BANK LOANS AND DEFAULTS

AMANULLAH BASHAR
(feedback@pgeconomist.com)
Nov 8 - 14, 20
10

The infected portfolio or non-performing loans are posing a serious threat to the financial health of the banking sector besides the written off loans amounted to Rs50 billion during last year alone while the total written off amount is now estimated to be around Rs300 billion.

Well placed sources in banking circles mentioned that about 50 per cent of consumer portfolio is infected which is a situation that calls for serious corrective measures to allow the financial sector to play its due role in rebuilding of the economy.

In order to avoid negative shocks to the financial sector and to cope with the worsening macroeconomic variables that have complicated the monetary debate in financial year 2011, realistic approach is needed to lend a supporting hand to the economic managers in general responding to the rising inflationary pressures and excessive increase in the fiscal deficit.

Following broad line characteristics indicate a clear picture of the working pattern of the banks during last 40 years:

1970 - 1980

Banks were nationalised.

Borrowings were influenced by political families or political influence with sole purpose of taking money from business/projects.

Long-term projects did not exist.

1980 - 1990

Almost same situation continued in this decade.

Misuse of World Bank's supplier credit for project for industrialisation

1991-2000

Dr. Yaqoob joined the government of Pakistan as Special Secretary/Principle Economic Advisor and was appointed Governor, State Bank of Pakistan in 1993. He bought reforms in the banking sector as the Governor.

IMF and mainly the World Bank pressurised for Banking Reforms.

Basel Accord required Capital adequacy

2000-2010

CIRC formed in September 2000 to clean up the balance sheets of the nationalised banks in the public sector for sale to the private sector.

It was the same model as adopted in USA as Resolution Trust Corporation.

Circular 29 of State Bank of Punjab was introduced in October 2002 for settlement of NPLs 2004 onwards witnessed government back "consumer finance" expansion for demand side economy or pull economy

It is pertinent to mention that advocate Syed Iqbal Haider, the counsel for the SBP, submitted to the court two lists of top 50 beneficiaries of the loan write-offs. The first list includes the names of companies and industries, which got loans of Rs47.109 billion written off on a standalone basis, and the other contains the names of those who got Rs15.556 billion of loans waived under BPD-29, a special banking circular. The lists have been submitted in compliance with the court's earlier directives to the central bank to cite at least 10 cases between 1971 and 2009 to prove that loans had been written off after fulfilling banking rules and regulations.

A three-judge bench, headed by Chief Justice Iftikhar Mohammad Chaudhry, had taken notice of press reports that the central bank had quietly allowed commercial banks to write off loans of Rs54.6 billion under a scheme introduced by former president Pervez Musharraf.

Meanwhile, the central bank of Pakistan has recently convened a meeting of commercial banks and development finance institutions to work out a strategy in response to the observations made by the Supreme Court regarding written off loans.

The issue of written off loans was discussed at length during the meeting that was attended by the presidents and chief executives of banks. The representatives of the commercial banks apprised the SBP Governor that banks had already issued notices to defaulters in line with the directives of the Supreme Court.

The banks' representatives informed the meeting that a write-off is undertaken after all remedies to recover have been exhausted. They said that their boards allow the writes-offs. Banks' representatives informed the meeting that a number of prominent industrialists were made to suffer jail sentences and large-scale liquidations or auction sales were carried out. At the same time it was also pointed out that a substantial number of borrowers, 47,911 to be precise having loans of Rs500,000 and below were allowed write off.

The bankers said that they would consult their key managements and the legal counsels and devise strategies in respect of write-offs and report to the State Bank.

It was agreed in the meeting that the Apex Court must be facilitated by providing all necessary information/data and all efforts should be made to deal with respect to write offs. The participants of the meeting were of the view that this initiative of the Supreme Court could be used as an opportunity and hoped that it would result in discouraging willful defaults, improve recovery position and bring stringent laws on recovery. The participants of the meeting were of the view that the Supreme Court may be informed that the litigation process with regard to the recovery of loans takes a lot of time.

However, the meeting resolved that they are committed to adhere to the directives of the honourable Supreme Court to satisfy the Apex Court. It may be mentioned here that a three-member bench of the Supreme Court comprising Chief Justice Iftikhar Muhammad Chaudhry, Justice Ghulam Rabbani and Justice Khalil-ur-Rehman Ramday is hearing a suo moto case on write offs.