KASB Bank Limited: Capital Shortage

Abstract

KASB Bank Limited was a small sized bank in Pakistan. Its operations did not generate sufficient profits and over the years it was unable to meet the regulatory capital as specified by the State Bank of Pakistan. The bank’s loan portfolio was infected with poor quality borrowers and this resulted in very high non performing loans which required loan loss provisions. The bank sponsor had other group companies which the KASB Bank acquired in order to meet the capital needs. The State Bank as part of compliance with BASEL rules required higher amounts of capital to protect the banking sector and had allowed KASB Bank extra time to meet the capital needs. However, the State Bank ultimately used its regulatory authority to put the bank under its supervision. The State Bank placed KASB Bank under a moratoriam so that the KASB Bank customer deposits were frozen and only withdrawls up to PKR300,000 were allowed from each account. The State Bank wanted another bank to take over the KASB Bank operations and allowed other interested banks to conduct due diligence so as to review the financial status of the bank with a view to take over the troubled bank. There were very few banks interested in taking over because KASB Bank had negative equity estimated at PKR12 to PKR14 billion. The State Bank in order to protect the interests of the 150,000 depositors and the stability of the banking system gave a concessionary loan of PKR20 billion as part of the scheme of amalgamation of KASB Bank with Bank Islami.