Every economy undergoes various ups and downs and business cycles caused by many internal and external factors affecting businesses in general and some in particular. Pakistan in its history of 71 years has seen many such upheavals starting with the Korean War and subsequent devaluation. There was another major shock resulting of dismemberment of Pakistan in 1971 affecting the businesses owned by West Pakistan Businessmen and those from West Pakistan for whom East Pakistan was a captive market. Immediately thereafter in December 1971, there was Nationalization of ten basic Industries including shipping, heavy chemicals, iron and steel, oil refineries, heavy engineering, heavy electrical, petrochemicals, cement and electric utilities. Again on January 1974, government announced nationalization of Banks, and oil marketing companies and Insurance companies. Once again, on July 1, 1976, the government announced the nationalization of cotton ginning, rice husking and flourmills. Besides the foregoing the reforms in health sector introduced a generic formula system abolishing branded drugs production, nationalization of schools and colleges including higher education engineering colleges, eg, Dawood College for Engineering, Karachi. This period also witnessed abolishment of the multiple exchange rate system, which provided for varying rates of Bonus Vouchers freely tradable at stock markets for importers to meet their requirements and from official rate of exchange of Rs 4.75 per US dollar to Rs 11.00 per US dollar. The above brought about a sea change in overall business climate and morale and almost ruined many businesses and businessmen without any recourse.
After change of regime and imposition of Martial law in 1977, the atmosphere saw a change in a different manner and government became more interactive with businessmen.
In circa 1980, there was a major cotton crop failure. As per my vague memory, the size of the normal cotton crop, which used to about 4 million bales of cotton it dropped to 2.2 million bales. Economists say that if there is a 5% over supply of a commodity the prices crash, similarly if there were 5% short supply, the prices sky rocket what to talk of a 45% drop in cotton output. The cotton prices saw a meteoric rise. Textile Industry, which was 70% of the country's industry, went into a tailspin. The industry was still struggling with the negative effects of devaluation, those that had booked their foreign currency liabilities at Rs 4.75 per dollar or equivalent in the other currencies had to revise their bank liabilities. A few survived and the government came to the rescue in a half hearted manner and set up a committee under the stewardship of then Secretary Ministry of Finance, H. U. Beg, famously known as the 'Beg Committee'. In the final report as far as my memory goes help was to be given only to those industries, which were willing for a management change.
Following the above stated cotton crisis, the background of various packages and reliefs for delinquent loan accounts provided by the federal government directly or through SBP.
A decade or so later, during the caretaker administration of Moeen Qureshi as Prime Minister (August 1993 to October 1993) he was briefed that there was an infected portfolio of Rs 80 billion and if by some coercive action the loan could be recovered and the economy will take an upward turn. The government also announced that all those bank officers who were involved in the approval process would not be spared. It came out with a novel idea of publishing the names of all defaulting companies and names of their Boards of Directors/ partners/ proprietors. This was the most drastic and unpleasant move by any government ever that shattered the business and investment climate and dishonored the Pakistan's business community the world over. This was done and all newspapers were full of supplements with such lists and names. The defaulting community was also threatened of raids on their businesses and residences to acquire their precious belongings, eg, household furniture, carpets, jewelry, paintings and automobiles of their families and dependents. This scheme however failed to achieve any meaningful results. The entire business community was ridiculed and demoralized affecting the investment climate adversely.
Thereafter, during the regime of Benazir Bhutto (November 1993-1997) as Prime Minister, she announced measures to recover the defaulted Loans. The trade bodies engaged with the government and as a result of prolonged parleys a scheme was announced to restructure the defaulted loans. SBP and Pakistan Banking Council formed committees for each Bank comprising bankers, and representatives nominated by Federation of Pakistan Chambers of commerce and Industry and a Chartered Accountant. These measures did have a positive effect to some extent but write offs were not allowed.
During the government of Caretaker Prime Minister Malik Mairaj Khalid (November 1996 to February 1997) by an ordinance, the Federal Govt. announced the establishment of Resolution Trust Corporation to take over from the commercial banks the assets of companies/firms that were defaulters of bank loans. This couldn't take off at all.
Again, during the Government of Nawaz Sharif (1997-1999) the Prime Minister expressed his resolve that his Government will ensure recovery of all defaulted loans and punish the defaulters even if any new laws need to be introduced or the constitution needed any amendment. The government announced that all defaulters pay up by 16th of March 1998 with principal amount plus 5% in lieu of accumulated mark-up or face prosecution. Again the trade bodies engaged the government and told the Prime Minister that at that time the default portfolio in the most advanced economies such as Japan amounted to $1.0 trillion, which was 1/3rd of the Japanese Annual GDP. Also business failures and Bank defaults in free economies were matters of routine and part of the risks involved in lending. There are foreclosures or restructuring/ rescheduling as normal practices and market based economies have their own dynamics that deal with such routine mishaps. It never stops the wheels of the economy and moves on. Again, through the SBP, resolution committees were formed on the same lines as done during Benazir Bhutto Administration and substantial advances were made and restructuring/ rescheduling carried out.
