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The NDFC affairs

The element of stealth and surprise remains the hallmark of the Finance Ministry's impulsive policies.

From Shamim Ahmed Rizvi, 
Islamabad
Sep 10 - 16, 2001

A snap 180 days moratorium imposed on the National Development Financial Corporation (NDFC) freezing about Rs. 24 billion deposits of over 200,000 account holders has caused another jolt to the credibility of the government and further shattered the confidence of the investors. According to a notification of the State Bank NDFC depositors accounts will stand transferred to National Bank of Pakistan from where they can withdraw their principal amounts in a phased programme during and after the moratorium.

Contrary to the claims of transparency, the country's financial affairs continue to be manned in surreptitious manner. The element of stealth and surprise remains the hallmark of the Finance Ministry's impulsive policies, having direct bearing on the financial institutions' credibility. The people are being confronted, again and again, with uncertain financial situation and depositors are periodically subjected to cruel mental torture, besides causing undue financial hardships to them through such unwarranted decisions. As if the depositors' agony resulting from the clandestine closure of the Indus and Prudential Banks and Bankers Equity Ltd. was not enough that they have been made to endure another shock in the form of NDFC's moratorium, when the nation has still not fully recovered from the devastating effects of the foreign currency accounts freeze in May, 1998.

The SBP on August 29 announced that individual depositors of NDFC having deposits up to Rs. 100,000 would be able to draw the principal amount from September 5. The depositors would get profit on their deposits up to August 27. According to NDFC sources, out of over 200,000 NDFC depositors, around 35,000 depositors have deposits of up to Rs. 100,000 each. Of the remaining depositors, 20 per cent individual account holders having deposits between Rs. 100,000 and Rs. 500,000 will be able to draw their principal amount in the third week of October before NDFC final amalgamation with the NBP.

During the moratorium period, NBP staff would be present at all branches of NDFC where depositors with principal amount up to Rs. 100,000 are allowed to draw the principal amount of their deposit from September 5, as per the announcement of State Bank. The State Bank circular did not make it clear whether these payments will include the interest earned on deposits till the date of such withdrawal or only the principal amount will be returned.

The authorities could not have played a more bitter joke on the investors. Denying them their right to earn profit on deposits is totally unfair and without any justification. Admitted that the NDFC has been in a bad shape for quite some time but it is not the depositors that have brought this state-run corporation to where it is now. If the decision to stop paying profits on the NDFC deposits after August 27 is not reviewed, it will further shaken the confidence of the investors and the savers and little room for expecting them to come forward and place their funds into saving schemes of the state-run financial institutions. That in turn will frustrate the government plans to revive the economy.

Not only that the moratorium has been imposed in a most clumsy and awkward manner the wisdom of the move as such comes under question more so because it has once again shaken the already dwindling confidence of the local and foreign investors and has dealt a severe blow to small savers. We should not forget that investment in the country is touching its lowest ebb and the saving rate here is much lower than in several other countries of the region.

Imposing moratoriums on banks and financial institutions (BEL and PCB and the NDFC) instead of fixing the problems before they warrant such drastic moves raises questions about the efficiency of the government as well as the State Bank. Besides, it shakes the confidence of the investors and savers particularly, because bitter memories of the sudden freezing of $11 billion deposits in May 1998 are still fresh in their minds. And the fact that these deposits had to be frozen because they had been used up without any authority by the successive governments and the SBP had kept the deposits in the dark adds insult to injury. This was such a crude reality check for the investors and the savers, including overseas Pakistanis who owned major chunk of the frozen deposits, that any move made by financial managers now are seen in this light. People have lost faith in whatever the authorities want to tell them.

It is also rumoured that the State Bank has to come out with its decision to suspend the operation of NDFC in haste because the World Bank had demanded closure of unviable financial institution as a pre-requisite of its $300 million loan for restructuring the financial sector. The NDFC is one of them. Since top government functionaries were divided on the question of whether the corporation should be restructured or amalgamated with some other institutions, the World Bank wanted a clear assurance that the government would exercise the second option which was more in line with its demand The announcement of a 180-day moratorium was the only option that the government could think of to reassure the World Bank that the NDFC will not be restructured it will rather be amalgamated with the National Bank.

While explaining the rationale for the NDFC amalgamation with the NBP, the State Bank has said that a revival plan chalked out for the NDFC was not found feasible. But management of the corporation insists and several officials in the State Bank and the Ministry of Financial believe that revival of the NDFC is still a much better option than its amalgamation with the NBP. These officials privately admit that the revival option was perhaps unacceptable to the World Bank.

The list of the NDFC defaulters is also long but on top are sitting some three dozen parties the descendent of the spivs of the olden times. Together their defaults totals Rs. 10 billion. Just imagine. Thirty-six parties in number and the amount of default is Rs. 10 billion or only Rs. 1.5 billion less than Rs. 11.5 billion deposits of over 100,000 small investors. Has such a huge default built up overnight of course not. They kept mounting up since mid 80s but successive governments failed to contain them. They rather contributed their bits to expand the defaulters list. A casual glance at the list of 36 large defaulters would testify this statement.