends ori- entation courses for directors, no formal or systematic training process was estab- lished. Developing a systematic training program for directors is thus important. Remuneration of the board of directors is subject to a shareholder vote at an- nual general meetings. Provisions for performance-based compensation are not included in the remuneration package of directors. To attract and retain qualified and competent staff, a review of compensation policies is needed. Banks are re- quired to disclose the compensation of directors in detail. Although the guidelines have been issued, the success of the governance proce- dure largely depends on commitment by the banks. Their approach to corporate governance should extend beyond simple compliance with legal requirements. This is an evolving process and cannot happen overnight. As such, the regulatory authority surveillance and enforcement is important. Sri Lanka Sri Lanka is classified as a lower-middle-income country with a GNI per capita of US$1,350 per month. Sri Lanka has the smallest population in the region at 19.8 million and the fourth largest GDP at US$26.97 billion, in 2006, which grew at an average annual rate of 7.2 percent. Over the six years, the Sri Lankan economy con- tinued to show resilience amid shocks, such as conflicts and the 2004 tsunami. Gross national savings rate was 24.8 percent of GDP. In 2006, the economy was dominated by the services sector with 56.5 percent of the GDP. Industries, agricul- ture, and manufacturing sectors contributed 27.1 percent, 16.5 percent, and 13.9 percent, respectively. The exports-to-GDP ratio was around 31.6 percent of the GDP. The Sri Lankan bond market is dominated by government securities, at more than 90 percent of total outstanding bonds. The Sri Lankan stock market is fairly well developed. In 2006, the market capitalization of listed companies was 28.81 percent of GDP, equivalent to US$7.77 billion. As in most other countries in the region, banks are the main providers of fund- ing to the economy. Commercial banking assets accounted for 34 percent of total financial assets and 38.2 percent of GDP. The Sri Lankan commercial banking system consisted of 2 state banks, 9 private banks, and 12 foreign banks (Central Bank of Sri Lanka 2006b, 2007a). Sri Lanka leads the region in ranking on access to finance, and the banking sec- tor needs to focus on market concentration, financial stability, and corporate gov- ernance. The banking sector in Sri Lanka is highly concentrated with more than 50 percent of assets, deposits, and loans concentrated in three banks. In terms of improving stability, the liquidity position needs careful monitoring. Furthermore, the corporate governance guidelines needs to be expanded,4 and more important, the banking sector should strive to adopt the guidelines set out by the Central Bank of Sri Lanka (CBSL) at a level beyond simple compliance with legal require- ments. On a positive note, the Sri Lankan banking sector has laudable perfor- mance in providing physical access and leads the region in this category. Perfor- mance and efficiency measures are also improving. Capital markets show good progress on improvements in the regulatory and infrastructure areas. 38 Getting Finance in South Asia 2009 Figure 2.5 Accessibility Is on the Rise in Sri Lankan Banks 18 1,200 deposits 16 1,000 14 & loan 12 800 accounts 10 600 8 percentage per 6 400 1,000 4 people 200 2 0 0 2001 2002 2003 2004 2005 2006 year deposit accounts loan accounts geographic branch geographic ATM penetration penetration demographic demographic ATM branch penetration penetration Sources: Data from Central Bank of Sri Lanka, Securities and Exchange Commission of Sri Lanka, and the Colombo Stock Exchange; see appendix 1, table A1.11. Access to Finance Sri Lanka led the region in providing access to finance through commercial banks. Both demographic branch penetration and ATM penetration expanded over the years and, by the end of 2006, reached 7.69 and 5.67, respectively. Geographic penetration ratios for branches and ATMs also increased over the six-year period by almost 35 percent. On usage, deposit accounts per 1,000 people as well as loan accounts per 1,000 grew by about 35 percent and 42 percent, respectively. Overall, provision of access and usage had improved at a healthy rate (figure 2.5). In addition to commercial banks, there are 14 specialized banks with a branch network of 415. These include 6 development banks and 4 savings banks that op- erate with a branch network of 201 and 136, respectively. Two housing finance in- stitutions have 28 branches island-wide. These institutions provide various types of financial services to the public. Unlike most other South Asian countries, the microfinance industry in Sri Lanka is reasonably commercialized and is channeled mainly through cooperative institutions and Samurdhi Banking Societies. Equity capital as well as member de- posits fund these institutions. In view of the large amount of funding channeled through these institutions the CBSL has formulated a Micro-Finance Institutions Act with a view toward establishing a regulatory and supervisory mechanism. It is expected that this act would become law in the near future. Performance and Efficiency During the six-year period, returns of the commercial banks continued to increase progressively. ROE increased by about 31 percent over the period. The ROA ratio The Getting Finance Indicators: Country Perspective 39 almost doubled, from 0.84 percent in 2001 to 1.83 in 2006. Higher interest margins and growth in business activities resulted in increased profitability. Performance of the two state banks also contributed significantly toward this increase. The staff cost ratio declined slightly and was around 41.49 percent in 2006. The operating cost ratio also reduced to 84.68 percent. However, reduction of the cost ratios should improve efficiency further. Overall, operating efficiency is positive with the net interest margin increasing to 4.31 percent in 2006. Recurring earning power shows a slight reduction in the latter part of the six-year period. Interest in- come is the main source of income for commercial banks. The expansion of credit and the higher interest rate spread contributed toward the progress made. Better management of operational costs would allow the banks to increase efficiency as well as reduce the interest margins. This would allow the banks to reduce interme- diary costs and promote economic growth. Financial Stability The CAR improved from 8.59 percent in 2001 to 11.82 percent in 2006, an almost 37 percent increase over the six-year period. However, the CAR of one of the state banks was below the regulatory requirement. The CAR of this bank has improved over the years from a negative capital position to a positive level, while still below the regulatory requirement. This situation should be monitored. The ratio dipped slightly in 2006 due to an additional capital charge for market risk that banks had to maintain per guidelines issued by the CBSL. This direction to compute a capi- tal charge for market risk was issued in March 2006, in keeping with current inter- national practices and the requirements of the Basel Committee. The leverage ratio also followed the same pattern indicating adequate capital guidelines fol- lowed by the Sri Lankan banking sector. The NPL ratio decreased over the six-year period by almost 63 percent, from 19.57 percent in 2001 to 7.16 percent in 2006, reflecting the reduction of the per- ceived credit risk. Provisions increased by well over 53 percent over the period, to 68.12 percent in 2006. The central bank vigilance on NPLs in the banking sector and stringent provisioning requirements resulted in these positive gains in credit quality. Prudential regulations have improved further, and a general provisioning requirement of 1 percent on all performing loans as well as loans in arrears (from three to six months) was introduced in December 2006. Although the provision- ing requirements are not in line with the international standards, these improve- ments are welcome signs. High credit growth and rising interest rates may pose some risks to the banking sector, however. The liquid assets to total assets ratio declined slightly to 19.00 percent while liquid assets to liabilities ratio also declined. The maturity patterns of the assets and the liabilities of the banking system and the use of the Real-Time Gross Settle- ment (RTGS) system may have reduced the need to hold excess liquidity in the banking system significantly, but banks should manage the liquidity situation carefully and efficiently. CBSL has issued a consultative paper on the implementation of Basel II with the computation of credit and market risk on the Standardized Approach and op- erational risk on the Basic Indicator Approach. Guidelines on integrated risk man- agement systems were issued to banks in March 2006. These guidelines will be re- fined over the period, based on the results of the test computations during the period of the parallel run. A parallel computation of Basel I and Basel II com- menced from the first quarter of 2006, until full implementation of Basel II in the 40 Getting Finance in South Asia 2009 first quarter of 2008. In addition, CBSL is taking necessary steps to shift bank ex- amination from a compliance-based one to risk-based supervision (see chapter 8 for more details on Basel II adoption by Sri Lanka). Capital Market Development The Sri Lankan domestic bond market is still at development stages, and it re- mains dominated by government securities at around 99 percent (see World Bank 2007b). The corporate bond market remains largely underdeveloped. In terms of a percentage of GDP, the Sri Lankan bond market was the largest in the region at 50.84 percent of GDP in 2006, while India was second with 35.94 percent of GDP. The bond market to equity market capitalization ratio declined over the six-year period. The domestic public bonds to GDP ratio almost doubled over the six-year period at 31.62 percent in 2006. Conversely, stock market growth was remarkable, with market capitalization to GDP rising from approximately 8.81 percent in 2001 to more than 29.8 percent by the end of 2006, equivalent to a 238 percent growth. Market liquidity denoted by stock trading value to GDP showed a healthy liquidity position around 3.75 per- cent in 2007. The turnover ratio was less than 1, which indicated lower efficiency. Improvements in the market infrastructure, expansion of the investor base, and improvement in legal, regulatory, and corporate governance are needed to de- velop the capital markets. Market Concentration and Competitiveness The Sri Lankan banking system reported the highest market concentration in the region. More than 52 percent of assets, deposits, and loans of the banking sector are concentrated in just three banks. On a positive note, all the concentration ra- tios declined gradually over the years. The HHI declined by almost 390.94 points over the six years, and was at 1259.88 in 2006. This is still considered moderately concentrated per the international norms. Bank concentration ratios on assets, deposits, and loans registered significant declines. Such concentration could in- hibit competition and reduce operational efficiency. Additionally, private credit extended by the banks increased over the years and remained at 29.30 percent in 2006. The commercial banking assets-to-GDP ratio also increased, by 24 percent, to 53.96 percent in 2006. Expansion of bank credit to the private sector exposes banks to credit risk, and hence prudential credit risk management systems should be in place to contain such risks. Corporate Governance CBSL has taken several important steps to ensure better corporate governance in the banking sector. Forthcoming Basel II implementation, proposals to mandate corporate governance standards, and mandated credit ratings to improve better disclosure are some of these steps. In January 2007, the Central Bank issued new policy guidelines for the regula- tion of bank ownership. Among these guidelines, one of the most significant was the broad basing of bank ownership by requiring that large ownerships held by sin- gle shareholders or groups be reduced to 15 percent within a maximum period of five years. However, the caps on shareholdings in banks are restrictive, and thus cre- ate a strong incentive for shareholders to disguise their interests through nominees or associated parties, despite the legal provisions outlawing such agreements. The The Getting Finance Indicators: Country Perspective 41 definition of significant ownership should be broadened to encompass exertion of control irrespective of the size of the shareholding, and a suitability test should be introduced. The Monetary Board (MB) of CBSL should explicitly be empowered to prevent the exercise of voting rights of a party that fails the suitability test. In August 2007, the CBSL released the comprehensive exposure draft on cor- porate governance for banks and solicited views, comments, and suggestions from bank stakeholders and the public. The implementation of the code was scheduled for January 1, 2008. The corporate governance directions, which were developed on generally accepted corporate governance principles, mainly cover the broad re- sponsibilities of the board of directors, the board's composition, criteria to assess the fitness and propriety of directors, management functions delegated by the board, separation of duties of the chairman and CEO, board-appointed commit- tees, and disclosure of financial statements. (The direction on corporate gover- nance is available at CBSL 2007c.) The banking sector has a larger responsibility to adopt the guidelines set out by the CBSL not just as guidelines but also as part of the banking culture. A detailed analysis of the corporate governance standards in Sri Lanka from the previous report is given below along with later adjustments: In 2002, the CBSL issued a code of corporate governance for banks and other financial institutions for voluntary compliance. This code was compiled by the National Task Force on Corporate Governance in the Financial Sector, set up to promote best practices in corporate governance at the national level. Issuing this code of conduct for banks was a step in the right direction. Yet, disclosure require- ments and detailed guidelines are still needed on many issues, such as stakeholder rights, beneficial ownership, special voting rights, rights of shareholders to vote on bank operations, regulatory and government control of share transactions, and minority shareholder rights. These issues should be reviewed, with necessary changes incorporated into regulatory guidelines and legal statutes. Under the guidelines and regulations issued by the Colombo Stock Exchange, publicly listed companies must disclose the share ownership of their top 20 share- holders in their annual reports, available to both the market and the general pub- lic. In addition, banks must disclose holdings of 5 percent and above to the Central Bank. Government ownership is disclosed in the same manner. Only the board of directors and the company can appoint directors and decide on their remunera- tion at annual general meetings. For government-controlled banks, however, the government can nominate directors. Even though rules protect the preemption rights of minority shareholders, no provisions establish stakeholder rights. Addi- tionally, no rules require disclosure of beneficial ownership of shareholders. The ownership structure, stakeholder rights, and rules governing beneficial ownership should be clearly defined, with legal provisions to ensure proper disclosure. Investor rights relating to voting procedures and shareholder meetings need further strengthening. Adequate information is disclosed to shareholders in a timely fashion before shareholders' meetings, and shareholders can vote in absen- tia. Yet, no provisions exist for third-party verification of voting. Shareholders cannot vote on a normal range of issues, including related-party transactions. Disclosure of special voting rights and caps on voting rights is not mandated. Basic ownership rights also need improvement, particularly with respect to shareholders' right to vote on the operations of banks, regulatory and government control of share transactions, and the rights of minority shareholders. Board 42 Getting Finance in South Asia 2009 appointments and dismissals are not subject to shareholders vote, while the govern- ment can control these outcomes in state banks. The ability of minority sharehold- ers to appoint directors depends on banks' internal rules. A clear dividend policy is in place. Additionally structural defenses against takeover bids are established, in- cluding the acquisition of a material interest in a bank (10 percent or more of its shares), which requires prior approval of the Central Bank and the Ministry of Fi- nance. In addition, the SEC requires any investor acquiring more than 30 percent of a listed company to make a mandatory offer to all other shareholders. Banks' financial statements are prepared in accordance with generally accepted local accounting principles, which are in material conformity with international accounting standards. Financial reporting is done monthly, quarterly, and annu- ally, and audit fees paid to external auditors must be disclosed. The Central Bank issued clear guidelines on the appointment of audit committees and defined their roles and responsibilities, although it is unclear whether these committees control the selection of auditors. External auditors are not permitted to perform other, nonaudit services for the banks they audit. Guidelines are issued on internal audi- tors, but further improvements can be made. Internal auditors are independent, reporting to the audit committee, but the frequency of such reporting is not clearly defined. Sri Lankan banks follow a hybrid board structure with around 5­11 members on average. Board members' qualifications and experience are governed by the FPT criteria set by prudential guidelines. Board committee requirements are presented only in the SEC Governance Rules and in the voluntary code. The rules require boards to have two committees (the remuneration and the audit committees) that must be composed of at least two independent directors and the chairpersons, nonexecutives in both cases. The roles and responsibilities of boards are clearly de- fined, and tasks and objectives are defined and individually assigned. In addition, the corporate governance code details the need for systematic training for directors. Banks are permitted to disclose merely the aggregate compensation of their direc- tors in their annual reports. No information is available on whether banks offer performance-based compensation to their directors or whether shareholders can vote on directors' remuneration--both practices that should be incorporated into policy. The board's composition and structure should be enhanced. Concepts such as "independent directorship" and committee structures should be introduced. CBSL should provide clear guidance on their significance and responsibilities, and the key role they play in the governance structure of a financial institution. Endnotes 1. Using the Atlas method, economies are classified based on their per capita GNI: low- income, US$650 or less; lower-middle-income, US$2,037 or less (see World Bank 2007a for the entire list). 2. Since 2006­07, public sector banks are permitted to pay performance-linked incen- tives to full-time executive directors of banks (not to nonexecutive directors). 3. The Pakistan Institute of Corporate Governance was incorporated in December 2004 and started to function in 2005. 4. Comprehensive corporate governance rules have been issued with effect from Janu- ary 1st, 2008. 3 Country Rankings on the Getting Finance Indicators Analysis of the Getting Finance Indicators confirms that the commercial banking sector in the five South Asian countries have made significant progress under the development dimensions reviewed in this study. The progress made under each dimension varies among the countries. The countries were ranked using a simple- averaged ranking method (for a description of the ranking methodology, see chapter 7). It is anticipated that such rankings would help to understand where performance is strong and where improvements are most needed, and where each country is on the development paradigm. As with any evaluation system, assessing the health of the financial system based on a limited number of micro indicators imposes many technical as well as practical limitations. And the interpretation of the results reflects these caveats. To assess the soundness and performance of the financial sector, six develop- ment dimensions were used. Six micro indicators were used to represent each of the five financial dimensions--access to finance, performance and evaluation, fi- nancial stability, capital market development, and market concentration and competitiveness. For the sixth dimension (corporate governance), a questionnaire was used to assess four key areas. Each of the six dimensions was ranked across the six-year period to arrive at individual composite scores. An overall composite score was computed by averaging the individual composite scores. Overall Rankings on Development Dimensions India secured the top rank with an overall composite score of 0.80--emerging as the strongest South Asian commercial banking sector (table 3.1). The Indian com- mercial banking sector was competitive and financially stable and was ably sup- ported by a well-developed capital market. Pakistan was second (overall compos- ite score of 0.67) with strong performance and quality corporate governance. Sri Lanka secured the third place (overall composite score of 0.65) with healthier fi- nancial outreach by the commercial banking sector. Bangladesh was fourth (over- all composite score of 0.57) and demonstrated improved access to finance and market concentration, although it did not rank on top. Nepal was ranked fifth 43 44 Getting Finance in South Asia 2009 Table 3.1 Getting Finance Indicators for South Asian Countries, 2001­06 (final rankings) Bangladesh India Nepal Pakistan Sri Lanka Access to finance Composite score (total points/180) 0.68 0.66 0.28 0.43 0.93 Indicator rank 2 3 5 4 1 Performance and efficiency Composite score (total points/180) 0.42 0.63 0.42 0.80 0.73 Indicator rank 4 3 4 1 2 Financial stability Composite score (total points/180) 0.49 0.89 0.24 0.81 0.57 Indicator rank 4 1 5 2 3 Capital market development Composite score (total points/180) 0.46 0.91 0.37 0.69 0.58 Indicator rank 4 1 5 2 3 Market concentration and competitiveness Composite score (total points/180) 0.71 0.89 0.56 0.44 0.40 Indicator rank 2 1 3 4 5 Corporate governance Composite score (total points/40) 0.64 0.80 0.65 0.84 0.67 Indicator rank 5 2 4 1 3 Total points 3.40 4.77 2.52 4.01 3.88 Score (total points/6) 0.57 0.80 0.42 0.67 0.65 Overall Rank 4 1 5 2 3 Source: From table 7.1. Authors' calculations are based on appendixes 1 and 3. Data in appendixes come from South Asian Central Banks, SECs and Boards, and stock exchanges; Indian Banks' Association 2006a, 2006b, and 2006c; Reserve Bank of India 2006a, 2006b, 2006c, and 2007. Note: The ranking calculation methodology is given in chapter 7. (overall composite score of 0.45). It has made commendable efforts in certain areas; however, to be comparable, it needs to address many issues to improve its commercial banking system. All countries have their own strengths and weaknesses. The two radar graphs highlight the key issues that matter to each country in their efforts to develop fi- nancial soundness. The first radar graph (figure 3.1) shows India being ahead of other countries with scores ranging from 0.63 on performance and efficiency to 0.91 on capital market development. The range for Pakistan was 0.43 for access to finance and 0.84 for corporate governance. The development dimensions for Sri Lanka ranged between 0.40 for market concentration and 0.93 for access to fi- nance, while the Bangladesh range was between 0.42 for performance and effi- ciency and 0.71 for market concentration. Nepal had the lowest scores ranging from 0.24 for financial stability and 0.65 for corporate governance. The second radar graph (figure 3.2) shows how these countries have fared under different dimensions from the dimensions' perspective. All countries had higher performance in corporate governance, ranging from 0.64 in Bangladesh to 0.84 in Pakistan. On the other hand, capital market development showed the least amount of development with scores ranging from 0.30 in Nepal to 0.91 in India. The other four dimensions scored between these two extremes. Access to finance ranged between 0.28 in Nepal to 0.93 in Sri Lanka. Performance and efficiency scores were between 0.42 for both Nepal and Bangladesh, and 0.80 for Pakistan. Financial stability scores were between 0.24 in Nepal and 0.89 in India. Finally, market concentration scores were 0.40 in Sri Lanka to 0.89 in India. These two Country Rankings on the Getting Finance Indicators 45 Figure 3.1 South Asian Countries: Strengths and Weaknesses of the Commercial Banking Sector Bangladesh 0.71 0.91 Sri Lanka 0.42 India 0.93 0.63 0.40 0.24 0.43 0.65 0.84 Pakistan Nepal access to finance capital market development performance and efficiency market concentration & competitiveness financial stability corporate governance Source: From table 7.1. Data used in table 7.1 calculation come from appendixes 1 and 3, for which the sources are South Asian Central Banks, SECs and Boards, and stock exchanges; Indian Banks' Association 2006a, 2006b, and 2006c; Reserve Bank of India 2006a, 2006b, 2006c, and 2007. Figure 3.2 South Asian Countries Focused on Corporate Governance; Capital Market Development Needs Attention access to finance Sri Lanka, 0.93 corporate governance performance and efficiency Pakistan, 0.84 Pakistan, 0.80 0.28 0.42 0.64 0.24 0.40 0.37 India, 0.89 India, 0.89 market concentration financial stability and competitiveness India, 0.91 capital market development Bangladesh India Nepal Pakistan Sri Lanka Source: From table 7.1. Data used in table 7.1 calculation come from appendixes 1 and 3, for which the sources are South Asian Central Banks, SECs and Boards, and stock exchanges; Indian Banks' Association 2006a, 2006b, and 2006c; Reserve Bank of India 2006a, 2006b, 2006c, and 2007. 46 Getting Finance in South Asia 2009 graphs show that each country has its own priorities that are different from oth- ers, depending on the characteristics of their own financial systems and economic structures and the stage of development they are in as of now. Individual Rankings on Micro Indicators The following analysis provides a more comprehensive picture of how each coun- try fared on the micro indicators within each development dimension and thereby key areas on which to focus for each country. Access to Finance Sri Lanka leads in the area of access to finance on all indicators except for geo- graphic bank penetration. Its overall access ratios have improved favorably over the period (figure 3.3). Bangladesh has the highest geographic branch penetra- tion. India and Pakistan need to focus on access indicators. Access is lowest in Nepal. Performance and Efficiency Pakistan comes first in the performance and efficiency category with superior per- formance in most micro indicators. India also fares well in all areas. The area that requires Pakistan's focus is operating costs (figure 3.4). Sri Lanka is not far behind, and records the lowest staff cost ratios in the region. Nepal confronts problems of negative capital and low operating efficiency with high staff cost ratios. However, their operating cost ratios are the lowest in the region. Bangladesh must focus on high operating costs and lower net interest margins. Figure 3.3 Sri Lanka Leads on All Access to Finance Indicators 35 30 25 score 20 15 composite 10 5 0 demographic demographic deposit accounts loan accounts geographic demographic branch penetration ATM penetration per 1,000 people per 1,000 people branch penetration ATM penetration (branches per (ATMs per (branches per (ATMs per 100,000 people) 100,000 people) 1,000 km2) 1,000 km2) Bangladesh India Nepal Pakistan Sri Lanka Source: From table 7.1. Data used in table 7.1 calculation come from appendixes 1 and 3, for which the sources are South Asian Central Banks, SECs and Boards, and stock exchanges; Indian Banks' Association 2006a, 2006b, and 2006c; Reserve Bank of India 2006a, 2006b, 2006c, and 2007. Country Rankings on the Getting Finance Indicators 47 Financial Stability India's top performance on stability reflects higher capital adequacy ratios (CARs), lower nonperforming loan (NPL) ratios, and stable liquidity positions (figure 3.5). Pakistan ranks second with higher provisioning ratios; it should focus on its liq- uidity management. Sri Lanka has improved well in all areas with liquidity as the main area of concern. Bangladesh should improve its capital positions and should focus on NPLs and provisioning. Nepal has negative CARs and lower ratios on all indicators when compared with the region. Capital Market Development India fares well with higher market capitalization, liquidity, and lower concentra- tion resulting from having a developed capital market (figure 3.6). All other coun- tries need to concentrate on developing their capital markets. For Pakistan and Sri Lanka, the focus should be on developing their bond markets. Market Concentration and Competitiveness The Indian banking system proves to be the best in the region on market concen- tration (figure 3.7). All the concentration ratios have declined over the years. Bangladesh also fared well in this category. The banking sector in Sri Lanka is highly concentrated, with more than 50 percent of assets, deposits, and loans con- centrated in three banks. Most countries should monitor the rapid growth of bank credit to the private sector, with a view to manage credit risk. Corporate Governance Pakistan does well in all areas of corporate governance, but the keys to its superior performance are the detailed governance guidelines issued by its regulatory author- ities, demonstrating better disclosure and greater shareholder rights (figure 3.8). Figure 3.4 Pakistan Performance Is Better on Performance Indicators 35 30 25 score 20 15 composite 10 5 0 return on return on staff cost operating net interest recurring equity assets ratio cost ratio margin earning power Bangladesh India Nepal Pakistan Sri Lanka Source: From table 7.1. Data used in table 7.1 calculation come from appendixes 1 and 3, for which the sources are South Asian Central Banks, SECs and Boards, and stock exchanges; Indian Banks' Association 2006a, 2006b, and 2006c; Reserve Bank of India 2006a, 2006b, 2006c, and 2007. 