BANKS ASKED TO PROVIDE RS 150 BN

Banks after experiencing huge losses in ‘Yellow Cab’ scheme are reluctant to fund new schemes which are not legally covered

From SHAMIM AHMED RIZVI, ISLAMABAD
Sep 13 - 19, 1999

Pakistani banks, which have not yet recovered from the shocks of imprudent lending under political pressure, are again pressurised by the government to arrange loans of huge amounts of Rs 150 to 175 billion for the populist Prime Minister’s Transport and Mera Ghar schemes. The managements of these banks, specially the major nationalised commercial banks, like Habib Bank, United Bank and National Bank, are reluctant to advance loans as they are not sure about the commercial viability of these projects. Their fear is mainly because of their past experience in the case of Prime Minister’s Yellow Cab Scheme, which was launched in 1991-92 and these banks have reportedly lost over Rs 8 billion in the said scheme.

These banks were on the verge of bankruptcy only two years back because of bad loans exceeding over Rs 150 billion. Their position has, however, slightly improved now not on account of recovery of held up loans or increased efficiency but as a result of large scale retrenchment under golden handshake scheme, supported by a World Bank loan, besides, substantial increase in their service charges. The World Bank had provided a soft loan to the tune of about Rs 18 billion to Pakistan to finance various schemes to cut expenses, enhance efficiency and improve the balance sheets of these banks in order to make them attractive for private buyers before putting them on sale under the Privatisation Scheme. They are yet to be privatised and any large scale imprudent banking operation will take them back to their previous position marring all chances of getting a good price. This apprehension is further strengthened in view of the fact that there had been virtually no improvement in the infected loan portfolio. On the other hand the defaulted loans continue to increase instead of decreasing. When the present government came to power 30 months ago, non-performing loans totalled Rs. 140 billion. This figure has now shot up to a level of Rs. 225 billion showing an increase of Rs. 85 billion, at a monthly rate of Rs. 2.8 billion. All efforts for recovery have become ineffective and now have virtually been abandoned.

Prudent leading

During all this period the State Bank of Pakistan has been stressing on prudent lending as it was the only method to ensure health of a commercial bank. Only on last Tuesday (Sept.1, 1999), the SBP Governor told a meeting of bank heads and development financial institutions to learn to say ‘NO’ when necessary and stick to the professional standards. A participant of the meeting told this correspondent that at the meeting, which was held at SBP head office in the backdrop of the Aug. 31 take-over of Bankers Equity by the State Bank on charge of financial irregularities, "The SBP Governor told us that it was a painful decision." He further added that misreporting and concealment of facts is the biggest criminal offence in banking and cannot be ignored in any case. The source said the SBP Governor urged heads of all banks and development financial institutions not to deviate from the policies set by the State Bank as well as their own board of directors from time to time. He also asked them to learn to say NO to all political and non-political forces trying to influence them and praised UBL President Zubyr. I. Soomro without being specific. For the participants of the meeting this carried a clear message as all of them knew well what had earned Soomro this appreciation. UBL has been engaged in a multi-dimensional conflict with one of its corporate clients owned by a very strong man in Islamabad whose job is to take people to task.

The source said the participants of the meeting were provided with copies of relevant extracts from the State Bank Act, last amended in May 1997, and a subsequent SBP circular containing this and other extracts. He said one of the extracts that reminded the bankers of the fact that they could not be forced to obey illegal orders. It was also quoted repeatedly by the SBP Governor during his speech.

The banks and financial institutions are coming under mounting pressures to advance loans for the government sponsored schemes including Rs 60 billion for the public buses and another Rs. 5 to Rs 7 billion for taxis, Rs. 75 to Rs 80 billion for the Prime Minister’s ‘Mera Ghar’ scheme, Rs 10 billion for self employment and at least Rs 15 billion for the revival of sick industrial units by way of offering assistance to new managements, waivers and write offs and allocation of fresh working capital.

The nationalized banks are being pressurized to advance loans at the grass root level and to the authorities (SMEDA and PMHA). These authorities are on paper only as these have been created through administrative orders and do not enjoy any legal cover. "Remember the Yellow Cab scheme," a banker recalled and pointed out that two foreign banks — one American and another British — and a partly privatized Muslim Commercial Bank made fabulous money then by opening letters of credit of the car dealers who imported even rejected and obsolete models of vehicles worth about one billion dollars. "All vehicles imports were duty-free and caused national exchequer a loss of more than Rs 70 billion," he estimated.

