Pakistani banks were taken over by the government on the 1st January, 1974 as per the party manifesto of the Pakistan Peoples Party.
The underlying idea of the take-over was that the profit which the private sector was pocketing should accrue to the government ex-chequer thereby reducing the budget deficit and consequently the tax burden on the public.
The another idea for the take-over was that their owners were extending credits to their chosen borrowers resulting in the creation of cartels. After the lapse of about three decades, one wonders if the projected basis was really correct. The public sector commercial organizations, including banks, instead of contributing any thing to the budget have become a burden of the order of Rs100 billion annually on the budget. The object of proper lending has also not been served, leading to the accumulation of heavy heap of the defaulted loans. After the government take-over, high-handedness of the labour unions - of course on the basis of political backing— had so much increased that banks’ managements had become absolutely powerless notwithstanding whether it was a matter of employees’ appointment / promotion or sanctioning loans. The ruling juntas and the bureaucracy also exercised its influence in the sanction of the irregular loans.
Immediately, after assuming power as the Prime Minister of the country, Mian Nawaz Sharif in February, l997 inducted the so-called professional management in the National Bank of Pakistan (NBP), the Habib Bank Ltd. (HBL) and the United Bank Ltd.(UBL). The Habib Bank and the United Bank were handed over to the incumbents from the Citi Bank and the National Bank of Pakistan to the one once belonging to the Bank of America. The professional managements could not, however, contribute any thing to the government ex-chequer during 1997-2001. They rather drew down on the budget to the extent of over Rs58 billion ($1.2 billion) under various heads as per the details given below in Table “A”.
These payments were made by the government by contracting banking sector adjustment loans from the World Bank and also perhaps from the Overseas Economic Co-operation Fund (OECF) of Japan. Thus the government had to borrow to the extent of $1.2 billion in foreign exchange to ensure continuous functioning of these public sector banks under the professional management.
The position of profit earned/loss sustained by these banks since 1997 is given in the table “B”:
It may be worthwhile to refer here to the Notes No.3.7 and 3.11 to the anal report of the HBL for the year 1998 which states that the exodus of the staff cost was to be amortized during the period of 50 months and the first instalment was charged to the profit and loss account for the year 1997. However, instead of charging the second instalment to the profit and loss account of 1998, the 1997 accounts were restated by adjusting the entire unamortized amount therein which resulted in accrual of extra profit of Rs2.423 billion during the year 1998. Had this not been done, the 1998 results would have depicted a loss of Rs1.209 billion.
The note No. 18 to the 2000 annual report mentions that a profit of Rs 1.066 billion has accrued because of the change in the accounting methodology. Had there been no such change, the bank would not have earned any profit during the year 2000. Thus Habib Bank Ltd. did not earn any profit during the years 1997, 1998, 1999 and 2000. It has shown a profit of Rs2.224 billion during 2001.The United Bank incurred heavy losses during 1997, 1998 and 2001 as against small profits during years 1999 and 2000. The position of the National Bank had been comparatively better but with the exception of the year 2001, profits had been nominal.
The accumulated profits (+) / losses (-) of these banks as on the 31st December, 2001 are as under:
NBP (+) Rs0.752 billion
HBL (—) Rs17.058 billion
UBL (—) Rs27.320 billion
The dictum viz-a-viz the retrenchment of employees from the public sector organizations, including the banks, that “it is a travesty of justice to keep 100,000 people employed in these corporations and compelling the nation to pay almost Rs100 billion every year being the losses of these corporations employing these individuals” may prima facie look plausible but the employment of the individuals is not the sole reason for the losses. The government may arrange the detailed studies to find out the reasons other than the expenditure on the excess staff for the losses of public sector corporations and take effective measures to remove them. For example, electricity utilities are incurring 40 per cent line losses and these represent the electricity theft. Did the 1999-2002 regime succeed in getting oven the problem? I do not know whether the exodus of staff has made the public organizations other than the banks financially viable but in the three public sector banks under review, the exodus of staff at a large scale has failed to curtail the salary / allowances expenditure. It has rather increased out of proportion as will be evident from Table “C” given hereunder:
* Statistics at the relevant year end as per the annual report.
