The complacent banking industry seems to be self-serving, and is faltering in its basic economic function of acting as an effective financial intermediary and in responding to the demands of development.

The weak regulator, State Bank of Pakistan (SBP), focuses on everything but misses the most essential issue: orientation of the banking sector.

Banks are shy of lending to the most needy sectors and regions while the loan-to-deposit ratio (LDR) was a low 51pc in calendar year 2013, against 69pc in 2007. It is 80pc in India and 71pc in Bangladesh.

Monetary experts consider the current LDR deceptive, as it is worked out on the basis of all loans, including the backlog of old loans. “If LDR is calculated on the basis of fresh deposits and advances, it will be under 15pc,” comments a former finance minister.

“Both the quality and quantity of lending by banks leave much to be desired. They are currently invested heavily in government securities, with as much as 83pc of deposits. They tend to mobilise deposits from across the country, but avoid lending to resource-starved, less developed regions and small and medium enterprises (SMEs).”

Senior bankers do not contest this view, but blame the government and the central bank for the banking industry’s lending policy.

“In a fairly regulated environment, we are law abiding corporate citizens. If we chase the best deal that promises high returns at minimum risk, that is what we are paid to do,” says a top executive of a private bank.

The relevant data confirms that risk-averse commercial banks earn fabulous profits by investing depositors’ money skewed to their own benefit, instead of using it to meet credit requirements of businesses. Their role as intermediaries in serving the greater interest of depositors is questioned by experts.

“The banking industry is highly concentrated. Over 70pc of assets are held by the top five banks, which collect deposits from all over the country but invest 80pc of their assets in government securities and in lending to top companies. This does little for national development, as government lending finances mainly operational losses of public sector entities,” Salim Raza, a former SBP governor, told Dawn over phone.

“SMEs’ share in total bank credit has declined to 6.8pc, and agriculture’s to 7.5pc. But the sharper skew lies in regional distribution of loans. Banks in Sindh advanced 65pc of their deposits as credit within the province, while the ratio was 51pc in Punjab. But for KP, the corresponding figure was 9pc; Balochistan’s at 6.5pc and AJK’s at 4.5pc, according to June 2013 SBP data,” he laments.

The country’s economic hierarchy is currently in the US to attend the spring meetings of the IMF and World Bank. In their absence, no one in the finance ministry or the SBP was ready to offer comments.

“The much-lauded privatisation of state-run banks seems to have taken a flawed but economically useful banking sector and turned it into a closely knit group of asset management companies, which are allowed to make enormous profits with minimal risk,” Munir Kamal says in his published comments.

“Such a misguided policy has not solved major problems identified in the pre-reform financial sector, and has left Pakistan with a banking sector which is institutionally unable to perform the necessary economic functions that banks have historically performed in other countries at similar levels of development.”

Sayem Ali, an economist at Standard Chartered Bank, agrees with the perception, though he feels that the SBP and the government are trying to make corrections to check the direction of the banking industry.

“Last year, the SBP fixed the minimum rate of return on deposits at 7pc to allow depositors get a slice of banks’ profit pie. It did squeeze banking spreads, as a balance sheet of any bank would show. So yes, a lot more needs to be done, but it would be unfair to assume that the SBP fails to act in the public interest,” Sayem makes a point.

“Besides, it would also be unfair to dump the blame of failings in the financial system exclusively on banks. Lack of documentation makes lending to the private sector highly risky in developing countries. The demand for credit from the private sector in Pakistan has also not been high because of law and order situation and the energy crisis,” he says while defending banks.

“If banks don’t invest in government securities when there is an opportunity and demand for credit is low, where would they employ their liquidity? Unemployed liquidity distorts the financial system: it leads to a drop in interest/deposit rates and spoils bank balance sheets,” another senior executive of a private bank says.

But businessmen are not ready to buy the bankers’ argument. “How can I believe bankers when so many of my desperate colleagues are struggling to arrange working capital through banks for so long, without success? The relevant authorities must do what it takes to make banks fulfill their role in the development of the country by supporting the key driver of the process: the private sector,” a businessman concluded the argument.