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Special Correspondent, Islamabad
Dec 13 - 19, 1999

Pakistan Industrial Credit and Investment Corporation (PICIC) was incorporated in 1957 as a public limited company to act as an agency for onward making the credits available through Government of Pakistan to industrial enterprises in the private sector. As an agency it was assigned the role of distributing the foreign currency loans received from international lending agencies for accelerating industrialisation of the country according to industrial planning and development approved by the GoP. During 1980 a sum of Rs 9947.50 million were lent to Pakistan Industrial Credit and Investment Corporation (PICIC), which were repayable during 1984-2007. PICIC had been regular in making the repayments up to 1993-94 but thereafter the recoveries by PICIC from their clients were not adequate to service the annual debt liabilities towards government which resulted into accumulation of over-dues. The factors leading to over-dues situation were the following: major exposure is in the textile sector. Due to persistent recession in the textile industry, liberal rescheduling of loans was allowed to various textile units; and, law and order situation in the country, particularly in Karachi, slowed down the recovery by PICIC from its borrowers.

Due to these constraints, financial position of PICIC became precarious and it suffered operating loss of Rs 280 million for the first time in 1994-95 and of Rs 1094 million in 1995-96. PICIC has now embarked upon a concerted effort to recover stuck up loans. Its financial performance has been turned around. In 1997-98 it resumed servicing of its debt by paying Rs 1100 million in that year. However, as of June 30, 1998 their outstanding liability of over-dues was Rs 4473.92 million (Rs 2018.87 million principal and Rs 2455.05 million interest).

The Economic Coordination Committee of the Cabinet on August 19, 1999 constituted a committee to examine the proposal of PICIC whereby it demanded for rescheduling of its loans. The committee comprising of high government officials held four meetings. PICIC in its rescheduling plan proposes yearly payment of Rs 1500 million to GoP in the first three years, Rs 1307 million in the fourth year and Rs 1000 million in the year 2003-2004 which would further decrease in the subsequent years. To a question asked by the committee that will the PICIC be able to make sufficient recovery of loans from its borrowers to meet the rescheduling plan, PICIC said that the recovery pattern from the year 1997-98 from the performing and non-performing loans has been around Rs 1000 million and Rs 500 million respectively. Apart from that the management was negotiating with the enterprises for out of court settlement of the cases under litigation. PICIC expects recovery of 70 per cent loans as a result of negotiations through this method. Regarding the thorugh process of liquidation, as per past experience, PICIC could recover only about 16 per cent of loans through liquidation process and in most of the cases even principal loan amount could not be recovered and was written off. The Management was pursuing a policy for recovery through the out of court settlement as there were better prospects for recovery of stuck up loans through this recourse. As of Ist July 1999, a balance of Rs 9799.7 million was payable by PICIC to GoP (principal Rs 6063.6 million and interest Rs 3736.3 million) till the terminal dates of these credit lines as agreed between PICIC and GOP. Against that, PICIC has to recover Rs 1750.1 million from its borrowers excluding future accrued interest.

PICIC has proposed rescheduling of the outstanding over-dues amounting to Rs 4473.92 million from the year 1999 onwards making adjustment within the terminal dates without involving any moratorium. While considering the question of loss likely to incur to GoP as a result of rescheduling and grant of waiver of interest on principal of Rs 2018.87 million, the PICIC informed that PICIC's liability towards GoP amounted to Rs 11777.2 million as against GoP's liability to foreign lenders equivalent to Rs 9948.6 million. Thus a benefit of Rs 1828.6 million was accruing to GoP. PICIC has proposed payment of over-dues without interest on outstanding principal of Rs 2018.87 million which works out to Rs 1302 million up to its repayment leaving a net gain of Rs 526.6 million to GoP.

GoP gave loans to PICIC for financing the projects in private sector for accelerating the industrialization. The on-lending rate was capped at 14 per cent per annum providing a spread of 3 per cent per annum to PICIC to meet the management cost as well as to give dividends to its shareholders. During the years 1994-1997, due to recessions in textile industry, the government asked PICIC to allow rescheduling to its borrowers. Following that the recovery plan of PICIC was severely affected and defaulted to GOP. Additionally a number of borrowers became insolvent and companies were liquidated. PICIC suffered heavy losses as a result of liquidation of these companies. In the past, PICIC was declaring dividends to its shareholders from the profit generated through capital market operations. PICIC was asked by SBP to make provisions of Rs 3407 million in 1996-97 and Rs 2296 million in 1997-98 under Prudential Regulation which it is still short of Rs 2156 million. To meet this requirement further, PICIC may not be able to give cash dividends to its shareholders as the accrual profit would be diverted to repay the loans and to meet the provisioning requirements laid down by SBP.

Committee's findings

PICIC has been performing the role of a DFI for accelerated industrialization as per policies of the government. The interest rate on financing the projects was capped which was not commercially viable to meet the bad debt cases. In the preceding years due to recession in textile industry, government has allowed liberal rescheduling of loans to textile industry. PICIC had suffered huge losses as over 50 per cent were on-lent to textile sector. The request of PICIC for rescheduling of loans appears justified as the organization have no other source for repayment of loans other than the recovery from its clients. The rescheduling of outstanding liability of Rs 4473.92 million and waiver of interest of Rs 1302 million on over-due principal of Rs 2018.87 million may be approved subject to the following conditions: (a) The current installments becoming due each year shall be regularly paid on due date. (b) There shall be no moratorium or the grace period and extension in terminal dates for repayment of loans. (c) PICIC shall accelerate the repayments of loans if the capital gains improve in the coming years. Finance Division will monitor the financial performance of PICIC.

According to PICIC loan recovery is the only source of cash inflow from where debt repayment to Government of Pakistan can be made. In view of limitations due to stuck-up advances of around 66 per cent it is beyond PICIC's capacity to clear over-dues and hence back-loaded. Capital market has remained bearish for the fourth year in succession. Besides, a turn-around in near future is not in sight and hence capital gain has not been envisaged in cash flow projections. Domestic/external resources available from GoP and State Bank of Pakistan have fully been exhausted and there is no prospect of availability of relent loans from GoP in near future. PICIC, is therefore planning to negotiate lines of credit with local and foreign institutions besides raising funds from international market on issuance of papers. In order to effectively mobilize these sources of funds and revitalize PICIC, credit rating is also being planned. T achieve these objectives it is necessary to improve financial position which includes resumption of repayment of relent loans to GoP on rescheduling basis. It is for this reason that PICIC is requesting GoP to help revitalize PICIC to be able to restart its core business of long term industrial financing on its own strength and financial position as PICIC was incorporated with the sole objective of long term project financing being its main business.