When an unfamiliar or unlikely public sector outfit makes a sizable profit it is news in Pakistan. And that is because most of the public sector units in the country make losses, and some like, the KESC and the Wapda units, very large losses.

They used to total upto Rs100 billion a year. And upset all the government's financial projections.

So Tariq Hamid, chief executive officer of the recently set up Corporate and Industrial Restructuring Corporation (CIRC) is delighted his organization has been able to earn a surplus of Rs694 million last year as the difference between the money it paid for the non-performing loans to the banks or other public sector units it had acquired and their sale price. He does not specify the actual profit which should be smaller, minus the expenses on such transactions. Nonetheless CIRC's performance is creditable for an organisation expected to make large losses while dealing in staggering non-performing loans of public sector banks, like the Habib Bank and United Bank before privatization, and Allied Bank which was privatized first, and much earlier.

The CIRC earned a surplus of Rs694 million from the sale of 22 units out of 88 sick units it had acquired and have accommodated 30,000 workers directly or indirectly, which is an achievement in this period of massive unemployment.

Encouraged by the results of such moves the CIRC is now to deal with the non-performing loans of private sector or privatized banks. As all the major banks, minus the National Bank of Pakistan, have been privatized and the NBP is being privatized on an instalment basis by selling five and ten per cent shares, enlargement of its scope is imperative.

The CIRC hitherto could deal with the defaulted loans of nationalised banks whose 85 per cent shares are owned by the government. Since the Habib Bank and Allied Bank have been privatized (apart from the Muslim Commercial Bank earlier) its charter needs to be amended to enable it dispose of private sector or privatized banks' non-performing loans.

The draft amendment has already been approved by the federal cabinet and the ordinance, as amended, has to be passed by Parliament. After that parliamentary approval the private sector banks, confronting large non-performing loans, can approach the CIRC for its help through the State Bank of Pakistan (SBP). In fact after the parliamentary approval all financial institutions operating in Pakistan could approach the CIRC for help in the disposal of their non-recoverable non-performing loans.

What the banks would get from the CIRC is a small amount compared to their vast non-performing loans but they would feel better and fed lighter for getting rid of such irrecoverable loans instead of spending too much time in litigation in their efforts to recover them and succeeding very seldom. The CIRC disposed of six units in the month of December and intends to sell five units each month in 2004. If it sticks to its schedule it will have a busy time in the coming months.

The CIRC since its inception three years ago in September, 2000, made recoveries of Rs3.5 billion from the non-performing loans acquired from various banks through the disposal of sick units to new entrepreneurs or direct settlement. As many as 22 units out of 88 units settled by CIRC have become functional or partly ready to go into operation. And that created 30,000 jobs directly or indirectly.

The whole world is writing off bad loans for large amounts. In the lead are countries like the U.S., Japan, France and Germany. And now China has come in a big way as its public sector banks have very large losses. Pakistan hence cannot lag behind and insist on recovery of the loans at any cost. The economic boom of Japan in the 1970s and 1980 could not last for ever. Hence those investors who borrowed heavily and invested on industry or real estates ran into large losses as well as heavy loans which they defaulted.

The economic boom of the 1990s in the US did not last for ever either as its investors had expected. Hence the large loan defaults in the U.S. and the economic recession of the end of the century and beginning of 21st century.

The same happened in Pakistan for very different reasons. The sudden political changes and coming-in of the military rule, the fall out of the nuclear explosions of the 1999 and the degradation of the Taliban regime in Afghanistan brought about continued economic upsets until 9/11 happened and changed the geopolitical map of the region and began improving the economy of Pakistan slowly.

It is now better for our banks to concern themselves with future earnings and new business strategy than be grappling with the recovery of the loans which are largely irrecoverable in the vastly changed economic circumstances.

The CIRC acquired 69 non-performing loans of Habib Bank before its privatization with a total value of Rs7 billion. It is now getting 21 NPL of Habib Bank with an outstanding value of Rs2.3 billion.

When the National Development Finance Corporation was earlier merged with the National Bank CIRC had acquired 44 NPL with an outstanding amount of Rs7.7 billion for just Rs278 million. And before UBL was privatized, the CIRC had acquired 62 non-performing loans worth Rs26 billion for rupees four billion.

Evidently many of these loans are hopeless cases and the banks feel it better to get something out of the loans than nothing at all, and waste a great deal more of money on lawyers and litigation. But the private sector banks may not be ready to sell their non-performing loans so cheap and may try to bargain with the defaulting borrowers by offering them more attractive terms for repayment.

The SBP's role in this regard is very important. It does want to clean up banks' portfolios as quickly as possible, and in a fair manner. But the efforts of the Circ should be not to make a small profit in each deal or a bunch of loans acquired from the banks but to rehabilitate them and make them employ more people and become truly productive.

A total of 4,000 industrial units were reported to have become sick. It means millions of persons out of employment from such units. It means a great deal of bank loans gone down and precious foreign exchange wasted. Hence what is important is not the small profits which CIRC could make through its smart deals but revival of most of these sick industries, except those which could not be salvaged and rehabilited.

In East Germany following the fall of the communist system the factories were not only given free to new entrepreneurs but also provided with large loans or donations to keep the factories running and productive, and its thousands of workers in employment. Hence the future of the economy and making the best use of the failing assets are far more important than simply making the borrowers repay.

Employment, rehabilitation of the assets and increasing production should be far more important than the future of CIRC or its profitability which means the CIRC should have a really futuristic charter and operational strategy.