May 5, 2002	Sunday	Safar 21, 1423

ISLAMABAD, May 4: Non-performing loans (NPLs) of the nationalized commercial banks (NCBs) have become a major problem because of political interference and directed credits to individuals and companies.

“As a result of political interference and directed credits, NPLs have become a major problem and together with various taxes, explicit and implicit on intermediation, have led to spreads as high as 7-8 percentage points between deposit and lending rates,” says a World Bank latest country report “Pakistan Development Policy Review — A New Dawn”.

It said that Pakistan’s financial sector developed along predictable lines, given direct state intervention in all the allocation of financial resources on the one hand and chronic fiscal deficits financed by borrowing on the other.

The amount of NPLs or the bad debts is said to have once again reached to about Rs300 billion. There had been some reduction but due to reported new default cases, the amount has again touched the figure of Rs300 billion.

The report said that of banking system assets, NCBs and privatized banks account for over 60 per cent. Competition is limited. While NCBs have been a prime source of working capital loans, development finance institutions (DFIs) have been important in long-term credit.

According to the report, the banking sector has been undergoing deep restructuring since 1997. But following the May 1998 nuclear tests in India and Pakistan and subsequent cutoff in foreign aid, to avoid a massive capital outflow, the government converted foreign currency deposits into rupee or long-term foreign currency bonds at low interest rate. Despite the crisis the banking sector in 1990 was much stronger than in 1997 by most benchmarks. Private management of the NCBs and central bank independence were responsible for strengthening the banking system to withstand the foreign current deposit stock.

In mid-1999, interference in the banking system began to increase again through new, centrally mandated credit programmes. Loan recovery slowed and bankruptcy procedures halted. Banks’ provisioning rules were weekended. Full privatization did not materialize, due, on the one hand, to weak market conditions, the country’s deteriorating foreign investment climate and lack of sustained effort, and, on the other, to the banks’ high cost operating structures and depleted balance sheets. The DFIs also remained unreformed dominated by the public sector institutions that invested mainly in the government paper.

Privatization of the NCBs is now high on the agenda. The government of Pakistan plans to finish privatizing the partly privatized banks (as of 2001 the government had sold its remaining shares in Muslim Commercial Bank), and is seeking to find strategic investors for Allied Bank of Pakistan. It intends to fully privatize Habib Bank and the United Bank, with risk- mitigating arrangements in view of their weak balance sheets.