privatization of banks and its impact on customers

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CHAPTER 6

Privatization of Banks and Its Impact on Customers

6.1. Introduction

In the operation of a bank, there is unique relationship between banks and customers.

Banks are borrower from customers at one place (pulling savings) and banks are lenders

to customers at second place (providing loans, advances and credits). This borrowers and

lenders relation is very important and need confidence on each other. The success of

commercial banks totally depends on satisfaction of customers, if customers are satisfied

they will use the products and services of the banks and banks can generate

revenueprofit for the owners.

The financial sector witnessed significant changes in terms of introduction of new

services, e!pansion in e!isting services and changes in the regulatory framework. "uring

the last few years, the banking sector e!panded its menu of services aggressively by

introducing new products. In the area of consumer financing, the banks are now

competing with each other aggressively in contrast with an almost absence of these

activities in the past. Banks have also been revamping their e!isting services of deposit

taking and lending by introducing new instrumentsschemes tailored according to the

business needs of customers. #ncouragingly, these changes are being made to specifically

target the small and the medium si$e savers or borrowers. %onsequently, lending to the

small and medium enterprises, which had been a neglected area in the past, has now re&

emerged as a strong potential investment avenue.

6.2. Caracteristics of Commercia! Banks in Pakistan

"espite the rigorous reforms of the financial sector during the 's, there was a dearth of

financial services offered by the financial institutions in the country. Banks and the non&

bank financial institutions were largely involved only in the provision of traditional services

like deposit mobili$ation and credit e!tension mainly for working capital or pro*ect

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financing needs of industry. ervices like personal financing, credit cards or -T facility

were negligible and there was no concept of online banking, phone banking or even housing

finance by the banks. The situation, however, started turning around in the /s when

significant progress was made in improving the health and soundness of the financial sector.

6.". Customer#s Pro$!ems

'. %ustomers were needs to keep some cash in homes for emergency, because of

working hours of banks in 0akistan. 0eoples having money in their accounts were

unable to withdraw from bank after '/ o1clock of afternoon. This was one of the

most important drawbacks of banking services and was caused the low rate ofmobili$ation of savings.

/. The second important problem of banking sector in 0akistan was no safe products

and services for fast transfer of money. %arrying huge amount in ship of cash had

become the base for looting burglary etc.

+. 2o proper facilities for submission of utility bills at the end and start of months.

aking of long queue to wait for own term was another problem facing by

customers, and problem of law and order for local authorities.

3. Information1s about products and services were not for all. The small deposit holders

were not aware to get benefits from bank products and services.

4. 5oans, advances and credits were only for big fishes on the basis of their political

backgrounds or something else, but not for all customers.

6. 2o use of modern technology in banking sector was also cause of dissatisfaction of

customers.

6.%. Ca!!en&es faced $' Commercia! Bankin& in Pakistan.

There is a mini revolution in the financial sector of the economy in 0akistan. The

liberali$ation of e!change control, large scale privati$ation of state enterprises, opening

of new banks in the private sector, deregulation of credit controls, conversion to Islamic

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banking etc., etc. have brought about radical changes in the banking sector. The banks are

rapidly equipping themselves for the new role to be played in meeting the challenges

faced by commercial banking. The main competition challenges faced by commercial

Banking in 0akistan are as under7 &

'. Can&e in (arket )eeds. "ue to privati$ation of state owned enterprises,

deregulation environment, free capital flow in and out of 0akistan, the banks are

now to focus greater attention on meeting the market needs of the customers. The

banks that solve the customer1s problems for enlarging sale of the product will

receive higher reward. The traditional role of providing trade finance only is now

relegated to the background.

/. *ervice to Customers. The banks which can provide speedy, accurate and

standard services in the delivery of products, loans etc. to the customers will be a

success. The others will be chipped away.

+. Re&u!ator' Ca!!en&es. The bank shall have to work within a regulatory

framework that protects the interest of the depositors and ensure the provision of

capital to the customers.

3. Consumer Bankin&. The banks do not adequately finance the basic needs of the

consumers such as housing, transportation, and other durable. There is a challenge

to banking sector as to how the finance could be provided to the consumers so

that they could also benefit from the advances in technology and banking.

4. Ca!!en&e to )e+ Banks in Private *ector. The new banks in the private sector

will have to develop a sound funding base, attracting high quality management,

providing high quality services to the customers to meet the new challenges in the

banking sector.

