The government has released details of the total written-off loans during the last ten years, which amounts to almost RS 100 billion. The beneficiaries are all influential politicians, bureaucrats, industrialists and others. The quantum of written off loans by the government-controlled banking sector has angered the depositors, investors and the general public.
There is a strong demand from all walks of life that some action should be initiated by the government to recover these written off loans. Banks have become a common pool to loot public wealth. We have corruption covered up under the NRO and written-off loans and it seems there is no authority that is concerned that this public wealth should be recovered.
There seems to be unanimity of opinion that it is the general public and the taxpayer who has paid the price of writing-off these loans in the shape of lower deposit rates and lower tax collection. This also highlights several operational weaknesses of our banking sector that need to be corrected immediately to minimise the misappropriation of public funds in the future.
The general belief is that banks are important for the country's economic development and therefore very important for a developing society like ours. The serious impact of these huge write-offs annually is likely to diminish public support for government-controlled financial institutions. Most people that I speak to say that a vigilant and prudent banking sector can play an important role in the uplift of the economy.
The past performance of the public sector banks has not been appreciated, as it is generally felt that the management of these banks, especially their board of directors and chairmen, has been prone to political pressure and unable to safeguard the public interest and trust desired from them. We have the BOP scam in the news that has alarmed everyone. We have colossal write-offs to influential segments of society that has shaken the confidence of the nation.
We have political appointees on the boards of directors of public sector banks where conflict of interest is visible. No code of conduct is enforced for the appointment of directors for a banking company. One of the leading public sector banks is being criticised for major write-offs, but no action has been initiated from the State Bank of Pakistan to clarify the position as being the majority shareholder.
In that board we find nominees that have no banking experience and were never exposed to the mechanism of financial sectors where the risk factor is of paramount importance. It is not known if the SBP has ever raised the issue of write-offs of such magnitude and advancing loans, without proper securities, with the leading bank it owns (SBP). Approval of loans, without proper securities, have become normal banking practice in the Pakistani banking sector since banks were nationalised in the 1970s
The SBP being the regulator of the banking sector should have played an important role to oversee that public funds are not channelled to willful defaulters. It seems that the regulator has not performed this task to the satisfaction of the public. The circular 29 issued by SBP in this respect has not checked the misappropriation of public funds by the willful defaulters, instead it has facilitated them by providing unlimited discretion to banks management, in writing off huge loans at public expense. The circular is being severely criticised for this reason.
Beside this, the regulator has failed to initiate and suggest the desired insolvency laws that may be implemented before the loans are written off. Therefore, there is an immediate need to revisit the said circular of the State Bank of Pakistan so that it is updated according to modern requirements. Despite the fact that this colossal amount was written-off by the government-owned banks, banks are still showing increasing profits every year.
This demonstrates that banks are still profitable after writing-off such big amounts. It show the excessive operating profit margins enjoyed by these banks due to widespread "margins" between deposits and lending rates. If we analyse the seriousness of the non-performing loans and their write offs, we observe that the total gross advances of the big five banks (NBP, MCB, HBL, UBL, ABL) as at September 2009 amounts to rupees 1924.125 billion. Out of this, banks have identified toxic loans of rupees 186.330 billions.
This is almost 10 % of the gross advances. The toxic loans of 10% reflect the quality of decision-making process within the banking sector. It is by no means a satisfactory situation for us as a nation. If this trend is allowed to continue, bad loans would further grow, with an increase in total advances in future years. Out of rupees 186.330 billion toxic loans, a total of rupees 137.86 billion has been provided so far in the accounts as at the end of September 2009.
Thus an additional amount of rupees 28.47 billion (26%) needs to be provided to ensure that the toxic loans are fully accounted for in the books of accounts of these five big banks. The above figures are in addition to whatever has been written-off so far, in the past as written off loans are not part of non-performing loans.
Banks contribute towards national economy by providing reliable and efficient systems to encourage savings and providing loans to those who need funds for their businesses. The deposit and lending rates play a vital role together to achieve the desired results. There is a need to make serious efforts to reduce the banking spread from over 7% to below 4% currently prevailing in the banking sector.
