Hardly any penalty on banks

Central banks, all over the world, would like to guide, and sometimes goad, the financial institutions through their policy circulars and generally refrain from resorting to extreme measures. Nonetheless, at times, it becomes necessary to take punitive action when their instructions are disregarded.
Such an unpleasant situation was witnessed on 19th November, 2009 when the State Bank of Pakistan (SBP) had to impose a fine of about Rs 10 million on 19 banks and DFIs for the delay in the recovery of sugar-financing from sugar mills. It may be recalled that, as per the SBP instructions, loans and advances obtained by sugar mills had to be fully retired in four phases till October, 2009.
However, out of the Rs 52 billion financing by the banks/DFIs to the sugar mills during the 2008-09 season, only Rs 41.6 billion were retired, while the remaining amount could not be recovered till the date prescribed by the SBP. This prompted the State Bank to issue show-cause notices to the concerned banks/DFIs last week, asking them to clarify their position and furnish solid reasons behind their inability to recover the full amount of sugar advances from millers. Some of the banks/DFIs failed to present plausible reasons, forcing the State Bank to impose fines ranging from Rs 200,000 to Rs 800,000. The magnitude of the fine, reportedly, depended on the number of months for which the concerned institutions failed to meet the deadline.
This unpleasant episode may appear to be pretty ordinary to most people, but raises a number of questions about proper enforcement of rules and regulations and the extent of greed prevailing in society, especially among the rich, who can borrow heavily from financial institutions. It needs to be highlighted that the State Bank had given more than adequate time to banks/DFIs to recover the amount of sugar-financing, but the fact that they did not care to comply with the instructions and failed to provide convincing reasons for their failure shows on their part a lack of respect for the State Bank's directives.
Such a behaviour, in our view, provides enough reason to the public, particularly the depositors, to be suspicious about the banks' activities, which could ultimately lead to a lack of trust between the banks and their depositors. The greed of the millers could be gauged from the fact that they were not basically handicapped by the failure of sugar stocks to move in the market, but by the urge to hoard the commodity for earning abnormal profits as long as possible.
It is good to see that the SBP has taken a serious note of the situation, but its decision to impose only a token fine shows that the central bank has taken a lenient view of the situation. An amount of less than one million rupees is hardly anything for any financial institution. In our view, the amount of penalty should have been fixed at a level which should serve as a deterrent in future. We are saying this because the selective credit control measure, taken by the State Bank, with regard to sugar advances does not seem to have fully served the intended purpose of checking speculation and hoarding of the commodity by borrowings from the banks and stabilising sugar prices on the open market. Another related dimension of the problem is the excessive/unethical profits being made by certain unscrupulous elements of society by procuring sugar at Rs 38 and selling it at around Rs 70 per kg.
Obviously, these elements are not going to pay taxes on their incomes, earned through this source, and are also encouraging immoral practices in society by employing such undesirable tactics. We can't say much about this because of court orders, but the matter needs to be urgently examined from a larger perspective.