It must yield tangible results
By SHABBIR H. KAZMI
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.