Banks are expected to respond soon—in matter of weeks if not days—to the ‘wake up’ call given to them by the federal finance minister Shaukat Aziz on Tuesday (January 15) followed by an authoritative advice from the President House in Islamabad on Thursday (January 17) to cut down on their lending rates.

After giving a wake-up call to the bankers, Federal Finance Minister Shaukat Aziz literally “instigated” the Karachi traders last Tuesday to “keep mounting your pressure on the banks to lower the lending rates”. He declared “the government is with you”. President General Musharraf also chose the gathering of 48 selected businessmen from all parts of the country to inform them that the government was considering to lower the interest rates.

A lowering of lending rate upto 12 per cent is considered to be a necessary catalyst for industrial investment in Pakistan. Even though the utilities and transport cost in Pakistan remain high because the government collects upto Rs 20 surcharge on a liter of petrol, tax burden is crippling and in spite of all claims of deregulations, the sight of a government agency man is enough to cause shivers to factory owner and to bring a halt to a factory machine.

The year 2002, according to the Supreme Court verdict, is a year of election in which the government is all set to show some economic activity, employment generation and some growth worth the name. In last more than two years, the unemployment situation has risen to alarming levels. Ironically the NCBs played a key role as a large number of branches were closed down and almost 20,000 employees were shown gates. The banks were hard pressed and remained fund-starved under the 10-month IMF Standby facility. Money market remained tight.

Now that the government claims to have balanced and stabilised the macroeconomic indicators, the attention has shifted to growth and employment generation. The NCBs were the most convenient sources available to the previous “political governments” for implementing their political agendas and now a military set-up wants these banks to stimulate investment environment in the country. it would facilitate earning the much needed legitimacy that the military set-up desperately wants.

Enquiries made at the different levels of managements of the three nationalised commercial banks revealed that a start may be made by offering a cut of one to 1.5 per cent in the lending rates. The three NCBs command almost 70 per cent of the market share and any change in their lending rates affects the operations of all other banks.

The State Bank of Pakistan, in its first T bills auction of the year 2002, held on January 9, lowered the rates of six months and one year duration, signalling loudly that banks should consider reducing lending rates. Since mid half 2001, the SBP has been constantly giving signals to the banks to review their lending rates.

Rates on export refinance have already been brought down after these were linked since April last year with the T-Bills auction rates. But exporters complain that banks remain reluctant to offer them credit particularly after the September 11 incident.

Dr Ishrat Hussain, in his address to the Habib Bank seminar on Challenges and Potential and Small and Medium Size Enterprises held on January 15 indicated an acceptable average weighted rate somewhere 12.5 to 13 per cent from the existing average weighted 14 per cent lending rate. “But we want a market driven lending rate” he had pointed out suggesting that it was upto the banks to take a decision in this regard.

It is another matter that chief executive and head of each of the three NCBs is a handpick of Finance Ministry and the SBP. The members on board of directors of each of the three NCBs are the nominees of the finance ministry and the SBP.

“Was it a put- up show or that creatures have outgrown creators” a retired cynic banker remarked on hearing a ‘wake-up call’ and lengthy speech of the finance minister to the bankers.

Each one of the three NCBs is beset with own peculiar problems and is addressing the interest rate issue in its own perspective. In all these three banks there also seems to be a resolution to prepare and make public, the annual accounts and balance sheets of the year 2001, well within the prescribed time before the end-March next. “Profitability is the target given to us by the government” a senior executive remarked who said that a cut in T-bills rate and lowering of banks’ lending rate is bound to impair profitability this year.

Drag of a big portfolio of non-performing loans (Rs 95 billion) and the huge tax burden are the common factors that afflict all the three big NCBs (National Bank, Habib Bank and the United Bank) equally and are a cause of a big intermediation spread. Another common factor in all three NCBs is the consultants galore, a visible discrimination against the regular banking cadre and an all pervading demoralisation.

Finance minister Shaukat Aziz, during his almost two-hour long meeting with the top bankers in Karachi last Tuesday employed the time tested tactic of carrot and stick. “We know exactly which banks have taken their clients’ deposits through the Hundi to Dubai and are lending against them in Pak rupees locally” he informed the bankers and did not mince words to give a stern warning “This connivance will not be tolerated”. He warned the banks to stop this practice as it amounts to speculating against the rupee. This was the stick he showed to the bankers and offered carrot of bonds in lieu of tax refunds to the banks.

Had this announcement been made by a finance minister of a democratic country, who is answerable to a sovereign parliament, he would have been immediately put in the dock for protecting unscrupulous bankers. But not so in Pakistan. There is a history of a nexus between the bureaucrats, bankers, elite businessmen, feudals and the ministers of elected or un-elected governments.

The finance minister wants the bankers to come out with innovative products, develop techniques of risk management, and utilisation of 1.7 billion dollars of foreign exchange deposits.

But the banks and the financial institutions had been generous to the businessmen and landed gentry in the decade of eighties. Bulk of the project financing, now converted into a huge portfolio of bad loans, was advanced during the decade of eighties. Bulk of this portfolio, now amounting to more than Rs 282 billions, were advanced when late military dictator and his trusted civilian bureaucrat minister Ghulam Ishaq Khan were the masters of destiny.

A series of revival efforts were made that too consumed billions of funds from the banks by way of write-offs, waivers and fresh injection of funds. Bankers and bureaucrats came out with innovative concepts of Excess Debt Recovery (EDR), sustainable and non-sustainable debts and shared the benefits with the defaulters. A Committee of Revival of Sick Industries—probably sixth or seventh in last 15 years after H.U. Baig, a retired bureaucrat, provided relief in 1987 or so—is working. It has so far offered financial relief to 119 sick industrial units.

There were complaints that banks were not implementing the restructuring and rescheduling of loans in many cases. The SBP has to issue a circular in November to the banks asking them to follow the recommendations of the committee.

If whispers going around in the business circles are to be believed then favourites among the sick units’ sponsors are being taken care of and those who are on the other side of the fence are being ignored.