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 revenue profit 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 instruments schemes tailored according to the business needs of customers. #ncouragingly, these changes are being made to specifically target the small and the medium si$e savers or borrowers. %onsequently, lending to the small and medium enterprises, which had been a neglected area in the past, has now re& emerged as a strong potential investment avenue. 6.2. C aracteristics of Commercia! Banks in Pakistan "espite the rigorous reforms of the financial sector during the '(()s, there was a dearth of financial services offered by the financial institutions in the country. Banks and the non& bank financial institutions were largely involved only in the provision of traditional services like deposit mobili$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$!ems '. %ustomers were needs to keep some cash in homes for emergency, because of working hours of banks in 0akistan. 0eoples having money in their accounts were unable to withdraw from bank after '/ o1clock of afternoon. This was one of the most important drawbacks of banking services and was caused the low rate of mobili$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.%. C a!!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 & '. C an&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' C a!!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. C a!!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$!e 6.1. Products )um$ers of Credit Cards )um$er of 4n .ine $ranc es )um$er of AT( )um$er of AT( Transactions 51116 7a!ue of Transactions 5in (i!!ion6 Trends in Auto .oans 5in (i!!ion6 12,13 1.2 22118 "., "3386 %.1 281,2 ).A /etai!s of Consumers0 Products and *ervices in Pakistan. 2111 "22 216 "62% 2111 %,1 2,2 ,22% 2112 "31111 333 "22 2"12 211"(arc %11111 22% %%, 6%,1

221111 22,111

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

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Figure 6.1 Numbers of Credit Cards

400000 200000 0
Numbers of Credit
Cards

Figure 6.2 Number of On Line branches 1000 500 Number of On Line branches 0

Figure 6.3 Number of ATM

600 400 200 0 2000 2002

Number of ATM

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Ta$!e 6.2.

/istri$ution of AT( 5in )um$ers6 2111 2111 66 1%6 11" %" %3 2,2 "2.8 2112 82 2%, 1,1 2% 6, "22 "3.8 211" (arc 111 238 1,, 12" 63 %%, ).A

Pu$!ic *ector Commercia! Banks /omestic Private $anks (us!im Commercia! Bank 5(CB6 4t ers -orei&n Banks Tota! * are of (CB in 9

%8 11" 3, "8 %, 216 "6.%

,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." :uestions 1. Customers kno+!ed&e a$out Privatization of Banks Positive /o 'ou kno+ + at is "9 39 E;treme!' )e&ative positive 29 ,9 ,9 1,9 319 6,9 ,19 %,9 privatization< 2. /o 'ou fee! an' c an&e in $ank services< ". %. /o 'ou kno+ a$out ne+ 119 /o 'ou ave confidence on 219 ",9 219 products of t e $anks< $anks< 289 E;treme!' ne&ative 2,9

Figure 6.4 Custom ers no! "edge about #an s

80% 60% 40% 20% 0% ositi!e "#trem e$% 'ositi!e Ne&ati!e "#trem e$% ne&ati!e

1( )o %ou *no+ +hat is 'ri!ati,ation2( )o %ou fee$ an% chan&e in ban* ser!ices.( )o %ou *no+ about ne+ 'roducts of the ban*s4( )o %ou ha!e confidence on ban*s-

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0eoples of 2;:0 have unique culture that is not easy to change with education. 8eligious factor is also considered in bank transactions. "uring survey I have observed that ma!imum customers with enough education do not know what is privati$ation. <nly 4? customers ma!imum @niversity teachers, doctors and engineers or well&educated businessmen were known to concept of privati$ation. <nly /? of total were well aware about the privati$ation process. 64? did not know this term, while /A? heard the term but did not know the real concept. ,o for changes in services are concerned response of '/? was positive or e!tremely positive. >? of were of the views that after privati$ation, the services of these two banks are improved but unable to notify. 4? were able to notify the change in services. I have also observed that '4? respondents are aware about the new products introduced by these two banks after privati$ation. %onfidence on banks ratio is still very low in 2;:0 because of the problems already e!plained in this chapter (cultural problem). The survey results also confirm the continued lack of confidence in the banking system as a result of the unorthodo! policies of the government in the '((( and onward. The ma*ority of the respondents indicated that the lack of banking confidentiality and fear of government probes of individual bank accounts serve as a deterrent to deposits, especially large deposits. The ama$ing thing we have noted in the survey is that 64? of total are still look like allergic from banking system while /4? have shown confidence on banking system in 0akistan. <ne positive impact is the disappearance of the long waiting time at some of the larger banks that have introduced -T.s and computers. ,ome depositors still complain about delays at banks, especially those banks that are not yet computeri$ed.

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Ta$!e 6.% C an&es in Bank Emp!o'ee#s Be avior :uestions Be avior +it customers Cooperation +it customers /ea!in& +it customers Provision of information =ood "19 239 2%9 29 7er' &ood 2,9 1%9 119 69 Bad 2"9 229 "69 %,9 7er' $ad 229 "19 "19 %19

Figure 6.$ %m&"o'ees #eha(ior !ith Customers 50% 40% .0% 20% 10% 0% /ood 0er% &ood 1ad 0er% bad
1eha!ior +ith customers

Coo'eration +ith customers )ea$in& +ith customers ro!ision of information

The survey reveals that employee1s behavior with customers is improved because of change in ownership and structure of their services that is 44? where +)? is good and /4? is very good, cooperation and dealing with customers is not bad but percentage of information is very low. This shows that low percentage of customer1s knowledge is because of non&availability of appropriate information.

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Ta$!e 6., Customer#s A+areness A$out t e Banks )e+ Products 0ositive -T. <n line -ccount %redit cards #:T0<, +? 4? >? '? #!tremely 0ositive /? +? 4? )? A)? 64? 6)? )? 2egative #!tremely 2egative '4? />? /A? ((?

Figure 6.6 Customers A!areness About #an Ne! )roducts

120% 100% 80% 60% 40% 20% 0% ositi!e "#treme$% ositi!e Ne&ati!e "#treme$% Ne&ati!e

ATM
On $ine Account Credit cards "2T O3

I have found during the survey that ma!imum customers in these three districts ("era Ismail khan, .ardan and 0eshawar) used as population do not know the new products created by these two banks after privati$ation. <nly 4? of the total know about the -T. stand for, while (4? do not know what is -T. and what that stands forB I have also observed that only A? of the customers know about on line account facility of the banks and (/? have no knowledge of on line account. <nly '/? in these three districts have knowledge of credit cards and AA? responded in negative. ,o for #:T0<, is concerned only '? has give answer in positive while ((? don1t know what is #:T0<,B

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Ta$!e 6.6 Customers 7ie+s A$out 4peration of )e+ Products and *ervices Positive E;treme!' )e&ative E;treme!' positive )e&ative AT( 29 ,9 ""9 619 4n !ine account %9 ,9 ,19 %19 Credit cards ,9 69 "29 %29

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 line account 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 competition will give birth to new products, is proved in case of 0akistani banking sector. - lot of new products and services are introduced after the privati$ation and reform in banking industry of 0akistan. The introduction of computers at bank branches and the installation of -T.s 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.