KARACHI, July 26: About 11 government owned banks and DFIs are set to write off another Rs25 to Rs30 billion loan during next three years. This write-off of loans will be done within the guidelines framework of a circular already issued by the State Bank of Pakistan, Dr Ishrat Hussain, governor, State Bank announced on Saturday.

“I would like to alert anyone that the application of State Bank circular 29 may result in waiver or write off of non performing loans worth about Rs25 to Rs30 billion by end August 2006,” Dr Ishrat declared while making it clear “we should be prepared for this eventuality and not get any shocks about it.”

Presiding over the prize award ceremony of the Institute of Bankers Pakistan (IPB) the SBP governor devoted his entire speech to address the question of loan write offs by the public sector banks and development financial institutions “during last three years.”

He put the total stock of non-performing loans, as of today at Rs266 billion. He said that over 32,000 account holders had settled their outstanding loans with their respective banks and DFIs amounting to Rs18.8 billion. Over 8,284 account holders were expected to settle their loan disputes with the banks by end August next. He indicated an optimistic assessment of settlement of Rs40 billion loans which would bring down total stock of non performing loans to Rs226 billion.

He informed the public that there was no directive given by the President House, Ministry of Finance, State Bank of Pakistan or any other government ministries to the banks in these loan write-off cases. “I can say without fear of contradiction that during the last three and a half years, neither the President nor any of his Generals or Cabinet ministers even interfered or exerted any pressure to grant any new loans or write off any old ones,” he made it clear.

The President only agreed to provide relief to the calamity struck small farmers in Balochistan and Sindh on their loans taken from Agricultural Development Bank now renamed Zarai Taraqiati Bank and this was done across the board rather than for specific individuals.

Dr Ishrat said the decisions on write offs were taken by the Management of Banks’ Boards according to their own professional judgments on in compliance of court judgments, acquisition by the CIRC, decisions of Committee on Revival of Sick Industrial units or general amnesty granted for calamity affected areas.

The SBP governor in fact chose the occasion to acknowledge “courageous decisions” taken by Nawaz Sharif government in beginning of 1997 by appointing professionals of highest calibre and integrity to the board of directors and chief executives of the nationalized commercial banks. “This tradition was carried on by the previous military government and has been endorsed by Prime Minister Jamali,” he announced.

Dr Ishrat read out from a prepared text, spread over 15 pages, in which his thrust of argument was “until and unless there is no personal motive of the bankers or any political pressure, the write-off of irrecoverable loans and cleaning up of their balance sheets is the normal practice of banks all over the world.”

He said that the government-owned banks and DFIs wrote off Rs23.5 billion non-performing loans since January 1999 and exact amount of loans write-off since October 12, 1999, when military took over is Rs20.3 billion.

The principal amount involved in these loans write-off, he said, was only Rs7.6bn. Most of these loans were very old, 10 to 25 years old, which have been stuck up for at least last five years.

“Although these loans had already become bad and were not being serviced by the borrowers, the mark-up kept on accruing every year and by December 2002 the accumulated mark-up on these loans was Rs16 billion,” he disclosed.

“If the factory has already stopped producing goods or services and generating cash flow and the borrower was unable to pay the principal due, in the first place, how do we expect them to pay 212 per cent accumulated mark up on principal amount,” the SBP governor argued while trying to clarify that major portion of the mark-up charged to the delinquent borrowers is not taken into banks’ profits and waiver of this amount of Rs16 billion does not affect the financial health and profitability of the banks in any way.

He also offered an analysis of the borrowers by the size of the loan write-offs by NBP, HBL, SME Bank and Zarai Taraqiati Bank which show that contrary to the perception of the beneficiaries were small borrowers. As many as 262,209 small borrowers got relief of Rs7.6 billion. Of this Rs5 billion were written off of small scale agriculture borrowers and Rs1bn of SME borrowers.

Besides these small borrowers, 1,408 borrowers got relief of Rs9.78 billion loan write-off.

Maintaining that waivers and loan write-offs are integral part of banking business the State Bank governor informed the audience that during last three years Rs124.1bn, which is 58.6 per cent of total non-performing loan stock was recovered in cash.

The National Accountability Bureau (NAB) has facilitated cash recovery of Rs86.6 billion in last three years. The Corporate and Industrial Restructuring Corporation (CIRC) has acquired loans worth Rs31.28 billion from the banks at discounted price of Rs5.13 billion and auctioned off 77 units.

The Committee for Revival of Sick Industrial Units has also restructured loans worth Rs44 billion and helped in revival of 163 sick industrial units.

Dr Ishrat said that as long as banks are in the business of making loans and taking risks, the write offs will continue to take place. As long as they are made in a transparent manner according to the policies there should be no cause of concerns.

APP adds: talking to newsmen the governor, State Bank Dr Ishrat Husain said that around 80pc of the banking assets in the public sector would be privatized or given in private hands and the regulatory agency would only keep a vigilant eye on their working.

He said the rationale behind the privatization of the banks was to make them more responsible for their performance and risk management.

Replying to a question, the governor said the foreign reserves of the country were parked in various countries in diversified currencies and modes of investments based on rate of return and convenience.

He said it was wrong impression that all the reserves were in America and invested in dollars. He said the exact information cannot be supplied to the public but these were kept in different countries, as the foreign currency has to be invested abroad.

Responding to a supplementary question, he explained that the proportion of investment and parking of reserves in a specific country changes swiftly depending upon the rate of return and other analytical calculations.