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.
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