IN his address at the Institute of Bankers on July 26, 2003, the former SBP Governor Dr Ishrat Husain disclosed that loans worth Rs23.5 billion were written off during 1999-2003.
He had said, “Contrary to popular perception as many as 262,209 small borrowers benefited from this policy and got relief of Rs7.6 billion. Of this, Rs5.0 billion was written-off for small agricultural borrowers and Rs1 billion to SME borrowers.
Thus, the allegations that army generals and politicians are main beneficiaries of banks’ write-offs since 1999 are not only inaccurate but also misleading. It is true that 1,408 borrowers got relief of Rs9.7 billion but this list consists of those businesses, which met the criteria set up by the respective boards of directors of the banks. The average amount for small borrowers was Rs29,000, while for large borrowers it was Rs6.9 million. He expected that Rs25-30 billion of defaulted loans would be written-off during the next three years. In an article in Dawn, Dr Husain dealt with, “Critical issues in banking,” in which he also touched upon loan write-offs: “Contrary to the popular perception, the main beneficiaries of the write off of the old outstanding and unrecoverable loans have been 47,635 small individual borrowers with loan amounts of less than Rs0.5 million.” He preferred not to reveal the total amount of these write-offs. Earlier Dr Hafiz Pasha, as the Prime Minister’s Advisor on Finance, had, in an answer to a question in the Senate, disclosed that the amount of defaulted bank loans had gone up from Rs23.4 billion in 1985 to Rs184.5 billion as on March 31, 1998. The loan written-off during this period was Rs16.6 billion. Of this, the write-off during 1997 was Rs7.1 billion. As indicated earlier, the write-off between 1999 and 2003 was Rs23.5 billion.
Individual banks give the details of write-offs in their annual reports but these have to be collected to put together the information. The SBP regularly publishes the position of NPLs, but does not consider it worthwhile to give the position of defaulted loans, or bad debt, not to speak of the write-offs. There is no place for this important issue in the annual report of the bank. Five major banks have written-off their loans of Rs 0.5 million and above to the extent of Rs22.3 billion in 2005 when the outstanding liabilities of these loans were Rs24.3 billion. The average amount of write-off comes to Rs34.3 million.
The wonder of wonders is that the amount written off under ‘Other Financial Relief’ is far more than the liabilities outstanding at the beginning of the year. But the concept of “Other Financial Relief “ is not explained beyond indication of waiver and reversal, themselves begging explanation. This is a very fertile area for research much beyond the space constraint of an article.
One aspect of the phenomenon, which shocks the layman, defying plain common sense and is quite intriguing, to say the least, is the fact that in many cases the amount written off is much more than the liability at the beginning of the year.
The UBL is a classic case, as it wrote-off Rs4.8 billion as against the total liabilities of Rs3.04 billion at the beginning of the year. ‘Other Financial Relief’ provided was Rs3.1 billion against ‘Other liabilities’ of Rs1.1 billion.
A couple of individual cases may be mentioned here, which dramatize the situation. The write-off in case of Khalid Riffat Transport Corp was Rs26.8 million against the liabilities of Rs4.0 million while for Mehr Dastgir Spinning Mills Ltd, Multan these figures stood at Rs1,160.5 million and Rs657.7 million respectively.
In a new development, the bank wrote-off loans worth Rs951.3 million while the liability was Rs643million for 41 borrowers who were located in the Middle East-Dubai, Sharjah, Ajman, Abu Dhabi, Ras Al khaima, and Umm Aliwain
The size distribution of the loans reveals the predominance of large loans. Loans of Rs100 million and more account from 71 per cent of the write-off.
The MCB loan to Punjab Road Transport was secured under the Punjab government guarantee. The bank, instead of enforcing the guarantee, wrote-off the loan. The top 20 borrowers, who represented only 3.1 per cent of the beneficiaries, accounted for half of the write offs.
Whose money is doled out? Banks’ own equity is not even 10 per cent of the funds deployed by them. Even so, despite privatisation, the SBP is the major shareholder. In case of Habib Bank, the share of the SBP, as of December 05, was 60.5 per cent while that of Aga Khan Fund for Development was 38.5 per cent.
The bulk of the funds deployed by banks thus come from hapless depositors. The real loss, therefore, is theirs. Can such a distribution of wealth among the big borrowers help in poverty alleviation so dear to the authorities? The affair speaks volumes about the laxity on the part of banks in lending to the elite and under the supervision of the central bank. Loan write-off by banks is a universal practice, but subject to very stringent conditions. A sick enterprise is subjected to the legal bankruptcy procedure by an independent agency, and this leads to appointment of a liquidator. He is charged with distributing the remaining assets among creditors. Banks are among them and get their proportionate share to the extent of the shortfall in the value realised by them in the first instance by cashing the collateral of the borrower.
The residual, if any, is written-off by banks. Pakistan is unique in this regard as no such drill is prescribed. As a matter of fact, there has been no bankruptcy law. One is said to be now on the anvil. Banks have the privilege of declaring a loan irrecoverable and write it off.
The SBP guidelines for this purpose only require that banks satisfy themselves that: (i) There has been no negligence in sanctioning and later administering the loan, (ii) no write-off be allowed, if the forced sale value of the security held by the bank is more than the outstanding amount recoverable, (iii) all liquid assets including FDRs, government securities, share certificates held under lien and pledged goods, etc. have been realized and sale proceeds thereof appropriated towards adjustment of outstanding. (iv) the borrower\ guarantor has no means of repayment, (v) the borrowers have not created other business interests and assets out of the non-performing loan to be written-off, (vi) no criminal misappropriation of stock or other movable, immovable securities by the borrower was involved.
As a general principle, Islam does not allow manipulation of things to gain undue financial advantage.
The Quran, as a matter of general principle, has this to say about honouring ones contracts, including those pertaining to monetary matters, “O ye who believe! fulfill your compacts,” (5:2) “And fulfill the covenant, for the covenant will be questioned about.” (17:35)
The Holy Prophet (PBUH) has specifically underlined the sanctity of debt. He would not lead the funeral prayer of a person who died in debt unless some one else undertook to discharge the liability.
A man said to him, “Tell me, if I am to be killed in the cause of Allah, would all my sins be removed from me?” The Holy Prophet (PBUH) said, “Yes, if you are killed while you are steadfast, looking forward to your reward, marching forth and not turning away, but if you owe any debt that will not be remitted. Gabriel just told me this.”
IN his address at the Institute of Bankers on July 26, 2003, the former SBP Governor Dr Ishrat Husain disclosed that loans worth Rs23.5 billion were written off during 1999-2003.
