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It must yield tangible results

Nov 15 - 21, 1999

Apparently the campaign for recovery of amount from loan defaulters is in full swing. Defaulters are being reminded of the deadline for settling the amount. However people view this campaign in different ways. Some of them believe that similar recovery drives initiated in the past have hardly helped due to political reasons, the laws are weak and the financial institutions already suffering from excessive liquidity are not keen as they fear a recession. Whereas others believe that no one, whosoever should be spared. If about 25 per cent is recovered during the latest drive it can help in boosting the GDP growth rate.

One needs to first estimate the outstanding amount and then try to forecast the recoverable amount to be collected by the deadline expires. The outstanding amount is estimated around Rs 300 billion. This can be split into three portions, principal, interest and interest on interest. The principal amount is estimated around half of the total or Rs 150 billion. Bulk of this pertains to a smaller number of borrowers. A larger percentage has three to five years tenure.

At the same time a large number of defaulters can be termed as 'habitual defaulters'. They are the people who have political connections and had secured these loans, to start with, with a clear intention of not paying them back. Project financing was not based on economic viability of these ventures and equity was raised through kickbacks. Therefore, no sooner did these units started commercial production they became sick. These units cannot be revived as they were not viable even at the time they were financed. Therefore, the best way out is to liquidate these ventures rather than postponing their closure at the cost of national loss.

The financial sector experts, keeping all the odds in mind, still say that 30 to 50 billion rupees can be recovered. This will constitute outright recovery of outstanding amount and down payment for rescheduling. Many of these experts believe that the recovery could be higher should the government decide to exert the maximum pressure. "It only needs a rigid attitude and no political consideration. The financial institutions need to catch less than 100 people or groups — mostly politically well connected people. It is not a difficult target to achieve provided the government does not bow down before various pressure groups" said an analyst.

One group of experts believe that the amount, to be recovered, is already in circulation and recovery drive can initiate a recession in the country. The other group says a larger chunk has already left the country and it is a chance to bring it back. The first group says that the defaulters have used the amount for setting up new industrial ventures, buying real estate, accumulating dollars and shares. This was the reason that undocumented economy has registered tremendous growth rate during the last five years. But the second group says that there are clear indications that only one tenth of the misappropriated funds has been retained in the country whereas the balance 90 per cent has already been placed outside Pakistan.

If the first point of view is accepted, the recovery drive can result in economic slow down. But it will be confined, mostly, to undocumented economy. The positive impact will be much higher than the estimated adverse implications. While the trade of luxurious products including cars and smuggled imported consumer brands may witness a decline, the prices of goods used by an average consumer will witness a reduction. It will not be due to any reduction in demand but due to reduced 'hoarding power' of the traders.

The poor results of previous recovery drives clearly indicate weaknesses of the legal system in the country. Therefore, there is an urgent need to address this issue. In the prevailing circumstances amendments in the laws can be made promptly and conveniently by issuing required ordinances.

The banking sector experts have made some radical suggestions. These include immediate takeover of units in case sponsors fail to settle outstanding amounts and appointment of administrators, change of management wherever possible and declaring sponsors bankrupt after summary proceedings. They also suggest that if any sponsor is declared bankrupt he/she should be declared ineligible for remaining a director in any company and a signatory of a company's account.

To some people these may look a little harsh but this is the way financial institutions operate in many countries. The takeover laws are simple and change of management is a routine. If sponsors in Pakistan were part of the ongoing loot there should be an end to this. The money lent by the financial institutions belongs to shareholders and depositors. It is the responsibility of the management of these institutions and the government to protect the interest of the shareholders and the depositors which they have been failing to discharge. Now there must be an end to this ruthless exploitation — it is not a favour to the stakeholders but simply discharging the duty prudently.