48 Getting Finance in South Asia 2009 Figure 3.5 India Shows Strong Performance on Financial Stability 35 30 25 score 20 15 composite 10 5 0 capital leverage gross provisions to liquid liquid assets to adequacy ratio ratio nonperforming nonperforming assets ratio liabilities ratio loans ratio loans ratio Bangladesh India Nepal Pakistan Sri Lanka Source: From table 7.1. Data used in table 7.1 calculation come from appendixes 1 and 3, for which the sources are South Asian Central Banks, SECs and Boards, and stock exchanges; Indian Banks' Association 2006a, 2006b, and 2006c; Reserve Bank of India 2006a, 2006b, 2006c, and 2007. Figure 3.6 India Leads the Region in Capital Market Development Indicators 35 30 25 score 20 15 composite 10 5 0 domestic bond domestic public ratio of trading stock market market liquidity: stock market market to bonds oustanding value of top 10 capitalization Ratio of stock turnover ratio equity market to GDP stocks to total to GDP trading value capitalization trading value to GDP Bangladesh India Nepal Pakistan Sri Lanka Source: From table 7.1. Data used in table 7.1 calculation come from appendixes 1 and 3, for which the sources are South Asian Central Banks, SECs and Boards, and stock exchanges; Indian Banks' Association 2006a, 2006b, and 2006c; Reserve Bank of India 2006a, 2006b, 2006c, and 2007. Country Rankings on the Getting Finance Indicators 49 Figure 3.7 India Ranks High on Market Concentration and Competitiveness Indicators 35 30 25 score 20 15 composite 10 5 0 Herfindahl- K-bank K-bank K-bank private credit commercial Hirschman concentration concentration concentration extended by banking assets index (HHI) ratios ratios ratios banks to GDP to GDP (K=3) ­ assets (K=3) ­ deposits (K=3) ­ loans Bangladesh India Nepal Pakistan Sri Lanka Source: From table 7.1. Data used in table 7.1 calculation come from appendixes 1 and 3, for which the sources are South Asian Central Banks, SECs and Boards, and stock exchanges; Indian Banks' Association 2006a, 2006b, and 2006c; Reserve Bank of India 2006a, 2006b, 2006c, and 2007. Figure 3.8 Pakistan Leads in Corporate Governance Indicators 6 5 4 score 3 composite 2 1 0 1.1 identification 1.2 indirect and 2.1 shareholder 2.2 basic 3.1 adherence 3.2 independent 4.1 role and 4.2 compensation of substantial beneficial meetings ownership to internationally internal and effectiveness majority holders ownership and voting rights accepted external auditors procedures accounting and audit standards committee 1. ownership structure and 2. investor rights 3. transparency 4. board structure influence of external and disclosure and effectiveness stakeholders Bangladesh India Nepal Pakistan Sri Lanka Source: From table 7.1. Data used in table 7.1 calculation come from appendixes 1 and 3, for which the sources are South Asian Central Banks, SECs and Boards, and stock exchanges; Indian Banks' Association 2006a, 2006b, and 2006c; Reserve Bank of India 2006a, 2006b, 2006c, and 2007. 50 Getting Finance in South Asia 2009 India follows closely behind. The other three countries have performed fairly well. All countries appear to have done reasonably well on meetings and voting proce- dures, board structure, and accounting and auditing standards. All countries need to concentrate on indirect share ownership, basic ownership rights, responsibilities and effectiveness of the boards, and disclosure requirements. 4 An International Perspective To find out whether South Asian banking systems are comparable to the interna- tional systems and to find out how well they compare, comparable data for selected high-income Organisation for Economic Co-operation and Development (OECD) member and nonmember countries--including Australia; Canada; Hong Kong, China; New Zealand; Singapore; the United Kingdom; and the United States--are compiled to serve as the benchmark (for a description of benchmarks, see chapter 1, Development of Benchmarks; for underlying benchmark data, see appendix 2.A; for data sources, see appendix 2.B). The benchmark ranges (high and low) for each year are compared against the indicators for the five South Asian countries to assess their strengths and weak- nesses (see data appendix 1, tables A1.1­1.6 for data comparison of South Asian countries and the benchmark ranges for each year). Comparisons on each micro indicator within the five development dimensions provide a more detailed picture of the comparability and the strong and weak points of each country. Benchmark Comparison (2006) Comparative analysis of the 12 micro indicators (under the five dimensions1) for 2006 shows that South Asian countries compare well on such ratios as returns, capital adequacy, and market concentration. Areas requiring attention include credit quality issues of nonperforming loans (NPLs) and provisioning. South Asia needs to focus on developing its capital market so that it can meet the long-term finance needs of commerce as well as the portfolio appetite of institutional in- vestors. When comparative data over the six-year period are examined overall, however, it is evident that South Asia is making commendable progress in making their banking systems more efficient and comparable to international standards (for underlying data, see appendix 1, table A1.6). Access to Finance South Asian geographic branch penetration figures are significant, especially in Bangladesh (44.53) and India (23.46) and compare well with benchmark range on the higher side. The benchmark countries range from a low of 1 to a high of 51 52 Getting Finance in South Asia 2009 Figure 4.1 Year 2006: South Asian Branch Penetration Is Significant, ATM Penetration Weak 300 2 252.00 km 250 1,000 200 per 150 100 branches/ATMs of 57.00 50 44.53 no. 22.46 7.11 9.67 15.8111.65 1.003.00 2.71 2.970.48 2.44 0 bench/low Bangladesh India Nepal Pakistan Sri Lanka bench/high geographic branch penetration geographic ATM penetration Source: From appendix 1, table A1.6. Data used are from South Asian Central Banks, SECs and Boards, stock exchanges, and publications; Indian Banks' Association 2006a, 2006b, and 2006c; Reserve Bank of India 2006a, 2006b, 2006c, and 2007; and benchmark data sources from appendix 2.B. 57 branches per 1,000 km2. Because all of these benchmark countries already use e-banking extensively, the branch network has lesser importance (figure 4.1). This is confirmed by the geographic automated teller machine (ATM) penetra- tion ratio. The highest South Asian ratio in Sri Lanka at 11.65 ATMs is not signifi- cant when compared with the benchmark range between a low of 3 and a high of 252. Technological advancements and infrastructure developments are necessary in South Asia for the region to compare well with the international benchmarks. Performance and Efficiency South Asian return-on-equity levels (except for Nepal, with negative returns) are well above the benchmarks. Pakistan and Bangladesh at 34.7 percent and 33.86 percent, respectively, achieved higher returns than the benchmark figures, which range from a high of 18.6 percent to a low of 8.9 percent. India and Sri Lanka achieved returns closer to the benchmark figures at the higher end. The benchmark returns on assets vary from a high of 1.8 percent to a low of 0.5 percent. Pakistan leads the pack at 3.2 percent, with all countries being able to achieve higher returns than the benchmark countries at the lower end. The high re- turns are attributable to higher interest spread in South Asian countries (figure 4.2). Financial Stability Capital adequacy ratios in most of the South Asian countries are in line with the benchmarks. Pakistan at 13.33 percent is 2.07 percentage points short of the benchmark figure on the higher end of 15.4 percent. India and Sri Lanka have higher than the required norms. Bangladesh, at 8.33 percent, needs to improve its capital adequacy ratio. Nepal has negative capital. The benchmark figure at the lower end is 10.4 percent (figure 4.3). South Asia needs to exert more effort on reducing NPLs and improving credit quality. The upper and lower benchmarks are just 0.20 percent and 2.40 percent An International Perspective 53 Figure 4.2 Year 2006: South Asia Beat the Benchmark in Return on Equity 40 33.86 34.70 30 27.01 20 18.60 17.00 10 8.09 0.50 1.66 1.31 1.90 3.20 1.83 1.80 0 ­10 percentage ­20 ­30 ­40 ­43.30 ­50 bench/low Bangladesh India Nepal Pakistan Sri Lanka bench/high return on equity return on assets Source: From appendix 1, table A1.6. Data used are from South Asian Central Banks, SECs and Boards, stock exchanges, and publications; Indian Banks' Association 2006a, 2006b, and 2006c; Reserve Bank of India 2006a, 2006b, 2006c, and 2007; and benchmark data sources from appendix 2.B. Figure 4.3 Year 2006: South Asia Needs to Work on Credit Quality; Capital Adequacy Is on Par with Benchmarks 250 204.50 200 150 100 81.50 68.12 percentage 64.20 50 36.3026.33 10.60 8.3312.40 13.33 11.82 15.40 13.15 14.22 2.40 3.33 5.707.16 0.20 4.72 0 ­1.75 ­50 capital adequacy gross NPL provisions/NPL bench/low Bangladesh India Nepal Pakistan Sri Lanka bench/high Source: From appendix 1, table A1.6. Data used are from South Asian Central Banks, SECs and Boards, stock exchanges, and publications; Indian Banks' Association 2006a, 2006b, and 2006c; Reserve Bank of India 2006a, 2006b, 2006c, and 2007; and benchmark data sources from appendix 2.B. (where 0.2 percent is the high or better benchmark range), while all of South Asian ratios are very much above the benchmark ranges. Nepal has a high NPL level of 14.22 percent of total loans. India has the lowest ratio at 3.33, which is closer to lower level of benchmark range of 2.40 (figure 4.3). 54 Getting Finance in South Asia 2009 Figure 4.4 Year 2006: For South Asia, Capital Market Development Is a Priority 1,000 2.50 902.56 900 2.21 800 2.00 700 market 600 1.50 500 turnover 438.57 percentage 400 1.00 300 India 0.64 0.52 200 0.50 100 82.60 43.13 67.60 15.19 29.80 21.41 0.54 35.87 0.03 5.41 1.11 3.75 0 0.00 bench/low Bangladesh India Nepal Pakistan Sri Lanka bench/high stock market capitalization to GDP market liquidity (stock trading value to GDP) stock market turnover Source: From appendix 1, table A1.6. Data used are from South Asian Central Banks, SECs and Boards, stock exchanges, and publications; Indian Banks' Association 2006a, 2006b, and 2006c; Reserve Bank of India 2006a, 2006b, 2006c, and 2007; and benchmark data sources from appendix 2.B. Similarly, provisions for NPL ratios of benchmark countries also indicate their finer credit management. The higher end is 204.5 percent while the lower end is 36.3 percent. Other than Nepal, South Asian countries seem to improve their pro- visioning with policies that are more stringent. Pakistan has the highest ratio in the region, at 81.5 percent (figure 4.3). Capital Market Development Except for India, capital markets in all other countries are at the developmental or infant stage, as reflected by comparable data from the benchmark countries. Eq- uity market capitalization varies between 43.13 percent and 903.56 percent, with India at 82.60 percent. Market liquidity indicated by total value of shares traded has a benchmark range of 21.41 percent to 438.57 percent, with India at 67.6 per- cent. Efficiency of the capital market as measured by stock market turnover has a range of 0.52 times to 2.21 times, and India is 0.64 times (figure 4.4). Market Concentration and Competitiveness Overall market concentration is low in South Asia except for Sri Lanka. The Herfindahl-Hirschman Index (HHI) values for benchmark countries range from 563.35 (classified as unconcentrated) to 1,854.41 (highly concentrated). All South Asian countries fall into the category of unconcentrated (HHI less than 1,000) ex- cept for Sri Lanka, which at 1,259.88 is classified as moderately concentrated. For the benchmark countries, the three-bank concentration ratio on loans ranges from 31.01 percent to 56.93 percent. All South Asian countries have low concen- tration ratios (around 30 percent) except Sri Lanka at 52.74 percent (figure 4.5). An International Perspective 55 Figure 4.5 Year 2006: Market Concentration Is within the Range 60 56.93 2,000 52.74 1,800 50 1,854.41 1,600 39.67 1,400 40 1,259.88 34.00 1,200 HHI 31.01 32.15 30.30 30 1,000 949.86 784.01 percentage 800 20 563.35 596.86 599.43 600 400 10 200 0 0 bench/low Bangladesh India Nepal Pakistan Sri Lanka bench/high HHI three-bank ­ loans Source: From appendix 1, table A1.6. Data used are from South Asian Central Banks, SECs and Boards, stock exchanges, and publications; Indian Banks' Association 2006a, 2006b, and 2006c; Reserve Bank of India 2006a, 2006b, 2006c, and 2007; and benchmark data sources from appendix 2.B. International Comparison of Financial Ratios-- Benchmark Countries (2006) The comparative analysis in the preceding section compares South Asian indica- tors against comparable benchmark ranges. In this section, the performance of South Asian countries on the selected indicators is compared graphically with in- dividual countries in the benchmark group (for underlying data, see appendix 1, table A1.6 and appendix 2.A, table A2.6). Figures 4.6 to 4.10 are self-explanatory. Figure 4.6 Year 2006: Geographic ATM Penetration, UK Leads 300 252 250 2 km 200 1,000 per 150 ATMs of 100 no. 50 43 6 3 9 3 7 12 0 2 0 United United Canada Australia New Bangladesh India Nepal Pakistan Sri Lanka States Kingdom Zealand Source: For the five South Asian countries, data are from appendix 1, table A1.6. Data sources include South Asian Central Banks, SECs and Boards, stock exchanges, and publications; Indian Banks' Association 2006a, 2006b, and 2006c: Reserve Bank of India 2006a, 2006b, 2006c, and 2007. For benchmark countries data are from appendix 2.A, table A2.6; data sources are from appendix 2.B. 56 Getting Finance in South Asia 2009 Figure 4.7 Year 2006: South Asia Better Performances in Return on Equity 40 30 20 10 0 ­10 percentage ­20 ­30 ­40 ­50 pore States China India nka Kingdom Canada Nepal La Australia Zealand Singa Pakistan Sri United New Kong, Bangladesh United Hong Source: For the five South Asian countries, data are from appendix 1, table A1.6. Data sources include South Asian Central Banks, SECs and Boards, stock exchanges, and publications; Indian Banks' Association 2006a, 2006b, and 2006c: Reserve Bank of India 2006a, 2006b, 2006c, and 2007. For benchmark countries data are from appendix 2.A, table A2.6; data sources are from appendix 2.B. Figure 4.8 Year 2006: Nonperforming Loans Higher in South Asia Sri Lanka 7.16 Pakistan 5.70 Nepal 14.22 India 3.33 Bangladesh 13.15 Hong Kong, China 1.10 Singapore 2.40 New Zealand 0.20 Australia 0.20 Canada 0.40 United Kingdom 0.90 United States 0.70 0 2 4 6 8 10 12 14 16 gross NPLs to total loans (percentage) Source: For the five South Asian countries, data are from appendix 1, table A1.6. Data sources include South Asian Central Banks, SECs and Boards, stock exchanges, and publications; Indian Banks' Association 2006a, 2006b, and 2006c: Reserve Bank of India 2006a, 2006b, 2006c, and 2007. For benchmark countries data are from appendix 2.A, table A2.6; data sources are from appendix 2.B. An International Perspective 57 Figure 4.9 Year 2006: South Asia--Lower Stock Market Capitalization 1,000 900 800 700 600 500 percentage 400 300 200 100 0 e land States tralia China India Nepal Lanka Kingdom CanadaAus Zea PakistanSri United New Kong, SingaporBangladesh United Hong Source: For the five South Asian countries, data are from appendix 1, table A1.6. Data sources include South Asian Central Banks, SECs and Boards, stock exchanges, and publications; Indian Banks' Association 2006a, 2006b, and 2006c: Reserve Bank of India 2006a, 2006b, 2006c, and 2007. For benchmark countries data are from appendix 2.A, table A2.6; data sources are from appendix 2.B. Figure 4.10 Year 2006: Lower Concentration in South Asia 2,000 1.854.41 1,707.79 1,611.11 1,501.22 1,500 1,259.88 1,000 949.86 HHI 784.01 704.03 674.16 596.86 599.43 536.63 500 0 States tralia China India Nepal Lanka Kingdom Canada Aus Zealand Singapore Pakistan Sri United New Kong, Bangladesh United Hong Source: For the five South Asian countries, data are from appendix 1, table A1.6. Data sources include South Asian Central Banks, Securities Exchange Commissions and Boards, stock exchanges, and publications; Indian Banks' Association 2006a, 2006b, and 2006c: Reserve Bank of India 2006a, 2006b, 2006c, and 2007. For benchmark countries data are from appendix 2.A, table A2.6; data sources are from appendix 2.B. 58 Getting Finance in South Asia 2009 International Comparison of Financial Ratios-- Comparator Groups (2005) The performance of South Asian countries on selected indicators in 2005 is also compared with that of two comparator groups: a sample of developed countries-- Australia, Canada, Japan, New Zealand, the United Kingdom, and the United States--and a peer group in Asia--China; Hong Kong, China; Indonesia; the Re- public of Korea; Malaysia; the Philippines; Singapore; and Thailand (for underly- ing data, see table 4.1). The results show that the South Asian performance fares well with both groups on some important categories--for example, returns, capital adequacy, and mar- ket concentration. Others areas--for example, credit quality, provisioning, and access measures--needed attention. South Asian countries fare poorly in the area of capital market developments. Access to finance measured by demographic branch and ATM penetration shows that both OECD and selected East Asian peer groups perform better than South Asian countries (figure 4.11). Under performance and efficiency, the South Asian countries (except for Nepal) record returns on both equity and assets that are comparable to those in the devel- oped countries (figure 4.12). In the financial stability category, once again, the South Asian group (except for Nepal) is able to match the performance of the two comparator groups, which is an improvement compared with their performances measured in previous stud- ies. The OECD group, however, has significantly lower NPL ratios: the ratios range from 0.2 percent in Australia to 1.8 percent in Japan, whereas those in South Asia range from around 5.13 percent in India to 18.94 percent in Nepal. In the Asian peer group, the ratios are high, ranging from 0.2 in Hong Kong, China to 19.7 in the Philippines (figure 4.13). The proxies used to measure the capital market development are the domestic public bonds outstanding to GDP ratio and equity market capitalization ratio. For South Asia, with the exception of India, none of these measures compare favor- ably. Japan recorded the highest bond-to-GDP ratio of 150.6 percent, while Singa- pore, Malaysia, and the United States recorded significant market capitalization ratios at 152.99 percent, 144 percent, and 135.1 percent, respectively (figure 4.14). Market concentration was measured by bank asset concentration and private credit-to-GDP ratios. The South Asian group showed lower concentration. Mar- ket concentration was highest in Hong Kong, China and Singapore for the Asian peer group, and New Zealand for the OECD group. Private credit was highest in the United Kingdom with 160.48 percent, and for the Asian group, it was highest in Malaysia and the Republic of Korea (around 126 percent) (figure 4.15). Table 4.1 Financial Ratios for South Asian Countries and Comparator Groups, 2005 (percent) Access Efficiency Financial Capital market Market concentration to finance and performance stability developments and competitiveness Return Return Capital Gross D/Public Equity Three-bank Private D/Branch D/ATM on on adequacy nonperforming bonds to market assets credit to Economy penetration penetration equity assets ratio loans GDP capitalization concentration GDP South Asia Bangladesh 4.64 0.20 28.63 1.30 7.65 13.55 16.75 6.06 37.05 31.87 India 6.33 1.63 16.90 1.30 12.80 5.13 33.00 52.70 32.02 33.30 Nepal 1.67 0.24 ­45.87 1.79 ­6.07 18.94 16.40 10.49 45.87 27.57 Pakistan 4.82 0.67 36.90 2.90 11.90 6.70 30.90 30.59 40.35 28.83 Sri Lanka 7.20 4.50 27.01 1.70 12.84 8.76 31.77 24.69 53.02 33.87 Asian peer group China 1.33b 3.80b 15.10 0.80 -- 9.80 24.60 35.41 66.44 111.80 Hong Kong, China 20 -- 11.10 0.70 10.40 0.20 10.07 39.74 73.43 47.84 Indonesia 3.73 4.84a 17.50 2.50 19.30 15.60 18.00 27.20 62.28 23.00 Korea, Rep. of 10.50 167.2b 22.50 1.30 13.0 1.20 25.40 73.20 50.34 125.80 Malaysia 8.26 16.44b 14.10 1.40 13.70 9.60 38.30 144.00 45.31 126.60 Philippines 6.75 5.20 8.70 1.10 17.60 19.70 38.60 35.40 46.23 30.60 Singapore 9 39 11.10 1.20 15.80 3.00 39.78 152.99 98.66 110.21 Thailand 7.37 17.05c 14.20 1.90 13.20 9.10 21.20 68.20 53.69 90.50 OECD countries An Australia 24 115 25.30 1.80 10.40 0.20 15.25 111.27 69.70 109.73 Inter Canada 28 158 14.90 0.70 12.90 0.50 57.38 109.19 58.58 75.65 national Japan 45 136 11.30 0.50 12.20 1.80 150.60 106.10 38.66 97.90 New Zealand 28 57 14.54 0.94 10.91 0.30 25.40 39.74 82.67 129.47 United Kingdom 23 97 11.80 0.80 12.80 1.00 28.95 126.22 31.85 160.48 Perspective United States 26 134 12.70 1.30 13.00 0.70 47.23 135.10 53.47 47.84 Sources: IMF 2007a, 2007b; regulatory Web sites; Bank for International Settlements 2007; World Bank 2007a; World Federation of Exchanges 2007; supervisory authorities; and staff calculations. Note: For definitions of acronyms and abbreviations, see the list at the beginning of the report. a. 2000 data. b. 2003 data. 59 c. 2004 data. 60 Getting Finance in South Asia 2009 Figure 4.11 South Asia Is Not Comparable on Access Indicators United States United Kingdom New Zealand countries Japan Canada OECD Australia Thailand Singapore group Philippines peer Malaysia Korea, Rep. of Asian Indonesia Hong Kong, China China Sri Lanka Asia Pakistan Nepal South India Bangladesh 0 20 40 60 80 100 120 140 160 180 no. of branches/ATMs per 100,000 people D/ATM penetration D/branch penetration Source: IMF 2007a, 2007b; regulatory Web sites; Bank for International Settlements 2007; World Bank 2007a; World Federation of Exchanges 2007; supervisory authorities; and staff calculations. Figure 4.12 South Asia Performance Indicators Are Better 40 30 20 10 0 ­10 percentage ­20 ­30 ­40 ­50 of India Nepal Lanka China China Rep. Japan States Canada Pakistan Zealand Sri Indonesia Malaysia Thailand Australia Kingdom Singapore Bangladesh Kong, Philippines Korea, New United United Hong South Asia Asian peer group OECD countries ROE ROA Source: IMF 2007a, 2007b; regulatory Web sites; Bank for International Settlements 2007; World Bank 2007a; World Federation of Exchanges 2007; supervisory authorities; and staff calculations. An International Perspective 61 Figure 4.13 South Asia Capital Adequacy Is on Par, Nonperforming Loans Are below Peer Groups United States United Kingdom New Zealand countries Japan Canada OECD Australia Thailand Singapore group Philippines peer Malaysia percentage Korea, Rep. of Asian Indonesia Hong Kong, China China Sri Lanka Asia Pakistan South Nepal India Bangladesh ­10 ­5 0 5 10 15 20 gross NPL CAR Source: IMF 2007a, 2007b; regulatory Web sites; Bank for International Settlements 2007; World Bank 2007a; World Federation of Exchanges 2007; supervisory authorities; and staff calculations. Figure 4.14 South Asia Capital Market Development below Peer Groups, except India 160 140 120 100 80 percentage 60 40 20 0 of India Nepal Lanka China China Rep. Japan States Canada Pakistan Zealand Sri Indonesia Malaysia Thailand Australia Kingdom Singapore Bangladesh Kong, Philippines Korea, New United United Hong South Asia Asian peer group OECD countries D/Public bonds to GDP equity market capitalization Source: IMF 2007a, 2007b; regulatory Web sites; Bank for International Settlements 2007; World Bank 2007a; World Federation of Exchanges 2007; supervisory authorities; and staff calculations. 62 Getting Finance in South Asia 2009 Figure 4.15 South Asia Has a Comparatively Low Market Concentration 180 160 140 120 100 80 percentage 60 40 20 0 of India Nepal Lanka China China Rep. Japan States Canada Pakistan Zealand Sri Indonesia Malaysia Thailand Australia Kingdom Singapore Bangladesh Kong, Philippines Korea, New United United Hong South Asia Asian peer group OECD countries three-bank assets concentration private credit to GDP Source: IMF 2007a, 2007b; regulatory Web sites; Bank for International Settlements 2007; World Bank 2007a; World Federation of Exchanges 2007; supervisory authorities; and staff calculations. Endnote 1. Corporate governance was not benchmarked. 5 Findings and Observations Financial sector development affects poverty both directly and indirectly--indi- rectly by affecting the economic development process, which will increase income- generating capacities, and directly by increasing access to financial services for the underprivileged. Recognizing the importance of financial development to their growth and poverty reduction strategies, South Asian authorities actively pursue financial sector reform measures to build a stable financial system that is resilient to economic shocks. Financial sector development can be observed in many ways, including better allocations of resources, lower intermediation costs, increased ef- ficiencies through technological developments, diversity of the market players, availability of innovative instruments, market-oriented regulatory systems, and better access to finance. Supervisory authorities continue to monitor these devel- opments to spot vulnerabilities and weaknesses and thus take preventive measures. Thus, this report is a useful reference tool in this process. As stated earlier in the report, findings are confined to the commercial banking sector and should be viewed with the noted technical and practical limitations in mind. These findings and observations are important, however, because the trend analysis of the micro indicators flag areas of strengths and weaknesses. One or even several ratios might be misleading; however, when combined with other ob- servations about the local situation and the industry, they could provide informa- tion for the regulatory authorities to focus on in their development efforts. Access to Finance South Asian countries need to focus on improving access to finance in the commer- cial banking sector. When compared with the economic growth and the progress made in other areas such as performance and returns, the provision of financial ac- cess has lagged. It is recognized that, in South Asia, other players such as microfi- nance institutions (MFIs) also play a significant role in providing financial services to the poor, but they are unable to mobilize funds and diversify risks on a large scale as banks do. Hence, it is important that banks play a more active role in financial in- termediation so that more people may benefit through increased access to financial services. Among the countries studied, Nepal needs to pay more attention to im- prove access; in comparison to other countries, Sri Lanka has progressed well. 63 64 Getting Finance in South Asia 2009 Performance and Efficiency South Asia recorded commendable improvements in the performance and effi- ciency category. Higher interest rate spreads, larger volumes in trade, and more aggressive regulatory measures are instrumental in the banking system, registering improved performance. Higher interest spreads should be monitored and re- duced, however, to provide lower intermediary cost to the users. Pakistan leads the South Asian countries in this category. South Asian group have posted returns higher than the high-income Organisation for Economic Co-operation and De- velopment (OECD) member and nonmember benchmark countries as well as the East Asian peer group in this category. Although most of the region's banking sec- tors have managed to bring down their staff and operating cost ratios consider- ably, there is room for further improvement. Financial Stability Capital adequacy is another area of encouraging performance by South Asian countries, except in Nepal, where negative reserves have affected the capital ade- quacy ratios (CARs). India ranks high on financial stability ratios. Nepal has a neg- ative capital position that needs to be rectified immediately, and Bangladesh has a CAR below the required level. All countries need to focus on reducing the nonper- forming loans (NPLs) further. South Asia lags benchmark countries as well as peer groups in both NPLs and provisioning ratios. Although significant legal and regu- latory reforms have taken place, prudential norms should align with international norms so that a sound credit culture can develop. Furthermore, although not an imminent problem, the liquidity situation needs monitoring. Having recognized the importance of prudent risk management, all South Asian countries have initiated action to implement the Basel II capital framework in their banking systems in the near future. It is encouraging that each country is at various stages of development in this process. Once implemented, this would align the capital needed with the risk profiles. Henceforth, banks would be able to better manage their capital as well as their business risks. Capital Market Development Except for India, all other countries are at various levels of development stages in capital market development. Local bond markets are dominated by government borrowing, while most stock markets are concentrated on few players or indus- tries. Improvements in the market infrastructure, regulatory and legal reforms, and governance are needed for the development of capital markets. Authorities have to exercise concerted efforts on capital market development to further im- prove the financial intermediation options. Market Concentration and Competitiveness Market concentration is low in South Asia except for Sri Lanka, where with re- spect to deposits, loans, and assets, three-bank concentration ratios are more than 50 percent. Further, increases in private credit extended as a percentage of gross domestic product (GDP) ratios need to be monitored carefully by the countries, Findings and Observations 65 as increasing volumes of credit pose a major risk if interest margins are to fall. Therefore, countries should tighten up their prudential guidelines as well as eval- uate the funding sources to avoid possible maturity mismatches. Corporate Governance All the South Asian countries have attempted to incorporate corporate gover- nance guidelines. India, Pakistan, and, more recently, Sri Lanka have issued de- tailed guidelines. Still, all countries need to review and strengthen their corporate governance guidelines in various areas. Bangladesh and Nepal need to further de- velop their corporate governance guidelines and work toward improving their ac- counting and auditing standards to conform to international standards. Sri Lanka needs to improve its corporate governance guidelines mainly as they relate to stakeholders' rights and disclosure of beneficial ownership. India needs to review differences between governance rules applicable to government-controlled banks and those applicable to private banks. In addition, all countries need to improve transparency and disclosure requirements. It is important to ensure that these guidelines and regulations are enforceable. Finally, banking institutions should strive to be guided in their decisions by the guidelines issued by the regulatory authorities. Benchmarking and Comparability Comparison of the performance of South Asian countries with benchmark data-- high-income OECD member and nonmember countries and the East Asian peer group--show that South Asian performance fares favorably with both groups on some important categories--for example, returns, capital adequacy, and market concentration. But other categories--for example, credit quality, provisioning, and access measures--need attention. Capital market developments require concerted efforts by policy makers of South Asian countries. Part 11 Indicators 6 Compilation Guide for the Getting Finance Indicators for South Asia As part of the World Bank's regional initiative to develop standardized indicators to measure the performance and soundness of the financial sector, this report, Getting Finance in South Asia 2009: Indicators and Analysis of the Commercial Banking Sec- tor, uses indicators under six categories: (1) access to finance, (2) performance and efficiency, (3) financial stability, (4) capital market development, (5) market con- centration and competitiveness, and (6) corporate governance. Initially, these indi- cators will be computed only for commercial banks. Interpretation and analysis of these indicators is likely to vary unless banking supervisors adopt a common methodology for computing them. Because most of the indicators take the form of ratios, understanding the nature of the underlying data is imperative. This guide provides common definitions, data sources, and concepts for both compilers and users of the indicators. For indicators appearing in previous FPSI reports, the definitions are the same as those given in the compi- lation guide issued under those studies. Access to Finance In countries seeking to develop financial markets, it is important to monitor and measure the level of access to financial services. This knowledge provides a more balanced picture of financial sector development. It also enables policy makers and regulatory authorities to better target the development efforts. Initially it is expected that access to finance will be analyzed using data relating to providers of finance (supply-side data). Demographic as well as geographic market penetra- tion will be analyzed. 