KARACHI, Oct 6: Industrial Development Bank of Pakistan (IDBP) -- a pioneer in industrial financing and bank of well repute in the decades of sixties and seventies -- has now accumulated a loss of Rs26.95 billion and its external auditors are now sceptical of its continuity as a going concern.

A team of State Bank of Pakistan inspectors has found IDBP to be insolvent and has not minced words in declaring the performance of its senior management and board of directors as “unsatisfactory”.

The State Bank conducted a full-scope inspection of IDBP for the year ending December 2005 and submitted a report early last month to the government, disclosing a loan default of Rs27 billion, which was selectively leaked out to the media recently. The bank now carries a negative adjusted equity of Rs26.41 billion. Resultantly, the capital adequacy ration (CAR) of the bank has decreased to 1,165.58 per cent from 672.6 per cent the previous year.

During 2004-05, the bank wrote off Rs1.12 billion loans in 48 cases. Of these, each of 30 cases involved one million rupees and more and each of 18 cases were of less than Rs1 million.

Chief Executive Naeem Iqbal, a retired executive of Habib Bank, was nominated in late 2003 for three years during which the financial and management position deteriorated to a level where its sustainability is in doubt. An attempt to reach the chief executive by telephone to get his version of the IDBP insolvency proved futile, as he was whole the time engaged in restructuring the bank. The six directors nominated on the board by the federal and provincial governments -- bureaucrats and businessmen -- were found irregular, indifferent and inactive participants in board’s deliberations. The staff has been found totally demoralised, alienated and indifferent to the work culture because of lack of proper corporate leadership and discipline at the top level.

“The bank faced a number of issues that included lack of oversight on part of the board and senior management who failed to establish effective control compliance culture at the bank, allowing capital expenditure without proper approvals, weak management information system, limited scope of internal audit, poor inter-branch reconciliation and delay in processing of write-off cases and poor recovery,” observed the State Bank inspection team after witnessing an all-round rut that had set in all departments of the bank.

The senior management and the board of directors were found wanting in satisfactory performance so much so that a few of the members of the board did not participate in the meeting. At the same time, agenda for the meetings was also not timely sent to the directors. The executive committee met only once in a year as against a requirement of holding 12 meetings in a year.

At the end of 2005, the IDBP’s deposit base was down to Rs8.33 billion from Rs11.43 billion a year ago. Its borrowings from the State Bank swelled to Rs17.58 billion from Rs14.79 billion last year. Its total liabilities at the end of 2005 amounted to Rs33.19 billion. After the conversion of government’s SBP borrowings into equity, the bank requires further capital injection of more than Rs12 billion. The total shortfall amounts to more than Rs28 billion which is adjusted with Rs16.38 billion SBP and government borrowing would need a further injection of Rs12 billion.

The State Bank inspectors observed total lack of coordination among the various departments of the bank. They detected 88 cases were written off in terms of BPD 29 but the same were appearing in the books of account. Similarly, in other 88 cases of non-performing loans amounting to Rs3.10 billion where recoveries were made but entries were not reversed.

Strangely, there is no mechanism in place to carry out physical inspection of hypothecated goods and machinery. The bank also discontinued the practice of taking comprehensive insurance of hypothecated assets due to cost constraint. As a result, the bank suffered a direct loss of Rs190 million in 104 cases where machinery and equipment had been stolen from the projects financed by the bank. IDBP was not able to lodge FIR in 12 cases aggregating Rs16.53 million.

There is now a lot of simmering and frustration among the staff because of the alleged out-of-turn promotion and monetary benefits given to a lady executive. Leaders of the Officers Association term it a case of downright favouritism hurting seniority of many of them.In this dismal scenario, the chief executive has been given the task to restructure and corporatise IDBP and make it presentable for the prospective investors in a privatisation deal.

IDBP was set up in 1961 as a successor of Industrial Finance Corporation and then for almost a quarter of century the bank played a key role in setting up of key industrial projects in the country. Cronyism overtook competitive banking during the 1980s in the Ziaul Haq’s Martial Law regime and in the following years.

The State Bank inspection report is an obituary on the demise of a splendid institution. IDBP received the first jolt in 1997 when the adviser on finance to the caretaker government of Farrooq Leghari, Javed Burki issued a statement on privatisation of PICIC and IDBP. There was a run on the two institutions. PICIC somehow survived but for IDBP it was the beginning of the end.