Banks' generosity

Cancelling from an account a bad debt or even a worthless asset is no trivial issue. Writing off bank loans has, therefore, always been an issue of a serious concern in Pakistan due mainly to its economic and political implications. In response to a question raised by a member of the National Assembly, the parliament was informed on 7th September, 2012 that the commercial banks and development financial institutions (DFIs) had written off Rs 112.31 billion loans to as many as 1,434 beneficiaries over the past four years.
The amount included loans of Rs 10 million or more written off during this period. United Bank Limited was the most generous in writing off its loans as it topped the list with Rs 28.6 billion in 284 cases, followed by Habib Bank (Rs 16.8 billion, 233 cases), MCB Bank (Rs 16.33 billion) and Samba Bank (Rs 12.6 billion). Allied Bank wrote off Rs 7 billion in 104 cases while National Bank benefited 137 account holders by writing off loans of Rs 10 billion. Other banks and DFIs which wrote off loans were Askari Bank (Rs 2.3 billion), HSBC Middle East (Rs 4.9 billion), KASB Bank (Rs 4.4 billion), ZTBL (Rs 3.3 billion), Silk Bank (Rs 2.12 billion), Standard Chartered (Rs 1.5 billion), NIB (Rs 1.1 billion) and Bank of Khyber ( Rs 1 billion). Banks which wrote off loans amounting to less than Rs 1 billion were Alfalah Bank, Bank of Punjab, Citibank, Faisal Bank, SME Bank, Soneri Bank, Summit Bank, Pak-Kuwait Investment Bank, Pak-Libya Holding Co and Saudi-Pak Industrial and Investment Bank. In order to satisfy the concerns of the parliamentarians, Finance Minister said that irrecoverable loans had been written off by banks and DFIs in accordance with their duly approved policies by their board of directors.
It is not known whether or not the members of National Assembly have been fully satisfied with the explanation of the government but to all intents and purposes, the amount of written off loans is quite substantial and therefore raises a number of questions about the overall working of banks in the country. It, nonetheless, needs to be recognised at the outset that loaning to parties in the private sector is always a risky business but the banks due to their sound working procedures and practices are supposed to contain such risks to the minimum. If such a strategy is not meticulously employed and writing off loans exceeds a reasonable/prudent limit, as seems to have happened in the case of Pakistan, the capacity of the banks to advance fresh loans would be seriously retarded. This would not only reduce overall investment in the economy and slow down the growth rate but would also adversely affect the deposit rates and saving rate in the economy. Another negative impact would be that banks would tend to avoid the private sector due to fear of further defaults, forcing them to write off more loans, and induce them to park their loanable funds in safe assets like government bonds and securities. Such a tendency is already quite evident in commercial banks in Pakistan these days. Another negative aspect is that if writing off loans becomes a routine and is excessive in a country, the banking system usually becomes prone to corrupt practices and, overtime, loses its significance as a vehicle for development. Keeping all these factors in view, it is of vital importance to curb the unhealthy tendency of readily cacelling bad debts or loans as soon as possible. For this to happen, banks have to improve their appraisal and monitoring standards, the SBP and the government have to insulate them against unnecessary interference from outside and the justice system has to deliver to protect the genuine interests of banks. It, however, needs to be kept in mind that whatever the safeguards, bankruptcies due mostly to unanticipated events and loan write-offs in genuine cases is an essential feature of banking business and, therefore, cannot be avoided altogether. What the banks, however, need to do is to be extra careful while dealing with wilful defaulters and potential candidates for write-offs who are out to exploit the system and punish them accordingly. It is good to see that some members of parliament and judiciary have lately started taking a serious notice of the situation. Hopefully, such a movement would be helpful in tackling this issue earnestly by restricting the practice of loan write-offs to only highly deserving cases. Banks' continued generosity in this area could be very costly for their shareholders, depositors and the economy.