KARACHI, Aug 2: The tax-payers and depositors are paying a heavy price on account of loan write-offs and bailout of state- run banks in distress. Addressing the Institute of Bankers, the governor of State Bank Dr Ishrat Husain revealed that since October 12, 1999, eleven public sector development financial institutions (DFIs) and nationalized commercial banks have written off an amount of Rs20.251 billion. For the next three years, he estimates another write-off/waiver of Rs25-30 billion.

In addition, the government/SBP has injected Rs46.6 billion to meet the capital adequacy requirements of Habib Hank and the United Bank.

Over a period of about six years, the cumulative figure for write-off/waiver and bailout would be anywhere between Rs90-100 billion, assuming there would be no further injection of funds to resurrect and privatize any other bank or DFI. The IMF has recently advised the government to opt for liquidation of two institutions, if they cannot be privatized.

Non-performing loans taken decades earlier, have been written off/waived. “The write-offs of defaulted loans by the banks are very much is a part of normal business and is in accordance with international practice,” says Dr Ishrat and he is so right. The European and American banks, which suffered in the East Asian crisis in 1997, were bailed out by the IMF/World Bank.

Of course, the wilful defaulters come under the scrutiny of the National Accountability Bureau but their share in the overall non-performing loans (NPL) is much less.

An important issue is, who is paying the price for the write-off and the bailout. The honest borrowers pay for the unjustified lending rate, hiked because of NPLs. But, more importantly, a heavy price is paid by the taxpayers and the depositors. The return on PLS deposit rates is lower than the running inflation rate.

The small depositors are treated in the same way as the Wapda and the KESC treat the electricity consumers. The utilities are surviving on official subsidy (taxpayers’ money) and high electricity tariff and banks are trying to prosper by depriving the depositors a fair rate of return on their money. The banks also impose penalty on deposits below prescribed sums.

Dr Ishrat says: “the banks are in the business of risk taking and there are occasions when economic shocks or business cycles or frequent changes in government policies do turn some of the assets sour.” And to add to what he says the risks mount in the face of a turbulent world and more frequent economic and fiscal crises, countrywide, regional and cyclic.

The role of finance capital is changing from a key agent of economic development to one focused on stemming the tide of its own creeping organic degeneration. The concept of Development Finance Institution (DFI) is dead. It means no specialized institution for project finance in a developing country.

While opting for universal banking, the commercial banks say project financing is not their cup of tea and they can spare only a nominal portion of their liquidity for funding projects. With interest rates and incomes declining, banks are now seeking more and more fee-based incomes.

Foreign finance capital that fuelled industrialization in the past has dried up. Donors say that for Pakistan good governance is more important than money. Economical spending on social and physical infrastructure is lacking.

The banks are awash with excess liquidity and the country has over $11 billion in forex reserves. It is a favourable exogenous “shock” for the economy, but in the short-term, the banks may not find the capital inflows as juicy — surplus capital but low level of investment. Supply and demand situation has been reversed. It is time for the corporates to get the best bargain from the banks. Interest rates have plummeted from 22-24 per cent about 3-4 years ago to a single digit. Money is priced cheap. The interest rates are unlikely to go up in the immediate future.

Bankers are no longer in a dictating position even in a capital-starved developing economy. To quote German bankers the reason is very simple: “Ideas are capital and the rest is money.” Or as the local bankers say: “Funds are no problem for feasible projects.” It is human skills that is paramount. This calls for adjustments in lending policies.