1. Demographic branch penetration Number of bank branches Bank branches per 100,000 people = 100,000 Total population Number of bank branches: Number of commercial bank branches in the country at year-end. Total population: Total population at year-end. 69 70 Getting Finance in South Asia 2009 This indicator measures the demographic penetration of the banking sector in terms of access to banks' physical outlets. Higher penetration means more branches and thus easier access. 2. Demographic ATM penetration Number of ATMs ATMs per 100,000 people = 100,000 Total population Number of automated teller machines (ATMs): Number of ATMs of commercial banks in the country at year-end. Total population: As defined in eq. (1) above. This indicator also measures the demographic penetration of the banking sector in terms of access to physical outlets. Higher penetration means more ATMs and thus easier access. 3. Deposit accounts per 1,000 people Number of deposit accounts Number of deposit accounts = 1,000 per 1,000 people Total population Number of deposit accounts: Number of deposit accounts in commercial banks in the country at year-end. Total population: As defined in eq. (1) above. This indicator measures the use of banking services. Higher values mean greater use of services. 4. Loan accounts per 1,000 people Number of deposit accounts Number of loan accounts = 1,000 per 1,000 people Total population Number of loan accounts: Number of loan accounts granted by commercial banks in the country at year-end. Total population: As defined in eq. (1) above. This indicator also measures the use of banking services, with higher values indicating greater use. 5. Geographic branch penetration Bank branches per 1,000 km2 = Number of bank branches 1,000 Total surface area (km2) Number of bank branches: As defined in eq. (1) above. Total surface area (km2): Total surface area of the country as measured by square kilometers. Compilation Guide for the Getting Finance Indicators for South Asia 71 This measures the geographic penetration of the banking sector in terms of access to the physical outlets of the bank. Higher penetration would indicate easier geo- graphic access of branches. 6. Geographic ATM penetration ATMs per 1,000 km2 = Number of ATMs 1,000 Total surface area (km2) Number of ATMs: As defined in eq. (2) above. Total surface area (sq. km.): As defined in eq. (5) above. This measures the geographic penetration of the banking sector in terms of access to the physical outlets of the bank. Higher penetration would indicate easier geo- graphic access to ATMs. Performance and Efficiency Bank efficiency has become critically important in an environment of increasingly competitive international markets. Thus, comparative data on the efficiency of banks are important both to regulators and to banks, which can use the data to adjust their operating policies. For this study, two types of efficiencies are ana- lyzed: returns efficiency and cost efficiency. 7. Profits to period-average equity (ROE) Net income Return on equity = Average value of total equity Net income: Net profit before tax and other extraordinary adjustments. Average value of total equity: Can be calculated by taking the beginning- and end- period values for total capital (total equity) and finding the average. Total capital (total equity): Also called regulatory capital funds or own funds. De- fined as Tier I (core) capital + Tier II (supplementary) capital. Tier I capital: Equity capital and disclosed reserves that are freely available to meet claims against the bank. Tier I capital comprises paid-up shares, share premi- ums, retained earnings, statutory reserves, and general reserves. Goodwill should be deducted because its value may fall during crises. Tier I capital should be at least 50 percent of the total capital funds. Tier II capital: Undisclosed reserves, revaluation reserves, general loan loss provi- sions, and hybrid instruments that combine the characteristics of debt and eq- uity and are available to meet losses and unsecured subordinated debt. Tier II capital should be less than or equal to Tier I capital. Subordinated debt should not exceed 50 percent of Tier I capital. Loan-loss provisions should not exceed 1.25 percent of the total risk-weighted assets. This ratio measures the efficiency with which a bank uses capital and, over time, the sustainability of its capital position. 72 Getting Finance in South Asia 2009 8. Profits to period-average assets (ROA) Net income Return on assets = Average value of total assets Net income: As defined in eq. (7) above. Average value of total assets: Can be calculated by taking the beginning- and end- period values for total assets and finding the average. This ratio measures the efficiency with which a bank uses assets. 9. Staff cost ratio Personnel expenses Staff cost ratio = Operating expenses Personnel expenses: Total remuneration payable to employees. Operating expenses: All expenses other than interest expenses and provisions. This ratio measures personnel cost as a share of total administrative expenses and reflects cost efficiency. 10. Operating cost ratio Operating expenses Operating cost ratio = Net interest earnings Operating expenses: As defined in eq. (9) above. Net interest earnings (net interest income): Interest earned less interest expenses. This ratio measures efficiency in controlling administrative and operating ex- penses in relation to net interest income. 11. Net interest margin Net interest earnings Net interest margin ratio = Average value of total assets Net interest earnings (net interest income): As defined in eq. (10) above. Average value of total assets: As defined in eq. (8) above. This ratio measures the overall operating efficiency of the banking sector. 12. Recurring earning power Preprovision profits Recurring earning power ratio = Average value of total assets Preprovision profits: Profits before tax and loan loss provisions. Average value of total assets: As defined in eq. (8) above. Compilation Guide for the Getting Finance Indicators for South Asia 73 This ratio measures the recurring earning strength and efficiency of the banking sector. Financial Stability Financial stability means avoiding significant disruptions to the financial system and its functions. It is key to achieving both low inflation and sustainable eco- nomic growth. While different indicators measure different aspects of financial sector stability, this study uses capital adequacy, asset quality, and liquidity ratios. The capital adequacy ratios (CARs) measure the capacity of an institution to ab- sorb losses and thus indicate its financial strength. The asset quality and liquidity ratios measure major vulnerabilities relating to credit risk and liquidity risk. 13. Capital adequacy ratio (CAR) Regulatory capital funds Capital adequacy ratio = Risk-weighted assets Regulatory capital funds: Also called own funds or total capital funds, as defined in eq. (7) above. Risk-weighted assets: Each class of assets and off­balance sheet exposures are weighted using weights related to the credit risk associated with each type of assets. The standard risk weights used as international best practices (Basel I) are as follows: · Cash, gold, and government or treasury securities, 0 percent · Government agencies, 20 percent · Mortgage loans, 50 percent · Others, 100 percent The CAR provides an assessment of how well the capital cushions fluctuations in earnings and supports asset growth. The ratio should be calculated on a consoli- dated basis. Under international best practice, 8 percent of total risk-weighted as- sets on a consolidated basis is considered adequate capital. 14. Leverage ratio Total equity Leverage ratio = Total on-balance sheet assets Total Equity: Total capital funds as defined in eq. (7) above. Total on-balance sheet assets: Total assets in the balance sheet at the end of period without risk weighting. This ratio measures the extent to which assets are financed by funds other than own funds; hence, it is a measure of capital adequacy. 74 Getting Finance in South Asia 2009 15. Gross nonperforming loans ratio Gross nonperforming loans Gross nonperforming loans ratio = Total advances Gross nonperforming loans (NPLs): The amount of NPLs before specific loan loss provisions are deducted. According to prudential norms, loans are classified as nonperforming when payments of principal and interest are past due by three months. Total advances: Gross loans and advances, including NPLs before deducting spe- cific loan-loss provisions. This ratio is a measure of asset quality and indicates the credit quality of a bank's loan portfolio. 16. Provisions to nonperforming loans ratio Loan-loss provisions Provisions to nonperforming loans ratio = Gross nonperforming loans Loan loss provisions: Specific loan-loss provisions outstanding at the end of the period. Gross NPLs: As defined in eq. (15) above. This ratio is a measure of asset quality and identifies the adequacy/shortfall of the specific provisions made in respect of NPLs. 17. Liquid assets ratio Liquid assets Liquid assets ratio = Total assets Liquid assets: Cash, demand deposits, and other financial assets that are available on demand or within three months or less. Total assets: As defined in eq. (16) above. This ratio measures stability. It indicates the liquidity available to meet expected and unexpected short-term demands for cash--and thus the vulnerability of the banking sector to loss of funding sources. 18. Liquid assets to liquid liabilities ratio Liquid assets Liquid assets to liquid liabilities ratio = Liquid liabilities Liquid assets: As defined in eq. (17) above. Liquid liabilities: Short-term debt liabilities and the net market value of financial derivatives positions (short term). This ratio also measures stability. It captures the liquidity mismatch between short-term assets and liabilities and indicates the extent to which a bank can meet its short-term obligations without incurring liquidity problems. Compilation Guide for the Getting Finance Indicators for South Asia 75 Capital Market Development The development of capital markets is a powerful indicator of the depth of the fi- nancial sector. By allocating funds for viable investment projects, healthy capital markets diversify the channels of financial intermediation. This study uses ratios to measure the size and structure of the stock and bond markets. 19. Domestic bond to equity market capitalization ratio Domestic bonds outstanding Bond to equity market capitalization ratio = Equity market capitalization Domestic bonds outstanding: Total value of outstanding domestic debt securities issued by private entities as well as public entities, at the end of the period. Equity (stock) market capitalization: Market value of all outstanding shares calcu- lated by share price times the number of shares outstanding at the end of the period. This ratio gives an indication of the size and structure of the capital markets. It also reflects financial depth and diversity. 20. Domestic public bonds outstanding to GDP ratio Domestic public bonds outstanding Domestic public bonds to GDP ratio = GDP Domestic public bonds outstanding: Total outstanding value of domestic debt se- curities issued by public entities. Gross domestic product (GDP): This is an aggregate measure of production in the economy equal to the total value added of all residential units engaged in pro- duction, for the given period. This is another measure of the size of the bond market. It reflects the extent to which the public sector preempts resources that would otherwise be available to the private sector. 21. Trading value of top 10 stocks to total trading value ratio Trading value of top 10 stocks Trading value of top 10 stocks ratio = Total value of shares traded Trading value of top 10 stocks: Total value of top 10 actively traded stocks in the stock exchange for the period under consideration, such as financial year or calendar year. Total value of share traded: Total value of shares traded in the stock exchange for the period under consideration, such as financial year or calendar year The ratio measures the degree of concentration of the top 10 firms in the market and reflects the depth of the stock market. 76 Getting Finance in South Asia 2009 22. Stock market capitalization to GDP ratio Stock market capitalization Stock market capitalization to GDP ratio = GDP Stock market capitalization: As defined in eq. (19) above. GDP: As defined in eq. (20) above. This ratio measures the relative importance of the stock market to the size of the economy. 23. Stock trading value to GDP ratio Total value of shares traded Stock trading value to GDP ratio = GDP Total value of share traded: As defined in eq. (21) above. GDP: As defined in eq. (20) above. This is a measure of activity or liquidity in the stock market and reflects the ease of trading. 24. Stock market turnover ratio Total value of shares traded Stocket market turnover ratio = Average market capitalization Total value of share traded: As defined in eq. (21) above. Average market capitalization: Average of the end-period market capitalization values for the current period and the previous period. This is a measure of efficiency in the stock market. Market Concentration and Competitiveness The study examines the market structure of the banking sector to evaluate the banking system's proneness to instability and crises. A high level of concentration in the banking industry, by reducing competition and increasing cost, has a nega- tive impact on efficiency. At the same time, a highly competitive banking sector might be more prone to crisis (due to increased fragility resulting from intense competition) than a more concentrated one. 25. Herfindahl-Hirschman Index (HHI) n HHI = (MSi)^2 i=1 HHI is calculated as the sum of the squares of the market share (in terms of assets) of each bank in the geographic banking market. This ratio measures the market concentration. A highly concentrated commercial banking sector may lead to lack of competitive pressure. Compilation Guide for the Getting Finance Indicators for South Asia 77 26. K-bank concentration (assets) ratio Three largest banks' total assets K-bank concentration ratio (CRk) assets = Total assets of commercial banks (CRk), where k = three largest banks. Three largest banks' total assets: Calculated as total assets of the three largest banks. Total assets of commercial banks: Total assets of the commercial banking sector. This ratio measures the banking concentration in terms of assets. 27. K-bank concentration (deposits) ratio Three largest banks' total deposits K-bank concentration ratio (CRk) deposits = Total deposits of commercial banks (CRk), where k = three largest banks. Three largest banks' total deposits: Calculated as total deposits of the three largest banks. Total deposits of commercial banks: Total deposits of the commercial banking sector. This ratio measures the banking concentration in terms of deposits. 28. K-bank concentration (loans) ratio Three largest banks' total loans K-bank concentration ratio (CRk) loans = Total loans of commercial banks (CRk), where k = three largest banks. Three largest banks' total loans: Calculated as total loans of the three largest banks. Total loans of commercial banks: Total loans of commercial banking sector. This ratio measures the banking concentration in terms of loans. 29. Private credit extended by banks to GDP ratio Total value of private credit by commercial banks Private credit to GDP ratio = GDP Total value of private credit by commercial banks: Claims on the private sector by commercial banks. GDP: As defined in eq. (20) above. This ratio measures the relative activity of banks as financial intermediaries in channeling savings to investors. 78 Getting Finance in South Asia 2009 30. Commercial banking assets to GDP ratio Total value of private credit by commercial banks Private credit to GDP ratio = Total loans of commercial banks Total commercial banking assets: As defined in eq. (26) above. GDP: As defined in eq. (20) above. This ratio measures the relative importance of commercial banking sector to the size of the economy. Corporate Governance Sound corporate governance creates an environment that promotes banking effi- ciency, mitigates financial risks, and increases the stability and, therefore, the cred- ibility of financial institutions. Developing countries have much to gain by im- proving their corporate governance standards. The basic principles are the same everywhere: fairness, transparency, accountability, and responsibility are the min- imum standards that give banks legitimacy, reduce vulnerability to financial crisis, and broaden and deepen access to capital. Scoring performance on corporate governance is hugely challenging and must be done with care. Unlike other types of financial analysis, where quantitative measures can provide "hard" benchmarks to guide the more qualitative aspects of analysis, assessing corporate governance is a largely qualitative exercise. Because corporate governance is assessed in this study through a series of straightforward questions, no definitions or guidelines are provided here. 7 Methodology Data Compilation Annual data on the commercial banking sector in each of the five countries repre- senting South Asia (in this study as well as in the phase I, II, and III studies)-- Bangladesh, India, Nepal, Pakistan, and Sri Lanka--were compiled for the six years from 2001 to 2006. The data for the financial indicators were collected using a data collection template (for the results, see appendix 1), while the data on cor- porate governance were collected through a questionnaire (for the responses, see appendix 3.A). In completing this questionnaire, the supervisory agencies were asked to substantiate their responses with relevant legal references or sources. The data available in this report (and the previous studies) are unique in that they are comparable data collected directly from the regulatory authorities or their published reports. To ensure the compatibility of the indicators across the region and aid consistent interpretation and analysis, a compilation guide (see chapter 6) was prepared, setting out definitions and underlying concepts for both the compilers and the users. Choice of Indicators To provide a more holistic perspective of Getting Finance in South Asia, and to improve the understanding of the financial systems in the regions' countries, indi- cators under the six categories of access to finance, performance and efficiency, corporate governance, financial stability, capital market development, and market concentration and competitiveness were selected. The financial indicators selected are based on internationally accepted mea- sures and reflect the structure of financial systems in South Asia, just as in the pre- vious reports. The corporate governance indicators are based primarily on the guidelines issued by the Basel Committee on Banking Supervision, which in turn rely on the principles of corporate governance published by the Organisation for Economic Co-operation and Development (OECD) (see chapter 9). Although market-based indicators such as credit ratings and market volatility would serve better for macro prudential analysis, such indicators were not se- lected for this study. The effectiveness of such indicators depends on the quality 79 80 Getting Finance in South Asia 2009 and depth of the financial markets. In most South Asian countries, these charac- teristics are directly affected by the ownership structure of the commercial bank- ing sector (with government-owned or government-controlled banks accounting for a large share of banking sector assets) and by the lack of stringent public dis- closure requirements (for a detailed discussion of the advantages and disadvan- tages of macro prudential analysis, see World Bank and IMF 2005). It was there- fore believed that micro prudential indicators would be better measures of the soundness of financial sectors in South Asia. Method for Country Rankings The ranking of countries by the financial and corporate governance indicators is based on a simple-average ranking system. Given the limited size of the sample, ranking based on percentile averages is not warranted. Simple-average ranking also appears to be appropriate given the lack of sufficiently detailed data to assess the impact of each variable on financial soundness and thus permit different weights to be assigned to the variables (see Djankov, Manraj, McLiesh, and Ramalto 2005). Thus, the use of simple-average ranking has made it possible to overcome some of the shortcomings associated with the type of analysis and indicators used in this report. Financial Indicator Scores For the rankings on each financial indicator, for each year each country is ranked relative to the others, with 1 representing the lowest ranking and 5 the highest. The lowest score of 1 is also given for any year for which no data are available (in- dicated in the data tables in appendix 1, by N/A). Except in instances in which no data are available for more than one country or in which more than one country reports the same ratio, each country receives a different score. These scores are aggregated across the years to arrive at the score for the six- year period on each indicator--and the scores for the indicators within a category are added to arrive at the aggregate score for that category (access to finance, per- formance and efficiency, financial stability, capital market development, or market concentration and competitiveness). This aggregate score is then divided by the maximum "possible" total score for the category. That maximum score is 180, de- rived by multiplying the number of indicators in the category (6) by the highest possible score (5), then multiplying that by the number of years (6). Dividing the aggregate score by the maximum possible total score of 180 gives the composite score for each category. The composite scores range from zero to one. See table 7.1 for the composite scores received by the countries under each category. Also, the ranking of countries under each category is given in table 3.1. Corporate Governance Scores For corporate governance, each country is individually ranked on the two major sections of each of the four topics on a scale from 1 (not observed) to 5 (largely observed), based on the responses to the questionnaire (see appendix 3.A), the country's corporate governance guidelines, and various reports. Here again a score of 1 is given if no data are available. Because the countries are not ranked comparatively, more than one country can receive the same score in a category. Methodology 81 Table 7.1 Composite Scores on the Getting Finance Indicators for South Asian Countries Indicator Bangladesh India Nepal Pakistan Sri Lanka Access to finance 1 Demographic branch penetration (branches per 100,000 people) 15 25 6 15 29 2 Demographic ATM penetration (ATMs per 100,000 people) 17 12 13 16 30 3 Deposit accounts per 1,000 people 18 24 6 12 30 4 Loan accounts per 1,000 people 21 21 7 11 30 5 Geographic branch penetration (branches per 1,000 km2) 30 24 6 12 18 6 Geographic ATM penetration (ATMs per 1,000 km2) 22 12 12 12 30 Total points 123 118 50 78 167 Composite score (total points/180) 0.68 0.66 0.28 0.43 0.93 Performance and efficiency 1 Return on equity 18 16 6 27 23 2 Return on assets 12 20 14 25 20 3 Staff cost ratio 15 17 6 23 29 4 Operating cost ratio 6 21 30 21 12 5 Net interest margin 8 19 10 25 28 6 Recurring earning power 17 21 10 23 20 Total points 76 114 76 144 132 Composite score (total points/180) 0.42 0.63 0.42 0.80 0.73 Financial stability 1 Capital adequacy ratio 12 27 6 25 20 2 Leverage ratio 14 25 6 24 21 3 Gross nonperforming loans ratio 11 30 7 23 19 4 Provisions to nonperforming loans ratio 10 20 8 30 22 5 Liquid assets ratio 17 29 6 25 13 6 Liquid assets to liabilities ratio 24 30 10 18 8 Total points 88 161 43 145 103 Composite score (total points/180) 0.49 0.89 0.24 0.81 0.57 Capital market development 1 Domestic bond market to equity market capitalization 7 30 20 22 11 2 Domestic public bonds outstanding to GDP 10 26 8 25 21 3 Ratio of trading value of top 10 stocks to total trading value 19 18 7 30 16 4 Stock market capitalization to GDP 6 30 14 21 19 5 Market liquidity: Ratio of stock trading value to GDP 19 30 12 7 23 6 Stock market turnover ratio 21 29 6 19 15 Total points 82 163 67 124 105 Composite score (total points/180) 0.46 0.91 0.37 0.69 0.58 (Table continues on next page) 82 Getting Finance in South Asia 2009 Table 7.1 Composite Scores on the Getting Finance Indicators for South Asian Countries (continued) Indicator Bangladesh India Nepal Pakistan Sri Lanka Market concentration and competition 1 Herfindahl-Hirschman index (HHI) 26 28 11 18 7 2 K-bank concentration ratio (K=3) ­ assets 24 30 12 18 6 3 K-bank concentration ratios (K=3) ­ deposits 24 30 17 13 6 4 K-bank concentration ratios (K=3) ­ loans 23 29 17 15 6 5 Private credit extended by banks to GDP 20 17 16 8 29 6 Commercial Banking assets to GDP 11 26 28 7 18 Total points 128 160 101 79 72 Composite score (total points/180) 0.71 0.89 0.56 0.44 0.40 Corporate governance 1 Ownership structure and influence of external stakeholders 1.1 Identification of substantial majority holders 3 4 3 4 4 1.2 Indirect and beneficial ownership 1 4 1 4 2 2 Investor rights 2.1 Shareholder meetings and voting procedures 4 5 4 5 3 2.2 Basic ownership rights 3 3 3 3 2 3 Transparency and disclosure 3.1 Adherence to internationally accepted accounting standards 4 4 4 5 5 3.2 Independent internal and external auditors and audit committee 3 4 3 4 4 4 Board structure and effectiveness 4.1 Role and effectiveness 5 4 4 5 5 4.2 Compensation 2 4 5 4 2 Total points 26 32 26 34 27 Composite score (total points/40) 0.64 0.80 0.65 0.84 0.67 Source: Calculations based on appendixes 1 and 3. Underlying data from South Asian Central Banks, SECs and Boards, and stock exchanges; Indian Banks' Association 2006a, and 2006b, and 2006c; Reserve Bank of India 2006a, 2006b, 2006c, and 2007. Methodology 83 With four topics and two major sections in each, and with the highest possible score being 5, the maximum "possible" score on corporate governance is 40. The information on corporate governance gathered in the 2005 study was revised in 2006; however, no significant changes are observed. Because comparable data are not available, the scores cannot be aggregated over the six-year period. Therefore, the total scores of 2006 are simply divided by the maximum possible score to ar- rive at the composite score for corporate governance. See table 7.1 for the com- posite scores received by the countries. Also, the ranking of countries under the category is given in table 3.1. Financial Soundness Ranking To ease comparison and interpretation, the composite scores range from 0 to 1. The composite scores for each of the six categories of indicators are then averaged for each country. These simple averages are then arranged from the highest to the lowest to identify the overall financial soundness ranking for each country (see table 3.1 for the overall ranking). 