November 26, 2007	Monday	Ziqa’ad 15, 1428

The State Bank of Pakistan has issued a circular requiring banks to make 100 per cent provision against the non-performing loans (NPLs) and to this end, banks have been asked not to deduct from the NPLs the amount of the Forced Sale Value (FSV) of the collaterals provided by the borrowers. What is the basis of the SBP’s above decision -- the growing NPLs and/or the inability of the lending banks in realising the collaterals?

According to information placed on SBP website, the quantum of NPLs at the end of calendar year 2006 was Rs173.178 billion (all banks) and Rs186.397 billion if we include the NPLs of the Development Finance Institutions (DFIs). As per the SBP annual report for fiscal year 2006-07, NPLs of “all banks” at end FY-07 have increased to Rs187.4 billion- an increase of Rs14.222 billion.

The report does not contain figures of DFI’s NPLs. The said NPLs figures do not depict the correct picture and seem to have been doctored. Up to September,2003 the unrealised interest on the NPLs charged to the “Memorandum Account” formed part of the NPLs. Then the SBP decided that the unrealised interest accruing from October 1, 2003 onwards will not form part of the NPLs.

If we take into account this interest element, the volume of the NPLs will far exceed Rs200 billion. The total volume of NPLs as of June 30, ,1999 inherited by the present rulers was Rs212.1 billion. [SBP annual report for 1999-2000 page 93].

It is said that bank loans go bad throughout the world. A fair proportion is put at five per cent of the lendings. As per the weekly report on the SBP website, the outstanding advances of the scheduled banks have been put at Rs2484.495 billion as of June 39, 2007. This gives NPLs/advances ratio of 7.5 per cent which is much higher than the international norms.

The efforts of the government and its economic managers--[since October, 1999 takeover— which include creation of National Accountability Bureau (NAB), failed in making recovery of bad loans. It appears that the efforts of the government/SBP, during the last 7-8 years had, at the most, been to contain the NPLs stock at 1999 level instead of making recoveries from the rich borrowers.

The containing of NPLs stock even at 1999 level was possible through massive write-offs which eroded the capital base of at least two banks-- Habib Bank Ltd.[HBL] and United

Bank Ltd. [UBL]. To replenish the eroded capital base of these two banks, cleaning their balance sheets for preparing them for sale to foreigners, funds were provided from the government exchequer by resorting to the borrowings from the International Financial institutions (IFIs) like World Bank/Overseas Economic Co-operation Fund of Japan etc. The total amount dished to HBL/UBL and National Bank of Pakistan (NBP) exceeds Rs65 billion.

The funding made to these banks was obviously at the cost of the ordinary tax payer for the benefit of the rich borrowers who had the capacity to repay but the government /SBP did not have the political will to make recoveries. The sum dished out to these two banks far exceeds the sale proceeds of the banks so far accrued to the government.

The massive amounts of written-off interest made by the NBP/HBL/UBL and the MCB since 1997 are understated as they pertain to the loans for Rs500,000 and above. The annual reports of the banks do not specify the amounts of written-off interest in respect of loans for amounts below Rs500,000. The amounts of write-offs during 1997-99 aggregate Rs17.775 billion i.e. average Rs5.592 billion annually. The total write-offs during 2000-2006 works out to Rs94.108 billion i.e. Rs13.4 billion annually.

As the SBP does not publish the data about write-offs, this scribe had to pick it up from the annual reports of four large banks responsible mainly for huge write-offs.. In case the data of interest write-offs relating to the loans up to Rs500,000 and write-offs of principal//interest by other banks is also taken into account, the aggregate since 1997 may reach or exceed Rs120-125 billion.

What will happen if the second round of massive defaults commences? A beginning appears to have already been made. This is perhaps the reason that compelled the SBP to ask the banks for making 100 per cent provisions against the NPLs also, implicitly relieving them of the responsibility to realis the collaterals placed against the loans if the same go bad.

One is afraid that in the case of massive ensuing defaults, axe may once again fall on the poor tax-payers as NBP is fully owned by the government while majority of the shares of HBL (74 per cent] and UBL ( about 50 per cent) are still owned by the government.

The option of 100 provisioning is prima-facie against the interest of depositors as the process will reduce the profitability of banks which can result in further cut in the deposit rates which are already meagre and SBP advices to raise the deposit rates have fallen on the deaf ears. SBP governor’s promise made a few months back to legislate in the matter [of raise in the deposit rates] still remains a mere a promise.

In an environment the circumstances where large scale flow of funds from abroad (workers’ remittances) and cut in the credit demand have practically absolved the banks of the need of making efforts for mobilising deposits, the chances of the banks’ voluntarily offering better interest rates are far-fetched unless the regulator—the SBP-- comes to the rescue of the depositors.

As against the NPLs amounting to Rs187.4 billion, provisions exist to the extent of Rs133.686 billion as of June 30, 2007, This means that the banks’ profitability will approximately reduce by Rs54 billion in 2007. One is afraid if this may result in further squeezing the depositors by banks.