KARACHI, April 30: The Banking Ombudsman has suggested the State Bank of Pakistan to draft a suitable set of instructions for the banks in Pakistan to regulate private loan recovery agencies that are found to use crude and ruthless tactics and against whom the complaints from small borrowers are increasing.

The second annual report of the Banking Ombudsman for 2006 released on Monday refers to “Fair Debt Collection Practices Act” that was incorporated in the Consumer Credit Protection Act in 1977 in USA to prohibit abusive practices by debt collectors. This practice is now being observed in many countries of the world to recover unpaid loan.

“Instances of forced entry into houses and workplaces, use of threatening and foul language have been reported in the media,” Banking Ombudsman Azhar Hameed informed journalists on Monday while launching the second annual report.

Quoting from his report, the Ombudsman spoke of the cases “when innocent people have been accosted and maltreated and borrowers with up-to-date payment record have been needlessly harassed.”

The annual report of the Banking Ombudsman reveals that consumer loans during last four years -- 2000 to 2006 -- increased by the 140 per cent and number of borrowers increased by 100 per cent. By June 2006, the total sum of small loans of less than half a million rupees amounts to Rs368 billion, which is 15 per cent of the total advances of the banks. The number of small borrowers is 4.54 million.

Auto loans have also witnessed a significant rise. The report estimates excess of one million auto loans in the books of the banks in the year 2006 as against only 300,000 during 2002.

“The banks have enticed consumers through aggressive marketing and attractive packaged products,” the report alleges while blaming the banks of concealing product knowledge. “Consumers are unable to make informed decisions and are seen to be facing difficulties,” the report says.

A very candid observation of the report is that currently, almost all the consumer loans are on the basis of variable mark-up rates. The recent surge in rates has severely affected consumers’ loan servicing capability, which, in some cases, has led to loan default.

The report refers to a recent instruction of the State Bank to banks to prominently display the lending and deposit rates on all consumer products as well as posting the information on the website. In addition, banks have been asked to inform their customers of the intricacies of ATM, ATM Cards, Debt Cards and Credit Cards.

The Ombudsman report has suggested development of a long-term debt market to facilitate banks for launching fixed-term loans for the benefit of their small borrowers, who would be well aware of their future financial liability.

At the very outset of the press conference Mr Azhar Hameed made it clear that he has been empowered to entertain all complaints relating to banking services and products and has been given adequate powers to call for relevant information for disposal of the complaint provided the banking confidentiality is maintained.

But he made it clear that the Banking Ombudsman does not have powers to direct banks to grant loans and advances and it does not have any jurisdiction to look into banks’ loan mark-up policy.

The Ombudsman office, he said, receives formal and informal complaints. During last year as many as 900 complaints were received and duly addressed. During last year 1,005 formal complaints were received.