8 Major Policy Developments in the Prudential Regulations of South Asia, 2005­06 Bangladesh Implementation of the New Capital Adequacy Framework (Basel II) in Bangladesh Bangladesh adopted the 1988 Basel I accord in 1988, which required banks to maintain a minimum capital ratio of not less than 8 percent of the risk-weighted assets. Effective June 2003, all banks operating in Bangladesh had to maintain a minimum capital adequacy ratio (CAR) of not less than 9 percent of their risk- weighted assets with at least 4.5 percent in core capital (Tier I capital). In keeping with international practices, Bangladesh Bank (BB) has decided in principle to adopt the Basel II. Given the complexities involved, however, it has decided on a consultative approach. BB has decided to adopt a mix of Standardized and Foun- dation Internal Rating-Based (IRB) approaches to guide the minimum capital re- quirement. To study and guide the banking sector through this process, BB has es- tablished the following: a high-level steering committee with representations from the BB, banking industry, and accounting profession; and a mid-level coordina- tion committee to study the risk-based grouping and a Basel II implementation cell. Once the process is identified and realistic timeframes are drawn, it is ex- pected that the implementation of the new accord will take place in 2009. At pre- sent, BB is reviewing the existing capacities of the banking sector to undertake more stringent risk management processes that are required. BB is taking steps in this direction by issuing guidelines on managing core risks in banks. Prudential Regulations Prudential guidelines issued by Bangladesh Bank in 2005­06 include the following: 2005 · February: Accounting of the interest of classified loans: A continuous credit, a demand loan, or a term loan that will remain overdue for a period of 90 days or 85 86 Getting Finance in South Asia 2009 more will be put into the "Special Mention Account," and interest accrued on such loan will be credited to the Interest Suspense Account instead of crediting the same to the Income Account. · April: In the circular in which qualitative judgment is used as the basis for loan classification, it is stated that if the inspection team of BB classifies any loan, the loan can be declassified with the approval of the board of directors of the bank. However, before placing such a case before the board, the chief executive officer (CEO) and branch manager shall certify that the conditions for declas- sification have been fulfilled. · April: BB issued a circular revising the policy on single-borrower exposure. Among other things, it has been decided to reduce the single-borrower expo- sure limit from 50 percent to 35 percent. The total outstanding financing facil- ities by a bank to any single person or enterprise or organization of a group shall not, at any point in time, exceed 35 percent of the bank's total capital sub- ject to the condition that the maximum outstanding against fund-based fi- nancing facilities (funded facilities) does not exceed 15 percent of the total cap- ital. Under the same guidelines, nonfunded credit facilities (for example, a letter of credit or guarantee) can be provided to a single large borrower. But under no circumstances shall the total amount of the funded and nonfunded credit facilities exceed 35 percent of a bank's total capital. · April: For the loans that have already been disbursed with the approval of BB, and that have exceeded the limit as stipulated, banks shall take necessary steps to bring down the loan amount within the specified limit. To meet this condi- tion, banks may, if necessary, arrange partaking with other banks. However, for continuous loans, the limit has to be brought down per Section 02 by Decem- ber 2005. December 2006 is the deadline for term loans. · July: Banks and financial institutions (FIs) have been instructed to formulate and implement specific programs for performing Know-Your-Customer (KYC) procedures per the specified format supplied by the Anti-Money Laundering Department of BB keeping in line with the Guidance Notes on Prevention of Money Laundering. · August: Some amendments have been made to the policy on loan classification and provisioning. Per the amendments, banks will be required to make General Provision at 5 percent on the outstanding amount of loans kept in the Special Mention Account (SMA) after netting off the amount of Interest Suspense and the status of the SMA loan should be reported to the Credit Information Bu- reau (CIB) of BB. This instruction will be effective from December 31, 2005. · October: An information technology (IT) guideline of minimum security standards for scheduled banks and FIs has been prepared and forwarded to the banks on CD-ROM. Banks are advised to follow the guideline in their IT area and implement all the security standards by May 15, 2006. · December: With the aim to fully implement a Risk Grading System, an Inte- grated Credit Risk Grading Manual has been developed and forwarded to the banks on CD-ROM. Banks are advised to implement Credit Risk Grading (as described in the manual) by March 31, 2006, for all exposures (irrespective of amount) other than those covered under Consumer and Small Enterprises Fi- nancing Prudential Guidelines and those under the Short-Term Agricultural and Micro-Credit. Banks are also advised to submit a compliance report by Major Policy Developments in the Prudential Regulations of South Asia, 2005­06 87 April 15, 2006, to the effect that the Credit Risk Grading has been put in place. The Risk Grading Matrix provided in the manual will be the minimum stan- dard of risk rating and banks may adopt and adapt more sophisticated risk grades in line with the size and complexity of their business. Arrangement will be made by BB, if necessary, to train trainers of the banks in this regard. The BB's on-site inspection teams will monitor the progress of implementation of the manual and guideline during routine inspection. 2006 · February/March: Policy for rescheduling of loans has been reviewed and it has been decided that borrowers whose credit facility has been rescheduled will get a new loan facility subject to the fulfillment of the following conditions: The defaulting borrower who has an interest waiver must settle at least 15 percent of the compromise amount (excluding the down payment on rescheduling per the present guidelines) to avail of any further credit facility from any bank. In case of borrowing from other banks, the same rule will be applicable (that is, the borrower will have to submit a no objection certifi- cate [NOC] from the rescheduled bank). Export borrowers may be granted further credit facility (after being identi- fied as not a willful defaulter), if required, subject to at least 7.5 percent of the compromise amount (excluding the down payment on rescheduling as per present guidelines) being paid. Prior approval of BB shall have to be obtained if the loan is related to the di- rector or ex-directors of a Bank Company. Information on the loan accounts rescheduled shall be reported to the CIB of Bangladesh Bank. If any such issue is already there (such fresh facility has already been allowed after allowing for a waiver), the same will not fall under purview of this circular. · June: To strengthen credit discipline and bring classification policy in line with international standards, BB has revised its prudential norms for loan classifica- tion and provisioning. As part of the process, a Master Circular was issued on June 5, 2006, to enable the banks to have all existing instructions on the subject at one place. This circular also includes a few new instructions as well as new formats for loan classification and provisioning. More concentration has been given on Short-term Micro-Credit by enhancing its limit from Tk 10,000to Tk 25,000. Banks with Offshore Banking Units (OBUs) have been brought under the purview of loan classification and provisioning to aid transparency of OBU transactions of EPZ (Export Processing Zone) enterprises and report to the Banking Regulation and Policy Department (BRPD) and the CIB for cross- information purposes. Other Policy Developments As part of the restructuring of the nationalized commercial banks (NCBs), the Rupali Bank is under the process of being sold to a foreign buyer. In March 2007, BB made it mandatory for all banks to get credit rated by a credit rating agency. Banks are advised to have credit ratings in all relevant areas as well as the bank management. 88 Getting Finance in South Asia 2009 India Implementation of the New Capital Adequacy Framework (Basel II) in India The Reserve Bank of India (RBI) released draft guidelines on February 14, 2005, for implementation of Basel II in India. According to the draft guidelines, banks are required to adopt a standardized approach for credit risk and a basic indicator approach for operational risk. Banks would need the approval of RBI for migration to advanced approaches of risk measurement. The RBI is committed to the adop- tion of Basel II by the banks and had earlier indicated March 31, 2007, as the in- tended date for adoption by all commercial banks. Taking into account the state of preparedness of the banking system, however, banks were given more time to es- tablish appropriate systems to ensure full compliance with Basel II. Foreign banks operating in India and Indian banks having presence outside India were to migrate to the standardized approach for credit risk and the basic indicator approach for operational risk under Basel II with effect from March 31, 2008. All other sched- uled commercial banks are encouraged to migrate to these approaches under Basel II, however, not later than March 31, 2009. The Steering Committee of the banks would continue to interact with banks and the RBI, and guide the smooth imple- mentation of Basel II. The banks are required to follow the Standardized Approach for credit risk and the Basic Indicator approach for operational risk. Under Basel II, the capital requirements are more sensitive to the level of credit risk; they are also applicable to operational risks. Thus, banks would need to raise additional capital for Basel II requirements, as well as to support the expansion of their balance sheets. To enable smooth transition to Basel II and to provide banks in India additional options for raising capital funds, banks were advised in Janu- ary 2006 that they could augment their capital funds by issue of the following in- struments: (1) innovative perpetual debt instruments (IPDI) eligible for inclusion as Tier I capital; (2) debt capital instruments eligible for inclusion as upper Tier II capital; (3) perpetual noncumulative preference shares eligible for inclusion as Tier I capital; and (4) redeemable cumulative preference shares eligible for inclu- sion as Tier II capital. To move the banks to conform to Basel norms for explicit charge for market risk, banks were advised, in January 2002, to build up Investment Fluctuation Re- serve (IFR) to a minimum of 5 percent of investment in Held for Trading (HFT) and Available for Sale (AFS) categories in the investment portfolio. Later, in 2004, banks were advised to maintain capital charge for market risk in a phased manner over a two-year period ended March 31, 2006. Banks were allowed to treat the en- tire balance held in IFR as Tier I capital, provided they maintained a capital of at least 9 percent of the risk-weighted assets for both credit and capital charge for market risk. Prudential Regulations The following are among the prudential guidelines issued by the Reserve Bank of India in 2005­06: 2005 · February: Detailed prudential guidelines were issued by the RBI to banks on capital adequacy for implementation of the new capital adequacy framework Major Policy Developments in the Prudential Regulations of South Asia, 2005­06 89 under Basel II. To maintain consistency and harmony with international stan- dards, banks were advised to adopt the Standardized Approach for credit risk and the Basic Indicator Approach effective from April 2006. Under the new ap- proach for operational risk framework, banks adopting the Standardized Ap- proach would use the ratings assigned only by those credit rating agencies that are identified by the RBI. Banks were also required to focus on formalizing and operationalizing their internal Capital Adequacy Assessment Process (CAAP), which would serve as a useful benchmark while undertaking a parallel run be- ginning April 2006. · March: Draft guidelines on the implementation of the new capital adequacy framework were issued by the RBI for comments on management of opera- tional risk. · April: Banks were advised by the RBI to implement a Business Continuity Plan, including a robust information risk management system within a fixed timeframe. · April: Banks with capital adequacy of 9 percent for both credit risk and market risk for both AFS and HFT may treat the balance in the IFR in excess of 5 per- cent as part of Tier I capital. · April: A minimum framework was outlined, in respect of disclosures by FIs on their risk exposures in derivatives, to provide a clear picture of their exposure to risks in derivatives, risk management systems, objectives, and policies. · May: Detailed guidelines were issued for merger and amalgamation of private sector banks, laying down the process of merger proposal, determination of swap ratios, disclosures, the stages at which the board will get involved in the merger process, and norms for buying and selling shares by the promoters be- fore and during the process of merger. · June: Banks were advised to have a board-mandated policy in respect of their real estate exposure covering exposure limits, collaterals to be considered, mar- gins to be kept, sanctioning authority and level, and sector to be financed. Banks were directed to report their real estate exposure under certain heads and disclose their gross exposure to the real estate sector and provide details of the breakup in their annual report. · July: The risk weight for credit risk on capital market and commercial real es- tate exposure increased from 100 percent to 125 percent. · July: Banks were permitted to offer Internet-banking services without the prior approval of the RBI but subject to fulfillment of certain conditions. · October: Banks that have maintained capital of at least 9 percent of the risk- weighted assets for both credit risks and market risks for both AFS and HFT categories as on March 31, 2006, were permitted to treat the entire balance in the IFR as Tier I capital. For this purpose, banks may transfer the entire balance in the IFR below the line in the Profit and Loss Appropriation Account to Statutory Reserve, General Reserve, or balance of the Profit and Loss Account. · October: Revised guidance note on management of operational risk issued by the RBI to banks. The design of a risk management framework should be ori- ented toward a bank's own requirements, and dictated by the size and complex- ity of business, risk philosophy, market perception, and the expected level of capital. The risk management systems in the bank should be adaptable to change in business, size, market dynamics, and introduction of innovative products. 90 Getting Finance in South Asia 2009 · November: The general provisioning requirement for standard advances, with the exception of direct advances to agricultural and the small and medium en- terprise (SME) sectors, is increased to 0.40 percent from 0.25 percent. · November: With a view toward achieving the objective of greater financial in- clusion, all banks were advised to initiate steps within one month, to make available a basic banking no-frills account either with nil or low minimum bal- ances and to report to the RBI on a quarterly basis. Banks were advised to give wide publicity, including on their Web sites, to the facility of such no-frills ac- count, indicating the charges in a transparent manner. · November: Banks were advised to have a well-documented policy and a Fair Practices Code for credit card operations. Guidelines include norms relating to issue of cards; interest rate and other charges; wrongful billing; use of direct selling agents (DSAs), direct marketing agents (DMAs), and other agents; pro- tection of customer rights; right to privacy; customer confidentiality; fair prac- tices in debt collection; redress of grievances; internal control and monitoring system; and right to impose penalty. 2006 · January: Banks were advised to augment their capital funds by issue of the fol- lowing additional instruments: IPDI eligible for inclusion as Tier I capital Debt capital instruments eligible for inclusion as upper Tier II capital Perpetual noncumulative preference shares eligible for inclusion as Tier I capital Redeemable cumulative preference shares eligible for inclusion as Tier II capital · February: The Union Budget, 2006­07, proposed the following measures: Increase in foreign institutional investor (FII) investment limit in the gov- ernment securities to US$2 billion from US$1.75 billion Increase in FII investment limit in corporate debt to US$1.5 billion from US$0.5 billion Increase in ceiling on aggregate investment by mutual funds in overseas in- struments to US$2 billion from US$1 billion and removal of requirement of 10 percent reciprocal share holding Limited number of qualified Indian Mutual Funds (MFs) allowed to invest, cumulatively, up to US$1 billion in overseas exchange traded funds Steps to create a single, unified exchange-traded market for corporate bonds An investor protection fund under the aegis of the Securities and Exchange Board of India (SEBI) · March: SEBI amended the SEBI Disclosure and Investment Protection Guide- lines, 2000, with respect to rationalization of disclosure requirements, abridged letter of offer, disclosure of issue price, further issue of shares, and lock-in pro- visions for listed companies making rights or public issue. · April: SEBI amended the SEBI Discloser and Investment Protection Guide- lines, 2000, to permit unlisted companies to opt for grading of initial public of- ferings (IPOs) from credit rating agencies and to ensure disclosure of all grades, including unaccepted grades. Major Policy Developments in the Prudential Regulations of South Asia, 2005­06 91 · May: The risk weight on exposure of banks to commercial real estate increased to 150 percent from 125 percent. Furthermore, total exposure of banks to ven- ture capital funds will form a part of its capital market exposure and, hence- forth, a higher risk weight of 150 percent will be assigned to these exposures. · May: The general provisioning requirement for banks on standard advances in specific sectors (that is, personal loans, loans and advances qualifying as capital market exposures, residential housing loans beyond Rs 20 lakh, and commercial real estate loans) increased to 1 percent from the present level of 0.40 percent. · May: Banks (excluding Regional Rural Banks [RRBs]) were advised to disclose in the Notes on Account the information providing details of the breakup of provisions and contingencies shown under the head Expenditure in Profit and Loss Account as follows: (1) provisions for depreciation on investment; (2) provision toward nonperforming assets (NPAs); (3) provision toward standard asset; (4) provision made toward income tax; and (5) other provision and con- tingencies (with details). Other Policy Developments In February 2005, the RBI laid down a comprehensive policy framework for own- ership and governance in private sector banks. The broad principles underlying the framework were to ensure that ultimate ownership and control of commercial banks is well-diversified, key shareholders and directors and CEO pass the"fit-and- proper"test (FPT), and the board observes sound corporate governance principles. In March 2005, the RBI set up the Board for Regulation and Supervision of Payment and Settlement Systems (BPSS), as a committee of the Central Board of the Reserve Bank. BPSS is the apex body for giving policy direction in the area of payment and settlement systems. At present, foreign banks operate in India through only one of the three chan- nels: branches, wholly owned subsidiaries (WOS), or a subsidiary with an aggre- gate foreign investment up to 74 percent. With a view of delineating the direction and pace of the reform process in the area of foreign ownership in domestic banks, in February 2005, the RBI laid down a road map for the presence of foreign banks in India in two phases. During the first phase, covering the period from 2005 to 2009, foreign banks, existing and new, may be permitted to open branches in excess of the World Trade Organization (WTO) commitment of 12 branches in a year. The existing and new foreign banks may choose either the branch or WOS route. The RBI may prescribe market access and national treatment limitation consistent with WTO and international practices. During this phase, permission for acquisition of shareholdings in Indian private sector banks by eligible foreign banks will be limited to banks identified by the RBI for restructuring. In the second phase, commencing April 2009, RBI will address the issues of re- moving limitations on the operations of the WOS and according them treatment on par with domestic banks. This phase will begin after reviewing the experience in Phase I and after due consultations with all stakeholders in the banking sector. The RBI has been issuing instructions and guidance notes on various risks for the benefit of the banks and to sensitize the banks in regard to the growing need for establishing proper risk management systems. RBI issued a set of instructions to banks on June 29, 2005, for risk management of exposures arising from ad- vance against real estate. In terms of these guidelines, banks must have a board- mandated policy in respect of their real estate exposure and the policy must set 92 Getting Finance in South Asia 2009 limits, establish a risk management system, monitor the exposure to this sensitive sector, and disclose the exposure in their annual report. In November 2005, as a major step toward setting up and operating a national- level payment system, the National Electronic Fund Transfer (NEFT) was operationalized. The Banking Companies (Acquisition and Transfer of Undertakings) and Fi- nancial Institutions Laws (Amendment) Act, 2005, mainly seeks to amend the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, and the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980. The implementation of a Cheque Truncation System (CTS) basis in the national capital region of Delhi was introduced as a pilot project at the end of December 2006. The CTS would be implemented in the rest of the country phase by phase. The Reserve Bank of India Act, 1934, was amended by the Parliament in 2006. This amendment, among other things, has empowered the RBI to determine the Cash Reserve Requirement (CRR) without any ceiling or floor rate. The RBI had issued draft guidelines on securitizations of standard assets in April 2005. Based on the feedback received from all stakeholders, the final guide- lines on securitizations of standard assets were issued on February 1, 2006. The Government Securities Act, 2006, proposes to consolidate and amend the law relating to issuance and management of government securities by the RBI. The Payments and Settlements Bill, 2006, was introduced in the Lok Sabha on July 25, 2006. The bill seeks to designate the RBI as the authority to regulate pay- ment and settlement systems. Nepal Implementation of the New Capital Adequacy Framework (Basel II) in Nepal To fall in line with the international best practices and to promote a healthy and sound financial market, Nepal Rastra Bank (NRB) is moving toward the adoption of Basel II. The complexity and sophistication of the Nepalese financial market does not warrant advanced approaches like the IRB Approach or the Standardized Approach. Therefore, NRB intends to start with the Simplified Standardized Ap- proach for credit risk, Basic Indicator Approach for operational risk, and Net Open Exchange Model for market risk. To facilitate progressing toward implementation of the accord, NRB has set up a "New Capital Accord Implementation Preparatory Committee" and a working- level committee called the Accord Implementation Group (AIG). The AIG con- sists of officers from the NRB as well as the banking sector. AIG has examined the provisions under Basel II and has conducted a Quantitative Impact Study (QIS) of eight banks based on the assumptions and approach finalized. The impact study indicated a reduction in the risk-weighted exposures in the credit risk of the banks. AIG plans to carry out a second QIS to rationalize the findings. The AIG also prepared a draft capital adequacy framework with detailed guidelines on each of the three pillars, based on the proposed approach, which has been circulated among the stakeholders for review. It is expected that this capital framework will come into effect in 2008. Major Policy Developments in the Prudential Regulations of South Asia, 2005­06 93 Prudential Regulations Prudential guidelines issued by NRB in 2004­05 include the following (2006 guidelines are not available): 2004 · July: The rates for refinancing facilities provided by NRB to banks and FIs have been fixed as follows: all previous procedural arrangements relating to refi- nancing facilities remain unchanged. Rate of Refinance provided under Sick Industries Rehabilitation Program: 1.5 percent Rate of Refinance to Rural Development Banks and Export Credit and Agri- culture Credit in local currency: 3 percent All other arrangements except those mentioned in above remain unchanged Furthermore, the commercial banks, at the time of making a request for refi- nance under the Sick Industries Rehabilitation Program, shall provide certifi- cation as to the fulfillment of criteria set by the Sick Industries Rehabilitation Main Committee and the rate of interest charged to the borrower be fixed at 4.5 percent. · July: With reference to loan-loss provision to be created for rescheduled and restructured accounts for 2003­04, banks and financial institutions will have to create a loan-loss provision of 1 percent as applicable to the Pass Loans cate- gory on the accounts that are restructured or rescheduled with the recovery of all due interests. But the banks and financial institutions taking advantage of this facility shall not be allowed to distribute dividends to the shareholders from the profits arising out of this waiver. · July: In accordance with the provisions of the Monetary Policy, the rate of cash reserve ratio to be maintained by the banks has been revised to 5 percent for 2004­05. All the procedural aspects per the earlier directive of NRB shall re- main in place. · July: The interest rate for the refinance loan to be provided to banks and finan- cial institutions has been revised. The new interest rate for the Sick Industries Rehabilitation Program will be 1.50 percent, while the rate for the refinance loan to be provided to rural development banks and to refinance export and agricultural loans to be provided in local currency shall be 3 percent. · July: The CAR to be maintained by the banks and financial institutions for 2004­05 was 12 percent. Because of the prevailing difficult circumstances, the CAR for 2004­05 has been reduced to 11 percent. · July: Banks and FIs were required to divest their investment in shares of other banks and financial institutions by mid-July 2004. In this regard, the invest- ment in shares that were not divested by mid-July 2004 and whose divestment is not restricted by statute shall require a provision of 100 percent in 2004­05. · August: The earlier provision requiring preapproval from NRB to conduct banking transaction in the public holidays and beyond the normal banking hours has been repealed. The banks can now conduct such kind of banking transactions under pre-intimation to NRB. 94 Getting Finance in South Asia 2009 2005 · March: Banks and FIs have been given the minimum guidelines to be incorpo- rated in the formulation of the loan write-off bylaw of the respective banks. Some of the major guidelines are as follows: Banks should develop criteria to identify the loans that are unrecoverable and should formulate the bylaw for the write-off of these accounts with the approval of the board. Banks may write off loans that fall under the loan-loss category per NRB di- rectives with 100 percent loan-loss provision. However, all loans with past dues of more than five years and with 100 percent provision should be com- pulsorily written off. The borrower and other related parties to the loan must be included on the blacklist of the Credit Information Center. Banks should maintain separate and updated information in relation to the loans written off. Banks should establish a separate unit for the recovery of written-off loans and should continue their efforts for the recovery of such written-off loans. Banks should disclose the details of the loans written off during the year in its annual accounts. They should also submit the details of such loans to the Bank Supervision Department and Credit Information Center within 15 days from the date of fiscal year-end. · April: The procedure for calculation of the cash reserve ratio as defined by the circular of July 28, 2003, has been amended. The new methodology will be based on seven days a week and the basis will be the average weekly deposit of four weeks before that date. The average weekly deposit and the cash reserve will be calculated as the sum of the deposits of the bank and their balance with NRB for the week (Sunday to Saturday) and divided by the number of days, in- dependently. Banks are now required to submit the required information within a fortnight from the end of the week. All other procedural aspects in re- lation to CRR calculation and penalties remain the same. · May: In case of restructure and reschedule of loans of industries, recom- mended by the Sick Industries Interim Investigation and Recommendation Committee of the Ministry of Industry, Commerce, and Supply, with the re- covery of minimum 12 percent of interest and completion of other formalities, banks will have to create a provision of only 25 percent. But, where the interest recovery has been less than 12 percent, banks will have to create provisions per the existing regulation. · May: Banks should arrange to disclose the permanent account number (PAN) of individuals/firms/companies with registration in the value added tax (VAT), in the credit application. · May: The rate of the refinance for export loans funded in foreign currency was revised to 3.25 percent with effect from May 30, 2005, with all the procedural aspects and the conditions remaining the same. · May: The previous directive on blacklisting issued on June 4, 2004, was re- tracted and a new one was issued. The directive has made the credit informa- tion, in respect of loans and advances above a sum of NRs 2.5 million, manda- tory. The new directive is more stringent and makes a distinction between Major Policy Developments in the Prudential Regulations of South Asia, 2005­06 95 willful and nonwillful defaulters. This directive includes provisions to blacklist the valuator and to recommend for the action against the Chartered Accoun- tants who certify the false documents of the borrowers. The directive includes provisions to recommend for the seizure of passports of blacklisted borrowers. The new directive covers various areas, including procedures to be followed for inclusion in the blacklist; restrictions on the sanction of loans and facilities; conditions for inclusion in the blacklist; identification of individuals, firms, companies, and