KARACHI, March 30: Window dressing of balance-sheet is not a rare business practice. By doing so, companies improve their corporate image or save on taxes. And commercial banks are no exception.

In Pakistan, private sector tends to hide profits to minimise tax payments. Public sector enterprises over-state their gains or under-state losses in a bid to show improved performance of bureaucrat-managers.

When window dressing is taken to its extremes to misrepresent the true state of affairs, poor cash flows expose the wrongdoings and the balloon bursts. This is what has happened with most of state enterprises and nationalized commercial banks.

Now, the regulators appear to be more vigilant. The balance-sheet of NCBs are being subjected to closer scrutiny. And some banks and DFIs have been liquidated/or merged with stronger institutions.

The State Bank has also taken note of the current trends in bank deposits. The bank deposits grew by Rs80 billion in the first half of current fiscal against Rs8.5 billion in the corresponding period of last year.

As an increase of Rs50 billion is for December 2001 alone, the State Bank says: “the possibility of window dressing at the end of the financial year may not be excluded” and adds “subsequent decline of Rs17.1 billion in the first week of January further supports this view.”

In nationalized commercial banks (NCBs), profits used to be over-stated in the past to show improved performance of the management. Now, the commercial banks are required by the central bank to get their credit ratings.

And since the NCBs are being prepared for privatization, the strategic buyers would carry due diligence before striking any deals. Accounting procedures and criteria for determining non- performing loans have also been improved. These are expected to restrict some of the practices that make window-dressing of financial performance possible.

Bankruptcies like those of Indus, Mehran, NDFC or Bankers Equity cannot, however, be ruled out unless the regulators are vigilant and Enron-like political patronage does not occur.

In 1998, the Habib Bank declared an after-tax profit of Rs1.5 billion but the regulators’s findings were entirely different and the bank management was informed accordingly.

In fact some central bankers told this scribe at that point of time that HBL was no better than UBL, if not worse.

When Zakir Mahmood took over as HBL president in February 2000, the financial accounts for 1999 were not finalized. In the light of the SBP report, he took up the issue with the regulators and the ministry of finance. And finally, the HBL board of directors decided to get an independent assessment of the actual financial condition of the bank.

Two chartered accountant firms Taseer Hadi Khalid and A.F. Ferguson were appointed to give a report on “capital adequacy situation.” Among others, the auditors’ report was submitted to the State Bank and ministries of finance and privatization in May 2000.

The auditors report concluded that in fact the bank has significant losses that has to be catered for. For example, the auditors had recommended an additional provision of Rs10 billion in loan loss provisions. The figure was reduced to Rs3.5 billion, as the SBP allowed extrapolation of collateral which had not been valued.

As the audit revealed, these provisioning needs were the outcome of problems going back nearly 15 years, which had not been fully recognized.

After a detailed review, a charge of nearly Rs10 billion was taken that also included provisions for operating costs, tax balances and leave encashment. This resulted in a pre-tax loss of Rs5.3 billion and an after-tax loss of Rs8.9 billion for the year 1999.

Since the bank was left with a very small amount of capital, the Minister of Finance Shaukat Aziz and the SBP governor Dr Ishrat Husain approved a cash injection of Rs8 billion to enable the bank to operate normally.

To strengthen the balance-sheet, the HBL management has made loan provisions of Rs3.5 billion in 1999, Rs1.3 billion in 2000 and Rs2.6 billion in 2001. In the past two years, the total provisions actually amounted to Rs4.5 billion, says an HBL source.

In the past, the NCBs took more than six months to make the audited accounts public. To quote the HBL President Zakir Mahmood, the balance-sheet for the year ending December 2001 was prepared and approved by the HBL board of directors within eight weeks, reducing the period by three months.

The bank has restructured the provisions of getting information from 1470 local and foreign branches in 26 countries and two joint ventures being run in Nepal and Nigeria in less than eight weeks. Immediately after the board meeting, Zakir Mahmood told a news conference that HBL’s pre-tax profits more than doubled to Rs2.2 billion in 2001 from Rs970 million in 2000.

Net revenue increased by Rs2.2 billion to Rs.16.8 billion, a 15 per cent growth, reflecting improvements in all sectors of the bank’s operations, says an HBL press release.

And for the first time in several years, the HBL balance-sheet after AGM approval, was made public on Saturday, just in three months after closing the books on December 31.