In October 1999, the then Army Chief General Pervez Musharraf took the reigns of the government; Lieutenant-General Syed Amjad was appointed as Chairman NAB. Similarly serving Majors General and senior officers headed all provincial NABs. It was announced by the government that all defaulters must pay up by 15th of November 1999 or face NAB action. It was the most formidable formation the business community was faced with. Within that month a new National Accountability Ordinance was promulgated on 23rd November 1999. All of a sudden, on a very cold evening in the last week of November 1999, some 27 top most prominent businessmen of Pakistan were arrested from their residences in their pajamas without giving them a chance to pick up their clothing, woollies, toiletries, and medicines. They were taken to a police station in Lahore and stuffed four each in 12X12 open-air cages of steel rods. There was one "L" shaped toilet with two sides open with oriental WC without roof. There were straw mats on the floor for sitting and sleeping and no pillows, blankets or quilts in the freezing cold at night. No family, friends or employees were allowed to meet and what to talk of quality of food supply and water. This carried on till first week of December 1999 when a group of businessmen managed to see the CEO General Pervez Musharraf and wailed before him and described the state of the apprehended businessmen and that all business activity and investment in the country was at a halt. The whole business community was in panic and most of them must have sworn never to borrow from banks ever again because there is always a chance of businesses failing and if the consequences of un-willful default are to be so ugly then better do something else. People set up industries not just for themselves but for their families and generations. Hardly anyone would undertake these ventures for cheating or fraud. Government relented a bit but coercive handling by NAB still continued one way or the other for quite some time without much success. Thereafter the government set up a Committee for the revival of Sick Units (CRSIU) and authorized to restructure Non Performing Portfolios and revive the sick units found to be financially viable. The government also created an asset resolution framework in the form of Corporate and Industrial Restructuring Corporation (CIRC). This corporation were to acquire the bad loans from Nationalized banks at a discount and auction them publicly thus taking away the assets from existing owners and repaying to the banks in the form of 5 year bonds. The overall private sector advances meanwhile as a result of all above measures and change of credit culture attributable to risk aversion on the part of businessmen and bankers alike.
In March 2001, the CEO, General Pervez Musharraf, approved the sale of 868 sick units through open public auctions. These sick units were identified by CIRC in consultations with concerned banks as these units were closed for years and owed Rs 107 billion to the nationalized commercial banks. Under this scheme CIRC were to take over the assets of sick companies owned by banks and financial institutions at their book value (Total debt minus provisions) and in return the government were to issue bonds to these banks at the time of privatization of the units after three years of take-over. The bonds at the book value of units were to have 5-year maturity period with a government guarantee at a profit fixed by the federal government from time to time in accordance with State Bank rates.
Initially, the CIRC had selected 101 cases for the process from six banks and financial institutions, namely the National Bank of Pakistan (NBP), United Bank Limited (UBL), Habib Bank Limited (HBL), Industrial Development Bank of Pakistan (IDBP), National Development Finance Corporation (NDFC) and Agriculture Development Bank of Pakistan (ADBP). The CIRC became operational after promulgation of two ordinances, in September and November 2000. Under the ordinances the original borrowers were given the chance to settle their dues within 30 days or otherwise the CIRC starts executing cases through high courts.
The strategy to auction the irretrievable sick industrial units having been approved by the Chief Executive was seen as a last ditch attempt by the government to solve the twin problem of sick industries and non-performing loans of the NCBs/DFIs that constantly threatened their operational liability. It appeared that the creditor banks and DFIs have not been able individually to change the management of the sick units owing sizable amounts of loans through open auction in the market. This may have been due to partly for the fact that the task required concerted action by the management of the banks and that would have destabilized their daily working as the number of defaulting units has been increasing rapidly in each bank. In this context creation of a single specialized institution like the CIRC was considered the right step to exclusively attend to the task.
From slow pace of work assigned to CIRC, it appeared that not many buyers/investors both domestic and foreign were coming forward as was initially expected. It was hoped that some overseas Pakistanis may enter the scene to buy suitable enterprises from among the sick units Additionally, foreign investors from the Middle East countries may also be interested in exploring the opportunities to make investments in relatively medium scale amounts. These expectations, however, did not prove correct.
The Committee for Revival of Sick Industrial Units (CRSIU) had restructured loans worth Rs 44.1 billion and helped revive 163 sick units by allowing waivers and write-offs.
Despite the above measures, there still remained age-old loans of the Banks, which had not been serviced for at least five years and fell into loss category. There being very low probability that these loans could be recovered as with the passage of time the value of their collateral was, by and large, eroding while mark-up on outstanding but non-performing loans kept on adding. This led to a situation where the units were closed but their outstanding bank liabilities were increasing every day .The banks thus were inflating their balance sheets applying highest rate of mark-up and penalties, which could never be recovered. The protracted and cumbersome legal process and prolonged litigation for execution of decrees had been a major stumbling block in the recovery of loans.
(To be continued)
(The writer is former Chairman of erstwhile Export Promotion Bureau, Government of Pakistan)
wajidjawad@yahoo.com