Ten years after the care-taker government of Moeen Qureshi surprised the nation and shocked the defaulters of bank loans by announcing the names of those with loans above rupees one million the situation has become far worse.

The situation now is so bad the default has almost doubled to Rs157.7 billion from Rs81 billion despite the best efforts of the State Bank of Pakistan, and the government, repayments made by some of the conscientious borrowers and others under heavy pressure.

And to prepare two of the largest public sector banks for privatization the government has to spend Rs60 billion on the Habib Bank and the United Bank. After investing that much the UBL was sold for Rs12.5 billion and the Habib Bank is expected to fetch Rs30 billion for their controlling shares.

In an effort to off-load its banking dead weight the government has privatized three of the public sector banks. The Muslim Commercial Bank, the Allied Bank, the UBL and sold 10 per cent of the shares of the National Bank. The Habib Bank is the big plum which awaits privatization, a process is already underway.

Initially when the default was announced the public sector banks were the most infected; since then all other categories of banks are also infected including foreign banks which hold defaulted loans of Rs6.3 billion.

In fact the total of the non-performing loans which incapacitates the banks a great deal is around Rs250 billion or around 30 per cent of the bank advances.

The default of commercial banks is Rs149.3 billion, and the development finance institutions Rs8.4 billion, Public Sector Commercial Banks have a default of Rs66.6 billion, and private sector banks Rs36.22 billion, private domestic banks a default of Rs14.6 billion and foreign banks have a total default of Rs6.3 billion.The default in June, 1998, was 146 billion which has risen since then by Rs. 11.7 billion as more borrowers defaulted.

What is remarkable is all the sectors of the banking industry in the country have been infected by the extensive default while it all began massively with the public sector banking default.

In fact defaulted and non-performing loans have become a world phenomenon. The problem affected Japan massively as well as France and Germany, as several companies in the US are affected and it was there where the major savings and loan bankruptcies began resulting in a loss of over $400 million to the state.

Among the new industrial states of East Asia, South Korea is deeply affected with Daewoo going burst and other conglomerates equally affected despite vast help of the state.

China has a vast banking default problem with the public sector units the large defaulters and the total default could be as much as 40 per cent of the debt. But China has a cautious approach to the problem to prevent a public run on the banks.

The Western states want Japan to let many of its banks go burst so that the banking system could be cleaned altogether but the Japanese government is cautious.

What is remarkable is the massive default in Pakistan is the outcome of the high interest rates, which went up officially as high as 23 per cent at the time of Moeen Qureshi as Prime Minister but Japan had always a very low interest rate and at times 0 to 2 per cent interest and yet its borrowing companies have run up huge debts, primarily because they went for real estate expansion in a big way. South Korea too over-expanded too much and ran into heavy debt when the recession came.

But while other countries have been quick to act, Pakistan has been too slow to act because of an excess of dishonest practices which the government or the State Bank did not want to cover up.

As a result a number of banks collapsed in Pakistan beginning with the most notorious Mehran Bank whose ripples are seen even now. The privatized Bankers Equity was liquidated while the once famous National Development Finance Corporation was shut and merged into the National Bank. The Indus Bank was shut down while Prudential Bank was shut down and reopened. The Capital Bank had a still birth because of its pre-natal fraud. Finally the Emirates Banks closed down because of the fraudulent practices of the manager of its Lahore branch whose military connection was too strong to get him punished.

What is remarkable is while so many banks have been closed down and some defaulters punished, very few guilty bankers have been punished. Most of them have been able to get away with their loot and malpractices. That is a dark chapter in our banking history.

Because of the large loan default which has reduced the earnings of the banks they have not been giving attractive interest rates to the depositors. Nor are they able to lower the interest rate for the borrowers, sufficiently low in harmony with the world trend.

However the interest rates for exporters have been coming down. And the State Bank of Pakistan has now announced a lending rate for export re-finance of 2 per cent plus 1.5 per cent as the spread for the banks, making a total of 3.5 per cent which is very low in our history.

Having tried all kinds of concessions to the borrowers and defaulters to make them repay the loans for the last five years the State Bank now wants the banks to bury its dead bodies or write off the loans to the sick industries which they can’t recover. It is no use distorting bank ledgers with figures of large loans they cannot recover having tried to do that and fail ad for the last ten years. The State Bank also wants the banks to give new loans to revive the economy and give a boost to the productive sector.

Some of the banks are too slow to respond and the State Bank has reprimanded them.

The State Bank is also drafting proposals to regulate the banks while the Securities and Exchange Commission is drafting the same for non-bank financial institutions. Both should be helpful to the financial sector, beginning with the banks which are far more cautious now.

If the bankers are cautious, efficient and honest, they can give a fair deal to their borrowers and depositors as well as shareholders. Efficient banking is central to our economic future. And the stronger we make it the better for the economy and the country.