KARACHI, April 28: A big loan to a steel competitor is the real reason for the sudden dissolution of board of directors of the Bank of Punjab and removal of its president, well-informed sources said on Monday.

The Punjab government, which has 51 per cent shares in the BoP, dissolved the board on Saturday and removed its president.

Banking sources said the BoP provided a loan of Rs8.6 billion to Harris Steel and its subsidiary.

However, more concerning issue for the bankers was that more actions like the one taken against the BoP could be taken by the government. The BoP issue remained the most heated topic in the banking circles on Monday.

“The action against the Bank of Punjab was not totally wrong as the bank extended loans to the steel group on political grounds, which turned into bad loans,” said a senior banker.

It was also pointed out by the external auditors that Rs8.6 billion loan given to the steel group came under the definition of bad loan.

The sacked BoP president Hamesh Khan in a statement said that he was appointed by former chief minister of Punjab Pervaiz Elahi.

After full year audit of the bank, auditors placed their qualification (observation) on its accounts due to loans worth Rs8.6 billion given to three companies, mainly Harris Steel.

These loans were restructured for a period of 7 years, including a 2-year grace period.

The management of BoP was of the view that these loans were fully secured and collateralised and recoverable.

The BoP issued a notice to the KSE (Karachi Stock Exchange) on March 28, 2008, and announced that it had been successful in receiving a tranche of the total Rs8.6bn suspicious loan from its debtor.

According to the notice in order to establish intention to repay the amount and to ensure cordial business relations with BoP, its client has repaid a sum of Rs450m towards the adjustment of the outstanding liability. This is 5.2 per cent of the total outstanding amount.

It has been earlier reported that the BoP was to be merged with the Punjab Provincial Cooperative Bank and the plan was delayed because of elections in the country.

“We believe that the National Accountability Bureau (NAB) would be moved to investigate the case of Rs8.6 billion loan,” said a senior banker.

He said that the sacked president was well-connected member of the banking family and also has strong backing of a political and industrialist group in the country.

“If the action remains within the province and no more cases are taken up, the banking sector would be comfortable but more actions could seriously damage the booming banking sector in Pakistan,” said a banker, who feared that few more bankers could be targeted.

He said the recent action by the Competition Commission of Pakistan against banks and imposition of penalties on allegation of making cartel, had caused fears that good days for banking were over now.

However, most of the bankers were not ready to accept that banks, in which the government still has stakes, were involved in risky lending and the consequent huge write-offs.