The loosers in that game were the Habib Bank, the United Bank and the National Bank of Pakistan. They offered about Rs 16 billion loans and should have recovered the entire loan amount with markup by September 1998 as the advances were for five years. But till this day the actual recovery is hardly Rs 6 billion and about Rs 1 billion was realized by way of impounding the defaulting vehicles. These banks have still to recover Rs. 8.5 billion.

It was in mid-1993 that the State Bank of Pakistan slapped heavy penalties on the HBL and the UBL for failing to observe the statutory liquidity ratio (SLR). It was mainly because of the excessive advances made in the yellow cab scheme by these two banks.

Originally, the PM had proposed to ask the banks to lend Rs 250 billion for his new schemes within three years. Keeping in view the amount of defaulted loans, that would have raised total bank lending to over two-thirds of the bank advances, something ominous for the banks’ future. But now, mercifully, the amount appears to have been brought down to Rs. 150 billion.

Before forcing the management of these banks the government should have realised that these banks cannot stand the burden of such a huge lending, recovery of which is most difficult if not totally doubtful. The health of banking sector is imperative for the health of the economy of the country. The health of Pakistani banking sector is being undermined because of loan default which is constantly on the rise—when the caretaker government of Moeen Qureshi disclosed details of the loan default, complete with names. Some of the top names are among the defaulters. How can the government, for example, make a success of the PM’s transport scheme now when it goes on increasing the price of petrol or P0L products in general. Even a little Suzuki costs Rs 3 lakh, and spare parts are very expensive. How many passengers will want to use a taxi that costs about Rs 10 per km. That is why one now finds rows of yellow cabs waiting for passengers at almost all the taxi stands.

While the Pakistani banks are expected to provide finances, involving risks for the housing and transport schemes, the foreign banks are said to be reaping profits as they are expected to provide only advisory services. Their contribution is said to be limited to devising loan instruments and handling letters of credit for import of construction machinery and cars and buses. The schemes for which the ailing nationalised banks are being asked to provide huge loans are neither properly planned, nor professionally evaluated, nor legally covered, nor is their execution transparent. In these circumstances, the banks which would advance loans would run a great risk.BLocal banks asked to advance loans for PM’s new projects

Banks after experiencing huge losses in ‘Yellow Cab’ scheme are reluctant to fund new schemes which are not legally covered

Pakistani banks, which have not yet recovered from the shocks of imprudent lending under political pressure, are again pressurised by the government to arrange loans of huge amounts of Rs 150 to 175 billion for the populist Prime Minister’s Transport and Mera Ghar schemes. The managements of these banks, specially the major nationalised commercial banks, like Habib Bank, United Bank and National Bank, are reluctant to advance loans as they are not sure about the commercial viability of these projects. Their fear is mainly because of their past experience in the case of Prime Minister’s Yellow Cab Scheme, which was launched in 1991-92 and these banks have reportedly lost over Rs 8 billion in the said scheme.

These banks were on the verge of bankruptcy only two years back because of bad loans exceeding over Rs 150 billion. Their position has, however, slightly improved now not on account of recovery of held up loans or increased efficiency but as a result of large scale retrenchment under golden handshake scheme, supported by a World Bank loan, besides, substantial increase in their service charges. The World Bank had provided a soft loan to the tune of about Rs 18 billion to Pakistan to finance various schemes to cut expenses, enhance efficiency and improve the balance sheets of these banks in order to make them attractive for private buyers before putting them on sale under the Privatisation Scheme. They are yet to be privatised and any large scale imprudent banking operation will take them back to their previous position marring all chances of getting a good price. This apprehension is further strengthened in view of the fact that there had been virtually no improvement in the infected loan portfolio. On the other hand the defaulted loans continue to increase instead of decreasing. When the present government came to power 30 months ago, non-performing loans totalled Rs. 140 billion. This figure has now shot up to a level of Rs. 225 billion showing an increase of Rs. 85 billion, at a monthly rate of Rs. 2.8 billion. All efforts for recovery have become ineffective and now have virtually been abandoned.