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6.,.Emer&ence of )e+ Products and *ervices

The privati$ation of public sector financial institutions, rela!ation in the licensing and

regulatory environment for micro and rural credit institutions, mandatory requirements for

banks to get themselves evaluated by credit rating agencies, measures to improve corporate

governance, removal of restrictions on consumer financing by nationali$ed banks,

incentives to provide mortgage finance, improvement in the legal framework for defaulted

loans recovery, changes in the prudential regulations enabling banks to e!pand their scope

of lending and customer network, reduction in the corporate ta! rates on banks, mandating

the banks to *oin -T networks and the initiation of the development of 8eal Time 9ross

ettlement (8T9) system all helped in bringing about a sea change in the financial

services offered by various financial institutions.

ignificant progress was made during /' and // in terms of e!pansion of micro

finance activities, emergence of new financial products and services, automation of retail

banking transactions, moderni$ation of payment system and Islami$ation of financial

services. :inancial services commitments under 9eneral -greement on Trade and

ervices (9-T) under ;T< have also impacted the financial sector in recent past.

:inancial services landscape of future will also be influenced by 9-T.

6.,.1. Consumer -inancin&

%onsumer financing means any financing allowed to individuals for meeting their

personal, family or household needs. %onsumer financing is not a new idea, this avenue

of lending was almost entirely ignored by the banks and only the non&bank financial

institutions had been active in e!tending such credits. This was due to the fact that banks

were reluctant to embark on such activities owing to the longer tenures involved. It was

only after /', when banks were flushed with liquidity that the interest in such lending

arose among banks.

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-t the moment %onsumer financing is being provided by banks through credit cards, auto

loans, housing finance and personal loans for the payment of goods, services and

e!penses. Banks are required to e!tend such loans within the broad parameters set by the

B0.

6.,.2.Consumer -inancin& Products

Credit cards

Auto oans

Housin& -inance

AT(E!ectronic Bankin& etc.

Ta$!e 6.1. /etai!s of Consumers0 Products and *ervices in Pakistan.

Products 2 21 22 2"(arc

)um$ers of Credit Cards 22 2, "3 %

)um$er of 4n ine $rances "22 %, 333 %

)um$er of AT( 26 2, " %%,

)um$er of AT( Transactions "62% ,2% "1 6%,

5

7a!ue of Transactions 5in (i!!ion 12,3 2218 "3386 28,2

Trends in Auto oans 5in (i!!ion . "., %.1 ).A

ource7 Banking ystem review tate bank of 0akistan, //.

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Figure 6.1 Numbers of Credit Cards

400000

Numbers of

200000 CreditCards

0

Figure 6.2 Number of On Line branches

1000

500

Number of On Line branches

0

Figure 6.3 Number of ATM

600

400 Number of ATM

2000

20022000

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Ta$!e 6.2. /istri$ution of AT( 5in )um$ers

2 21 22 2" (arc

Pu$!ic *ector Commercia! Banks %8 66 8 1

/omestic Private $anks 11" 1%6 2%, 238

(us!im Commercia! Bank 3, 1" 1,1 1,,

5(CB

4ters "8 %" % 12"

-orei&n Banks %, %3 6, 63

Tota! 26 2, " %%,

*are of (CB in 9 "6.% ".8 "3.8 ).A

ource7 Banking ystem review tate bank of 0akistan, //.

The data clearly indicates the interest of the peoples in uses of new products and services

of banking sector in 0akistan. But still the number of users is very low when we compare

it with total numbers of accounts for the mentioned periods. The positive point is the

upward trend of the users and we hope with the passage of the time and awareness of the

customers that ratio will further increased. =owever, the contribution of %B in the

provision of new products and services as a privati$ed bank is very encouraging. The data

about other bank (-B5) selected as a case study is not available to separately to use in

comparison.

6.6. Impact on Customers

8esearcher has prepared the questioner to collect the primary data in three district of

2;:0 i.e. "era Ismail khan, 0eshawar and ardan. I failed to use questioner as a data

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collection tool because ma!imum customers were less educated and unable to fill the

questioner properly, so I have carried semi structure interview to collect data about

customer1s views for pre and post privati$ation periods of banks. - series of questions

were designed to e!amine the satisfaction of bank customers with bank services,

confidence on banking sector, use and knowledge of new products etc., etc. I have

interviewed + customers of each bank in each district and table of their response to

different questions is as under7

Ta$!e.6." Customers kno+!ed&e a$out Privatization of Banks

:uestions Positive E;treme!' )e&ative E;treme!'

positive ne&ative

1. /o 'ou kno+ +at is "9 29 39 2,9

privatization? 4? 6? /A?