More money should be available for consumer financing. Small and medium size business enterprises should be prioritised and encouraged to obtain loans on easy terms. The interest rates should be brought down gradually to affordable level so that the economy should start improving, resulting in more job creations. These targets can only be achieved if our banking sector behaves in a prudent and responsible manner.
Lending to willful defaulters or without proper security should be stopped immediately or it be made difficult for both lenders and borrowers. No pressure should be accepted by the bank managements in granting loans to projects that are not economically viable or are without proper securities. Strict laws should be enforced for lenders to ensure that willful defaulters are identified at an early stage to minimise write-offs.
In case of genuine business losses, bankruptcy laws should be suggested by the SBP to the government for enactment. These should be strengthened and enforced by an independent high-powered banking court that should apply the law to all defaulting borrowers in a uniform manner without fear or favour. Any careless lending by any bank official should be made a criminal offence with severe punishment to deter collusion between the borrower and lender.
The collapse of "Woolworth" in the United Kingdom, after 99 years of its operation, is a good example of implementing insolvency laws by the lending banks when the management of "Woolworth" could not honour its commitment and failed to bring a viable restructuring plan to bail out the company from its financial troubles. About 30,000 people lost their jobs, when Woolworth closed its 800 stores nation-wide a year ago.
The decision to declare the company insolvent was made by the lenders, purely on its financial health at that time. The 10% ratio of bad loans to total gross advances translates into higher business cost for these banks. This is being financed by lower interest rates paid to depositors and higher service charges being charged from bank's customers.
This disparity is not only contributing towards the flight of capital from Pakistan to other countries, in search of higher returns but also discouraging small savings due to low rate of returns on bank deposits. The "high spread" between the two has been alleged to encourage defaults and discourage savings. In addition, higher toxic loans are impacting tax collection as written-off loans are tax deductible.
The national exchequer lost almost rupees 48 billion as potential tax collection, had there been no write-offs on an average tax rate of 35%. It is generally being stressed that these immoral practices should be stopped. How it can be accomplished seems to be a difficult proposition, as there has to be a will to do so, which is lacking in the present government, due to its tainted moral authority.
Should there be a high-powered judicial Commission that should probe all the cases of the past and closed transactions to establish if the write-off were as per the law, if the loans were given to willful defaulters on political grounds and if there was collusion between the lenders and the borrowers? There must be an impartial way to satisfy public demand. Questions are being raised as to who should be held responsible for these toxic loans.
The manner of approving the loans and subsequently writing off these loans needs to be carefully analysed to establish under which law of the land, the banks wrote off these loans and who authorised them to do so. Is it not the violation of our fundamental rights that the influential people get away through write offs and the poor is caught and harassed?
Is there any material difference between the NRO to the politicians and the loans write-offs to other segments of the society? Why are not those officials who approved these toxic loans individually held responsible for being negligent? What was the role played by the banking boards, who were assigned the role to oversee the loan sanctioning procedures, its recovery and its writing off? How did the board of directors ensure that the loans were not granted without adequate security?
The general perception is that the loans are being granted to willful defaulters with the boards' and senior managements' collaboration as they are the people, who declare these loans as non-performing loans, according to SBP circular No 29 and later on, these were written-off without any explanation. Does it fall upon the superior judiciary to probe into this matter and recover billion of rupees of the public money? The primary responsibility lies with the bank boards.
The directors should be held responsible individually and collectively for the negligent way these loans were approved and written off. Appointments on the boards should be according to the laid down procedures and these procedures should ensure competence in the banking field and a proven record of honesty and vigilance in financial transactions.
Friends and cronies should not be appointed by the government on these positions and the SBP must not issue clearance to these doubtful individuals. Incentive and compensation structure is faulty in our banking sector. It does not take into account the risk factors within the financial transactions. Huge compensation is being offered to those that yield easily to political and other pressures and make faulty judgement.
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