Non-performing loans in Pakistan still remain almost at an all-time high despite the best efforts of all-concerned except many defaulting borrowers and because of the domestic economic climate.

The State Bank of Pakistan (SBP), particularly its governor Dr Ishrat Hussain and the banks took notable initiatives for settlement of the loans, but without great success.

If the ratio of non-performing loans to the overall loans which at one time stood at almost one-third has come down sharply, it is because the loans have now increased greatly.

The viable textile sector has borrowed a great deal from the banks for its renovation and expansion to meet the challenges of a textile quota-free world from the year 2005.

The SBP wants to clean up the balance sheets of the banks so that they can operate as healthy entities with clean balance sheets. It also wants the banks and the development finance institutions to be prepared for privatization in the manner Habib Bank is to be privatized in December.

However the banks and the government have been careful in writing off the bad loans. During the three years of military rule, only Rs20 billion were written off, strictly in conformity with the prudential regulations. And the new policy for writing off the loans of commercial banks may result in the write-off of Rs25-30 billion by 2006.

These are small loans in the ocean of bad debt which the borrowers are not in a hurry to repay, hoping that if not this government, the next government may write them off.

Quite a many borrowers have taken money abroad and invested it in business and real estate and are not willing to liquidate it and bring it back.

A consul general of a foreign country who was invited by a businessman to his home in London, was surprised to note that his home there was as luxurious as it was in Karachi. and he had no intention of liquidating those assets and bringing back the money home to repay the loans.

I was some time ago at the home of a textile magnate in Multan, built in the French style, where the catering too was done almost in the French style. When I came back to Karachi, I checked the share market prices of his two textile mills. They were quoted at Rs4 and Rs6 respectively, against a face value of Rs10. The fact is most of these bad loans are tied up in court cases which last very long. The first thing they do when they file a case is to ask for the interest claim to be stopped.

Of course, much of the default is the result of very high interest rates which peaked to 25 per cent or more, but even when the interest rates have come down, the old loans have to be settled at the old rates. In the US where the rates have hit the bottom, borrowers can take new loans at the reduced new rates and repay the old loans and feel free, but not in Pakistan where the old loans have to be settled at the old rates.

Such an irrational policy has led to serious contradictions in the new lending practices, while corporate lending for favoured customers is being done at four per cent the small borrower from the Khushhali bank has to pay up to 18 per cent, but the export credit is available at three per cent, an all time low.

Low interest rates have become a universal phenomenon. The US Federal Fund rate has come down to one per cent, a 45-year low. And the chairman of the Federal Reserve, Alan Greenspan, says the rate may not go up for a long time, as the US domestic sales are not picking up.

Now a number of steps are being taken by the State Bank of Pakistan to tighten the control on the banks and prevent further bad loans. Now the SBP wants weekly reports of their transactions from the banks.

A number of entities have come up doing illegal banking, while avoiding the obligations of the banks, and the SBP has issued notices to 55 of them.

The Central Board of Revenue (CBR) has also asked the banks to report to it the interest payments made to various depositors to ensure they do not evade payment of full taxes.

Meanwhile, the efforts to privatize banks is being stepped up with the Habib Bank due to go on the block in December. And the National Bank of Pakistan (NBP) having sold off ten per cent of its shares to the public, is to offer 3.2 per cent more shares through the stock exchanges.

In spite of such streamlining measures the large block of Rs245 billion non-performing loans remain a major challenge to the government and the banks, and they have to take firm decisions to reduce it sharply over a three to five years period, instead of adopting a cavalier policy of charging nominal interest to corporate borrowers and punishing the poor borrowers too heavily.

However, the army rulers and their civilian cohorts have not prevented major defaulters from contesting the elections, winning seats and becoming ministers and speakers of assemblies. It was earlier said that defaulters would be debarred from contesting the elections. But in reality it did not take place and the defaulters felt greatly encouraged.