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Ta$!e 6.6 Customers 7ie+s A$out 4peration of )e+ Products and *ervicesPositive E;treme!' )e&ative E;treme!'

positive )e&ative

AT( 29 ,9 ""9 69

4n !ine account %9 ,9 ,19 %9

Credit cards ,9 69 "9 %9

Figure 6.* Customers +ie!s About O&eration of Ne! )roducts

ositi!e

"#treme$ 'ositi!e

Ne&ati!e

"#treme$ Ne&ati!e

The study also found that ma!imum customers did not know how to operate the new

products of the banks. The astonishing thing I have noted during interviewing the well

qualified customers like teachers including university teachers and doctors, engineers etc.

their response was totally negative about the operation of -T, however they were

aware about uses of on line account and credit cards.

The percentage of account holders who can operate these new products are very low, *ust

4? can operate the -T most them were foreign returned and ? can operate on lineaccount and ''? can operate credit cards.

In terms of banking hours, the ma*ority (>6./?) of the respondents in a survey indicated

their dissatisfaction with the current banking hours. i!ty&five percent (64?) of the

respondents indicated their preference for longer hours from A.+ am to 3. p.m. The

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study also found that ma!imum bank employees are not able to operate the new products

and technologies and need proper training.

6.3 Conc!usion

The new economics of information, together with the advent of e& banking, deregulation,

privati$ation, convergence, and consolidation are reshaping the banking industry.

-utonomy can help you develop a formidable online offering to satisfy and e!ceed

consumers raised e!pectations. -round the world, banks are facing new challenges in

their battle to compete successfully. These challenges are being driven by three

interrelated factors7 changing customer e!pectations, which has led to the CreinventionC

of retailingD innovations in technology that have permitted structural bypass, and an

evolution of regulatory policies that have led to enterprise realignment. -s a result, bank

management today is facing an entirely new set of strategic issues7

Eeeping shareholders happy

%ustomer loyalty and profitability

"istribution strategy

:le!ible cost structure

2ew structures for growth

8isk management

Eeeping pace with change

:inancial services providers are poised to profit from new e&business opportunities and

new legal freedom to combine industry segments&such as banking and insurance&but they

face the challenge of opening backend systems to broader audiences than ever before.

;ith a phenomenal growth of electronic transactions internationally, it is crucial for

0akistan to develop its e&commerce infrastructure to be the part of global economy. But

due to the capital&intensive nature of such operations, 0akistani banks have been lagging

behind in offering e&commerce services in the past. It is only during last couple of years,

when the e&banking witnessed some growth in the country. Banks are now investing

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heavily to bring their operations on modern technological grounds. To facilitate their customers,

each bank is now maintaining its website to provide a comprehensive information regarding the

services that they offer. ;ide&ranging services like

-utomated Teller achines, credit cards, debit cards and phone banking are now common

among most of the banks.

;e will recommend that *ust creation of new products are not enough but customer1s awareness

is more important. In the country like 0akistan, bank management should develop

comprehensive plan for educating customers and employees of the banking sector about the new

products and services.

;e conclude that the theory, privatization will increase competition and competitionwill give

birth to new products, is proved in case of 0akistani banking sector. - lot ofnew products andservices are introduced after the privati$ation and reform in banking industry of 0akistan. The

introduction of computers at bank branches and the installation of -Ts seemed to set in motion

a revolution in 0akistan1s banking system. o as to ensure that financial assistance is rendered to

the potential borrowers, it is necessary for a bank to develop adequate level of awareness about

the various types of schemes and facilities and their utility among the people. uch awareness

can be developed in various ways such as educating borrowers potential borrowers through

formal and informal interactions. The bank branches are required to hold customer meetings

once a month to generate awareness and interaction. In addition, the branch personnel are

e!pected to move in field to contact e!isting and potential borrowers to know their requirements

and e!pectations from the Bank to enable the banker to tailor the schemes to suit the

requirements of the customers within the overall framework and guidelines of the Bank.

privatization of banks and its impact on customers

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