other organized institutions qualifying for the blacklist; and conditions in which names can be taken off the blacklist. · July: In the beginning of 2005­06 (Nepali FY 2062­63), all circulars separately issued by NRB for commercial banks, development banks, finance companies and microcredit banks were replaced by a unified directive and were issued by the NRB's Banks and Financial Regulations Department via Bai. Bi. Ni. Bi. 148/1/2062/63/Dated: 2062.4.3/July 18, 2005. These directives came into effect on July 16, 2005. · August: All finance companies licensed by NRB (C category licensed FIs) may, by obtaining a license from the Public Debt Department of NRB, carry out the function of "buying and selling or accepting the bonds issued by His Majesty's Government (HMG) or Nepal Rastra Bank." · August: The bank rate and refinance rate have been fixed as follows: other con- ditions and procedural arrangements with respect to bank rate and refinance rate facilities to be provided to the bank and FIs by this bank remain un- changed. The existing bank rate of 5.5 percent has been increased to 6 percent The existing refinance rate of 3 percent for export credit and agriculture credit to be availed in local currency has been increased to 3.5 percent Other than the above, all other arrangements remain unchanged · August: The loans provided by any commercial banks, currently under the co- ordination of the Bank of Kathmandu to the workers going for foreign em- ployment under the HMG Youth Self-Employment and Employment Training Program, as well as the loans extended by any licensed FIs by obtaining loans from the commercial banks for the purpose of providing foreign employment loans, will be considered for inclusion under the Deprived Sector Loans of the respective commercial banks. · September: Additional actions against willful defaulters should be imple- mented per the provisions of the decision of HMG (Council of Ministers) re- garding actions to be initiated against the willful defaulters of banks and FIs. · October: Existing clause 2 of the Consolidated Directives issued by NRB to the banks and FIs concerning the branches and offices is replaced by the following: "The A, B, and C class licensed institutions, fulfilling the minimum paid-up capital as prescribed by Nepal Rastra Bank, shall apply for opening of a branch office within the approved working area with a business plan to Bank and Fi- nancial Institutions Regulations Department of NRB." Other Policy Developments NRB has continued to review the relevant legislations and regulations in 2005­06 to develop the regulatory framework that meets international standards and 96 Getting Finance in South Asia 2009 resolves the issues of the banking industry. To improve the financial sector legisla- tive framework, some new acts, namely the Bank and Financial Institution Act, 2006; Insolvency Act, 2006; Secured Transaction Act, 2006; and Company Act, 2006, were enacted. Money Laundering Control and Deposit and Credit Guaran- tee Acts are to follow. Pakistan Implementation of the New Capital Adequacy Framework (Basel II) in Pakistan After conducting several Quantity Impact Studies and theoretical as well as empir- ical studies in consultation with the industry, the State Bank of Pakistan (SBP) is- sued a road map in March 2005 outlining the implementation process of Basel II. In terms of these guidelines, banks would initially adopt the simplified Standard- ized Approach and go on a parallel run for one and half years starting from July 2006. In pursuance of the road map, banks submitted their individual plans men- tioning the specific approach (Standardized or IRB) they intend to adopt and their internal arrangements for its implementation. The majority of the banks expressed their intention to first adopt a comparatively simple Standardized Approach, keep- ing in view the requirement of more sophisticated systems for the advanced ap- proaches. Banks that decide to go for the IRB Approach will first have to seek the approval of SBP.A comprehensive review exercise on the part of SBP culminated in a more specific bank-wise internal plan. To streamline the implementation process and to ensure better coordination, each bank nominated its respective coordina- tors as the head of the group level along with formulation of Basel II units. Under the Standardized Approach, the capital requirement against credit risk would be determined based on a risk profile assessment by rating agencies recog- nized by regulators as External Credit Assessment Institutions (ECAIs). To ensure transparency in the recognition process, the eligibility criteria for recognition of ECAIs was devised in consultation with all stakeholders based on broad guidelines described in Basel II. Scrutiny resulted in granting ECAIs status to two rating agen- cies (The Pakistan Credit Rating Agency [PACRA] and JCR-VIS Credit Rating Co. Ltd.) as both were meeting the minimum requirements laid out in the criteria. The recognition implies that the banks would use ECAI's risk assessment rating of its portfolio to calculate the capital requirement under Basel II. In this regard, SBP is- sued detailed Eligibility Criteria for Recognition of ECAIs in July 2005. Banks are required to consider the credit ratings assigned by the SBP-recognized ECAIs only. Mapping of ratings with the appropriate risk weights was finalized in consultation with recognized ECAIs. Detailed instructions for adoption of various approaches to calculate the capital adequacy requirements for credit, market, and operational risk were issued on June 27, 2006. Capital reporting formats under Basel II instruc- tions were prescribed in March 2007. These formats primarily cover capital calcu- lation under Standardized Approaches for credit and market risk and Basic Indica- tor and Standardized Approaches for operational risk. The gap between previously adopted disclosure practices and new require- ments under the market discipline (Pillar III) of Basel II were identified and de- tailed requirements for public disclosure were issued in February 2006. These in- Major Policy Developments in the Prudential Regulations of South Asia, 2005­06 97 structions provide for the disclosures to be made by the banks under the different approaches of the Basel II that each adopts. A detailed survey to assess the level of preparedness of the banks regarding Basel II implementation was conducted in February 2007. This survey was in identifying and assessing the issues prevalent in the banking industry at large. Implementation of Basel II poses considerable chal- lenges for the banking system in Pakistan. To meet the gigantic task, the banks and SBP are engaged in capacity building in terms of upgrading their IT systems and enhancing expertise of the human resource base. SBP conducted a number of seminars and workshops on new capital accord and risk management techniques for internal and external stakeholders and remained engaged in improving its IT systems to get extensive regulatory reporting in line with the maximum disclosure requirements under Basel II. SBP envisaged adopting different approaches under Basel II in the following manner: · Standardized Approach for credit risk and Basic Indicator and Standardized Approach for operational risk from January 1, 2008 · IRB Approach from January 1, 2010, with banks and development finance in- stitutions (DFIs) permitted to implement it sooner if the State Bank approves their internal risk management systems Banks and DFIs were required to adopt a parallel run of one and a half years for the Standardized Approach starting July 1, 2006, and two years for IRB Ap- proach starting January 1, 2008. Prudential Regulations Among the prudential guidelines issued by the SBP in 2005­06 are the following. 2005 · January: Establishment of subsidiaries or brokerage companies by banks and DFIs (BPD Circular 1). · March: Prudential regulations for corporate and commercial banking (BPD Circular 8). · March: Relaxation of the regulatory framework for housing finance (BPD Cir- cular 10). · March: Placement of funds under Fe-25 deposits (BPD Circular 9). · April: Establishment of subsidiaries or brokerage companies by banks and DFIs (BPD Circular 13). · April: Prudential regulations for corporate and commercial banking (BPD Circular 14). · April: Rates of return on deposits (BPD Circular 16). · May: Prudential regulations (BPD Circular 19). · July: Guidelines for infrastructure project financing (BPD Circular 23). · September: Prudential regulations (BPD Circular 25). · October: Classification of dormant or inoperative accounts (BPD Circular 26). · October: Amendment of Regulation M-1 on prudential regulations for corpo- rate and commercial banking (BPD Circular 29). 98 Getting Finance in South Asia 2009 · October: Withdrawal of redundant or old instructions (BPD Circular 28). · October: Prudential regulations for agricultural financing (BPD Circular 27). · November: Guidelines for Higher Education Financing Scheme (BPD Circu- lar 31). · November: Introduction of basic banking account (BPD Circular 30). 2006 · January: To encourage transparency and promote consistency in the market- based pricing of loans, Banks and DFIs were directed to use Karachi Inter-bank Offered Rate (KIBOR) as a benchmark for determining the pricing of all rupee corporate and commercial bank lending. It has been observed that some banks are using longer-tenor benchmark rates for shorter-tenor loans. This practice is not correct. It is, therefore, clarified that (1) for fixed-rate time loans, the tenor of the benchmark rate should be the same as the tenor of the fixed loan; (2) for tenors exceeding three years and not covered by KIBOR, banks are advised to use appropriate benchmarks such as secondary market yields on the relevant tenor of Pakistan Investment Bonds; and (3) for floating-rate time loans, the tenor of the benchmark rate should be the same as of repricing tenor set for the floating-rate loan. · May: Banks and DFIs, among other things, were required to classify their exist- ing investment portfolio into HFT, AFS, and Held-to-Maturity categories by September 30, 2004. It has been observed that some of the banks and DFIs have moved their risky portfolio to the Held-to-Maturity category to avoid booking a revaluation deficit and have categorized their good portfolio in the HFT and AFS categories. At the same time, they are using Held-to-Maturity securities to manage liquidity by entering into repossession transactions in the interbank market. To discourage such practices, SBP has decided that the securities classi- fied as Held-to-Maturity by the banks and DFIs should neither be sold nor used for entering into repossession transactions in the interbank market or borrowing under the SBP repossession facility or discount window with effect from July 1, 2006. However, the banks and DFIs are allowed a one-time reclas- sification of their securities. This process of reclassification should be com- pleted by June 15, 2006. The banks and DFIs shall also ensure that the securities acquired or purchased after June 15, 2006, shall, at the time of their acquisition or purchase, be categorized into any of the three categories and the decision taken to that effect shall be recorded in writing on the investment proposal or deal ticket. · June: SBP has reviewed the Prudential Regulation R-4 for Corporate and Com- mercial Banking on Clean Exposure that requires the banks and DFIs to ensure that aggregate exposure against all their clean facilities shall not, at any point in time, exceed the amount of their equity. It has been decided to set higher limits for assuming unsecured exposure on a case-by-case basis, taking into account the following factors: Capital adequacy, Asset quality, Management quality, Earnings, and Liquid- ity (CAMEL) rating of the bank or DFI Quality of unsecured portfolio in terms of percentage of classified advances and write-offs and charge-offs Major Policy Developments in the Prudential Regulations of South Asia, 2005­06 99 Past track record of dealing in the relevant clean products The banks/DFIs that wish to take clean exposure in excess of their equity level will be required to obtain prior approval from SBP, and their requests will be processed in light of the above criteria. All other instructions on the subject will, however, remain unchanged. · June: To facilitate the downscaling financial services of the commercial banks, SBP has prepared guidelines for them to provide microfinance services under four different modes, which include the following: Establishment of microfinance counters in the existing branches Designating stand alone microfinance branches Establishing independent microfinance subsidiary Developing linkages with microfinance banks and nongovernmental organi- zations and microfinance institutions (NGO/MFIs). The microfinance operations of commercial banks under Modes I, II, and IV will be subject to Prudential Regulations issued separately under the Banking Companies Ordinance of 1962 (BCO) for commercial banks undertaking mi- crofinance. Microfinance operations under Mode III will be governed under MFIs Ordinance 2001 and Prudential Regulations applicable on microfinance banks. · July: SBP has made the following amendments and additions, in public interest, in the Prudential Regulations for Corporate and Commercial Banking with im- mediate effect to ensure compliance with Financial Action Task Force recom- mendations on anti­money laundering, safeguard the interest of depositors from risks arising out of money laundering, and to reinforce the measures being taken by the banks and DFIs for proper management of their institutions: KYC Anti­money laundering measures Suspicious transactions · July: To create awareness and to facilitate the public in making informed deci- sions, the SBP has decided that, henceforth, banks and DFIs shall make com- plete disclosure of the lending and deposit rates of all consumer products of- fered by them by posting this information on their Web site as well as prominently displaying on entrances or window of their branches. Banks and DFIs would also disclose annualized percentage rates on all consumer products. In case of deposits, the expected rate of return under the profit and loss sharing (PLS) system will be clearly indicated for each tenure. For lending products, banks and DFIs shall clearly indicate whether the rate is fixed or floating. In case of floating rate, in addition to mentioning the existing rate, the informa- tion regarding the tenure of the benchmark (KIBOR or any other rate plus a predefined spread) used and periodicity of repricing should be disclosed. The banks and DFIs, in addition to the above, will take adequate measures to inform their customers about the intricacies of automated teller machines (ATMs), credit cards, and their charges as well as cardholder obligations. · July: In terms of Section 31 of the BCO all banks and DFIs in Pakistan are required to surrender to SBP all those deposits that have not been operated during the last 10 years, except deposits in the name of a minor or a goverment 100 Getting Finance in South Asia 2009 or a court of law. To facilitate banks and DFIs, instructions on the following subjects issued since 1968 to date have been reviewed and consolidated: Definition of unclaimed deposits and instruments Reporting of unclaimed deposits and instruments Surrender of unclaimed deposits Notice to the holder of unclaimed deposits and instruments Preservation of documents Information in account opening form (AOF) Procedure for refund of unclaimed deposit surrendered to SBP · August: Banks are required to cap their investment in shares at 20 percent of their equity except strategic investment. Strategic investment was defined as "an investment which a bank/DFI makes with the intention to hold it for a longer term of duration and should be marked as such at the time of invest- ment and can only be disposed of with the prior approval of State Bank of Pak- istan" (as per BPD circular dated August 1, 2006, State Bank of Pakistan). Other Policy Developments In April 2005, the Shariah Board of the SBP approved and incorporated some of the suggestions given by different stakeholders in the Essentials of Islamic Modes of Financing to ensure compliance with minimum Shariah standards by banks conducting Islamic banking in Pakistan. These essentials are issued as General Guidelines to be followed by banking institutions conducting Islamic banking in the country (see the SBP Web site at www.sbp.org.pk/). To provide regulatory framework for payment systems and electronic fund transfers, the Payment Systems and Electronic Fund Transfers Act was enacted in 2007. Sri Lanka Implementation of the New Capital Adequacy Framework (Basel II) in Sri Lanka In January 2008, the Central Bank of Sri Lanka (CBSL) joined the global trend by implementing the Basel II framework in Sri Lanka. A consultative paper was re- leased to banks providing guidelines on the major areas of the framework in June 2007. These new guidelines replaced the guidelines issued in 2006 on the parallel computation of capital adequacy. The impact of Basel II on the banks' capital was monitored based on the results from the parallel computation of capital adequacy under the new guidelines since June 2007. The Capital Adequacy Computation under Basel I was the effective statutory capital ratio during this period of parallel runs. CBSL has directed that initially, during this period, the CAR under Basel II should be computed on a bank-only (solo) basis. Incorporating the feedback re- ceived from the stakeholders on the consultative paper, the Directions on Basel II were issued in December 2007 to banks for implementation of Basel II from Jan- uary 2008. Accordingly, banks are required to apply the Standardized Approach for credit risk, the Standardized Measurement Method for market risk, and the Basic Indicator Approach for operational risk in computing the capital require- ment. The Directions issued contains four parts--that is, the direction, the guide- Major Policy Developments in the Prudential Regulations of South Asia, 2005­06 101 lines, the format for computation of the CAR, and the guidelines on the imple- mentation of IT infrastructure for Basel II. Prudential Regulations Among the prudential guidelines issued by the SBCL in 2005­06 are the following. 2005 · January: Licensed specialized banks: deposit direction (amendment). · February: Direction under section 46 (1) of the Banking (Amendment) Act. · February: Order published under section 47 (4) of the Banking Act. · February: Security to be obtained for an accommodation granted to a director. · February: Banking (Amendment) Act: Issue of directions, and so on. · February: Public disclosure by publication of bank accounts in the press. · February: Submission of the monthly and quarterly compliance reports. · March: Banking Act (Single-Borrower Limit) Direction No. 2 of 2005. · March: Accommodation to directors and related companies. · March: Banking Act (Single-Borrower Limit [SBL]) Direction No. 3 of 2005. · March: Affidavit to be submitted under section 42 (2) of the Banking Act. · March: Appointment of directors of banks (amendment). · March: Declaration to be submitted by person proposed as a director. · April: Enhancement of minimum capital requirement for banks (licensed commercial banks). · April: Enhancement of minimum capital requirement for banks (licensed spe- cialized banks). · May: Introduction of products based on Islamic principles. · July: Request to maintain capital in foreign currency. · August: Annual license fee for licensed specialized banks. · August: SBL Direction No. 4 of 2005. · August: Request to maintain capital of banks in foreign currency. · September: Publication of quarterly financial statements of banks in the press. · September: Imposing a Default Charge on Failure to Maintain Adequate Funds in RTGS (real-time gross settlement) Settlement Accounts for Settlement of Net Clearing Obligations of Licensed Commercial Bank. · October: Banking Act: SBL. 2006 · January: Publication of Quarterly Financial Statements of Banks in the Press. · February: Submission of Audited Financial Statements by Banks. · February: Publication of Audited Financial Statements of Banks in the Press. · March: Reporting of Post-Tsunami Remittances received through NGOs and non-NGOs to the Central Bank of Sri Lanka. · March: Inadequate and Incorrect Disclosures and Press Statements by banks. · March: Banking Act--Direction on the Prudential Norms for Classification, Valuation, and Operation of the Bank's Investment Portfolio. · March: Banking Act--Determination on the Computation of a Capital Charge for Market Risk. 102 Getting Finance in South Asia 2009 · March: Parallel Computation of Basel I and Basel II. · March: Reversal of unearned income and classification of advances as nonperforming. · March: Guidelines on Business Continuity Planning. · May: Implementation of the Provisions of Part IX (Sections 72 to 76) of the Banking Act on Abandoned Property. · May: Classification of Banking Outlets. · May: Conduct of NGO Accounts by Licensed Banks. · May: Amendment to LankaSettle System Rules: August 2003 (as amended) Daily Operating Schedule of the LankaSettle System. · May: General Direction--Payment and Settlement Systems Act No. 28 of 2005. · June: Draft Guidelines on the Computation of the Capital Ratio under Basel II. · June: Prevention of Frauds using Electronic Cards. · June: Conduct of NGO Accounts by Licensed Banks (second Direction is issued). · June: Payment of Taxes by the Banking and Financial Sector. · June: SBL--Compliance with the Aggregate Exposure Limit. · August: SBL Direction No. 2 of 2005 as amended by Direction No. 4 of 2005 (for Licensed Commercial Banks incorporated outside Sri Lanka). · November: Banking Act--Amendments to the Direction on Maintenance of the CAR. · November: Banking Act--Amendment to the Determination and Notice on Maintenance of the CAR. · December: Banking Act--Amendments to the Direction on Requirement to Maintain a General Provision for Advances. · December: Minimum Capital Requirement of Licensed Commercial Banks. · December: Standard Times for Settlement of Inter-participant Transactions in the LankaSettle System. Other Policy Developments In 2005, the Payment and Settlement Systems Act No. 28 of 2005 was enacted to provide for the regulation of payment, clearing, and settlement systems; for the disposition of securities in the books of the Central Bank; for the regulation of providers of money services; and for the electronic presentment of checks. In addition to the Convention on the Suppression of the Financing of Terror- ism Act, enacted in September 2005, two laws were passed in early 2006 to deal with prevention of money laundering. The Prevention of Money Laundering Act (PMLA) introduced the offense of money laundering to the laws of the country, but the Financial Transactions Re- porting Act (FTRA) provides for the mechanism to monitor and report financial transactions to ensure that the offenses of terrorist financing and money launder- ing are dealt with strongly. To give effect to the FTRA, a Financial Intelligence Unit was established in March 2006 in the CBSL and is now fully functional. Major Policy Developments in the Prudential Regulations of South Asia, 2005­06 103 In March 2006, CBSL formed the National Payments Council (NPC), the high- est decision-making body of the country with regard to the Payment Settlement Systems (PSS) in Sri Lanka (including representatives of all major stakeholders). The CBSL has prepared a PSS policy in consultation with the NPC. The proposed policy, which is planned for the next four-year period (2007­10), provides a framework to mitigate risks and increase efficiency, as well as a road map with measurable action points. During the first half of 2006, provisions of the Banking Act, No. 30 of 1988, were amended to address several deficiencies in the act. In March 2006, the Parliament passed the Monetary Law (Amendment) Act, No. 6 of 2006, thus strengthening the powers of the Monetary Board in relation to credit operations of the commercial banks and specialized banks. With a view to deterring illegal and hazardous practices relating to payment devices, the Payment Devices Frauds Act (No. 30 of 2006) was enacted by the Par- liament in September 2006. This act prohibits fraudulent and unauthorized pro- duction, trafficking, possession, and use of payment devices. In August 2007, the Central Bank released the exposure draft on corporate gov- ernance for banks soliciting the views, comments, and suggestions from the stake- holders of banks and the general public. Based on these suggestions, comprehen- sive corporate governance rules have been issued with effect from January 1, 2008. In December 2007, CBSL issued directions with regard to board committees, independent directors, roles and responsibilities of the board, and so on. A few of the major points relevant to comments made in the report are summarized below: · Board Committees: Each bank should have at least four board committees, that is, audit, human resources and remuneration, nomination, and integrated risk management committees. The board shall present a report of the performance on each committee, as well as on their duties and roles, at the annual general meeting. · Internal Audit Committee: Each bank should have an internal audit committee with broad responsibilities for (1) the appointment of the external auditor for audit services to be provided in compliance with the relevant statutes; (2) the implementation of the Central Bank guidelines issued to auditors from time to time; (3) the application of the relevant accounting standards; and (4) the ser- vice period, audit fee, and any resignation or dismissal of the auditor, provided that the engagement of the audit partner shall not exceed five years and that the particular audit partner is not reengaged for the audit before the expiry of three years from the date of the completion of the previous term. · Board Composition: The number of directors on the board shall not be fewer than 7 and not more than 13. The period of service of a director is 9 years and the maximum age is 70 years. The number of executive directors shall not ex- ceed one-third of the number of directors of the board. The board shall have at least three independent nonexecutive directors or one-third of the total num- ber of directors, whichever is higher. Detailed criteria have been set to deter- mine the independence of a director. Sources: Information available from the regulatory authorities of the five countries and their official Web sites; Indian Banks' Association 2006a, 2006b, and 2006c; and Reserve Bank of India 2006a, 2006b, 2006c, and 2007. 19 Regional OverviewPractices in International Best Corporate Governance Organisation for Economic Co-operation and Development Corporate governance refers to the structures and processes for the direction and control of companies. It is concerned with the relationships among the manage- ment, board of directors, controlling shareholders, minority shareholders, and other stakeholders. Good corporate governance contributes to sustainable eco- nomic development by enhancing the performance of companies and increasing their access to outside capital. The Organisation for Economic Co-operation and Development Principles of Corporate Governance (OECD 2004) provides the framework for the work of the World Bank Group in this area and identifies the key practical issues: the rights and equitable treatment of shareholders and other financial stakeholders, the role of nonfinancial stakeholders, disclosure and transparency, and the responsibilities of the board of directors (World Bank 2003). The good governance practices out- lined by the OECD also serve as the basis for the questionnaire developed to assess the corporate governance of South Asian countries in this report (see table 9.1). Basel Committee on Banking Supervision In February 2006, the Basel Committee on Banking Supervision issued eight prin- ciples-based corporate governance schemes to enhance corporate governance for banking organizations, indicating the need for the adoption of corporate gover- nance principles in banks. 105 106 Getting Finance in South Asia 2009 International Best Practices in Corporate Governance 106 Table 9.1 OECD Principles Applied in the Corporate Governance Questionnaire Principle Explanation 1. The rights of the shareholder A corporate governance framework should protect shareholders' rights. 2. The equitable treatment of All shareholders, including minority and foreign shareholders, should shareholders be treated equally. 3. The role of the stakeholders in Good corporate governance recognizes that it is in the long-term corporate governance interest of the corporation to respect the rights and interests of the stakeholders. 4. Disclosure and transparency There is a need to ensure timely and accurate disclosure of all material matters regarding the corporation, including financial aspects, performance, ownership, and governance. 5. The responsibilities of the board The board is key to the strategic guidance of the company and the effective monitoring of the management. It should be fully able to undertake its tasks and responsibilities and be fully accountable to shareholders. Source: Enterprise Development Impact Assessment Information Service 2003. Table 9.2 Sound Corporate Governance Principles Principle 1 Board members should be qualified for their positions, have a clear understanding of their role in corporate governance, and be able to exercise sound judgment about the affairs of the bank. Principle 2 The board of directors should approve and oversee the bank's strategic objectives and corporate values that are communicated throughout the banking organization. Principle 3 The board of directors should set and enforce clear lines of responsibility and accountability throughout the organization. Principle 4 The board should ensure that there is appropriate oversight by senior management consistent with board policy. Principle 5 The board and senior management should effectively utilize the work conducted by the internal audit function, external auditors, and internal control functions. Principle 6 The board should ensure that compensation policies and practices are consistent with the bank's corporate culture, long-term objectives and strategy, and control environment. Principle 7 The bank should be governed in a transparent manner. Principle 8 The board and senior management should understand the bank's operational structure, including where the bank operates in jurisdictions, or through structures, that impede transparency (i.e., "know-your-structure"). Source: Bank for International Settlements 2006. 