Banks in Pakistan lack credit robustness and one reason, apart from banks’ own laziness and higher government financing reliance on banking system, is the pile up of nonperforming loans (NPLs). The NPLs of banking system stood at Rs680 billion in December 2018 while the number was Rs613 billion in 2011. The fear is that majority of toxic assets are stuck in the banks for long as numerous recovery cases are lingering in the court of law for one or other reason.

Nearly 83 percent of bad loans in 2010 were in corporate and SMEs , and the ratio is the same in 2018. The problem of higher NPLs started back in 2008, and the toll crossed Rs600 billion in September 2011 - since then till September 2018, the NPLs hovered around Rs600 billion before inching up in the last two quarters. The recent hike is due to some fresh NPLs and based on the market pulse, the March 2019 numbers could be higher.

Let's concentrate on the pile stuck in banks for last 10 years which is hindering private sector credit growth. There are industries which can be revived and sick units that can be rehabilitated. The pressing need is to improve loan recovery and bankruptcy laws implementation, as without it, credit robustness is hard to come by.

The willingness to lend has diminished ever since 2008 happened, especially in the SME segment. The SME credit as ratio of private sector credit plummeted from its peak of 20 percent in 2004 to 7 percent in 2018. And overall private sector credit to GDP nosed down from its peak of 27 percent of GDP in 2007 to 18 percent of GDP in 2018.

One of the reasons for low credit to private sector is the increase in government borrowing from banking system in the last decade or so. Yes, the fiscal need has increased significantly since 2008, especially, after 7th NFC award. But at the end of day, it’s the banks choice on whom to lend. The bankers are keen on investing in government papers, while the high margin, private credit, becomes too risky, as system favours defaulters.

The legal system is inefficient as laws generally covers banks’ interests in case of defaults, but the quality of judges in banking courts and over burdened judiacry in high courts means lingered on cases. The problems in dealing SMEs and consumers (mainly housing] loans are even worse. The cases up to Rs100 million loans are dealt in banking courts where sessions judges do not have any experience in gauging financial transactions. The lawyers can easily twist cases to confuse judges. It could take a couple of years, just to prove that the defaulter is actually a bank borrower. In such a bizarre environment, forget about recovering loan, if the defaulter is willful.

There is urgent need to build capacity of judges in banking courts.

In case of loans over Rs100 million, the default cases are handled in high courts where judges are simply over burdened. The banking cases are usually low priority for them - there are around 50 cases a high court judge has to handle per day, and the lower staff could at times collude with defaulters to keep banking cases low on priority.

Even if a judge has capability and willingness to resolve banking cases, he or she does not have enough time to settle in desired timeframe. The need is to have special banking bench which should be mandated to resolve any case in stipulated time - say 3 to 6 months.

The banks should have the right of corporate restructuring. In case of Dewan Group, Dewan Farooq Motors was arguably the best automobile plant in Pakistan at that time. Had that been settled well, the automobile plant could have been efficiently operating today.

There are some better cases to discuss where defaulter willingness to cooperate resulted in win win for banks and shareholders.

The need is to expedite the banking court cases that would help in reviving many of the sick units - in textile, NPLs stand at Rs182 billion which is around one sixth of total textile lending. There are many units which are closed and these can be restructured with new management/ownership to revive some of the units.