##tapped markets. 17. first, although the banks have witnessed a substantial rise in profitability and improvement in capital adequacy ratios, the asset : liability management practices discussed above have increased the risk exposure of the banking sector, especially in the wake of monetary tightening since q4 - fy04. few trends were noteworthy : ( i ) the fall in the share of longer - tenor fixed deposits led to an emergence of maturity mismatch in banks ’ balance sheets. in particular, the incremental advances and investment had longer maturity compared with the incremental bank deposits. sbp encourage banks to attract long vide ordinance no. xl vi of 2001 dated 30 august 2001 term deposits by reducing cash reserve requirements ( crr ) for long tenor deposit while raising crr on shorter tenor deposits. besides improving the maturity profile of banks ’ liabilities, this measure was intended to reduce the stickiness of bank deposits. responsiveness of bank depositor to interest rates is expected to drive down the interest rate spreads. ( ii ) advances to total assets rose due to strong credit growth and impacted banking systems credit risk and liquidity indicators considerably from cy03 onward as reflected by the rise in advances to deposit ratios and decline in liquid assets to total assets ratios. surge in advances, with a relatively larger exposure towards high - risk cliental ( such as agriculture, sme and household sector ) also exposed the banking sector to higher credit risk ; the increased maturity mismatches, i. e., higher average maturity of assets than liabilities, have raised liquidity risk. so far the banking sector has effectively coped with the increased risk exposure. while nonperforming assets registered a downward trend from fy01 onward ; banks witnessed a strong growth in capital, which stemmed from substantial improvement in profitability and increased in minimum - paid capital requirement. 18. as expected, the indicators for productivity and capital adequacy have shown a positive relationship with roa of financial institutions. 2 the latter reflects that a well - capitalized financial sector is able to tap business opportunities more efficiently and have more flexibility in dealing with problems arising from adverse developments in the operating environment of the financial sector. this also supports the ongoing policy of strengthening the capital base of financial institutions through raising paid - up capital requirement. 19. second, banking sector reforms have not penetrated deep down or spread across population and regions. vast majority of the population does not have access to financial services. country is characterized by

lowest savings rates and access to finance remains weak. few selected indicators are quite illustrative of the situation : of the 156 million people, the number of deposit holder as per statistical bulletin is 26, 321, 688 which also include multiple accounts by same persons / entities. for a country with a population of approximately 156 million these numbers are abysmally low since it only accounts for less than 17 percent of total population. enhancement in deposit mobilization and in particular promoting long term resource mobilization – this will require banks to raise deposit rates to stimulate low savings rate which have been partly hurt by low returns and partly by high propensity to consumption. equally important are steps being taken by central bank to stretch maturity of deposit by charging lower reserve ratio ’ s for long dated deposits. 20. as per credit information bureau ( cib ) records the number of borrowers from the banking system is under five million i. e. 4, 781, 509 as of end june 2006, which accounts for only 3 percent of the population. not only is the population underserved but banks are catering to largely urban or semi urban areas and concentrating in similar locations / segments with limited reach to the middle and lower strata of society. notwithstanding credit to previously underserved markets such as consumer, housing, small - and medium - sized enterprises ( sme ) and agricultural sectors has expanded markedly and is now being provided by a broad range of financial institutions. despite this large segments of the economy continue to operate with little formal credit. credit penetration of banking sector is lowest in asia pacific : number of borrowers is barely 5 million. credit / gdp ratio is only 27 % of gdp. while rising from under half a percent total consumer loans remains only 3. 9 % of gdp. mortgage market currently is only $ 1 billion. formal microfinance network which has witnessed significant growth reaches only 770 households with limited coverage to women. 21. in developing a program for access to development finance, sbp is adopting a four - pronged approach : ( i ) encouraging the government to divest its remaining stake in banks. plans to privatize smalland medium - sized enterprise bank ( smeb ), industrial development bank of pakistan ( idbp ), house building finance corporation ( hbfc ), investment corporation of pakistan ( icp ), and national investment trust ( nit ) are on cards. ( ii ) promoting microfinance industry development in order to avoid the simultaneity problem