107 Getting Finance in South Asia 2009 International Best Practices in Corporate Governance 107 Table 9.3 South Asia Corporate Governance Status, 2006 Bangladesh Bangladesh Bank has issued guidelines for banks. However, these guidelines are still at the development stage, with room for improvement. In particular, the guidelines need to be augmented by legal provisions governing beneficial ownership, minority shareholders' rights, remuneration of directors, and roles and responsibilities of external and internal auditors. Bangladesh also needs to work toward full conformity with international accounting and auditing standards. India Reserve Bank of India has issued guidelines that are both comprehensive and commendable. Yet several areas need further review, the main one being the harmonization needed on the governance rules applicable to government-controlled banks and those applicable to private banks. Minority shareholders' rights also should be revisited. Nepal Nepal Rastra Bank has issued detailed guidelines on corporate governance for banks. They need to broaden these guidelines, however, to include investor rights and disclosure rights, beneficial ownership, and the responsibilities of the auditors. A key improvement would be better adherence to international accounting and auditing standards. Pakistan The State Bank of Pakistan has issued a comprehensive handbook of corporate governance for banks. In addition, in late 2005 Pakistan established the Pakistan Institute of Corporate Governance to further strengthen the corporate governance culture by providing training and awareness. Still, some areas need review, including further disclosures on beneficial ownership, safeguards on stakeholders' rights, transfer of ownership and management, and competitive compensation packages. Sri Lanka The Central Bank of Sri Lanka has issued a code of corporate governance for banks and other financial institutions. Yet disclosure requirements and detailed guidelines are needed on many issues, such as stakeholder rights, beneficial ownership, special voting rights, rights of shareholders to vote on bank operations, regulatory and government control of share transactions, and minority shareholder rights. In August 2007, the Central Bank released the exposure draft on corporate governance for banks soliciting the views, comments, and suggestions from the stakeholders of banks and the public. The implementation of the code is scheduled for January 2008. Source: Corporate governance responses received from the supervisory authorities; Indian Banks' Association 2006a, 2006b, and 2006c; Reserve Bank of India 2006a, 2006b, 2006c, and 2007. Appendixes 110 Getting Finance Appendix 1. Getting Finance Indicators for South Asia, by Country and Year in Table A1.1 Getting Finance Indicators for South Asian Countries, 2001 South Indicator Bangladesh India Nepal Pakistan Sri Lanka Benchmark Access to finance Asia Demographic branch penetration (branches per 100,000 people) 4.83 6.42 2.09 4.88 6.03 12­29 2009 Demographic ATM penetration (ATMs per 100,000 people) 0.10 N/A 0.05 N/A 2.55 43­115 Deposit accounts per 1,000 people 231.97 416.77 111.59 195.84 939.32 976­2,418 Loan accounts per 1,000 people 56.56 50.99 19.07 16.04 256.88 248­776 Geographic branch penetration (branches per 1,000 km2) 42.5 22.18 3.29 8.77 11.68 1­61 Geographic ATM penetration (ATMs per 1,000 km2) 0.91 N/A 0.08 N/A 4.93 1­152 Performance and efficiency Return on equity (percent) 17.12 13.80 ­93.62 12.20 20.57 7.70­23.38 Return on assets (percent) 0.74 0.90 ­3.04 0.60 0.84 0.50­1.40 Staff cost ratio (percent) 44.75 68.10 194.25 52.58 46.21 35.51­44.55 Operating cost ratio (percent) 236.78 92.33 35.87 90.91 118.66 49.86­149.64 Net interest margin (percent) 1.66 2.98 1.76 3.24 3.30 1.81­3.55 Recurring earning power (percent) 1.70 1.60 0.86 1.17 1.64 1.21­2.22 Financial stability Capital adequacy ratio (percent) 7.02 11.40 4.00 11.30 8.59 [not lower than 8% of RWA-Based] 10.40­18.20 Leverage ratio (times) 4.17 4.96 3.27 4.58 3.90 6.58­15.01 Gross nonperforming loans ratio (percent) 31.49 11.40 29.31 19.60 19.57 0.60­8.00 Provisions to nonperforming loans ratio (percent) 25.36 49.70 30.59 53.20 44.43 25.40­128.80 Liquid assets ratio (percent) 30.03 48.20 22.10 39.90 22.80 7.42­40.44 Liquid assets to liabilities ratio (percent) 122.90 260.00 47.88 56.25 26.30 2.83­42.20 Capital market development Domestic bond market to equity market capitalization (percent) 663.50 117.85 129.55 537.75 659.05 8.90­108.70 Domestic public bonds outstanding to GDP (percent) 16.17 26.80 14.50 38.90 16.28 8.83­58.69 Ratio of trading value of top 10 stocks to total trading value (percent) 59.16 72.90 83.13 22.52 54.37 15.55­ 57.00 Stock market capitalization to GDP (percent) 2.57 29.40 11.76 8.06 8.81 35.58­350.02 Market liquidity: Ratio of stock trading value to GDP (percent) 1.28 112.00 0.59 0.02 0.99 16.21­290.00 Appendix Stock market turnover ratio (times) 0.50 2.13 0.05 0.12 0.13 0.34­1.99 Market concentration and competitiveness Herfindahl-Hirschman index (HHI) 944.90 784.67 1,563.48 1,091.80 1,650.62 [HHI < 1,000 unconcentrated; 1. 1,000 < HH I< 1,800 Getting moderately concentrated; HHI > 1,800 highly concentrated] Finance 498.54­1,658.53 K-bank concentration ratio (K=3) ­ assets (percent) 47.38 33.80 58.02 50.30 63.09 27.04­61.19 K-bank concentration ratios (K=3) ­ deposits (percent) 50.55 33.98 51.73 53.23 62.02 27.44­60.18 Indicators K-bank concentration ratios (K=3) ­ loans (percent) 45.76 33.04 52.06 50.86 65.16 27.02­66.30 Private credit extended by banks to GDP (percent) 24.33 21.50 26.95 16.29 28.19 42.00­157.85 Commercial Banking assets to GDP (percent) 50.35 61.90 63.83 43.61 56.80 44.90­174.28 for Sources: South Asian Central Banks, SECs and Boards, and stock exchanges; Indian Banks' Association 2006a, 2006b, and 2006c; Reserve Bank of India 2006a, 2006b, 2006c, and 2007. South Note: All benchmark indicators are in respect of selected high-income OECD member and nonmember countries (Australia; Canada; Hong Kong, China; New Zealand; Singapore; the United Kingdom; and the United States). Asia, by Countr y and Year 111 112 Getting Finance in Table A1.2 Getting Finance Indicators for South Asian Countries, 2002 South Indicator Bangladesh India Nepal Pakistan Sri Lanka Benchmark Access to finance Asia Demographic branch penetration (branches per 100,000 people) 4.74 6.33 1.85 4.73 6.70 11­29 2009 Demographic ATM penetration (ATMs per 100,000 people) 0.14 N/A 0.06 N/A 3.27 37­128 Deposit accounts per 1,000 people 234.75 420.84 123.21 194.87 989.94 976­2,418 Loan accounts per 1,000 people 57.14 53.93 14.92 14.93 257.66 248­776 Geographic branch penetration (branches per 1,000 km2) 42.26 22.26 2.96 8.72 13.17 1­60 Geographic ATM penetration (ATMs per 1,000 km2) 1.22 N/A 0.10 N/A 6.43 2­169 Performance and efficiency Return on equity (percent) 12.40 17.30 ­96.16 27.50 25.71 6.10­25.51 Return on assets (percent) 0.54 1.10 ­3.37 1.50 1.11 0.40­1.50 Staff cost ratio (percent) 66.53 64.70 185.00 50.75 47.62 33.35­44.36 Operating cost ratio (percent) 187.63 85.38 59.78 85.81 99.80 53.39­138.44 Net interest margin (percent) 1.04 2.66 0.92 3.10 3.78 1.83­3.55 Recurring earning power (percent) 1.50 2.00 0.21 2.00 2.07 1.18­2.39 Financial stability Capital adequacy ratio (percent) 7.60 12.00 ­7.25 12.60 10.35 [not lower than 8% of RWA-Basel] 9.60­16.90 Leverage ratio (times) 4.34 5.24 3.71 4.11 4.71 6.92­14.64 Gross nonperforming loans ratio (percent) 28.10 10.40 30.41 17.70 19.09 0.70­7.70 Provisions to nonperforming loans ratio (percent) 25.30 53.40 29.98 58.20 50.38 37.50­123.70 Liquid assets ratio (percent) 25.84 47.40 18.16 48.10 18.80 7.07­31.70 Liquid assets to liabilities ratio (percent) 121.46 250.00 41.33 68.95 21.70 2.99­39.60 Capital market development Domestic bond market to equity market capitalization (percent) 735.42 118.92 212.14 278.47 585.08 10.06­145.00 Domestic public bonds outstanding to GDP (percent) 17.53 29.80 17.40 37.80 21.94 9.33­56.57 Ratio of trading value of top 10 stocks to total trading value (percent) 51.64 62.93 81.89 21.89 57.70 17.55­78.70 Stock market capitalization to GDP (percent) 2.61 27.40 8.54 9.15 10.28 33.14­304.85 Market liquidity: Ratio of stock trading value to GDP (percent) 1.28 36.00 0.38 0.15 1.91 12.47­244.23 Appendix Stock market turnover ratio (times) 0.49 0.88 0.04 0.90 0.21 0.38­2.03 Market concentration and competitiveness Herfindahl-Hirschman index (HHI) 886.66 741.50 1,574.76 1,052.12 1,528.39 [HHI < 1,000 unconcentrated; 1. 1,000 1,800 highly concentrated] Finance 484.12­1,869.49 K-bank concentration ratio (K=3) ­ assets (percent) 45.77 33.67 58.68 49.71 60.88 30.03­63.79 K-bank concentration ratios (K=3) ­ deposits (percent) 47.55 33.26 49.62 51.76 62.43 29.72­62.26 Indicators K-bank concentration ratios (K=3) ­ loans (percent) 43.22 31.92 49.34 47.00 60.02 28.95­62.38 Private credit extended by banks to GDP (percent) 26.32 23.80 27.21 16.90 28.09 42.30­154.98 Commercial Banking assets to GDP (percent) 52.78 67.30 67.69 47.72 54.51 45.23­172.93 for Sources: South Asian Central Banks, SECs and Boards, and stock exchanges; Indian Banks' Association 2006a, 2006b, and 2006c; Reserve Bank of India 2006a, 2006b, 2006c, and 2007. South Note: All benchmark indicators are in respect of selected high-income OECD member and nonmember countries (Australia; Canada; Hong Kong, China; New Zealand; Singapore; the United Kingdom; and the United States). Asia, by Countr y and Year 113 114 Getting Finance in Table A1.3 Getting Finance Indicators for South Asian Countries, 2003 South Indicator Bangladesh India Nepal Pakistan Sri Lanka Benchmark Access to finance Asia Demographic branch penetration (branches per 100,000 people) 4.67 6.25 1.85 4.61 6.85 10­30 2009 Demographic ATM penetration (ATMs per 100,000 people) 0.14 N/A 0.08 0.37 3.69 37­139 Deposit accounts per 1,000 people 234.60 418.67 102.43 190.55 1,000.53 976­2,418 Loan accounts per 1,000 people 56.87 55.84 12.96 18.86 279.15 248­776 Geographic branch penetration (branches per 1,000 km2) 42.25 22.41 3.04 8.66 13.63 1­ 59 Geographic ATM penetration (ATMs per 1,000 km2) 1.26 N/A 0.14 0.69 7.34 3­192 Performance and efficiency Return on equity (percent) 12.39 21.00 ­22.33 33.70 26.33 8.60­25.27 Return on assets (percent) 0.59 1.50 ­0.85 2.10 1.36 0.60­1.90 Staff cost ratio (percent) 64.53 62.10 306.16 51.48 49.58 36.65­45.76 Operating cost ratio (percent) 161.86 80.71 40.14 83.20 94.02 49.20­146.08 Net interest margin (percent) 1.09 2.85 1.58 2.98 4.16 1.70­3.37 Recurring earning power (percent) 1.68 2.50 ­0.01 2.57 2.58 1.18­2.30 Financial stability Capital adequacy ratio (percent) 8.42 12.70 ­11.74 11.10 10.31 [not lower than 8% of RWA-Basel] 10.00­17.90 Leverage ratio (times) 4.77 5.75 3.87 5.03 5.53 6.01­15.39 Gross nonperforming loans ratio (percent) 22.13 8.80 28.80 13.70 16.36 0.30­6.70 Provisions to nonperforming loans ratio (percent) 18.35 52.40 7.55 64.80 58.74 43.50­140.40 Liquid assets ratio (percent) 24.67 48.70 12.49 46.10 17.30 7.59­29.99 Liquid assets to liabilities ratio (percent) 127.19 260.00 27.03 63.44 20.00 2.46­36.66 Capital market development Domestic bond market to equity market capitalization (percent) 435.22 72.77 240.19 186.41 389.76 6.46­123.27 Domestic public bonds outstanding to GDP (percent) 16.73 31.60 18.50 36.70 27.43 9.94­54.63 Ratio of trading value of top 10 stocks to total trading value (percent) 51.55 55.42 58.35 19.18 60.83 16.42­74.00 Stock market capitalization to GDP (percent) 2.43 22.50 8.05 15.31 14.92 34.61­382.10 Market liquidity: Ratio of stock trading value to GDP (percent) 1.02 37.70 0.13 0.13 4.18 13.17­214.19 Appendix Stock market turnover ratio (times) 0.42 1.08 0.02 0.54 0.35 0.38­1.21 Market concentration and competitiveness Herfindahl-Hirschman index (HHI) 702.04 734.59 1,468.53 976.81 1,455.81 [HHI < 1,000 unconcentrated; 1. 1,000 < HHI < 1,800 Getting moderately concentrated; HHI > 1,800 highly concentrated] Finance 459.53­1,864.85 K-bank concentration ratio (K=3) ­ assets (percent) 38.33 33.49 56.67 47.47 58.19 29.64­64.41 K-bank concentration ratios (K=3) ­ deposits (percent) 43.27 32.76 46.80 48.93 60.89 29.96­62.80 Indicators K-bank concentration ratios (K=3) ­ loans (percent) 39.57 31.60 44.64 43.58 56.81 27.11­60.04 Private credit extended by banks to GDP (percent) 29.42 25.90 27.80 21.06 29.50 43.11­153.39 Commercial Banking assets to GDP (percent) 53.84 68.80 69.84 50.10 56.06 45.80­172.10 for Sources: South Asian Central Banks, SECs and Boards, and stock exchanges; Indian Banks' Association 2006a, 2006b, and 2006c; Reserve Bank of India 2006a, 2006b, 2006c, and 2007. South Note: All benchmark indicators are in respect of selected high-income OECD member and nonmember countries (Australia; Canada; Hong Kong, China; New Zealand; Singapore; the United Kingdom; and the United States). Asia, by Countr y and Year 115 116 Getting Finance in Table A1.4 Getting Finance Indicators for South Asian Countries, 2004 South Indicator Bangladesh India Nepal Pakistan Sri Lanka Benchmark Access to finance Asia Demographic branch penetration (branches per 100,000 people) 4.67 6.26 1.71 4.64 7.06 9­28 2009 Demographic ATM penetration (ATMs per 100,000 people) 0.17 N/A 0.11 0.52 4.16 38­152 Deposit accounts per 1,000 people 233.63 426.11 115.88 180.28 1,023.58 976­2,418 Loan accounts per 1,000 people 60.24 61.88 11.97 24.51 304.11 248­776 Geographic branch penetration (branches per 1,000 km2) 42.71 22.57 2.87 8.84 14.20 1­58 Geographic ATM penetration (ATMs per 1,000 km2) 1.55 N/A 0.18 0.99 8.37 3­225 Performance and efficiency Return on equity (percent) ­13.39 23.00 ­46.42 29.00 25.62 10.90­22.80 Return on assets (percent) ­0.63 1.70 1.47 2.00 1.43 0.70­1.70 Staff cost ratio (percent) 66.24 60.17 181.18 51.97 46.98 38.44­56.30 Operating cost ratio (percent) 141.89 77.05 31.93 83.62 95.66 59.57­154.30 Net interest margin (percent) 1.97 3.07 1.99 2.87 3.97 1.45­3.12 Recurring earning power (percent) 1.86 2.90 1.81 2.26 2.33 1.07­1.97 Financial stability Capital adequacy ratio (percent) 7.41 12.90 ­9.07 11.40 10.29 [not lower than 8% of RWA-Basel] 10.40­16.10 Leverage ratio (times) 4.16 5.90 ­3.00 6.45 5.63 6.41­15.18 Gross nonperforming loans ratio (percent) 17.63 7.20 22.77 9.00 11.29 0.20­4.00 Provisions to nonperforming loans ratio (percent) 19.15 62.00 3.82 72.40 68.29 34.20­182.90 Liquid assets ratio (percent) 23.50 48.70 13.61 37.00 20.30 7.50­31.54 Liquid assets to liabilities ratio (percent) 121.94 260.00 27.30 51.88 23.10 2.49­24.43 Capital market development Domestic bond market to equity market capitalization (percent) 239.99 64.33 204.93 108.60 299.80 5.58­118.07 Domestic public bonds outstanding to GDP (percent) 16.57 33.40 17.30 33.00 31.70 9.67­55.10 Ratio of trading value of top 10 stocks to total trading value (percent) 46.67 44.86 86.25 16.01 42.92 15.29­75.60 Stock market capitalization to GDP (percent) 4.28 41.90 8.72 24.07 18.83 38.71­486.34 Market liquidity: Ratio of stock trading value to GDP (percent) 0.74 57.80 0.45 0.19 2.92 15.45­269.33 Appendix Stock market turnover ratio (times) 0.23 1.10 0.06 0.50 0.18 0.40­1.41 Market concentration and competitiveness Herfindahl-Hirschman index (HHI) 724.09 677.93 1,245.62 903.97 1,377.33 [HHI < 1,000 unconcentrated; 1. 1,000 < HHI < 1,800 Getting moderately concentrated; HHI > 1,800 highly concentrated] Finance 345.65­1,449.90 K-bank concentration ratio (K=3) ­ assets (percent) 39.33 33.17 52.88 43.95 55.68 21.16­53.39 K-bank concentration ratios (K=3) ­ deposits (percent) 40.31 31.29 44.00 45.55 58.25 21.84­52.37 Indicators K-bank concentration ratios (K=3) ­ loans (percent) 36.54 30.97 42.14 42.56 53.28 21.90­50.16 Private credit extended by banks to GDP (percent) 30.96 27.50 28.95 25.86 31.26 44.00­147.61 Commercial Banking assets to GDP (percent) 51.82 71.20 71.55 52.07 56.92 46.22­166.75 for Sources: South Asian Central Banks, SECs and Boards, and stock exchanges; Indian Banks' Association 2006a, 2006b, and 2006c; Reserve Bank of India 2006a, 2006b, 2006c, and 2007. South Note: All benchmark indicators are in respect of selected high-income OECD member and nonmember countries (Australia; Canada; Hong Kong, China; New Zealand; Singapore; the United Kingdom; and the United States). Asia, by Countr y and Year 117 118 Getting Finance in Table A1.5 Getting Finance Indicators for South Asian Countries, 2005 South Indicator Bangladesh India Nepal Pakistan Sri Lanka Benchmark Access to finance Asia Demographic branch penetration (branches per 100,000 people) 4.64 6.33 1.67 4.82 7.20 9­28 2009 Demographic ATM penetration (ATMs per 100,000 people) 0.20 1.63 0.24 0.67 4.50 39­158 Deposit accounts per 1,000 people 237.32 432.11 113.58 173.15 1,066.24 976­2,418 Loan accounts per 1,000 people 60.45 71.42 11.30 30.57 344.17 248­776 Geographic branch penetration (branches per 1,000 km2) 43.41 22.99 2.87 9.22 14.64 1­57 Geographic ATM penetration (ATMs per 1,000 km2) 1.84 5.93 0.41 1.29 9.15 3­241 Performance and efficiency Return on equity (percent) 28.63 16.90 ­45.87 36.90 27.01 11.10­25.30 Return on assets (percent) 1.30 1.30 1.79 2.90 1.70 0.70­1.80 Staff cost ratio (percent) 65.00 58.29 135.35 50.73 44.53 23.00­52.71 Operating cost ratio (percent) 107.91 74.32 28.55 57.73 87.70 65.19­168.99 Net interest margin (percent) 2.38 3.07 2.22 4.11 4.05 1.17­3.13 Recurring earning power (percent) 2.36 2.40 2.33 3.35 2.26 0.82­2.06 Financial stability Capital adequacy ratio (percent) 7.65 12.80 ­6.07 11.90 12.84 [not lower than 8% of RWA-Basel] 10.40­15.80 Leverage ratio (times) 4.42 6.35 ­4.65 7.64 6.93 6.32­15.25 Gross nonperforming loans ratio (percent) 13.55 5.13 18.94 6.70 8.76 0.20­3.00 Provisions to nonperforming loans ratio (percent) 24.31 63.50 11.49 80.40 72.05 38.20­203.00 Liquid assets ratio (percent) 20.61 44.20 9.33 33.90 19.60 7.30­31.26 Liquid assets to liabilities ratio (percent) 104.60 220.00 20.34 52.77 22.10 2.47­23.26 Capital market development Domestic bond market to equity market capitalization (percent) 259.28 50.46 142.69 73.94 216.69 4.95­123.66 Domestic public bonds outstanding to GDP (percent) 16.75 33.00 16.40 30.90 31.77 10.07­47.23 Ratio of trading value of top 10 stocks to total trading value (percent) 41.89 41.66 83.96 20.48 43.10 15.88­43.80 Stock market capitalization to GDP (percent) 6.06 52.70 10.39 30.59 24.69 39.74­499.21 Market liquidity: Ratio of stock trading value to GDP (percent) 2.03 53.30 0.77 0.11 4.84 16.92­294.85 Appendix Stock market turnover ratio (times) 0.41 0.75 0.09 0.22 0.24 0.41­1.45 Market concentration and competitiveness Herfindahl-Hirschman index (HHI) 679.31 642.38 1,019.21 805.61 1,279.44 [HHI < 1,000 unconcentrated; 1. 1,000 < HHI < 1,800 Getting moderately concentrated; HHI > 1,800 highly concentrated] Finance 475.57­1,447.54 K-bank concentration ratio (K=3) ­ assets (percent) 37.05 32.02 45.87 40.35 53.02 21.30­54.23 K-bank concentration ratios (K=3) ­ deposits (percent) 37.72 31.09 41.73 41.49 56.30 19.93­53.53 Indicators K-bank concentration ratios (K=3) ­ loans (percent) 36.46 30.84 37.28 41.96 50.44 18.39­50.48 Private credit extended by banks to GDP (percent) 31.87 33.30 27.57 28.83 33.87 47.84­160.48 Commercial Banking assets to GDP (percent) 54.93 73.00 70.25 53.89 61.79 46.50­167.76 for Sources: South Asian Central Banks, SECs and Boards, and stock exchanges; Indian Banks' Association 2006a, 2006b, and 2006c; Reserve Bank of India 2006a, 2006b, 2006c, and 2007. South Note: All benchmark indicators are in respect of selected high-income OECD member and nonmember countries (Australia; Canada; Hong Kong, China; New Zealand; Singapore; the United Kingdom; and the United States). Asia, by Countr y and Year 119 120 Getting Finance in Table A1.6 Getting Finance Indicators for South Asian Countries, 2006 South Indicator Bangladesh India Nepal Pakistan Sri Lanka Benchmark Access to finance Asia Demographic branch penetration (branches per 100,000 people) 4.73 6.37 1.73 4.96 7.69 9­28 2009 Demographic ATM penetration (ATMs per 100,000 people) 0.29 1.93 0.28 1.25 5.67 39­167 Deposit accounts per 1,000 people 255.23 442.87 110.40 171.14 1,117.82 976­2,418 Loan accounts per 1,000 people 61.11 78.00 10.83 31.78 364.22 248­776 Geographic branch penetration (branches per 1,000 km2) 44.53 23.46 2.97 9.67 15.81 1­57 Geographic ATM penetration (ATMs per 1,000 km2) 2.71 7.11 0.48 2.44 11.65 3­252 Performance and efficiency Return on equity (percent) 33.86 17.00 ­43.30 34.70 27.01 8.09­18.60 Return on assets (percent) 1.66 1.31 1.90 3.20 1.83 0.50­1.80 Staff cost ratio (percent) 61.39 56.90 114.32 51.22 41.49 41.86­51.90 Operating cost ratio (percent) 100.48 75.65 25.55 54.63 84.68 62.65­157.59 Net interest margin (percent) 2.04 3.01 2.26 4.41 4.31 1.04­2.93 Recurring earning power (percent) 2.59 2.20 2.39 3.66 2.03 0.81­2.03 Financial stability Capital adequacy ratio (percent) 8.33 12.40 ­1.75 13.33 11.82 [not lower than 8% of RWA-Basel] 10.60­15.40 Leverage ratio (times) 5.33 6.57 ­4.14 8.94 6.78 6.02­14.37 Gross nonperforming loans ratio (percent) 13.15 3.33 14.22 5.70 7.16 0.20­2.40 Provisions to nonperforming loans ratio (percent) 26.33 64.20 4.72 81.50 68.12 36.30­204.50 Liquid assets ratio (percent) 18.67 38.40 9.70 32.20 19.00 9.41­34.13 Liquid assets to liabilities ratio (percent) 116.27 180.00 19.07 55.13 21.90 1.82­22.31 Capital market development Domestic bond market to equity market capitalization (percent) 316.64 39.77 92.96 71.2 136.68 2.97­145.36 Domestic public bonds outstanding to GDP (percent) 17.13 29.60 14.10 27.46 31.62 9.49­48.57 Ratio of trading value of top 10 stocks to total trading value (percent) 39.68 31.36 66.50 20.02 57.13 14.46­82.10 Stock market capitalization to GDP (percent) 5.41 82.60 15.19 35.87 29.80 43.13­903.56 Market liquidity: Ratio of stock trading value to GDP (percent) 1.11 67.60 0.54 0.03 3.75 21.41­438.57 Appendix Stock market turnover ratio (times) 0.20 0.64 0.04 0.06 0.15 0.52­2.21 Market concentration and competitiveness Herfindahl-Hirschman index (HHI) 596.86 599.43 949.86 784.01 1,259.88 [HHI < 1,000 unconcentrated; 1. 1,000 < HHI < 1,800 Getting moderately concentrated; HHI > 1,800 highly concentrated] Finance 563.35­1,854.41 K-bank concentration ratio (K=3) ­ assets (percent) 33.70 31.97 43.58 38.96 52.79 30.98­58.29 K-bank concentration ratios (K=3) ­ deposits (percent) 35.29 30.74 38.16 40.04 55.56 36.51­58.58 Indicators K-bank concentration ratios (K=3) ­ loans (percent) 34.00 32.15 30.30 39.67 52.74 31.01­56.93 Private credit extended by banks to GDP (percent) 34.45 39.40 26.98 29.30 35.45 88.16­193.60 Commercial Banking assets to GDP (percent) 55.43 78.90 67.32 53.96 63.61 46.50­167.76 for Sources: South Asian Central Banks, SECs and Boards, and stock exchanges; Indian Banks' Association 2006a, 2006b, and 2006c; Reserve Bank of India 2006a, 2006b, 2006c, and 2007. South Note: All benchmark indicators are in respect of selected high-income OECD member and nonmember countries (Australia; Canada; Hong Kong, China; New Zealand; Singapore; the United Kingdom; and the United States). Asia, by Countr y and Year 121 122 Getting Finance in Table A1.7 Getting Finance Indicators for Bangladesh, 2001­06 South Indicator 2001 2002 2003 2004 2005 2006 Benchmark Access to finance Asia Demographic branch penetration (branches per 100,000 people) 4.83 4.74 4.67 4.67 4.64 4.73 9­30 2009 Demographic ATM penetration (ATMs per 100,000 people) 0.10 0.14 0.14 0.17 0.20 0.29 37­167 Deposit accounts per 1,000 people 231.97 234.75 234.60 233.63 237.32 255.23 976­2,418 Loan accounts per 1,000 people 56.56 57.14 56.87 60.24 60.45 61.11 248­776 Geographic branch penetration (branches per 1,000 km2) 42.5 42.26 42.25 42.71 43.41 44.53 1­61 Geographic ATM penetration (ATMs per 1,000 km2) 0.91 1.22 1.26 1.55 1.84 2.71 1­252 Performance and efficiency Return on equity (percent) 17.12 12.40 12.39 ­13.39 28.63 33.86 6.10­25.51 Return on assets (percent) 0.74 0.54 0.59 ­0.63 1.30 1.66 0.40­1.90 Staff cost ratio (percent) 44.75 66.53 64.53 66.24 65.00 61.39 23.00­56.30 Operating cost ratio (percent) 236.78 187.63 161.86 141.89 107.91 100.48 49.20­157.59 Net interest margin (percent) 1.66 1.04 1.09 1.97 2.38 2.04 1.04­3.55 Recurring earning power (percent) 1.70 1.50 1.68 1.86 2.36 2.59 0.81­2.39 Financial stability Capital adequacy ratio (percent) 7.02 7.60 8.42 7.41 7.65 8.33 [not lower than 8% of RWA-Basel] 9.60­18.20 Leverage ratio (times) 4.17 4.34 4.77 4.16 4.42 5.33 6.01­15.39 Gross nonperforming loans ratio (percent) 31.49 28.10 22.13 17.63 13.55 13.15 0.20­8.00 Provisions to nonperforming loans ratio (percent) 25.36 25.30 18.35 19.15 24.31 26.33 25.40­204.50 Liquid assets ratio (percent) 30.03 25.84 24.67 23.50 20.61 18.67 7.07­40.44 Liquid assets to liabilities ratio (percent) 122.90 121.46 127.19 121.94 104.60 116.27 1.82­42.20 Capital market development Domestic bond market to equity market capitalization (percent) 663.5 735.42 435.22 239.99 259.28 316.64 2.97­145.36 Domestic public bonds outstanding to GDP (percent) 16.17 17.53 16.73 16.57 16.75 17.13 8.83­58.69 Ratio of trading value of top 10 stocks to total trading value (percent) 59.16 51.64 51.55 46.67 41.89 39.68 14.46­82.10 Stock market capitalization to GDP (percent) 2.57 2.61 2.43 4.28 6.06 5.41 33.14­903.56 Market liquidity: Ratio of stock trading value to GDP (percent) 1.28 1.28 1.02 0.74 2.03 1.11 12.47­438.57 Appendix Stock market turnover ratio (times) 0.50 0.49 0.42 0.23 0.41 0.20 0.34­2.21 Market concentration and competitiveness Herfindahl-Hirschman index (HHI) 944.90 886.66 702.04 724.09 679.31 596.86 [HHI < 1,000 unconcentrated; 1. 1,000 < HHI < 1,800 Getting moderately concentrated; HHI > 1,800 highly concentrated] Finance 345.65­1,869.49 K-bank concentration ratio (K=3) ­ assets (percent) 47.38 45.77 38.33 39.33 37.05 33.70 21.30­64.41 K-bank concentration ratios (K=3) ­ deposits (percent) 50.55 47.55 43.27 40.31 37.72 35.29 19.93­62.80 Indicators K-bank concentration ratios (K=3) ­ loans (percent) 45.76 43.22 39.57 36.54 36.46 34.00 18.39­66.30 Private credit extended by banks to GDP (percent) 24.33 26.32 29.42 30.96 31.87 34.45 42.00­193.60 Commercial Banking assets to GDP (percent) 50.35 52.78 53.84 51.82 54.93 55.43 44.90­174.28 for Sources: Bangladesh Bank; World Bank 2007a; IMF 2007b (stock market capitalization/GDP for 2001); and Beck, Demirgüç-Kunt, and Levine 2000 (private credit to GDP for 2001 and 2002). South Notes: 2006 (provisional data). All benchmark indicators are in respect of selected high-income OECD member and nonmember countries (Australia; Canada; Hong Kong, China; New Zealand; Singapore; the United Kingdom; and the United States). Asia, by Countr y and Year 123 124 Getting Finance in Table A1.8 Getting Finance Indicators for India, 2001­06 South Indicator 2001 2002 2003 2004 2005 2006 Benchmark Access to finance Asia Demographic branch penetration (branches per 100,000 people) 6.42 6.33 6.25 6.26 6.33 6.37 9­30 2009 Demographic ATM penetration (ATMs per 100,000 people) N/A N/A N/A N/A 1.63 1.93 37­167 Deposit accounts per 1,000 people 416.77 420.84 418.67 426.11 432.11 442.87 976­2,418 Loan accounts per 1,000 people 50.99 53.93 55.84 61.88 71.42 78.00 248­776 Geographic branch penetration (branches per 1,000 km2) 22.18 22.26 22.41 22.57 22.99 23.46 1­61 Geographic ATM penetration (ATMs per 1,000 km2) N/A N/A N/A N/A 5.93 7.11 1­252 Performance and efficiency Return on equity (percent) 13.80 17.30 21.00 23.00 16.90 17.00 6.10­25.51 Return on assets (percent) 0.90 1.10 1.50 1.70 1.30 1.31 0.40­1.90 Staff cost ratio (percent) 68.10 64.70 62.10 60.17 58.29 56.90 23.00­56.30 Operating cost ratio (percent) 92.33 85.38 80.71 77.05 74.32 75.65 49.20­157.59 Net interest margin (percent) 2.98 2.66 2.85 3.07 3.07 3.01 1.04­3.55 Recurring earning power (percent) 1.60 2.00 2.50 2.90 2.40 2.20 0.81­2.39 Financial stability Capital adequacy ratio (percent) 11.40 12.00 12.70 12.90 12.80 12.40 [not lower than 8% of RWA-Basel] 9.60­18.20 Leverage ratio (times) 4.96 5.24 5.75 5.90 6.35 6.57 6.01­15.39 Gross nonperforming loans ratio (percent) 11.40 10.40 8.80 7.20 5.13 3.33 0.20­8.00 Provisions to nonperforming loans ratio (percent) 49.70 53.40 52.40 62.00 63.50 64.20 25.40­204.50 Liquid assets ratio (percent) 48.20 47.40 48.70 48.70 44.20 38.40 7.07­40.44 Liquid assets to liabilities ratio (percent) 260.00 250.00 260.00 260.00 220.00 180.00 1.82­42.20 Capital market development Domestic bond market to equity market capitalization (percent) 117.85 118.92 72.77 64.33 50.46 39.77 2.97­145.36 Domestic public bonds outstanding to GDP (percent) 26.80 29.80 31.60 33.40 33.00 29.60 8.83­58.69 Ratio of trading value of top 10 stocks to total trading value (percent) 72.90 62.93 55.42 44.86 41.66 31.36 14.46­82.10 Stock market capitalization to GDP (percent) 29.40 27.40 22.50 41.90 52.70 82.60 33.14­903.56 Market liquidity: Ratio of stock trading value to GDP (percent) 112.00 36.00 37.70 57.80 53.30 67.60 12.47­438.57 Appendix Stock market turnover ratio (times) 2.13 0.88 1.08 1.10 0.75 0.64 0.34­2.21 Market concentration and competitiveness Herfindahl-Hirschman index (HHI) 784.67 741.50 734.59 677.93 642.38 599.43 [HHI < 1,000 unconcentrated; 1. 1,000 < HHI < 1,800 Getting moderately concentrated; HHI > 1,800 highly concentrated] Finance 345.65­1,869.49 K-bank concentration ratio (K=3) ­ assets (percent) 33.80 33.67 33.49 33.17 32.02 31.97 21.30­64.41 K-bank concentration ratios (K=3) ­ deposits (percent) 33.98 33.26 32.76 31.29 31.09 30.74 19.93­62.80 Indicators K-bank concentration ratios (K=3) ­ loans (percent) 33.04 31.92 31.60 30.97 30.84 32.15 18.39­66.30 Private credit extended by banks to GDP (percent) 21.50 23.80 25.90 27.50 33.30 39.40 42.00­193.60 Commercial Banking assets to GDP (percent) 61.90 67.30 68.80 71.20 73.00 78.90 44.90­174.28 for Sources: Indian Banks' Association 2006a, 2006b, and 2006c; Reserve Bank of India 2006a, 2006b, 2006c, and 2007. South Note: All benchmark indicators are in respect of selected high-income OECD member and nonmember countries (Australia; Canada; Hong Kong, China; New Zealand; Singapore; the United Kingdom; and the United States). Asia, by Countr y and Year 125 126 Getting Finance in Table A1.9 Getting Finance Indicators for Nepal, 2001­06 South Indicator 2001 2002 2003 2004 2005 2006 Benchmark Access to finance Asia Demographic branch penetration (branches per 100,000 people) 2.09 1.85 1.85 1.71 1.67 1.73 9­30 2009 Demographic ATM penetration (ATMs per 100,000 people) 0.05 0.06 0.08 0.11 0.24 0.28 37­167 Deposit accounts per 1,000 people 111.59 123.21 102.43 115.88 113.58 110.40 976­2,418 Loan accounts per 1,000 people 19.07 14.92 12.96 11.97 11.30 10.83 248­776 Geographic branch penetration (branches per 1,000 km2) 3.29 2.96 3.04 2.87 2.87 2.97 1­61 Geographic ATM penetration (ATMs per 1,000 km2) 0.08 0.10 0.14 0.18 0.41 0.48 1­252 Performance and efficiency Return on equity (percent) ­93.62 ­96.16 ­22.33 ­46.42 ­45.87 ­43.30 6.10­25.51 Return on assets (percent) ­3.04 ­3.37 ­0.85 1.47 1.79 1.90 0.40­1.90 Staff cost ratio (percent) 194.25 185.00 306.16 181.18 135.35 114.32 23.00­56.30 Operating cost ratio (percent) 35.87 59.78 40.14 31.93 28.55 25.55 49.20­157.59 Net interest margin (percent) 1.76 0.92 1.58 1.99 2.22 2.26 1.04­3.55 Recurring earning power (percent) 0.86 0.21 ­0.01 1.81 2.33 2.39 0.81­2.39 Financial stability Capital adequacy ratio (percent) 4.00 ­7.25 ­11.74 ­9.07 ­6.07 ­1.75 [not lower than 8% of RWA-Basel] 9.60­18.20 Leverage ratio (times) 3.27 3.71 3.87 ­3.00 ­4.65 ­4.14 6.01­15.39 Gross nonperforming loans ratio (percent) 29.31 30.41 28.80 22.77 18.94 14.22 0.20­8.00 Provisions to nonperforming loans ratio (percent) 30.59 29.98 7.55 3.82 11.49 4.72 25.40­204.50 Liquid assets ratio (percent) 22.10 18.16 12.49 13.61 9.33 9.70 7.07­40.44 Liquid assets to liabilities ratio (percent) 47.88 41.33 27.03 27.30 20.34 19.07 1.82­42.20 Capital market development Domestic bond market to equity market capitalization (percent) 129.55 212.14 240.19 204.93 142.69 92.96 2.97­145.36 Domestic public bonds outstanding to GDP (percent) 14.50 17.40 18.50 17.30 16.40 14.10 8.83­58.69 Ratio of trading value of top 10 stocks to total trading value (percent) 83.13 81.89 58.35 86.25 83.96 66.50 14.46­82.10 Stock market capitalization to GDP (percent) 11.76 8.54 8.05 8.72 10.49 15.19 33.14­903.56 Market liquidity: Ratio of stock trading value to GDP (percent) 0.59 0.38 0.13 0.45 0.77 0.54 12.47­ 438.57 Appendix Stock market turnover ratio (times) 0.05 0.04 0.02 0.06 0.09 0.04 0.34­2.21 Market concentration and competitiveness Herfindahl-Hirschman index (HHI) 1,563.48 1,574.76 1,468.53 1,245.62 1,019.21 949.86 [HHI < 1,000 unconcentrated; 1. 