by Ahmad Nadeem Gehla
The government banks and private financial institutions waived loans worth Rs60 billion during the 8 year from 1999 to 2007.
Those who got their loans written off include politicians, bureaucrats, former military officials and various business groups. The finical institutions which got their loans written off include National Bank, Pak-Kuwait Investment, IDBP, Pak-Oman Investment, Agricultural Development Bank, SME Bank, Bank of Khyber, Punjab Provincial Cooperative Bank, Pak-Libya Holding, Saudi-Pak Investment and IDBP. All these institutions are incorporated under ‘Banking Companies Ordinance’ and supervised by State Bank of Pakistan.
State bank of Pakistan being the regulatory authority issues the guidelines to all financial institutions for writing of irrecoverable loans. The present write offs by banking companies being reported in media were carried under guidelines of State Bank’s Circular no.SD 2/99 date July 16, 1999. Before framing any incentive package to borrowers, the banks are bound to get approval of their respective Board of Directors and approval by the Credit Information Bureau of the State Bank. All these write off further undergo the internal audit of respective bank and secreting by SBP’s. State Banks can also allow writing off loans for certain debtors, usually those that have little hope of paying off their loans.
The loan write-off is a normal practice in banking sector around the world; such moves benefit both debtors and lenders.
If the borrowers’ who suffer unexpected losses which are not covered by insurance or their insurance or guarantees are not enough to repay the debts, their loans are treated as non-performing assets and banks can offer certain incentives for recovery under permission of regulatory authority. Any write policy initiated by a Banks in Pakistan to offer its borrowers any incentive on irrecoverable loans or write offs and restructuring is for a fixed period of time which is widely publicized in media and apply to all borrowers.
In some cases bank loans are written off due to irresponsible lending which has become the biggest concern for banks in cases of personal debts. In countries like Pakistan irresponsible lending on political or military pressure has been a common cause of loan defaults and write offs in past when banks were owned by government. The write offs can be divided in to four major categories. The first and the most legitimate being write off in agriculture or industrial where losses occurred due to natural calamities like floods, crop disease or sudden downfall in international markets which are beyond the control of borrower. This is done mostly in cases of government subsidized loans and write offs help the sector to revive itself in order to protect the jobs and national produce.
The second category of Write-offs is where the borrower is unable to repay due to unexpected losses banks offer to wave off a portion of interests rather than going through the lengthy process of litigations. This allows banks a speedy recovery in return for losing a part of their profits. The third and major reason for write offs is irresponsible lending’s especially in personal loans, where the loans are not covered. Such write-offs are very common in countries where consumer credit is easily available.
The fourth and the common cause of write-offs in Pakistan is the irresponsible lending under pressure of military or civilian government officials.
During second regime of Mian Nawaz Sharif, a huge number of taxi cars were imported without any planning. The powerful exporters who were unable to sell these taxi cars influenced the government to force commercial banks to finance these vehicles. There was little credit left for industrial sector, almost half of the industry went out of business because of non availability of working capital. The biggest sufferers were small cotton ginners, oil extraction industry, power looms and rice processing sector which are the biggest job providers in Punjab and Sindh provinces’.
In order to revive the small industry, the State Bank allowed commercial banks to offer incentive packages of these defaults during Parvez Musharraf early regime.
The second sector which was badly hit during Nawaz Sharif’s second regime was agriculture. As the government was comprised of politicians from major industrial families, loans for big industry like Sugar, cement and textile were provided on political influence which resulted decrease in agricultural credit and as such huge defaults occurred in farming community. During early years of Shaukat Aziz, the agriculture sector was given a relief package for small agricultural loans where all or part of interests were waved off. This greatly helped the agriculture sector to revive and grow at an exceptional rate during Pervez Musharaf’s regime. A part of write-offs during Musharaf’s regime consists these two categories which are transparent and legitimate.
The major portion of write-offs of loans is not covered under above two categories. The so called ‘managed write-offs’ can be further divided in to two categories. The first being the big loans advanced on political or government pressure to big fishes by private banks. Such write-offs are mainly an issue between the management of the bank and its shareholders. While the second and most serious is irresponsible lending by government owned institutions like NBP and Bank of Punjab on government pressure.
In most of the cases these loans are not covered or under covered by mortgaged assets and there is little hope of recovery from big fishes. This is where the big scam lies.
In both above cases, manipulation is not possible without active participation of Board of Director of respective Bank and State Bank’s officials. The powerful industrialist families and groups first get loans by offering nonexistent or grossly undervalued assets as mortgage and later force the bank and SBP to write of these loans. The defaults in these cases are invariably wilful as banks official are under pressure for not to initiate recovery proceedings. This kind of write offs has been widely used as political bribe and proved to be effective toll to buy the political loyalties during Musharraf regime. The beneficiaries were the powerful retired generals, political families and big industrialists with right connections.
Only a high level powerful and independent institution or a commission can sort out these cases from those of legitimate write-offs. However bringing these involved in this scam to justice would not be an easy job in given social and political system. Even if such commission is able to identify the culprits, the recovery would be next to impossible. Most of those involved have already transferred their major assets overseas and have insufficient assets to cover the written off loans inside Pakistan.
Also most of industrial sectors are controlled by few families and in case of action against them; they will try to collapse the entire industrial activity thus bringing the government to knees.
The present storm in teacup is not going to result in to recovery of public money in present social and political structure where government and Supreme Court of Pakistan with all their might were unable to end the sugar crisis. However it will provide some spice to news media and result in exposing some names of powerful, which already doesn’t enjoy much public respect or integrity. In order to avoid such situations in future, we need to rebuild and strengthen the institutions.
A strong and independent State Bank of Pakistan is vital to effectively monitor the functions of banking companies. Also there needs to be an independent accountability commission which can probe such irregularities without fear or favour.