23 August, 2014 / Shawwal 26, 1435

ALL sick units and bank defaults are seen as a product of a corrupt banking system in cahoots with an unscrupulous business community.

There is certainly an element of truth in the assertion, but that is not the whole story. Nor is it going to be the end of the story. There will always be failing businesses and sick units.

But many of these cases can be attributed to factors such as the vagaries of the economic climate, bad management, unsound or rash business decisions and laxity of financial controls.

There are also instances of misappropriation leading to bank defaults and sick units. Only the latter can rightly be said to be willful and fit for criminal prosecution. For the rest, a pragmatic approach is necessary to salvage a part of the assets that are stuck in sick industrial units, assets that are valuable. Such an exercise is essential when investment, both internal and external, has practically dried up.

This may even serve to revive the current moribund economy. It is, therefore, important that we focus on ways and means of alleviating the current situation and minimising the incidence of future recurrence of the situation. We must do so with a sense of urgency.

In 2000 the State Bank had taken a step in the right direction in issuing guidelines to commercial banks for write-offs of non-performing loans. But this was more of a measure designed to clean up balance sheets of banks rather than an attempt at the revival of sick units.

It may indeed have led to the revival of some sick units but that was not necessarily the intent of or the spirit behind the guidelines. If the revival of sick units is to be taken up as a prime policy measure rather than merely as an adjunct to the concerns for the banking system, the following logical steps could lead us towards the desired result.

The exercise should start by evaluating all sick units in technical terms. Many will be found deficient in plant and machinery and may not be fit for physical revival, i.e., production may not be possible. All such units should be discarded right away. How they are to be disposed of should be left to banks.

Those found technically capable of production should then be evaluated in terms of their financial and market feasibilities. Those units which are not found feasible should be disposed of in the same manner as above.

The management of units that are found feasible in both technical and financial terms should then be scrutinised for its competence and, if necessary, professional management should be imposed on such units. In any case, strong managerial support must always be made available to such units.

The final step in the revival of the unit is the provision of adequate working capital. Banks and units must together figure out the absolute minimum level of working capital required for optimal operations.

Its provision should be timely and under strict expenditure guidelines to be laid down by the bank. Also, an independent audit system must be instituted for checks as and when deemed necessary by the bank.

If just 10 per cent of the units are revived as a result, the exercise will be worthwhile.

PROF (Dr) MUZAFFAR ALI ISANI Iqra University Karachi

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Comments (1) (Closed)

Shahid Masud (@HotMasud)
Nov 07, 2012 07:59pm
First of all I would like to thank PROF (Dr) Muzaffar Ali Isani for this great article. Sir though I am no authority to say anything, but still I want to add couple of things to your magnificent article. 1- By adopting the guidelines elaborated in your article not only the government and the banks will benefit , it will also save the future of those honest entrepreneurs who because of some genuine reasons couldn't do it. 2- Pakistan can achieve all of it's desired goals if it has professionals like you at the very top level of government. Sir, my life was ruined but I prey that may God help you to save the future of some honest entrepreneurs , Thanks.