1,000 < HHI < 1,800 Getting moderately concentrated; HHI > 1,800 highly concentrated] Finance 345.65­1,869.49 K-bank concentration ratio (K=3) ­ assets (percent) 58.02 58.68 56.67 52.88 45.87 43.58 21.30­64.41 K-bank concentration ratios (K=3) ­ deposits (percent) 51.73 49.62 46.80 44.00 41.73 38.16 19.93­62.80 Indicators K-bank concentration ratios (K=3) ­ loans (percent) 52.06 49.34 44.64 42.14 37.28 30.30 18.39­66.30 Private credit extended by banks to GDP (percent) 26.95 27.21 27.80 28.95 27.57 26.98 42.00­193.60 Commercial Banking assets to GDP (percent) 63.83 67.69 69.84 71.55 70.25 67.32 44.90­174.28 for Sources: Nepal Rastra Bank; the Securities Board of Nepal; World Bank 2007a; IMF 2007b (stock market capitalization/GDP for 2001); and Beck, Demirgüç-Kunt, and Levine 2000 (private credit to GDP for 2001 South and 2002). Note: All benchmark indicators are in respect of selected high-income OECD member and nonmember countries (Australia; Canada; Hong Kong, China; New Zealand; Singapore; the United Kingdom; and the United States). Asia, by Countr y and Year 127 128 Getting Finance in Table A1.10 Getting Finance Indicators for Pakistan, 2001­06 South Indicator 2001 2002 2003 2004 2005 2006 Benchmark Access to finance Asia Demographic branch penetration (branches per 100,000 people) 4.88 4.73 4.61 4.64 4.82 4.96 9­30 2009 Demographic ATM penetration (ATMs per 100,000 people) N/A N/A 0.37 0.52 0.67 1.25 37­167 Deposit accounts per 1,000 people 195.84 194.87 190.55 180.28 173.15 171.14 976­2,418 Loan accounts per 1,000 people 16.04 14.93 18.86 24.51 30.57 31.78 248­776 Geographic branch penetration (branches per 1,000 km2) 8.77 8.72 8.66 8.84 9.22 9.67 1­61 Geographic ATM penetration (ATMs per 1,000 km2) N/A N/A 0.69 0.99 1.29 2.44 1­252 Performance and efficiency Return on equity (percent) 12.20 27.50 33.70 29.00 36.90 34.70 6.10­25.51 Return on assets (percent) 0.60 1.50 2.10 2.00 2.90 3.20 0.40­1.90 Staff cost ratio (percent) 52.58 50.75 51.48 51.97 50.73 51.22 23.00­56.30 Operating cost ratio (percent) 90.91 85.81 83.20 83.62 57.73 54.63 49.20­157.59 Net interest margin (percent) 3.24 3.10 2.98 2.87 4.11 4.41 1.04­3.55 Recurring earning power (percent) 1.17 2.00 2.57 2.26 3.35 3.66 0.81­2.39 Financial stability Capital adequacy ratio (percent) 11.30 12.60 11.10 11.40 11.90 13.33 [not lower than 8% of RWA-Basel] 9.60­18.20 Leverage ratio (times) 4.58 4.11 5.03 6.45 7.64 8.94 6.01­15.39 Gross nonperforming loans ratio (percent) 19.60 17.70 13.70 9.00 6.70 5.70 0.20­8.00 Provisions to nonperforming loans ratio (percent) 53.20 58.20 64.80 72.40 80.40 81.50 25.40­204.50 Liquid assets ratio (percent) 39.90 48.10 46.10 37.00 33.90 32.20 7.07­40.44 Liquid assets to liabilities ratio (percent) 56.25 68.95 63.44 51.88 52.77 55.13 1.82­42.20 Capital market development Domestic bond market to equity market capitalization (percent) 537.75 278.47 186.41 108.60 73.94 71.20 2.97­145.36 Domestic public bonds outstanding to GDP (percent) 38.90 37.80 36.70 33.00 30.90 27.46 8.83­58.69 Ratio of trading value of top 10 stocks to total trading value (percent) 22.52 21.89 19.18 16.01 20.48 20.02 14.46­82.10 Stock market capitalization to GDP (percent) 8.06 9.15 15.31 24.07 30.59 35.87 33.14­903.56 Market liquidity: Ratio of stock trading value to GDP (percent) 0.02 0.15 0.13 0.19 0.11 0.03 12.47­438.57 Appendix Stock market turnover ratio (times) 0.12 0.90 0.54 0.50 0.22 0.06 0.34­2.21 Market concentration and competitiveness Herfindahl-Hirschman index (HHI) 1,091.80 1,052.12 976.81 903.97 805.61 784.01 [HHI < 1,000 unconcentrated; 1. 1,000 < HHI < 1,800 Getting moderately concentrated; HHI > 1,800 highly concentrated] Finance 345.65­1,869.49 K-bank concentration ratio (K=3) ­ assets (percent) 50.30 49.71 47.47 43.95 40.35 38.96 21.30­64.41 K-bank concentration ratios (K=3) ­ deposits (percent) 53.23 51.76 48.93 45.55 41.49 40.04 19.93­62.80 Indicators K-bank concentration ratios (K=3) ­ loans (percent) 50.86 47.00 43.58 42.56 41.96 39.67 18.39­66.30 Private credit extended by banks to GDP (percent) 16.29 16.90 21.06 25.86 28.83 29.30 42.00­193.60 Commercial Banking assets to GDP (percent) 43.61 47.72 50.10 52.07 53.89 53.96 44.90­174.28 for Sources: State Bank of Pakistan and the SEC of Pakistan. South Note: All benchmark indicators are in respect of selected high-income OECD member and nonmember countries (Australia; Canada; Hong Kong, China; New Zealand; Singapore; the United Kingdom; and the United States). Asia, by Countr y and Year 129 130 Getting Finance in Table A1.11 Getting Finance Indicators for Sri Lanka, 2001­06 South Indicator 2001 2002 2003 2004 2005 2006 Benchmark Access to finance Asia Demographic branch penetration (branches per 100,000 people) 6.03 6.70 6.85 7.06 7.20 7.69 9­30 2009 Demographic ATM penetration (ATMs per 100,000 people) 2.55 3.27 3.69 4.16 4.50 5.67 37­167 Deposit accounts per 1,000 people 939.32 989.94 1,000.53 1,023.58 1,066.24 1,117.82 976­2,418 Loan accounts per 1,000 people 256.88 257.66 279.15 304.11 344.17 364.22 248­776 Geographic branch penetration (branches per 1,000 km2) 11.68 13.17 13.63 14.20 14.64 15.81 1­61 Geographic ATM penetration (ATMs per 1,000 km2) 4.93 6.43 7.34 8.37 9.15 11.65 1­252 Performance and efficiency Return on equity (percent) 20.57 25.71 26.33 25.62 27.01 27.01 6.10­25.51 Return on assets (percent) 0.84 1.11 1.36 1.43 1.70 1.83 0.40­1.90 Staff cost ratio (percent) 46.21 47.62 49.58 46.98 44.53 41.49 23.00­56.30 Operating cost ratio (percent) 118.66 99.80 94.02 95.66 87.70 84.68 49.20­157.59 Net interest margin (percent) 3.30 3.78 4.16 3.97 4.05 4.31 1.04­3.55 Recurring earning power (percent) 1.64 2.07 2.58 2.33 2.26 2.03 0.81­2.39 Financial stability Capital adequacy ratio (percent) 8.59 10.35 10.31 10.29 12.84 11.82 [not lower than 8% of RWA-Basel] 9.60­18.20 Leverage ratio (times) 3.90 4.71 5.53 5.63 6.93 6.78 6.01­15.39 Gross nonperforming loans ratio (percent) 19.57 19.09 16.36 11.29 8.76 7.16 0.20­8.00 Provisions to nonperforming loans ratio (percent) 44.43 50.38 58.74 68.29 72.05 68.12 25.40­204.50 Liquid assets ratio (percent) 22.80 18.80 17.30 20.30 19.60 19.00 7.07­40.44 Liquid assets to liabilities ratio (percent) 26.30 21.70 20.00 23.10 22.10 21.90 1.82­42.20 Capital market development Domestic bond market to equity market capitalization (percent) 659.05 585.08 389.76 299.80 216.69 136.68 2.97­145.36 Domestic public bonds outstanding to GDP (percent) 16.28 21.94 27.43 31.70 31.77 31.62 8.83­58.69 Ratio of trading value of top 10 stocks to total trading value (percent) 54.37 57.70 60.83 42.92 43.10 57.13 14.46­82.10 Stock market capitalization to GDP (percent) 8.81 10.28 14.92 18.83 24.69 29.80 33.14­903.56 Market liquidity: Ratio of stock trading value to GDP (percent) 0.99 1.91 4.18 2.92 4.84 3.75 12.47­438.57 Appendix Stock market turnover ratio (times) 0.13 0.21 0.35 0.18 0.24 0.15 0.34­2.21 Market concentration and competitiveness Herfindahl-Hirschman index (HHI) 1,650.62 1,528.39 1,455.81 1,377.33 1,279.44 1,259.88 [HHI < 1,000 ­ unconcentrated; 1. 1,000 < HHI < 1,800 Getting moderately concentrated; HHI > 1,800 highly concentrated] Finance 345.65­1,869.49 K-bank concentration ratio (K=3) ­ assets (percent) 63.09 60.88 58.19 55.68 53.02 52.79 21.30­64.41 K-bank concentration ratios (K=3) ­ deposits (percent) 62.02 62.43 60.89 58.25 56.30 55.56 19.93­62.80 Indicators K-bank concentration ratios (K=3) ­ loans (percent) 65.16 60.02 56.81 53.28 50.44 52.74 18.39­66.30 Private credit extended by banks to GDP (percent) 28.19 28.09 29.50 31.26 33.87 35.45 42.00­193.60 Commercial Banking assets to GDP (percent) 56.80 54.51 56.06 56.92 61.79 63.61 44.90­174.28 for Sources: Central Bank of Sri Lanka, SEC of Sri Lanka, and the Colombo Stock Exchange. South Note: 2006 data are unaudited and provisional. All benchmark indicators are in respect of selected high-income OECD member and nonmember countries (Australia; Canada; Hong Kong, China; New Zealand; Singapore; the United Kingdom; and the United States). Asia, by Countr y and Year 131 Appendix 2A Getting Finance Indicators for benchmark countries, 2001­06 132 Table A2.1 Benchmark Indicators, 2001 Getting United United New Hong Kong, Reference Indicator States Kingdom Canada Australia Zealand Singapore China Benchmark Access to finance Finance 1 Demographic branch penetration (branches per 100,000 people) 24 25 29 25 21 12 24 12­29 2 Demographic ATM penetration (ATMs per 100,000 people) 114 62 115 68 47 43 -- 43­115 3 Deposit accounts per 1,000 people different countries used (976­2,418) 976­2,418 in 4 Loan accounts per 1,000 people different countries used (248­776) 248­776 South 5 Geographic branch penetration (branches per 1,000 km2) 8 61 1 1 3 710 1,575 1­61 6 Geographic ATM penetration (ATMs per 1,000 km2) 35 152 4 1 7 2,632 -- 1­152 Asia Performance and efficiency 7 Return on equity (percent) 13.00 7.70 13.90 20.10 23.38 9.70 17.90 7.70­23.38 2009 8 Return on assets (percent) 1.10 0.50 0.70 1.30 1.06 1.00 1.40 0.50­1.40 9 Staff cost ratio (percent) 35.51 41.88 44.55 41.98 42.88 36.93 43.86 35.51­44.55 10 Operating cost ratio (percent) 106.82 109.90 149.64 118.64 82.78 49.86 52.22 49.86­149.64 11 Net interest margin (percent) 3.55 1.89 2.23 2.09 2.10 1.81 2.53 1.81­3.55 12 Recurring earning power (percent) 2.22 1.21 1.29 1.55 1.52 1.31 1.93 1.21­2.22 Financial stability 13 Capital adequacy ratio (percent) 12.90 13.20 12.30 10.40 10.79 18.20 16.50 10.40­18.20 14 Leverage ratio (times) 10.74 8.64 7.08 9.32 6.58 15.01 9.50 6.58­15.01 15 Gross nonperforming loans ratio (percent) 1.30 2.60 1.50 0.60 1.20 8.00 6.50 0.60­8.00 16 Provisions to nonperforming loans ratio (percent) 128.80 72.20 44.00 107.10 25.40 60.10 59.20 25.40­128.80 17 Liquid assets ratio (percent) 16.77 22.22 18.95 13.33 7.42 40.44 35.64 7.42­40.44 18 Liquid assets to liabilities ratio (percent) 21.24 22.28 2.83 8.89 7.21 30.18 42.20 2.83­42.20 Capital market development 19 Domestic bond market to equity market capitalization (percent) 108.70 30.95 86.90 45.48 77.70 42.28 8.90 8.90­108.70 20 Domestic public bonds outstanding to GDP (percent) 41.92 29.58 58.69 18.16 27.18 32.11 8.83 8.83­58.69 21 Ratio of trading value of top 10 stocks to total trading value (percent) 15.55 37.00 37.30 50.40 57.00 27.90 44.70 15.55 ­57.00 22 Stock market capitalization to GDP (percent) 145.98 169.59 110.52 102.22 35.58 160.80 350.02 35.58­350.02 23 Market liquidity: Ratio of stock trading value to GDP (percent) 290.00 130.77 65.53 65.31 16.21 74.68 120.25 16.21­290.00 24 Stock market turnover ratio (times) 1.99 0.77 0.59 0.64 0.46 0.47 0.34 0.34­1.99 Market concentration and competitiveness 25 Herfindahl-Hirschman index (HHI) 498.54 514.28 1,375.15 952.49 924.28 1,658.53 1,192.77 498.54 ­1,658.53 26 K-bank concentration ratio (K=3) ­ assets (percent) 34.88 27.04 51.56 41.19 33.40 61.19 52.29 27.04­61.19 27 K-bank concentration ratios (K=3) ­ deposits (percent) 36.16 27.44 51.31 40.20 34.72 60.18 51.01 27.44­60.18 28 K-bank concentration ratios (K=3) ­ loans (percent) 30.41 27.02 50.19 37.54 34.73 66.30 45.10 27.02­66.30 29 Private credit extended by banks to GDP (percent) 42.00 131.95 66.98 87.65 108.07 112.28 157.85 42.00­157.85 30 Commercial banking assets to GDP (percent) 44.90 131.69 76.98 91.13 113.33 136.51 174.28 44.90­174.28 Table A2.2 Benchmark Indicators, 2002 United United New Hong Kong, Reference Indicator States Kingdom Canada Australia Zealand Singapore China Benchmark Access to finance 1 Demographic branch penetration (branches per 100,000 people) 25 24 29 25 28 11 23 11­29 2 Demographic ATM penetration (ATMs per 100,000 people) 122 69 128 83 48 37 -- 37­128 3 Deposit accounts per 1,000 people different countries used (976­2,418) 976 ­ 2,418 4 Loan accounts per 1,000 people different countries used (248­776) 248­776 Appendix 5 Geographic branch penetration (branches per 1,000 km2) 8 60 1 1 4 650 1,470 1­60 6 Geographic ATM penetration (ATMs per 1,000 km2) 38 169 4 2 7 2,266 -- 2­169 Performance and efficiency 2. 7 Return on equity (percent) 14.10 6.10 9.30 20.20 25.51 7.60 17.20 6.10­25.51 Getting 8 Return on assets (percent) 1.30 0.40 0.40 1.40 1.25 0.80 1.50 0.40­1.50 9 Staff cost ratio (percent) 35.62 39.19 43.05 41.91 44.36 33.35 43.59 33.35­44.36 10 Operating cost ratio (percent) 102.21 106.29 138.44 115.74 75.00 62.27 53.39 53.39­138.44 Finance 11 Net interest margin (percent) 3.55 1.83 2.45 2.09 2.26 2.01 2.36 1.83­3.55 12 Recurring earning power (percent) 2.39 1.18 1.24 1.53 1.77 1.54 1.83 1.18­2.39 Financial stability Indicators 13 Capital adequacy ratio (percent) 13.00 13.10 12.40 9.60 11.08 16.90 15.80 9.60­16.90 14 Leverage ratio (times) 10.66 8.47 6.92 9.18 7.19 14.64 9.79 6.92­14.64 15 Gross nonperforming loans ratio (percent) 1.40 2.60 1.60 0.40 0.70 7.70 5.00 0.70­7.70 16 Provisions to nonperforming loans ratio (percent) 123.70 75.00 41.10 106.20 37.50 61.20 62.93 37.50­123.70 for 17 Liquid assets ratio (percent) 16.75 22.16 19.24 13.66 7.07 31.70 30.92 7.07­31.70 benchmark 18 Liquid assets to liabilities ratio (percent) 21.34 22.61 2.99 9.15 6.65 31.39 39.60 2.99­39.60 Capital market development 19 Domestic bond market to equity market capitalization (percent) 145.00 40.99 109.42 55.10 84.40 52.99 10.06 10.06­145.00 20 Domestic public bonds outstanding to GDP (percent) 42.26 28.52 56.57 16.55 26.99 35.53 9.33 9.33­56.57 21 Ratio of trading value of top 10 stocks to total trading value (percent) 17.55 36.40 28.60 48.40 78.70 22.20 46.40 17.55­78.70 countries, 22 Stock market capitalization to GDP (percent) 120.61 131.72 88.65 92.86 33.14 124.91 304.85 33.14­304.85 23 Market liquidity: Ratio of stock trading value to GDP (percent) 244.23 174.36 56.00 72.13 12.47 63.58 131.88 12.47­244.23 24 Stock market turnover ratio (times) 2.03 1.32 0.63 0.78 0.38 0.51 0.43 0.38­2.03 Market concentration and competitiveness 2001­06 25 Herfindahl-Hirschman index (HHI) 484.12 560.56 1,386.29 927.66 907.04 1,869.49 1,136.50 484.12 ­ 1,869.49 26 K-bank concentration ratio (K=3) ­ assets (percent) 33.75 30.03 51.88 40.18 34.37 63.79 50.78 30.03­63.79 27 K-bank concentration ratios (K=3) ­ deposits (percent) 36.17 29.72 51.14 39.56 35.09 62.26 49.03 29.72­62.26 28 K-bank concentration ratios (K=3) ­ loans (percent) 28.95 30.95 50.34 37.56 35.47 62.38 43.11 28.95­62.38 133 29 Private credit extended by banks to GDP (percent) 42.30 135.94 67.88 89.79 111.18 111.81 154.98 42.30­154.98 30 Commercial banking assets to GDP (percent) 45.23 136.53 78.39 92.17 116.62 138.06 172.93 45.23­172.93 134 Table A2.3 Benchmark Indicators, 2003 United United New Hong Kong, Getting Reference Indicator States Kingdom Canada Australia Zealand Singapore China Benchmark Access to finance 1 Demographic branch penetration (branches per 100,000 people) 30 24 29 24 28 10 21 10­30 Finance 2 Demographic ATM penetration (ATMs per 100,000 people) 128 78 139 102 47 37 -- 37­139 3 Deposit accounts per 1,000 people different countries used (976­2,418) 976 ­ 2,418 4 Loan accounts per 1,000 people different countries used (248­776) 248­776 in 5 Geographic branch penetration (branches per 1,000 km2) 8 59 1 1 4 592 1,375 1­59 South 6 Geographic ATM penetration (ATMs per 1,000 km2) 40 192 5 3 7 2,275 -- 3­192 Performance and efficiency Asia 7 Return on equity (percent) 15.00 8.60 14.70 24.20 25.27 10.10 17.80 8.60­25.27 8 Return on assets (percent) 1.40 0.60 0.70 1.60 1.15 1.10 1.90 0.60­1.90 2009 9 Staff cost ratio (percent) 38.29 39.90 45.76 43.44 40.59 36.65 44.30 36.65­45.76 10 Operating cost ratio (percent) 105.72 106.24 146.08 113.93 76.14 49.20 57.21 49.20­146.08 11 Net interest margin (percent) 3.37 1.70 2.36 2.02 2.28 2.08 2.11 1.70­3.37 12 Recurring earning power (percent) 2.30 1.18 1.25 1.63 1.82 1.62 1.72 1.18­2.30 Financial stability 13 Capital adequacy ratio (percent) 13.00 13.00 13.40 10.00 10.30 17.90 15.30 10.00­17.90 14 Leverage ratio (times) 10.57 8.64 6.63 9.71 6.01 15.39 8.88 6.01­15.39 15 Gross nonperforming loans ratio (percent) 1.10 2.50 1.20 0.30 0.30 6.70 3.90 0.30­6.70 16 Provisions to nonperforming loans ratio (percent) 140.40 71.20 43.50 131.80 45.40 64.90 64.03 43.50­140.40 17 Liquid assets ratio (percent) 16.73 22.35 21.64 13.76 7.59 29.66 29.99 7.59­29.99 18 Liquid assets to liabilities ratio (percent) 21.46 24.87 2.46 9.39 7.41 29.25 36.66 2.46­36.66 Capital market development 19 Domestic bond market to equity market capitalization (percent) 123.27 33.60 88.23 51.92 71.46 39.98 6.46 6.46­123.27 20 Domestic public bonds outstanding to GDP (percent) 44.17 27.68 54.63 15.46 26.55 38.43 9.94 9.94­54.63 21 Ratio of trading value of top 10 stocks to total trading value (percent) 16.42 35.50 26.00 44.80 74.00 31.70 38.20 16.42­74.00 22 Stock market capitalization to GDP (percent) 117.25 120.03 86.18 93.04 34.61 134.49 382.10 34.61­382.10 23 Market liquidity: Ratio of stock trading value to GDP (percent) 142.20 120.11 54.61 70.88 13.17 95.12 214.19 13.17­214.19 24 Stock market turnover ratio (times) 1.21 1.00 0.63 0.76 0.38 0.71 0.56 0.38­1.21 Market concentration and competitiveness 25 Herfindahl-Hirschman index (HHI) 459.53 553.58 1,470.51 926.74 898.85 1,864.85 1,140.87 459.53 ­ 1,864.85 26 K-bank concentration ratio (K=3) ­ assets (percent) 32.58 29.64 53.50 39.43 34.43 64.41 50.69 29.64­64.41 27 K-bank concentration ratios (K=3) ­ deposits (percent) 35.03 29.96 53.09 38.07 35.52 62.80 48.56 29.96­62.80 28 K-bank concentration ratios (K=3) ­ loans (percent) 27.11 30.91 51.57 35.76 35.77 60.04 43.62 27.11­60.04 29 Private credit extended by banks to GDP (percent) 43.11 140.53 67.96 95.43 113.13 107.83 153.39 43.11­153.39 30 Commercial banking assets to GDP (percent) 45.80 141.35 78.28 96.59 119.00 135.21 172.10 45.80­172.10 Table A2.4 Benchmark Indicators, 2004 United United New Hong Kong, Reference Indicator States Kingdom Canada Australia Zealand Singapore China Benchmark Access to finance 1 Demographic branch penetration (branches per 100,000 people) 25 23 28 24 28 9 20 9­28 2 Demographic ATM penetration (ATMs per 100,000 people) 130 91 different countries used (976­2,418) 152 107 50 38 -- 38­152 3 Deposit accounts per 1,000 people different countries used (248­776) 976 ­ 2,418 Appendix 4 Loan accounts per 1,000 people 248­776 5 Geographic branch penetration (branches per 1,000 km2) 8 58 1 1 4 583 1,352 1­58 6 Geographic ATM penetration (ATMs per 1,000 km2) 42 225 5 3 8 2,357 -- 3­225 2. Performance and efficiency Getting 7 Return on equity (percent) 13.20 10.90 16.70 22.80 15.59 11.80 20.30 10.90­22.80 8 Return on assets (percent) 1.30 0.70 0.80 1.50 0.98 1.30 1.70 0.70­1.70 9 Staff cost ratio (percent) 38.44 43.05 48.36 44.98 39.68 43.85 56.30 38.44­56.30 Finance 10 Operating cost ratio (percent) 109.56 106.25 154.30 126.78 78.19 59.57 63.01 59.57­154.30 11 Net interest margin (percent) 3.12 1.45 2.19 1.85 2.04 1.82 1.78 1.45­3.12 12 Recurring earning power (percent) 1.97 1.07 1.26 1.40 1.43 1.38 1.55 1.07­1.97 Indicators Financial stability 13 Capital adequacy ratio (percent) 13.20 12.70 13.30 10.40 10.84 16.10 15.40 10.40­16.10 14 Leverage ratio (times) 10.93 7.89 6.41 10.12 8.16 15.18 8.38 6.41 -15.18 15 Gross nonperforming loans ratio (percent) 0.80 1.90 0.70 0.20 0.30 4.00 2.30 0.20­4.00 for 16 Provisions to nonperforming loans ratio (percent) 168.10 64.50 47.70 182.90 34.20 76.00 88.43 34.20­182.90 benchmark 17 Liquid assets ratio (percent) 16.45 27.22 21.04 12.99 7.50 31.54 31.53 7.50­31.54 18 Liquid assets to liabilities ratio (percent) 21.36 13.32 2.49 8.45 7.55 21.89 24.43 2.49­24.43 Capital market development 19 Domestic bond market to equity market capitalization (percent) 118.07 36.96 74.57 45.85 56.55 38.58 5.58 5.58­118.07 20 Domestic public bonds outstanding to GDP (percent) 45.38 27.82 55.10 14.65 24.40 38.22 9.67 9.67­55.10 countries, 21 Ratio of trading value of top 10 stocks to total trading value (percent) 15.29 32.80 24.30 42.50 75.60 40.90 39.50 15.29­75.60 22 Stock market capitalization to GDP (percent) 131.62 122.96 106.37 108.40 38.71 149.04 486.34 38.71­486.34 23 Market liquidity: Ratio of stock trading value to GDP (percent) 165.81 173.37 66.73 81.46 15.45 76.00 269.33 15.45­269.33 24 Stock market turnover ratio (times) 1.26 1.41 0.63 0.75 0.40 0.51 0.55 0.40­1.41 2001­06 Market concentration and competitiveness 25 Herfindahl-Hirschman index (HHI) 517.74 345.65 1,449.90 820.08 1,172.17 1,093.98 627.51 345.65 ­ 1,449.90 26 K-bank concentration ratio (K=3) ­ assets (percent) 35.07 21.16 53.39 35.58 46.59 38.04 35.35 21.16­53.39 27 K-bank concentration ratios (K=3) ­ deposits (percent) 37.20 21.84 52.37 34.97 44.08 38.96 34.73 21.84­52.37 135 28 K-bank concentration ratios (K=3) ­ loans (percent) 28.39 21.90 50.16 33.19 44.66 37.03 31.97 21.90­50.16 29 Private credit extended by banks to GDP (percent) 44.00 147.61 69.59 100.94 116.56 101.38 141.34 44.00­147.61 136 Table A2.5 Benchmark Indicators, 2005 United United New Hong Kong, Getting Reference Indicator States Kingdom Canada Australia Zealand Singapore China Benchmark Access to finance 1 Demographic branch penetration (branches per 100,000 people) 26 23 28 24 28 9 20 9­28 Finance 2 Demographic ATM penetration (ATMs per 100,000 people) 134 97 158 115 57 39 -- 39­158 3 Deposit accounts per 1,000 people different countries used (976­2,418) 976­2,418 4 Loan accounts per 1,000 people different countries used (248­776) 248­776 in 5 Geographic branch penetration (branches per 1,000 km2) 8 57 1 1 4 580 1,338 1­57 South 6 Geographic ATM penetration (ATMs per 1,000 km2) 43 241 6 3 9 2,487 -- 3­241 Performance and efficiency Asia 7 Return on equity (percent) 12.70 11.80 14.90 25.30 14.54 11.10 19.10 11.10­25.30 8 Return on assets (percent) 1.30 0.80 0.70 1.80 0.94 1.20 1.70 0.70­1.80 2009 9 Staff cost ratio (percent) 40.00 42.69 44.97 42.26 23.00 43.23 52.71 23.00­52.71 10 Operating cost ratio (percent) 108.06 110.00 168.99 101.14 112.46 66.94 65.19 65.19­168.99 11 Net interest margin (percent) 3.13 1.17 1.95 1.98 2.82 1.80 1.84 1.17­3.13 12 Recurring earning power (percent) 2.06 0.82 1.09 1.51 1.39 1.33 1.49 0.82­2.06 Financial stability 13 Capital adequacy ratio (percent) 13.00 12.80 12.90 10.40 10.91 15.80 15.30 10.40­15.80 14 Leverage ratio (times) 11.68 6.58 6.32 9.31 8.03 15.25 8.13 6.32­15.25 15 Gross nonperforming loans ratio (percent) 0.70 1.00 0.50 0.20 0.30 3.00 1.40 0.20­3.00 16 Provisions to nonperforming loans ratio (percent) 155.00 56.10 49.30 203.00 38.20 80.90 81.34 38.20­203.00 17 Liquid assets ratio (percent) 15.81 30.94 22.59 10.10 7.30 29.87 31.26 7.30­31.26 18 Liquid assets to liabilities ratio (percent) 20.36 11.78 2.47 5.65 5.81 13.21 23.26 2.47­23.26 Capital market development 19 Domestic bond market to equity market capitalization (percent) 123.66 32.79 63.76 45.84 57.43 32.78 4.95 4.95­123.66 20 Domestic public bonds outstanding to GDP (percent) 47.23 28.95 57.38 15.25 25.40 39.78 10.07 10.07­47.23 21 Ratio of trading value of top 10 stocks to total trading value (percent) 15.88 29.60 23.00 38.60 76.40 39.20 43.80 15.88­43.80 22 Stock market capitalization to GDP (percent) 135.10 126.22 109.19 111.27 39.74 152.99 499.21 39.74­499.21 23 Market liquidity: Ratio of stock trading value to GDP (percent) 181.53 189.80 73.06 89.17 16.92 83.20 294.85 16.92­294.85 24 Stock market turnover ratio (times) 1.30 1.45 0.65 0.77 0.41 0.52 0.57 0.41­1.45 Market concentration and competitiveness 25 Herfindahl-Hirschman index (HHI) 526.01 596.43 1,447.54 475.57 877.84 1,139.75 1,033.59 475.57 ­ 1,447.54 26 K-bank concentration ratio (K=3) ­ assets (percent) 35.24 32.87 54.23 21.30 38.83 41.05 47.56 21.30­54.23 27 K-bank concentration ratios (K=3) ­ deposits (percent) 37.26 35.10 53.53 19.93 37.05 42.32 48.75 19.93­53.53 28 K-bank concentration ratios (K=3) ­ loans (percent) 28.72 30.54 50.48 18.39 36.72 40.35 42.37 18.39­50.48 29 Private credit extended by banks to GDP (percent) 47.84 160.48 75.65 109.73 129.47 110.21 160.18 47.84­160.48 30 Commercial banking assets to GDP (percent) 46.50 149.40 79.80 102.30 121.91 127.37 167.76 46.50­167.76 Table A2.6 Benchmark Indicators, 2006 United United New Hong Kong, Reference Indicator States Kingdom Canada Australia Zealand Singapore China Benchmark Access to finance 1 Demographic branch penetration (branches per 100,000 people) 26 23 28 25 28 9 20 9­28 2 Demographic ATM penetration (ATMs per 100,000 people) 134 101 167 120 56 39 -- 39­167 3 Deposit accounts per 1,000 peoplea different countries used (976­2,418) 976­2,418 4 Loan accounts per 1,000 peoplea different countries used (248­776) 248­776 Appendix 5 Geographic branch penetration (branches per 1,000 km2)b 8 57 1 1 4 580 1,338 1­57 6 Geographic ATM penetration (ATMs per 1,000 km2)b 43 252 6 3 9 2,487 -- 3­252 Performance and efficiency 2. 7 Return on equity (percent) 12.80 8.09 20.90 18.60 14.88 13.70 18.17 8.09­18.60 Getting 8 Return on assets (percent) 1.30 0.50 1.00 1.12 0.98 1.40 1.80 0.50­1.80 9 Staff cost ratio (percent) 41.86 45.21 48.82 51.90 43.44 48.36 50.93 41.86­51.90 10 Operating cost ratio (percent) 108.66 117.05 157.59 89.65 70.85 63.28 62.65 62.65­157.59 Finance 11 Net interest margin (percent) 2.93 1.04 1.76 2.03 2.07 1.83 1.90 1.04­2.93 12 Recurring earning power (percent) 2.03 0.81 1.30 1.46 1.44 1.62 1.65 0.81­2.03 Financial stability Indicators 13 Capital adequacy ratio (percent) 13.10 12.90 12.60 10.60 10.67 15.40 15.00 10.60­15.40 14 Leverage ratio (times) 11.77 6.02 6.49 8.50 7.70 14.37 8.69 6.02­14.37 15 Gross nonperforming loans ratio (percent) 0.70 0.90 0.40 0.20 0.20 2.40 1.10 0.20­2.40 16 Provisions to nonperforming loans ratio (percent) 148.40 63.54 55.30 204.50 36.30 86.90 80.56 36.30­204.50 for 17 Liquid assets ratio (percent) 16.65 34.13 23.96 10.88 9.41 29.61 30.80 9.41­34.13 benchmark 18 Liquid assets to liabilities ratio (percent) 21.64 17.80 1.82 3.48 6.39 8.47 22.31 1.82­22.31 Capital market development 19 Domestic bond market to equity market capitalization (percent) 145.36 32.62 57.90 41.67 45.56 20.61 2.97 2.97­145.36 20 Domestic public bonds outstanding to GDP (percent) 48.57 35.84 48.52 12.95 19.69 43.03 9.49 9.49­48.57 21 Ratio of trading value of top 10 stocks to total trading value (percent) 14.46 28.10 26.20 -- 82.10 37.60 35.30 14.46­82.10 countries, 22 Stock market capitalization to GDP (percent) 148.25 164.97 130.82 142.65 43.13 290.69 903.56 43.13­903.56 23 Market liquidity: Ratio of stock trading value to GDP (percent) 259.09 329.20 98.60 111.89 21.41 136.34 438.57 21.41­438.57 24 Stock market turnover ratio (times) 1.85 2.21 0.81 0.90 0.52 0.56 0.60 0.52­2.21 Market concentration and competitiveness 2001­06 25 Herfindahl-Hirschman index (HHI) 563.35 704.03 1,501.22 674.16 1,611.11 1,707.79 1,854.41 563.35 ­ 1,854.41 26 K-bank concentration ratio (K=3) ­ assets (percent) 37.58 35.57 56.14 30.98 57.99 57.06 58.29 30.98­58.29 27 K-bank concentration ratios (K=3) ­ deposits (percent) 39.55 39.12 55.91 36.51 57.49 58.58 58.05 36.51­58.58 28 K-bank concentration ratios (K=3) ­ loans (percent) 31.01 35.83 52.26 34.10 56.07 56.93 50.93 31.01­56.93 137 29 Private credit extended by banks to GDP (percent) 88.16 193.60 143.04 123.61 158.70 98.19 139.33 88.16­193.60 30 Commercial banking assets to GDP (percent)c 46.50 149.40 79.80 102.30 121.91 127.37 167.76 46.50­167.76 138 Getting Finance in South Asia 2009 Appendix 2B. Benchmark Countries: Data Sources and Notes Sources: By indicator. 1. BIS 2007, various central bank reports, OECD 2007, and World Bank staff calculations. 2. BIS 2007, various central bank reports, OECD 2007, and World Bank staff calculations. 3. World Bank 2006a. 4. World Bank 2006a. 5. BIS 2007, various central bank reports, OECD 2007, and World Bank staff calculations. 6. BIS 2007, various central bank reports, OECD 2007, and World Bank staff calculations. 7. IMF 2007a (New Zealand, BvDEP [Bankscope] 2007 aggregate data). 8. IMF 2007a (New Zealand, BvDEP [Bankscope] 2007 aggregate data). 9. BvDEP (Bankscope) 2007 aggregate data. 10. BvDEP (Bankscope) 2007 aggregate data. 11. BvDEP (Bankscope) 2007 aggregate data. 12. BvDEP (Bankscope) 2007 aggregate data. 13. IMF 2007a (New Zealand, OECD 2007 statistics). 14. BvDEP (Bankscope) 2007 aggregate data. 15. IMF 2007a (New Zealand, OECD 2007 statistics). 16. IMF 2007a (New Zealand. OECD 2007 statistics; Hong Kong, China, BvDEP [Bankscope] 2007 aggregate data). 17. BvDEP (Bankscope) 2007 aggregate data. 18. BvDEP (Bankscope) 2007 aggregate data. 19. World Bank 2007a, BIS 2007, World Federation of Exchanges 2007, and World Bank staff calculations. 20. World Bank 2006b, BIS 2007, and World Bank staff calculations. 21. World Federation of Exchanges 2007. 22. World Bank 2006b, World Federation of Exchanges 2007, and World Bank staff calculations. 23. World Bank 2006b, World Federation of Exchanges 2007, and World Bank staff calculations. 24. World Bank 2006b, World Federation of Exchanges 2007, and World Bank staff calculations. 25. BvDEP (Bankscope) 2007 aggregate data. 26. BvDEP (Bankscope) 2007 aggregate data. 27. BvDEP (Bankscope) 2007 aggregate data. 28. BvDEP (Bankscope) 2007 aggregate data. 29. World Bank 2006b (2006 and New Zealand 2005, IMF 2007b, and World Bank staff calculations). 