May 15, 2006	Monday	Rabi-us-Sani 16, 1427

NORMALLY, entrepreneurs produce goods and services by employing factors of production, add to GDP, provide employment thus setting in motion a virtuous cycle and earn profit. This makes entrepreneurs and the economy rich. In Pakistan, very few have become rich through this desirable productive activity, which is a slow process.

Most of the wealth accumulated by the rich can be attributed to questionable means. The process started with unauthorized occupation of evacuee property right in 1947 and sale of permits and quotas was added in early fifties. The game picked up momentum adding new ways.

As for government departments, it is a said that nothing moves, even if you want to make payment to government, without paying money. All this gravitates income and wealth to the power centres at the expense of the common man.

It is claimed by the regime that there is no more corruption at the top, which means the President and the prime minister. This is a tacit admission that corruption at the lower levels continues to flourish. The most significant aspect of the corruption is that businessmen consider it as an expense and conveniently pass on to the consumer with a hefty premium.

The guesstimate of this scribe is that the ultimate burden of corruption on the common man is no less than the incidence of taxes, itself increasing rapidly with the recent shift of emphasis from direct to indirect taxes.

Banks, by providing the wherewithal, have played an important role in the creation of the existing bourgeois class. In 1947, with the mass exodus of non-Muslims, Pakistan could at best claim a handful of millionaires (nay, lakhpatis). Now within half century there is an army of billionaires (not in rupees but in US dollars terms) who can put to shame many of their counterparts in the most developed country in the world.

New government-financed institutions were set up and the normal banking rules relaxed to facilitate borrowing by the elite. As for the rules, mention must be made of increase in debt\equity ratio from 60:40 to 70:30 and 80:20 with even 85:15 in special cases.

They became pampered clients whose phone call to the bank manager was nothing short of order, the volume of loan was no constraint, collateral mattered little and the rate of interest became meaningless, as it was concessional to begin with, was not paid by making the loan non-performing for long.

Ultimately, the entire loan-principal and interest, was just written off without going through any legal procedure for bankruptcy. When the care-taker Prime Minister Mooen Qureshi first disclosed the bad debt (non-performing loans and default) of financial institutions in 1993, it was less than Rs100 billion.

Now NPLs alone stand at Rs205 billion. According to the State Bank Governor, loans worth Rs23.5 billion were written of between 1999 and 2003. The process continues.

During 2004, National Bank of Pakistan, wrote off loans worth Rs4 billion. Only two big borrowers-Saad and Pakland Cement, accounted for 35.4 per cent of the total amount of Rs4.6 billion written off by the bank. Individual banks reveal this information in their balance sheet but the State Bank has found it advisable not to publish it for the public.

There can be no more exciting story of banks having been so ruthlessly exploited by the elite. What have banks done for the small man? The following table speak for itself.

It may be borne in mind that the above figures of small loans includes loan to junior bank employees and the recently introduced consumer credit at the smaller end for low-ticket durables, like motor cycles, TV, fridge, etc. Banks also introduced salary advances for public sector employees.

The use of credit card is picking up. Loans for generating income have thus been much smaller. Interestingly, against total small loans of Rs135.1 billion, deposits in the same account sizes were Rs561.9 billion in June 05.

The crucial role of bank credit for poverty alleviation is obvious and can never be over-emphasized. To avail of foreign financing available specifically for this purpose and a number of financial institutions to provide micro finance and small and medium enterprise have been set up. They are all urban based. It is to be seen whether the tradition of doling out the available SBP and external funds will continue or public savings will be mobilized to make a dent.

The situation is extremely acute in rural areas where the incidence of poverty is the greatest affecting the vast majority of the population of the country residing there. The problem of rural debt is proverbial.

According to Agriculture Census 2000, 18.1 per cent of farm households are indebted with 58.4 per cent of their loans from non-institutional sources at atrocious rate, which snare them in debt, not for years, but for generations.

A small farmer paying six per cent per month interest cannot be left with enough income. He is also forced to sell his produce at deep discount through advance commitments. This reduces his capacity to pay and to keep his large family alive he must borrow more at an exorbitant rate. His disposable income is ultimately just a fraction of his nominal income.

The solution obviously lies in increasing the availability of institutional credit, particularly bank credit, first to free the small farmer to make himself self-sufficient for basic consumption at a very modest level and then to enable him to undertake investment to increase income.

According to the PIDE study, “The Structure of Informal Credit in Pakistan” (1998), the share of non-institutional credit, which had declined from 90.2 per cent in 1973 to 41.2 per cent in 1985, was 78 per cent to 1997. As to the sources of credit, the share of commission agents was 12 per cent, input dealers 11 per cent, landlord\machinery supplier 36 per cent, professional money lenders 3 per cent, processing units 16 per cent and others 11 per cent. Another PIDE study reveals that informal lenders in rural areas use their own resources up to 52 per cent and the rest is borrowed; 33 per cent from formal institutions and 16 per cent from informal sources.

The role of banks in meeting the genuine credit needs of the small farmer has not been even worth mentioning, as the above figures, which include that, indicate. On top of that banking facilities in rural areas, scanty as they were, have been, as a deliberate policy, drastically curtailed in recent year through closure of branches.

Since 1999 till June 05 per cent of bank branches in town with population of less than 10 thousand had been closed. Thank God, the folly has dawned on the State Bank and it has now instructed banks with 100 branches to have 20 per cent of them in rural areas including tehsil headquarters with no banks.

The State Bank has launched a campaign to step up bank credit to agriculture. As a result, outstanding bank advances to agriculture, hunting and forestry increased from Rs113.5 billion 04 to Rs127.1 billion in 05.

Commercial bank advances increased from Rs29.2 billion to Rs37.5.4billion, their advances for growing crops from Rs29.2 billion to Rs37.5 billion. The fact is that bank for agriculture stops at the doorstep of the influential big farmers who have assumed the role of moneylender.

There is a strong case for a rural bank exclusively devoted to the small man in rural areas. It need not be a new institution. ZTBL may be converted into this bank. Big landlords can meet their needs from commercial banks who are always ready to serve them.

For real meaningful progress, banks will have to be involved in the effort in a big way. There is no other way out. This would involve changing the very basic banking culture in the country.

Dr Ishrat Hussain, as Governor of the State Bank and President of IBP, entitled his last address at the fag end of his tenure in November 05, “Culture, Ethics and Values in the Banking System.” He observed, “This highly inequitable discriminatory attitude on the part of our bankers, if allowed to persist, will retard the broad based growth of industry. We will have to get away from the culture of sifarish, reciprocity, favouritism, nepotism and inculcate a culture of serving the customers equally and honourably without any distinction.”