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The stock of NPLs to Rs. 290 billion by end 2001 from Rs. 207 billion in 2000 and Rs. 185 billion in the year 1999

From SHAMIM AHMED RIZVI, 
Islamabad
June 10 - 16, 2002

There has been alarming increase in the amount of non-performing loans (NPLs) during the last 30 months of the present government. According to the latest figures available in the Ministry of Finance the stock of NPLs to Rs. 290 billion by end 2001 from Rs. 207 billion in 2000 and Rs. 185 billion in the year 1999. According to the latest country report of the World Bank this amount may increase to Rs 384 billion by end of the current year.

Recovery of stuck up loans was one of the prime objectives of General Musharraf, when he took over in October 1999, the then previous government. The recovery drive launched by the National Accountability Bureau (NAB) made wholesale arrests of the businessmen, even on circumstantial defaults, resulting in severe backlash and further loss of confidence. NAB was able to recover few billions rupee from the erring industrialists, but during the process many industries fell sick. The contracting economic activity in the country fuelled further failures, and more loans were categoried as non-performing.

Despite the official claims of over Rs. 50 billion cash recoveries, the Finance Ministry figures show an increase of almost Rs. 105 billion in the NPLs during the present regime. Realising its dismal performance on the recovery of defaulted loans the government took a fresh initiative in this regard. The then President Rafiq Tarar promulgated an ordinance to provide for expeditious legal remedies for the matters relating to non-performing assets. The ordinance also provided for legal remedies for the recovery of outstanding loans of the banks and other financial institutions to make them attractive for privatization and to promote the revitalization of national economy and rehabilitation and restructuring undertakings. The ordinance was expected to enable the government to expedite the process of recovery of outstanding loans as it provided for the high courts to set up special tribunals to deal with the loan defaulters. However like previous attempts and actions, this effort has also failed to bring about any significant improvement in the situation.

According to the latest country report of World Bank (2002) Pakistan Development Policy Review the non-Performing Loans (NPLs) of the Nationalised Commercial Banks (NCBs) have become a major problem because of political interference and directed credits to individuals and companies. The amount of NPLs have reached alarming proportions, that is, Rs. 384 billion in the current fiscal year. It is supposed to be one of the stringest problems of the domestic banking industry. The Asian economies are also badly plagued with NPLs. After the financial and economic crisis of 1997 in ASEAN countries, NPLs are again beginning to mount amid an expected global recession that would hit Asia the hardest. The entire financial area of Asia was feeling the heat from a sharp decline in economic output and exports even before the September 11. It is expected that even among the technology-driven economies like Singapore and Taiwan, a large number of start-ups would file for bankruptcy in the wake of a sudden plunge in consumer confidence and demand. More importantly, it also noted, that wealthier economies such as Taiwan, Singapore and Hong Kong were also affected.

The present government started a drive to recovery with a mission, but it seems that the mission has not yet been accomplished. Successive governments adopted many administrative and legal steps to curb the menace of non-performing and defaulted loans, but the recovery campaign and so-called frightened prudential regulation could not manage the overall creditability of the domestic banking industry and increase the profitability of the banking sector.

The increasing quantum of NPLs is not a good sign for the overall financial stability, creditability and profitability of the banking system. Some of them are wilful and reflect conspiracy between the bankers and the borrowers at the expense of poor savers and honest loans payers.

The increasing ratio of NPLs badly affect the lending rate. It is also one of the main reasons for the slow revival of sick units in the country. It is ultimately causing slow down in industrial productivity and economic activity. This situation forces the managers of the banking industry to pay minimal return to the depositors and change high mark-up on loans. Low return on deposits discourages savings, which are already very low. The ASEAN countries also suffered from massive unemployment, poverty, illiteracy, low industrial productivity, national income and social unrest.

Induction of highly paid so-called banking experts and consultants have failed either to reduce the extent of bad loans or otherwise improve efficiency. Whatever little financial improvement is being shown is through large-scale retrenchments or downsizing and closure of loss making branches.

Successive governments appointed political favourites to head these banks and indiscriminate unsecured lending under political influence ravaged the balance sheets. Management inefficiencies, narrowed visionary abilities and corruption led to gross mismanagement. Increasing interference of the state by centrally mandated credit programmers low recovery, frequent incidences of bankruptcy, low market conditions and lack of commitment and sustained efforts increased the ratios of NPLs which have now threatened the overall profitability and creditability of the domestic banking system. Corrupt political leaders destroyed the nationalised and semi-nationalised banks and public sector non-banking financial institutions in the period 1995-1997.

The SBP is taking steps to handle the increasing trend of NPLs. It has introduced several initiatives to assist the defaulting companies and non-performing industries. However, desired results have not been achieved due to influences, ineffective monitoring and slow court procedures. To speed-up legal action against the defaulting companies, the SBP has now amended court laws and has expanded the number of banking courts from 10 to 45.