* Salary / allowances for the complete relevant year. As the exact date of the exodus of staff is not available, comparison of salaries/allowances has been made between years 1997 and 2001.
It would be seen from the above table that during 1997-2001 period of 6 years, the NBP and the HBL have respectively off-loaded their staff to the extent of 36.1 per cent and 37.77 per cent / closed their branches to the extent of 19.93 per cent and 23.89 per cent but their salary/allowances expenditure has risen by 33.05 per cent and 30.67 per cent. The UBL had retrenched staff to the extent of 58.5 per cent and closed 34.33 per cent of the branches but the reduction in the salary/ allowances expenditure is of the order of 24.15 per cent only. The NBP has retrenched yet another 3010 employees in 2002 which will bring total exodus of staff by that bank since 1997 to 48.78 per cent.
Why the reduction in the expenditure is not proportionate to the reduction in the number of employees / branches? And if the real aim of reducing the expenditure was not achieved, what is the purpose of continuing with these “Reforms” in the public sector banks? What in fact had happened was that with the exodus of low-paid employees, a substantial number of advisors / consultants were appointed by these banks at fabulous salaries and perks and the United Bank is believed to be on the top in this context.
These banks can contradict the above viewpoint by publishing the duly audited data of the expenditure on these contract employees since 1997 including the details of the amounts of advances of various types granted to these employees/ terms of such loans also indicating whether these contract employees were entitled to these advances under the bank regulations or the regulations were modified to accommodate them?
Now-a-days “merit” based recruitment in the banks is being widely trumpeted. Has the merit these days centralized in the residents of the posh areas alone as it is said that in one public sector bank 70-80 per cent of the newly appointed officers are the residents of the city’s posh areas. One of the purposes of induction of the professional management in the public sector banks was to overcome the problem of the defaulted loans. Has there been any success in this regard, let us examine:
It will be seen from the above details that the nominal amounts of the nonperforming loans of any of the three banks has not gone down but have increased. The ratio of NPLs to total advances has increased in the case of the National Bank while it has gone down slightly in the case of the Habib Bank and the United Bank which seems to be because of the sharp increase in the amounts of the advances.
The United Bank had recently asserted that its “net” NPLs in relation to the “net” advances have reduced from 66 per cent in 1997 to 13 per cent in 2001.
Now let us see what the net NPLs and net advances denote. The State Bank has introduced two monitoring procedures for calculating the NPLs. Under the first procedure gross NPLs are matched with gross advances while under the second one net NPLs are matched with the net advances. The amounts of the net advances are worked out by deducting from the actual amount of advances the amounts of the provisions made by charge to the profit and loss account.
The amounts of the net NPLs are, however, determined by deducting from the actual amounts of the NPLs (a) the amounts of the provisions made against the NPLs by debit to the profit and loss account and (b) the amounts of the unrealized interest transferred to the suspense account. By deducting these two items, the NPLs become very lean and their percentage to the total advances comes down very sharply. This enables the bank to present a rosy performance picture which is not real. This can be gauged from the fact that UBL’s NPLs as at the end of 2001 are 33.11 per cent of the total advances as calculated above while based on net NPLs this percentage comes down to 13 only. As per State Bank’s data, the gross NPLs of the banking sector remain at the rate of 24 per cent since 1999 while net NPLs have come down from 15 to 11 per cent during this period.
This also raises the issue how far it would be rationale to show the NPLs decreasing by charging the same to the banks’ own profit and loss account in the shape of the provisioning? One feels that it would rather be futile to paint the rosy picture of the performance of the banking sector viz-a-viz the defaulted loans through methodological camouflages.
It may be pertinent to note here that since it has not been possible to locate the data of the unrealized interest transferred to the suspense account in the annual reports of the banks, it could not be taken into account in the above calculations of the NPLs ratio. If this item is also duly accounted for, the ratio of NPLs will further increase sharply and may be that it turns out to be higher than what it was prior to the induction of the professional management in early 1997.
