Nov 22 - 28, 1999
In vociferous problems of
Pakistan, the deficit domestic budget of the country and infected loan portfolio of
banking sector are paramount. Enough revenues are not being generated to cover the
expenditure budget therefore public sector borrowing is raised to meet the requirements.
Similarly, Banks/DFIs have a publicized infected portfolio of more than Rs.200 billion and
efforts are being accelerated 7for its recovery.
I am inspired by looking at the news of Malaysian State Agency takeover
of $10 billion in bad loans/non performing loans from financial institutions having equity
from Government which were due to bad management/ abuse of power or unwise transactions
and reflected a chaotic situation in the country synonymous to Pakistan.
The loan portfolio has to be in line with international accepted norms,
where, servicing of loans installment and recovery of markup is not compromised. The
recovery of defaulted loans is a prime objective, but, in the absence of a realistic
figure of recoverable amount, the planning is marred.
How the loans have reached to its present volume being quoted? Varied
borrowers pleas are unknown. Collaterals available at the disposal of lending institutions
are to be reassessed. All are gray areas without much clarity. On top of that, time frame
for recovery is an illusion.
We have also seen that those bankers who have been responsible for
disbursements or studying the feasibility and were conversant with ambience of
disbursement at the initial stage, are, out of picture due to layoffs in these
institutions in the past couple of years. It is a general psychology of the business deals
that if you change faces, the information abyss would take days and months leaving the new
team groping in the dark, reading files, assessing and making the loan recoverable to
The defaulted loan recovery should be planned as a separate portfolio
to be managed where strategies have to be formulated. It would require a new setup
supported by a data bank. The systems, equipment and negotiating force, all have to be
geared up in the form of a tailor made activity to complete the task within a time frame
and in an exemplary situation. In this context, a plan is being proposed to derive desired
results of maximum recovery at a minimum cost within lesser time.
Looking at the various kind of sectors and products involved, it is a
complex issue to negotiate and proceed for recovery without having a reasonable knowledge
of Sector, Borrower, Product, Collaterals and Options. The entire loan amount has to be
analyzed and to be segregated in various sectors as Agriculture, Industrial, Trading and
Politically motivated loans and should be dealt with in accordance to normal sectoral
indicators and behaviour.
Damaged crops, trading losses, exchange losses, labour problems, each
situation has to be assessed and a room for providing allowance to accept a reasonable
amount for write off will be business prudence. It will be in full knowledge of the
institutions that how much mark up has been added in the principal amount. The
deterioration in quality of assets as Collateral is to be kept in mind. The loss of
exchange or even delay in disbursement of acutely needed funds at time, makes a business
suffer. It would also be a requirement of social justice to deal with loan defaults on its
I am sure that with the analysis, infected portfolio magnitude will be
reduced to a rational figure of Rs100 billion or fifty percent of the total publicized
statistics. The entire portfolio has to be taken out from banking assets, to be parked in
an institution, trust/body/organization after being incorporated under a legal framework
with powers of foreclosure law to dispose of assets. The loss of asset portfolio from
banks would cause an inadequacy in capital, loss of earning or business, but the State
authority can provide some compensation to keep the institutions viable as per
The portfolio structuring will be based on the actual figures
considered befitting to recovery plan. It is a consensus that Rs. 100 billion recovery
plan will be within the scope of reach. Having planned the sectoral analysis, the major
activity will be of drawing a task force and motivating it for recovery.
It requires lot of homework and experience to negotiate. The force
deployed, has to be fully equipped with information and sectoral problems. More a contest
of wits, where a knowledgeable customer, knowing his business, will still take it as a
business venture leaving the personnels who are not fully abreast with the subject, at a
disadvantage. The borrower will exploit it to full extent.
The Cotton growers/ginners, textile defaults, Rice, Wheat or Sugar
procurement and business losses, or a leather industry liability, all will have to be
taken in its own perspective and divisions are to be created for specific product
recovery. Five Committees could be formed within the organization, having a portfolio of
Rs Twenty billion or more for recovery. Head of each Committee, having good knowledge of
the sector, will be selected from amongst bankers of good repute. He will report to
Chairman of the body formed for the purpose.
The Executive Incharge will be provided for his requirement of staff,
equipment, premises and minimum expenditure budget supported by a recovery plan and
The Committee will be supported by a Chartered Accountant, Legal
Advisor, expert from business industry, well conversant with the sectoral activity, and
experienced bankers. The Heads of Committee and staff are to be chosen from amongst
retired Presidents, Credit heads, and Senior bankers who have sufficient knowledge and
technical ability to salvage the situation. The utilization of their services will not be
an exercise in futility.
A mix of new talents from LUMS and IBA graduates whose energetic and
statistical approach will help to pickup the lost threads of ten years in the portfolio.
It would be on the job training for them and create expertise in growing financial sector.
The retired bankers/professionals will not require hefty salaries and by virtue of their
economical approach, the operational cost is to remain limited. It would be a blending of
old guards and new talents, fully equipped with knowledge, incentive and zeal to work for
the cause of the country and are likely to provide with the desired results.
Time frame and Budget
Initially the body may be set up for three years, extendable to further
two years. The Committees are to be allowed to prepare and present their first report on
planning, and budgeting within one month.
A joint meeting of Committee is to be held monthly to assess viability
and the documents, can be exchanged to develop coordination between them. The total
expenditure may be limited to one percent of the entire recoverable plan, to be authorized
by the National Council, formed by the Chief Executive, enabling expenditure to be carried
without bureaucratic hiccups.
It is estimated that cost of entire operation for three years should
not go beyond half percent. The staffing, equipments, premises, stationery, travelling,
local consultancy, utilized with austerity measures and indigenous products, will help
If the consensus figure is accepted for recovery plan as Rs. 100
billion, the expenditure of Rs. 500 million will be a sweet pill to be swallowed to make
sick financial sector healthy.
Viable system and conclusion
A planned and realistic approach duly supported by dedicated, honest
old bankers and professionals assigned to the job, the viability of maximum recovery is
possible. Providing employment to some retired bankers even for a period of three to five
years, will redress some grievances of those who have not been allowed a fair chance to
show their mettle in the new set up of nationalized sector banks.
The assistance of Chamber of Commerce can be sought by convincing them
that loan default stops the cycle of resources and ultimately the business community
suffers if funds are taken out of the system. It is in their interest to accept
responsibilities of business. Why is it only that the financial institution should suffer
for the venture which entrepreneurs had undertaken?
Another point equally important to the whole problem of default loans,
is excessive trumpeting. It should be under played and left to the professionals to draw
out the plan. It reflects business culture. We have already lost trust of the
international business community whose interest in our country can only be persuaded when
we give them a confidence of trust and fair play. If we speak more about default and
corruption without redressing the situation it will only further slide our rating. We can
still make our economy strong and muster some pride in the international sphere. Where
there is a will there is a way.