The State Bank of Pakistan (SBP) has recommended to the government that FIA or NAB should be asked to investigate the affairs of the Industrial Development Bank of Pakistan (IDBP), which caused Rs 27 billion loss to the national exchequer, official sources told Business Recorder.
"The SBP is only a regulatory body for banks and DFIs and the investigations to ascertain and fix responsibility on individuals for their acts of malfeasance and misconduct can appropriately be carried out by the FIA or NAB," the sources quoted the central bank's banking inspection department as suggesting the government.
The IDBP is owned by the federal government directly having 56.59 percent shareholding and indirectly through the SBP having 36.31 percent shares and through provincial governments and some other government controlled institutions 7.10 percent shareholding.
In terms of section 13 of the Ordinance, the federal government had been appointing board of directors of the bank, including chairman and the managing directors from time to time.
Under the system for sanctioning of loans and advances at the IDBP, the lending decisions that had generally been made on collective basis through credit committees and subsequent ratified by the board of directors, thus making it very difficult to hold an individual responsible.
However, the managing directors being head of the bank and the chairman of the board as well, were in a position to influence the credit decisions that set the future direction of the institution, the bank added.
The SBP is of the view that imprudent decisions and ineffective credit monitoring over the years, were the main reasons for huge stuck-up advance and on-going losses of the IDBP.
"Recovery efforts generally remained insufficient as in last few years cash recovery hovered around 2.3 percent of the stuck-up advances portfolio, the sources quoted the bank as saying.
The regulator said that lack of effective oversight by the board of directors, inefficiencies of successive management coupled with frequent changes at the top also contributed to the poor performance of the IDBP over the years.
The bank even had to work at one time without a board for about eight months during the year ended June 2001.
Retention of the same external auditors from 1971-72 to 1997-98 (for almost 26 years continuously except one-year ie 1989-90) exhibits successive management's reluctance to have their accounts audited by a fresh set of auditing firm. The neglect of important areas like internal controls and effective policy procedures compounded the problems of the bank.
The IDBP had no system to protect its physical mortgaged assets from theft and pilferage. So far, 122 cases have been detected wherein machinery mortgaged against bank financing have been found stolen.
As such majority of the IDBP loan portfolio went under litigation thus seriously affecting its earning capacity. Some of the loans went bad because of the change in business environment or changes in government's tax and tariff policies. These loans should have been restructured on time, but the decisions were delayed on one pretext or the other mainly to avoid responsibility coupled with inadequate flow of information both horizontally and vertically, the bank maintained.
With the intention that the banks show true and factual position of their financial health, in their annual accounts, the SBP advised the banks way back in 1972, that interest on advances classified as doubtful and loss in SBP inspection reports, should not be credited to the profit and loss account of banks, but rather kept in interest suspense account, the IDBP kept on accruing income on classified loans in violation of SBP prudential regulations to show their improved income position, camouflaging the true financial health of the institution.
While granting rescheduling to the borrowers, the bank capitalised on the accrued interest, which further over-burdened the borrowers, created disputes on indebtedness that resulted in hindrance towards cash recovery.
The SBP also said that in the mid 90s, the infection in credit portfolio of the bank started surfacing first time in the bank's annual accounts, when the bank reported a net loss of Rs 18.017 million in 1995-96 in the year 1997-98, the bank net loss increased to Rs 5.392 billion mainly because the provision of Rs 4.992 billion against non-performing loans was recognised for the first time, which was earlier avoided by the bank. The IDBP kept on incurring heavy losses in the subsequent years and the accumulated losses reached the shareholder's equity, but have turned the equity into negative by Rs 22.732 billion.
The consistent increase in stuck-up portfolio of the bank over the years resulted in continuous decline in the earning capacity of the bank. The classified advances, which were about 63 percent in 1997 rose to 90 percent as of June 2003.
As a result of this, the operating loss during the last two years stood at around Rs 3.5 million per day. Continuing losses created liquidity problem and the bank had to resort to costly deposits to meet its liquidity requirements.
The cost of deposit for the year ending June 2002, was as high as 13.42 percent, while the yield on advances was more than 4 percent because of the constant decrease in earnings from the large non-earning/non-performing loan portfolio.
However, the cost of deposits reduced significantly to around 6 percent in June 2003 as the SBP mounted pressure on the bank to rationalise its cost of funds. Similarly, the SBP laid emphasis on cleansing of the balance-sheet of the bank has led to a transfer of more than Rs 2 billion loans to CIRC.
The SBP, in its inspection report as of June 30, 1990, informed the IDBP management that after adjustment of assets classified under prudential regulations, the capital of the bank had turned into negative by Rs 106.95 million against positive book capital of Rs 647.967 million.
Thus the bank, from regulatory perspective, had become insolvent way back in 1990. It may be added that the SBP on its part has been regularly highlighting the financial problem of the bank to federal government under section 40-A of the Banking Companies Ordinance, 1962 on the basis of its periodical inspections.
The IDBP was advised time and again to take corrective measures to improve its financial health through moral suasion in view of IDBP being a public sector institution, and its ordinance which stipulated that no provision of law relating to the winding up of companies or banks would apply to the bank.
The State Bank has been emphasising that the management of the IDBP to exercise prudence in managing the affairs of the bank. Meetings have been held over time with the successive management of the IDBP and apprehensions of the SBP were conveyed to the bank's management.
The SBP governor discussed the precarious financial condition of the bank with the IDBP board on February 4, 2000, and advised them to focus on the areas such as non-performing loan portfolio, reduction in their administrative costs and to augment their resources base.
He had also advised that in the changing scenario characterised by market-friendly approach, the need and role of DFI might be carefully examined in view of their limited scope and narrow operational base.
In a meeting held in the finance ministry on November 28, 2001, which was also attended by the SBP governor, the IDBP management was advised to devise and follow an aggressive and meaningful loan recovery campaign.
Further, it was decided that necessary steps would be taken by the IDBP management/GoP to corporatise the bank in order to facilitate transfer of its ownership to the private sector. In order to protect the interest of the depositors and to provide sustenance to bank's operations, cash injections of Rs 5 billion was made in the bank by the SBP in February 2002.
The federal cabinet in its meeting, held on July 12, 2003, has decided to restore IDBP's equity to a level as required by SBP's prudential regulations for banks. This will be achieved by a converting IDBP's outstanding borrowings from GoP and SBP, into share capital/subordinated loan, along-with a further contribution by GoP.
The sale of IDBP, including any required reconstruction of the bank change of management, etc will be managed by the SBP.
Some of the private sector financial institutions have carried out due diligence exercise but no meaningful proposal has been received as yet. The SBP, however, on its part would be willing to extend full co-operation in respect of issues pertaining to the regulatory nature, but given the nature of the loan cycle when ie approvals were made by a different set of individuals and monitoring was done by another group further compounded by collective decision making, it would be quite difficult to arrive at an un-ambiguous conclusion and definitive evidence of individual infraction which can hold in the court of law.