" Loans turn bad only when they are given to bad parties and not sanctioned on merit............These loans are taken out with the intention of never paying back."In 1984, General Zia ul Haq constituted a committee headed by Finance Secretary Mr. H U Beg to recommend revival of sick industrial units. It was a one-time exercise obviously meant to review the loans of the nationalized units dating back to pre-nationalization and devaluation of the currency, " making provisions to either reschedule or reduce their liabilities".Yusuf Shirazi, Interview with The daily Dawn, 7.10.95." At present there is a lack of commitment for loan recovery at both ends, at the government level and the level of the defaulters."G M Adamjee, Interview with The daily Dawn, 23.9.95.
Every elected govt in last 13 years has set up committees to revive sick industries. Since 1990, committees have existed in each nationalized commercial bank and financial institutions for writing-off reschedule loans. No mention was ever made by the banks, State Bank or politicians about the existance of these committees. While hearing a case against this banking malpractice on November 10, 1997, the Supreme Court observed that " there appears to be no statutory rules or regulations or any expressed policy guideline issued by the State Bank of Pakistan, regulating or controlling the powers of banks to write-off, reschedule loans and interest which is being exercised by these banks, arbitrarily, without keeping in view the commercial considerations".
The revival of sick industrial units is an important priority for Nawaz Sharif govt and the reason for this priority is not difficult to understand if one goes through the list of biggest defaulters in the country. How the concept of reviving sick industries has evolved is itself a meaningful comment on how the system works and how corruption breeds corruption?
The H U Beg committee granted relief to hundards of sick industrial units and fathered the idea of another committee by recommending that relief be provided by reducing or rescheduling the loans of hundards of sick industrial units, " on case by case basis". This led to the creation of another committee by Pakistan Banking Council, in 1987 to provide relief to sick units, on permanent basis.
In 1988, Pakistan Banking Council empowered the board of nationalized commercial banks to write-off restructure loans up to Rs 1.00 million but loans above 1 million were to be referred to PBC Committee. In 1991, during Nawaz Sharif premiership, board of directors of all the financial institutions were empowered to write-off any loan.
The meetings of Federation of Pakistan Chamber of Commerce and Industry Committee (FPCCI) for revival of sick industries during second Benazir govt were chaired by Asif Zardari and it was during this period that FPCCI proclaimed proudly that it had managed the restructuring and rescheduling of 400 cases or Rs 24 billion and advised sponsors of sick/closed units, " in their own interest" to contact the federation and avail the opportunity of settling their cases with banks to make their units operational". We have already seen pervious pages that second Benazir govt scandalously wrote-off loans worth Rs 3,550 millions including all the loans of Farooq A Sheikh, Chairman FPCCI committee for revival of sick industrial units.
The practice of writing off/ rescheduling loans has become a big business. In fact it is such a powerful and lucrative business that honest and professional bankers were reluctant to talk against this evil. A senior banker from National Development Finance Corporation (NDFC) who had done a comprehensive study on the problem of loan default came all the way from Karachi to Islamabad, to speak on the subject at Sustainable Development Institute (SDI) in December 1996 but on the condition that he would not be reported or quoted.
" The concept of bad loans is gone, we call them non-performing loans", V A Jaffery, Benazir govt's advisor on Economic Affairs observed at a press conference with bits of sarcasm and helplessness.
H U Beg and several other bankers who studied the problems of bank loan default made comprehensive recommendations to discourage industrial sickness but their recommendations have been ignored and the business of rewriting loans is going on as usual. Beg, for example suggested that " legal action should be initiated against the defaulters, at an early stage of default and all banks and financial institutions should be notified about the action so that they should stop all facilities, not only to individual sponsors but also to their sister/ associated concerns. Besides, a sponsor whose unit is once liquaidated for willful default or siphoning off funds should be blacklisted.
A World Bank report on financial reforms in Pakistan observed that " not only has political pressure forced institutions to make bad loans and stop collection efforts, even the modest efforts to reform the recovery framework has met vigorous political opposition". It reported that as of October 30, 1992 a total of 21,000 cases were pending in the banking tribunals and observed that in order to discourage the practice of loan default " the bankcruptcy of a few large over extended firms and jail terms for a few willful fraudulent defaulters would be quite aslutary".
A USAID study about financing for the Housing sector concluded that the legal system for recovery of loans was almost non-existent and in one particular case in Karachi Banking Tribunal, there were approximately 10 hearings and adjournments since 1987 while in another case in Lahore, there were 67 hearings and adjournments between 1981 and 1991. It cited that a case was pending before Punjab Banking Tribunal since 1988 because the tribunal was not functioning for two and half years.
At a time when a
firm policy was needed to discourage defaulters from taking new loans and
reform the banking system, Asif Zardari started holding courts with FPCCI
to provide them relief and fresh financial assistance, thus giving permanency
to the evil of industrial sickness, as part of Pakistan's business culture.
It is not surprising that in his second term, Nawaz Sharif and Sartaj Aziz
have identified revival of sick industries, as the top priority of new
govt which means providing additional loans to existing defaulters.
How CBR helps them become Rich
Table of contents
Pakistan's top defaulters
Barons of Pakistan