30. World Bank 2006b. Note: All benchmark indicators are for selected high-income OECD member and nonmember countries (Australia; Canada; Hong Kong, China; New Zealand; Singapore; the United Kingdom; and the United States). a. Because of the nonavailability of data for high-income countries, benchmark countries for indicators 3 and 4 include Denmark, Greece, Italy, Malaysia, Singapore, Spain, and Thailand (2001­06). b. Hong Kong, China and Singapore data are removed as outliers from indicators 5 and 6. c. Due to nonavailability of data, 2005 ratios are used in 2006 for indicator 30. Appendix 3. Corporate Governance Matrix: Questionnaire Responses, 2006 1. Ownership Structure and Influence of External Stakeholders Question Bangladesh India Nepal Pakistan Sri Lanka 1.1 Identification of substantial majority holders 1.1.1 What are the rules that govern disclosure of share ownership? Is the In AA x ownership structure transparent? Appendix · Top 10 shareholders and percentage of ownership to be disclosed? x only to Top 20 regulator · Threshold of share ownership that needs to be disclosed (e.g., 5% and over)? 10% 1% 0.5% 10%; 3% to SBP 5% 3. · Is the government's ownership disclosed with its special privileges? in AA Corporate · Does government control the nomination and remuneration process for the board nomi. for public bks x nomi. For govt. nomi. for state of directors? nomi. cont. bks bks · Is there evidence of influence from external stakeholders such as labor unions or x but regulator for public x x x Gover banking and securities regulators? can sector bks · Are the preemption rights of minority shareholders firmly protected (e.g., are they x x nance enshrined in the company law and requiring a supermajority [75%] to disapply them)? 1.2 Indirect and beneficial ownership Matrix: 1.2.1 Are there rules that govern the disclosure by shareholders of ultimate x (only in x x no rules but beneficial ownership? indiv. tax returns) thresholds Questionnair · If so, please specify the threshold for disclosure of ownership. x 3% 10% for indiv.; 15% for co: 20% agg. · Are shareholders required to disclose their ownership to an authority? 5% x e · Where, when, by whom, and to whom are such disclosures to be made? To bank Annual a/c and monitored by Responses, reports to SBP CBSL · Do shareholders have access to this information? x · Does the market have access to this information? on s/holdings thru AR only for listed cos 2006 · Please specify monitoring and enforcement provisions, including penalties for Fines Penalties from x noncompliance. BCO & PRsa 139 · How many cases of noncompliance have been recorded in the past five years, and N/A Action taken x what actions were taken? case by case (Table continues on next page) 2. Investor Rights 140 Question Bangladesh India Nepal Pakistan Sri Lanka 2.1 Shareholder meetings and voting procedures Getting 2.1.1 Shareholder meetings · Are shareholders informed of shareholder meetings? Finance · How much notice is given (e.g., four weeks before the meeting)? 3 weeks 21 days 3 weeks 21 days 21 days · Do banks provide detailed agendas and explanatory circulars along with the notice of meetings? in South 2.1.2 Voting procedures Asia · Can shareholders vote by proxy, by post, or electronically? Proxy Proxy, post Proxy, post Proxy Proxy · Is the counting of votes verified by a third party? x x 2009 · Can shareholders vote on a normal range of issues, including major and related- x x party transactions? · Are banks required to disclose special voting rights and caps on voting rights? 5% cap except Not reqd. as it x for govt. is specified in Banking Reg'n Act 2.2 Basic ownership rights x 2.2.1 Are all directors' appointments and dismissals subject to a shareholder vote? only for pvt bks x SBP has subject to RBI power to rule Possible · Can the government control such outcomes due to higher percentage of N/A for public bks x By virtue of ownership (where applicable)? s/holding 2.2.2 Is there a clear dividend policy? x 2.2.3 Are there structural takeover defenses that would prevent a legitimate x RBI approval x takeover bid? for above Purchases more Purchases more threshold limits than 5% need than 10% need SBP approval CBS/MOF approval (more · Can the government or regulators reserve the right to approve such transactions? x x Promoters' Bank mgt share transfers changes need than 30%, must need reg. SBP approval make offer to all approval s/holders) 2.2.4 Can minority shareholders easily nominate independent directors? x x not in public x Depends on blks internal bank rules 3. Transparency and Disclosure 3.1 Adherence to internationally accepted accounting standards 3.1.1 Do banks prepare their financial statements in accordance with local generally x accepted accounting principles and provide reconciliation with international (ROSC Rpt)a (Local GAAP but IASC stds as accounting standards? some do) adopted by Appendix country 3.1.2 Are accounting standards in material conformity with international accounting standards? (ROSC Rpt)a Mostly (ROSC Rpt)a Except 3. IAS 39 & 40 Corporate 3.1.3 What is the frequency of reporting of financial statements (e.g., quarterly)? Annual Quarterly, semi- Quarterly Quarterly, Monthly, annual, & annual semiannual, & quarterly, & annual annual 3.1.4 Are bank financials available to the general public? If yes, how? On the Web, in Gover newspapers, upon request? All All All All All nance 3.1.5 Is disclosure of audit and nonaudit fees paid to the external auditor required? x 3.1.6 Must the chief executive officer, chief financial officer, or directors sign and Matrix: certify banks' annual accounts? CEO + 3 directors CEO + CFO CEO + CFO + dirs. CEO + 3 directors 3.2 Independent internal and external auditors and audit Questionnair committee 3.2.1 Audit committee · Has the bank appointed an audit committee? e · If banks appoint such a committee, is there a mandate or charter that clearly Responses, delineates its responsibilities? · How often does the committee meet? 3­4/yr min. Quarterly x Quarterly (min.) Not specified (differs from bk to bk) 2006 · Does the committee control the selection of auditors? x for pvt bks x · Does the committee chair attend shareholder meetings, and is the chair available Not clear to address questions on the audit? Not clearly stated RBI has directed Not clearly stated 141 but expected as but expected as chair is a director chair is a director (Table continues on next page) 142 3. Transparency and Disclosure (continued) Question Bangladesh India Nepal Pakistan Sri Lanka Getting 3.2 Independent internal and external auditors and audit committee (continued) Finance 3.2.2 External auditors · Has the bank appointed a reputed and experienced external auditor? in · Does the bank's auditor rotation policy conform to the requirements set by the South regulator? 3 yrs 3 yrs 3 yrs 3 yrs · Does the auditor perform any nonaudit services for the bank? (under separate x x x x Asia TOR) · Are local auditing rules and practices in line with international standards (ROSC Rpt)a (ROSC Rpt)a 2009 and practices? 3.2.3 Internal auditor · Has the bank appointed a qualified internal auditor? · Is the internal auditor independent? Does he report to the audit committee, board of directors, or other governing authorities? · Does the internal auditing program include clearly defined policies, processes, (ROSC Rpt)a and metrics as performance benchmarks? · Does the internal auditor provide periodic reports on the risk management, control, and governance processes to the audit committee? · If so, what is the frequency of such reports? Quarterly Annual Quarterly Not specified Not clear (differs from bk to bk) 4. Board Structure and Effectiveness 4.1 Role and effectiveness 4.1.1 Structure · What is the average structure of the board (unitary, two-tiered, or hybrid)? Unitary Unitary Hybrid Unitary Hybrid · What is the average size of the board? 13 8­10 5­9 7 min. 5­11 · Are there minimum qualification requirements for appointment of board members x by law, regulation, and recommended practice? 4.1.2 Role and responsibility · Is the scope of the powers and responsibilities of the board clearly defined? · Are tasks and objectives individually allocated to board members, including the x defined by BOD chair and the board secretary? · Does the board have a process to identify all the laws and regulations it must comply with? Appendix · Is there a process in place for director induction, training, and continuing education? x x orientation courses (SBP prior approval needed) 3. Corporate 4.1.3 For two-tier boards, do key responsibilities include the following? NA NA N/A NA Code of best (Please specify whether required by law or regulation or recommended practice issued by by a code.) CBSL requires BOD to be Gover responsible for these issues nance · Reviewing and guiding corporate strategy and major plan of action. Matrix: · Risk policy. · Business plans. Questionnair · Setting performance objectives. · Monitoring implementation and corporate performance. · Overseeing major capital expenditures, acquisitions, and divestitures. e Responses, (Table continues on next page) 2006 143 144 4. Board Structure and Effectiveness (continued) Question Bangladesh India Nepal Pakistan Sri Lanka Getting 4.2 Compensation Finance 4.2.1 Determination of board remuneration · Is there a law or regulation that sets board remuneration? x differ from bk to bk in · What role do shareholders play in determining board remuneration? N/A In pvt Approve Approve South sector bks it at AGM it at AGM · Who sets remuneration for the CEO? BOD, with BB Govt. for public BOD, approve it BOD Asia approval bks, s/holders at AGM for pvt bks 2009 4.2.2 Does the board of directors receive some performance-based x Exec. directors get x N/A in the form of an annual cash bonus, stock, or the like? perform. bonus for As per co. achieving targets ordinance; from 03/2006 public approved sector banks pay at AGM perform. bonus only from 2006­07 and only to full- time executive directors 4.2.3 Do banks disclose the board's compensation? x · If so, is disclosure aggregate or detailed? Public, Detailed Detailed Aggregate aggregate; private detailed Sources: South Asian Central Banks, SECs and Boards, and stock exchanges; Indian Banks' Association 2006a, 2006b, and 2006c; Reserve Bank of India 2006a, 2006b, 2006c, and 2007. Note: For definitions of acronyms and abbreviations, see the list at the beginning of the report. N/A = not available; NA = not applicable. a. 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The Regional Economist (January): 10-11. http://www.stlouisfed.org (accessed in 2007). Index The letters f and t following a page number refer to figures and tables, respectively. Access to finance financial stability, 9, 15, 16­17, 47, 48f, Bangladesh, 9, 15­16, 46, 46f 52, 64 development dimension, 4­5 gross domestic product, 13 goals for South Asian countries, 63 gross national income, 14 India, 9, 20, 21, 46, 46f market capitalization, 14, 57f international comparison, 51­52, 55f, market concentration and 58, 59t, 60f competitiveness, 10, 15, 17­18, measurement, 4, 69­71 49f, 57f micro indicators, 4, 46. See also specific microfinance in, 11, 16 indicators national debt, 14 microfinance, 10, 11 national savings, 14 Nepal, 9, 26, 46f, 63 performance and efficiency, 9, 15, 16, Pakistan, 9, 31­33, 46, 46f 46, 47f ranking of South Asian countries, 9, population, 13 44, 46, 46f prudential regulations and risk Sri Lanka, 9, 37, 38, 46, 46f, 63 management, 17, 18, 85­87 Accounting and auditing standards regional ranking in Getting Finance Bangladesh, 19, 85­86 Indicators, 9, 43, 44, 45f India, 24­25 strategies for financial sector Nepal, 30 development, 15 Pakistan, 36 structure of banking system, 14 Sri Lanka, 42 tax policy, 19 Afghanistan, microfinance in, 11 See also International comparison; South ATMs. See Demographic ATM penetration; Asian countries Geographic ATM penetration Basel Committee on Banking Supervision, 7, 105 Bangladesh Basel II framework access to finance in, 9, 15­16, 46, 46f Bangladesh compliance, 16, 17, 85 bank ownership and management goals for South Asian countries, 64 structure, 18­19 India and, 22, 88 Basel II and, 16, 17, 85 Nepal and, 28, 29, 92 capital market development, 10, 15, Pakistan and, 34, 96­97 17, 48f Sri Lanka and, 39­40, 100­101 corporate governance, 10, 15, 18­19, 49f, Benchmark data, 3­4, 8­9, 13, 51, 65. See 65, 107t also International comparison current economic performance, 13­15 Bond markets see Domestic bonds to economic growth, 14 equity market capitalization ratio economic sectors, 14 and Domestic public bonds exports, 14 outstanding ratio 149 150 Getting Finance in South Asia 2009 Capital adequacy ratio Corporate governance Bangladesh, 16, 52, 53f, 64, 85 assessment methodology, 4, 7, 78, 79 definition and calculation, 5, 73 Bangladesh, 10, 15, 18­19, 49f, 65, 107t India, 22, 52, 53f, 88­89 Basel Committee on Banking international comparison, 52, 53f, 59t, Supervision principles, 7, 105, 106t 61f country ranking methodology, 80­83 Nepal, 27, 52, 53f, 64, 92, 93 data sources, 79 Pakistan, 33, 52, 53f development dimension, 7, 78 ranking of South Asian countries, 47, goals for South Asian countries, 65 48f, 64 India, 10, 20, 23­25, 49f, 65, 107t Sri Lanka, 39, 52, 53f, 100­101 Nepal, 10, 29­31, 49f, 65, 107t Capital market development opportunities for improvement, 10 Bangladesh, 10, 15, 17, 48f Organisation for Economic development dimension, 6 Co-Operation and Development goals for South Asian countries, 64 best practices, 7, 105, 106t India, 10, 20, 22­23, 48f, 54 Pakistan, 10, 31, 35­37, 49f, 65, 107t international comparison, 10, 54, 57f, ranking of South Asian countries, vii, 10, 58, 59t, 61f 44, 47, 49f measures of, 6, 75­76 Sri Lanka, 10, 40­42, 49f, 65, 107t Nepal, 10, 26, 28, 48f Pakistan, 10, 31, 34, 48f Demographic ATM penetration ranking of South Asian countries, 10, 44, Bangladesh, 15 47, 48f definition and calculation, 4, 70 Sri Lanka, 10, 37, 40, 48f India, 21 Commercial banking assets international comparison, 58, 59t, 60f Bangladesh, 14, 14t Nepal, 26 India, 20, 14t Pakistan, 31 Nepal, 14t, 26f ranking of South Asian countries, 46f Pakistan, 14t Sri Lanka, 38 Sri Lanka, 14t, 37 Demographic branch penetration Commercial banking assets to GDP ratio Bangladesh, 15 Bangladesh, 15f, 18, 49f definition and calculation, 4, 69­70 definition and calculation, 7, 78 India, 21 India, 23, 49f international comparison, 58, 59t, 60f Nepal, 29, 49f Nepal, 26 Pakistan, 35, 53, 49f Pakistan, 31 ranking of South Asian countries, 49f ranking of South Asian countries, 46f Sri Lanka, 37, 40, 49f Sri Lanka, 38 Commercial banking sector Deposit accounts per 1,000 people accounting and auditing standards, 19, Bangladesh, 15 24­25, 30, 36, 42, 85­86 definition and calculation, 4, 70 Bangladesh, 14 India, 21 benchmark data, 8­9, 13, 51, 65 Nepal, 26 development role, 3, 13, 63 Pakistan, 32 India, 20 ranking of South Asian countries, 46f Nepal's, 26 Sri Lanka, 38 ownership and management structure, Domestic bond market to equity market 18­19, 23, 24, 25, 30­31, 35­37, capitalization ratio 40­41, 42, 91 Bangladesh, 17, 48f Pakistan's, 31 definition and calculation, 6, 75 Sri Lanka's, 37 India, 22, 48f Competitiveness. See Market concentration Nepal, 28, 48f and competitiveness Pakistan, 34, 48f Index 151 ranking of South Asian countries, 48f Pakistan, 32, 52f, 55f Sri Lanka, 40, 48f ranking of South Asian countries, 46 Domestic public bonds outstanding ratio Sri Lanka, 38, 52, 52f, 55f Bangladesh, 14, 14f, 17, 48f Geographic branch penetration definition and calculation, 6, 75 Bangladesh, 15, 51, 52f India, 14t, 20, 23, 48f definition and calculation, 4, 70­71 international comparison, 58, 59t, 61f India, 21, 51, 52f Nepal, 14t, 28, 48f international comparison, 51­52 Pakistan, 14t, 31, 34, 48f Nepal, 26, 52f ranking of South Asian countries, 48f Pakistan, 31­32, 52f Sri Lanka, 14t, 40, 48f ranking of South Asian countries, 9, 46f Sri Lanka, 38, 52f Equity market capitalization Getting Finance Indicators. See Financial See also Stock market capitalization ratio Performance and Soundness Indicators Financial Performance and Soundness Government securities market Indicators Bangladesh, 17 accomplishments of South Asian India, 23, 92 countries, 9, 43 Nepal, 26, 28 country ranking methodology, 80­83 Pakistan, 34 development and application, 3, 7­8 Sri Lanka, 37, 40 ranking of countries, 9­10, 43­46 Gross nonperforming loans ratio selection, 7, 79­80 Bangladesh, 16, 53f, 56f, 59f, 61f six dimensions, 4, 43. See also specific definition and calculation, 5, 74 indicator goals for South Asian countries, 64 Financial sector development India, 22, 53f, 56f, 59t, 61f data sources, 13 international comparison, 52, 53, 58, 53f, development dimensions, 4­7 56f, 59f, 61f limits of analysis, 10 Nepal, 28, 53f, 56f, 58t, 61f See also Commercial banking sector Pakistan, 33, 53f, 56f, 59t, 61f Financial stability ranking of South Asian countries, 47, 48f Bangladesh, 9, 15, 16­17, 47, 52, 48f Sri Lanka, 39, 53f, 56f, 59t, 61f definition, 5 development dimension, 5 Herfindahl-Hirschman Index goals for South Asian countries, 64 Bangladesh, 17, 55f, 57f India, 9, 20, 22, 47, 48f, 52, 64 definition and calculation, 6, 12 n.1, 76 international comparison, 52­54, 58, 59t India, 23, 55f, 57f measures of, 5, 73­74 international comparison, 54, 55f, 57f micro indicators, 47 Nepal, 29, 55f, 57f Nepal, 9­10, 26, 27­28, 47, 48f, 52, 64 Pakistan, 34, 55f, 57f Pakistan, 9, 33­34, 47, 48f, 52 ranking of South Asian countries, 47, 49f ranking of South Asian countries, 9, 44, Sri Lanka, 10, 40, 54, 55f, 57f 47, 48f, 83 significance of, in economic India development, 5 access to finance in, 9, 20, 21, 46, 46f Sri Lanka, 9, 37, 39­40, 47, 48f, 52 banking system structure, 20 Basel II commitment, 22, 88 Geographic ATM penetration capital market development, 10, 20, Bangladesh, 15, 52f, 55f 48f, 64 definition and calculation, 4, 71 corporate governance, 10, 20, 23­25, 49f, India, 21, 52f, 55f 65, 107t international comparison, 52f, 55f current economic performance, 13, 19­20 Nepal, 26, 52f, 55f economic growth, 19­20 152 Getting Finance in South Asia 2009 economic sectors, 20 Liquid assets ratio exports, 20 Bangladesh, 17 financial stability, 9, 20, 22, 47, 48f, 52, 64 definition and calculation, 5, 74 gross national income, 20 India, 22 market capitalization, 20, 57f Nepal, 28 market concentration and Pakistan, 34 competitiveness, 10, 23, 47, 49f, 57f ranking of South Asian countries, 47, 48f microfinance in, 11, 21 Sri Lanka, 39 national savings rate, 20 Liquid assets to liabilities ratio nonperforming loans, 22, 53 Bangladesh, 17 outstanding domestic bond, 20 definition and calculation, 5, 74 performance and efficiency, 9, 20, 21­22, India, 22 46, 47f Nepal, 28 population, 13, 19 Sri Lanka, 39 prudential regulation and risk ranking of South Asian countries, 48f management, 22, 23, 88­92 Loan accounts per 1,000 people regional ranking in Getting Finance Bangladesh, 15 Indicators, 9, 43, 44, 45f definition and calculation, 4, 70 state-owned banks, 21, 24 India, 21 strategies for financial sector Nepal, 26 development, 20 Pakistan, 32 See also International comparison; South ranking of South Asian countries, 46f Asian countries Sri Lanka, 38 International comparison access to finance, 51­52, 55f, 58, 59t, 60f Market concentration and benchmark data, 3­4, 8­9, 13, 51 competitiveness capital market development, 10, 54, 57f, Bangladesh, 10, 15, 17­18, 49f, 57f 58, 59t, 61f goals for South Asian countries, 64­65 financial stability, 52­54, 58, 59t India, 10, 23, 47, 49f, 57f market concentration and international comparison, 54, 55f, 57f, competitiveness, 54, 57f, 58, 58, 59t, 62f 59t, 62f measures of, 6­7, 76­78 performance and efficiency, 52, 56f, 58, Nepal, 10, 29, 49f, 57f 59t, 60f, 61f Pakistan, 10, 31, 34­35, 49f, 57f South Asian countries, 65 ranking of South Asian countries, 10, 44, 47, 49f K-bank concentration ratios significance of, in economic Bangladesh, 17, 18, 49f, 55f, 59f, 62f development, 6 definition and calculation, 6, 77 Sri Lanka, 10, 37, 40, 49f, 54, 57f India, 23 49f, 55f, 59t, 62f Methodology international comparison, 55f, 59t, 62f access to finance measures, 5, 69­71 Nepal, 29, 49f, 55f, 59t, 62f benchmark data, 3­4, 8­9, 13, 51 Pakistan, 34, 35, 49f, 55f, 59t, 62f capital market development measures, ranking of South Asian countries, 49f 6, 75­76 Sri Lanka, 37, 40, 47, 49f, 55f, 59t, 62f compilation guide, 4, 69­78 corporate governance assessment, 4, 7, Leverage ratio 78, 79 Bangladesh, 16 country rankings, 9, 80­83 definition and calculation, 5, 73 financial sector data sources, 13, 79 India, 22 financial stability measures, 5, 73­74 Nepal, 27 market concentration and ranking of South Asian countries, 48f competitiveness measures, 6­7, Sri Lanka, 39 76­78 Index 153 performance and efficiency measures, tax policy, 28, 94 5, 71­73 See also International comparison; South scope of data for comparative analysis, Asian countries 4, 7, 79 Net interest margin ratio Microfinance Bangladesh, 16 access to finance measurement and, 10 definition and calculation, 5, 72 Bangladesh, 11, 16 India, 22 India, 11, 21 Nepal, 27 limitations, 63 Pakistan, 32f, 33 Nepal, 11, 26 ranking of South Asian countries, 46, 47f Pakistan, 11, 32­33 Sri Lanka, 39 Sri Lanka, 11, 38 Nonbank financial institutions Micro indicators access to finance, 10 calculation, 69­78 Financial Performance and Soundness definition, 4 Indicators, 3 international comparison for financial See also Microfinance performance, 51 Nonperforming loans ranking of South Asian countries, 46­50 See also Gross nonperforming loans See also specific indicator ratio Nepal Operating cost ratio access to finance in, 9, 26, 46, 46f, 63 Bangladesh, 16 Basel II and, 28, 29, 92 definition and calculation, 5, 72 capital market development, 10, 26, India, 21 28, 48f Nepal, 27 corporate governance, 10, 29­31, 49f, Pakistan, 33 65, 107t ranking of South Asian countries, 46, 47f current economic performance, 13, Sri Lanka, 39 25­26 Organisation for Economic Co-operation economic sectors, 25 and Development, 3­4, 7­8, 51, exports, 25 105, 106t. See also International financial stability, 9­10, 26, 27­28, 47, comparison 48f, 52, 64 Ownership and management structure of gross domestic product, 25 banks gross national income, 25 Bangladesh, 18­19 market capitalization, 25, 29, 57f best practices, 105 market concentration and India, 23, 24, 25, 91 competitiveness, 10, 49f, 57f Nepal, 30­31 microfinance in, 11, 26 Pakistan, 35­37 national savings rate, 25 Sri Lanka, 40­41, 42 nonperforming loans, 28, 53 outstanding domestic bonds, 25 Pakistan performance and efficiency, 9, 26­27, 46, access to finance in, 9, 31­33, 46, 46f 47f Basel II implementation, 34, 96­97 population, 25 capital market development, 10, 31, prudential regulation and risk 34, 48f management, 28, 93­96 corporate governance, 10, 31, 35­37, 47, regional ranking in Getting Finance 49f, 107t Indicators, 9­10, 43­44 current economic performance, 13, 31 state-owned banks, 26 economic growth, 31 strategies for financial sector economic sectors, 31 development, 26 exports, 31 structure of banking system, 26 financial stability, 9, 33­34, 47, 48f, 52 154 Getting Finance in South Asia 2009 market capitalization, 31, 34, 57f Private credit extended by banks market concentration and Bangladesh, 18, 49f competitiveness, 10, 31, 34­35, definition and calculation, 7, 77 49f, 57f economic significance, 10 microfinance in, 11, 32­33 India, 23, 49f national savings rate, 31 international comparison, 58, 59f, 62f nonperforming loans, 33­34 Nepal, 29, 49f performance and efficiency, 9, 31, 33, 46, Pakistan, 35, 49f 47f recommendations for South Asian population, 13, 31 countries, 64­65 prudential regulation and risk ranking of South Asian countries, 49f management, 34, 97­100 Sri Lanka, 40, 49f regional ranking in Getting Finance Provisions to nonperforming loans ratio Indicators, 9, 43, 44, 45f Bangladesh, 17, 53f strategies for financial sector definition and calculation, 5, 74 development, 31, 33 goals and South Asian countries, 64 structure of banking system, 31 India, 22, 53f tax policy, 33 international comparison, 53, 53f, 54 See also International comparison; South Nepal, 28, 53f Asian countries Pakistan, 33, 43f Performance and efficiency ranking of South Asian countriesx, 47, Bangladesh, 9, 15, 16, 46, 47f 48f development dimensions, 5 Sri Lanka, 39, 53f goals for South Asian countries, 64 India, 9, 20, 21­22, 46, 47f Prudential regulations international comparison, 52, 56f, 58, Bangladesh, 17, 18, 85­87 59t, 60f, 61f economic significance, 10 measures of, 5, 46, 71­73 goals for South Asian countries, 64 Nepal, 9, 26­27, 47f India, 22­23, 88­92 Pakistan, 9, 31, 33, 46, 47f Nepal, 28, 93­96 ranking of South Asian countries, 9, Pakistan, 34, 97­100 44, 46, 47f previous Getting Finance Indicators Sri Lanka, 9, 38­39, 46, 47f studies, 3, 7, 13 Population, 13 Sri Lanka, 39, 101­103 Bangladesh, 13 India, 13, 19 Recurring earning power ratio Nepal, 13, 25 Bangladesh, 16 Pakistan, 13, 31 definition and calculation, 5, 72­73 Sri Lanka, 13, 37 India, 22 Poverty reduction and economic Nepal, 27 development Pakistan, 32f, 33 access to finance and, 4 ranking of South Asian countries, 47f capital market development and, 6 Sri Lanka, 39 corporate governance and, 7 Return on assets distribution of development gains, 4 Bangladesh, 16, 53f financial stability and, 5 definition and calculation, 5, 72 market concentration and India, 21, 53f competitiveness and, 6 international comparison, 52, 53f, performance and efficiency of financial 59t, 60f institutions and, 5 Nepal, 27, 53f risk management and, 8 Pakistan, 33, 52, 53f role of commercial banking sector, 3 ranking of South Asian countries, 47f significance of financial sector reform, 63 Sri Lanka, 38­39, 53f Index 155 Return on equity Sri Lanka Bangladesh, 16, 52, 53f, 56f access to finance in, 9, 37, 38, 46, 46f, 63 definition and calculation, 5, 71 Basel II implementation, 39­40, 100­101 India, 21, 26, 52, 53f, 56f capital market development, 10, 37, international comparison, 52, 53f, 56f, 40, 48f 59t, 60f corporate governance, 10, 40­42, 49f, Nepal, 53f, 56f 65, 107t Pakistan, 33, 52, 53f, 56f current banking system, 37 ranking of South Asian countries, 47f current economic performance, 13, 37 Sri Lanka, 38, 52, 53f, 56f financial stability, 9, 37, 39­40, 47, Risk management 48f, 52 Bangladesh, 17 gross domestic product, 37 goals for South Asian countries, 64 market capitalization, 37, 57f importance of, in economic market concentration and development, 8 competitiveness, 10, 37, 40, 47, 49f, India, 22, 23 54, 57f, 64 Nepal, 28 microfinance in, 11, 38 Pakistan, 34 nonperforming loans, 39 Sri Lanka, 39­40 performance and efficiency, 9, 38­39, See also Prudential regulation 46, 47f population, 13, 37 Self-help groups, 11, 21 prudential regulations and risk Shareholder rights management, 39­40, 101­103 Bangladesh, 19 regional ranking in Getting Finance India, 24 Indicators, 9, 43, 44, 45f Nepal, 30 strategies for financial sector Pakistan, 36 development, 37 Sri Lanka, 41­42 tax policy, 102 South Asian countries, overall See also International comparison; South access to finance, 9, 44, 46, 63 Asian countries accomplishments, 9, 43 Staff cost ratio capital market development, 10, 44, Bangladesh, 16 47, 64 definition and calculation, 5, 72 corporate governance in, 10, 44, goals for South Asian countries, 64 47­50, 65 India, 21 current economic performance, 13 Nepal, 27 economic reform strategies, 9 Pakistan, 33 economic significance of banking ranking of South Asian countries, 46, 47f sector, 13 Sri Lanka, 39 financial sector data sources, 13, 79 State-owned banks financial stability, 9, 44, 47, 64 Bangladesh, 16­17 international comparison of financial India, 21, 24 performance. See International Nepal, 26 comparison Stock market capitalization ratio market concentration and Bangladesh, 14,17, 57f competitiveness, 10, 44, 47, 64­65 definition and calculation, 6, 76 microfinance movement, 10, 11 India, 20, 23, 54, 57f performance and efficiency of financial international comparison, 54, 54f, 57f, institutions, 9, 44, 46, 64 58, 59t, 61f population, 13 Nepal, 25, 28, 57f ranking of, in Getting Finance Pakistan, 31, 34, 57f Indicators, 9, 43­50, 80­83 ranking of South Asian countries, 48f See also specific country Sri Lanka, 37, 40, 57f 156 Getting Finance in South Asia 2009 Stock market turnover ratio Pakistan, 34 Bangladesh, 17 ranking of South Asian countries, 48f definition and calculation, 6, 76 Sri Lanka, 40 India, 23, 54 Tax policy international comparison, 54, 54f Bangladesh, 19 Nepal, 28, India, 91 Pakistan, 34 Nepal, 28, 94 ranking of South Asian countries, 48f Pakistan, 33 Sri Lanka, 40 Sri Lanka, 102 Stock trading value ratio Trading value of the top 10 stocks ratio Bangladesh, 17 Bangladesh, 17 definition and calculation, 6, 76 definition and calculation, 6, 75 India, 23, 54 India, 23 international comparison, 54, 54f Nepal, 28 Nepal, 28 ranking of South Asian countries, 48f ECO-AUDIT Environmental Benefits Statement The World Bank is committed to preserving Saved: endangered forests and natural resources. The · 6 trees Office of the Publisher has chosen to print · 26 million BTUs of Getting Finance in South Asia 2009: Indica- total energy tors and Analysis of the Commercial Banking · 492 lbs of net Sector on recycled paper with 30 percent post- consumer waste in accordance with the recom- greenhouse gases mended standards for paper usage set by the · 2,042 gallons of waste Green Press Initiative, a nonprofit program water supporting publishers in using fiber that is not · 262 lbs of solid waste sourced from endangered forests. For more in- formation, visit www.greenpressinitiative.org. 90° 60° 70° 80° 100° SOUTH ASIA REGION AFGHANISTAN 30° 100° 60° PAKISTAN 30° BHUTAN NEPAL BANGLADESH INDIA 20° 20° Arabian Sea Bay of Bengal 10° 10° SRI This map was produced by the LANKA INDIAN OCEAN Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment MALDIVES 0 200 400 600 Kilometers on the legal status of any territory, or any endorsement or acceptance of 0 100 200 300 400 Miles such boundaries. 70° 80° 90° IBRD XXXXX AUGUST 2008 The commendable initiative takenbytheWorldBanktodevelopstandard indicatorsformeasuringtheperformanceand soundnessofthefinancialsectorinSouthAsiahas, overtheyears,servedtostrengthenthefinancial riskassessmentframeworkintheregion.These indicatorshavebeenofimmensehelptosupervisory authoritiesintheregion,includingtheStateBank ofPakistan,tomonitorfinancialvulnerabilitiesand weaknesses,andalsotodrawcomparativeanalysis withregionalcounterparts. --Dr.ShamshadAkhtar Governor, State Bank of Pakistan The data, benchmarks, and analyticscontainedinthisvolumeprovideawealth ofinformationonSouthAsianfinancialsector developmentandwouldundoubtedlybeofmuchuse toregulators,researchers,andthegeneralpublic. -- Dr.RaneeJayamaha Deputy Governor, Central Bank of Sri Lanka ISBN 978-0-8213-7571-6 SKU 17571