Prudent leading

During all this period the State Bank of Pakistan has been stressing on prudent lending as it was the only method to ensure health of a commercial bank. Only on last Tuesday (Sept.1, 1999), the SBP Governor told a meeting of bank heads and development financial institutions to learn to say ‘NO’ when necessary and stick to the professional standards. A participant of the meeting told this correspondent that at the meeting, which was held at SBP head office in the backdrop of the Aug. 31 take-over of Bankers Equity by the State Bank on charge of financial irregularities, "The SBP Governor told us that it was a painful decision." He further added that misreporting and concealment of facts is the biggest criminal offence in banking and cannot be ignored in any case. The source said the SBP Governor urged heads of all banks and development financial institutions not to deviate from the policies set by the State Bank as well as their own board of directors from time to time. He also asked them to learn to say NO to all political and non-political forces trying to influence them and praised UBL President Zubyr. I. Soomro without being specific. For the participants of the meeting this carried a clear message as all of them knew well what had earned Soomro this appreciation. UBL has been engaged in a multi-dimensional conflict with one of its corporate clients owned by a very strong man in Islamabad whose job is to take people to task.

The source said the participants of the meeting were provided with copies of relevant extracts from the State Bank Act, last amended in May 1997, and a subsequent SBP circular containing this and other extracts. He said one of the extracts that reminded the bankers of the fact that they could not be forced to obey illegal orders. It was also quoted repeatedly by the SBP Governor during his speech.

The banks and financial institutions are coming under mounting pressures to advance loans for the government sponsored schemes including Rs 60 billion for the public buses and another Rs. 5 to Rs 7 billion for taxis, Rs. 75 to Rs 80 billion for the Prime Minister’s ‘Mera Ghar’ scheme, Rs 10 billion for self employment and at least Rs 15 billion for the revival of sick industrial units by way of offering assistance to new managements, waivers and write offs and allocation of fresh working capital.

The nationalized banks are being pressurized to advance loans at the grass root level and to the authorities (SMEDA and PMHA). These authorities are on paper only as these have been created through administrative orders and do not enjoy any legal cover. "Remember the Yellow Cab scheme," a banker recalled and pointed out that two foreign banks — one American and another British — and a partly privatized Muslim Commercial Bank made fabulous money then by opening letters of credit of the car dealers who imported even rejected and obsolete models of vehicles worth about one billion dollars. "All vehicles imports were duty-free and caused national exchequer a loss of more than Rs 70 billion," he estimated.

The loosers in that game were the Habib Bank, the United Bank and the National Bank of Pakistan. They offered about Rs 16 billion loans and should have recovered the entire loan amount with markup by September 1998 as the advances were for five years. But till this day the actual recovery is hardly Rs 6 billion and about Rs 1 billion was realized by way of impounding the defaulting vehicles. These banks have still to recover Rs. 8.5 billion.

It was in mid-1993 that the State Bank of Pakistan slapped heavy penalties on the HBL and the UBL for failing to observe the statutory liquidity ratio (SLR). It was mainly because of the excessive advances made in the yellow cab scheme by these two banks.

Originally, the PM had proposed to ask the banks to lend Rs 250 billion for his new schemes within three years. Keeping in view the amount of defaulted loans, that would have raised total bank lending to over two-thirds of the bank advances, something ominous for the banks’ future. But now, mercifully, the amount appears to have been brought down to Rs. 150 billion.

Before forcing the management of these banks the government should have realised that these banks cannot stand the burden of such a huge lending, recovery of which is most difficult if not totally doubtful. The health of banking sector is imperative for the health of the economy of the country. The health of Pakistani banking sector is being undermined because of loan default which is constantly on the rise—when the caretaker government of Moeen Qureshi disclosed details of the loan default, complete with names. Some of the top names are among the defaulters. How can the government, for example, make a success of the PM’s transport scheme now when it goes on increasing the price of petrol or P0L products in general. Even a little Suzuki costs Rs 3 lakh, and spare parts are very expensive. How many passengers will want to use a taxi that costs about Rs 10 per km. That is why one now finds rows of yellow cabs waiting for passengers at almost all the taxi stands.

While the Pakistani banks are expected to provide finances, involving risks for the housing and transport schemes, the foreign banks are said to be reaping profits as they are expected to provide only advisory services. Their contribution is said to be limited to devising loan instruments and handling letters of credit for import of construction machinery and cars and buses. The schemes for which the ailing nationalised banks are being asked to provide huge loans are neither properly planned, nor professionally evaluated, nor legally covered, nor is their execution transparent. In these circumstances, the banks which would advance loans would run a great risk.