The Governor of the State Bank of Pakistan, in his key-note address for the recent prize award ceremony of the Institute of Bankers, Pakistan, has dealt with banks’ write-offs, a subject of great topical interest these days. At the end, this was also made available to the audience in a printed form, entitled “An analysis of the banks’ write-off (1999-2003)”.
In his analysis, the governor has given the rationale, policy guidelines for dealing with this important issue, within the context of strategy for resolving the problem of non-performing loans (NPLs), the amount written off or waived during the last three years, the impact on the banking system and indicated the beneficiaries thereof.
With the basic premise that “business failures are a normal event in the life cycle of an economy,” he has observed: “Write-offs are in essence a recognition of reality— that the original value of assets has diminished,” and, “the write-off of irrevocable loans and cleaning up of their balance is the normal practice of the banks all over the world.”
He has also high-lighted the fact that boards of directors of the banks have written off loans, in accordance with the policy guide-lines given by the State Bank and they are under obligation to reveal the names of borrowers who benefit and this they have been doing since 1999.Since it is not possible to cover all aspects of the wide ranging problems in an article, only two aspects, namely the beneficiaries of write-offs and the approach, may be dealt here
It has been mentioned that the write-offs/waivers by 11 public sector banks\DFIs during the last three years have amounted to Rs23.5 billion, of which the amount of write-offs\waivers granted between January 1 and October 11, 1999 accounted for Rs3.36 billion. The principal amount in these write-offs during the last three years was only Rs 7.6 billion, the balance of Rs 16 billion was accrued mark-up. Most of these loans were very old (10 to 25 years), which were stuck up for at least five years. It has also been mentioned that the names of all the borrowers, whose loans of Rs0.5 million and above were written off have already been published in the annual accounts of the banks for the years 1999, 2000, 2001, and 2002 with complete details.
It is expected that write-off/waivers of NPLs, according to the State Bank of Pakistan (SBP) criterion, may be worth about Rs 25-30 billion by end-August 2006.
The first question that arises in this connection is: What about the private banks, both local and foreign? Have they not written off any such loans? If so, why have they been excluded and what was the amount involved? Their inclusion would have not only completed the picture but also afforded an opportunity of comparison between the performance of public sector financial institutions and non-public sector ones in the same economic milieu.
Moreover, why the cut off-point of loans of Rs0.5 million? Smaller loans equally affect the banking system. Table II gives the details about the beneficiaries from the write-offs. The table unfortunately conceals more than it reveals, as it is confined to only 4 public sectors banks- NBP, HBL, ZTBL and SME Bank. It gives the position for 1999-March 2003- with an additional one quarter in which small agricultural loans in calamity areas were written-off by government.
Even so, it makes an interesting reading. As against the total write-offs\waivers of Rs23.5 million, as of end-December 2002, the 4 banks accounted for 1,408 borrowers above Rs0.5 million with Rs9,789 million or only 41.7 per cent, the average per borrower being Rs6.9 million. Among individual banks, ZTBL had 34 borrowers with Rs1,743 million giving the staggering average per loan of Rs51.4 million. The case of SME is shocking, as it is a relatively new institution, and within a very short span of existence, it has written-off loans of 16 borrowers worth Rs30 million, an average of about Rs2 million. The NBP has 564 borrowers with Rs 6,876 million, an average of Rs12.2 million per borrower, whereas the HBL has 794 borrowers with Rs1,137 million, an average of Rs 1.4 million. Both are commercial banks and operated in the same economic climate.
As for small loans written-off given in the Table, loans of 262,209 borrowers below Rs0.5 million worth Rs7,630 million have been put in this category, representing 32.3 per cent of the overall figure of Rs23.5 billion, the average being Rs29,090 per loan. Bank-wise, the average ranges from Rs 26,790 for ZTBL to Rs39,800 for SME. ZTBL accounts for the bulk of write-offs- 71.8 percent of the borrowers and 66.8 per cent of the amount The figures of ZTBL should be taken with the caveat that most of the small farmers serve as a proxy for big landlords who have taken out titles for their tenants in order to beat the land reform. Even otherwise, they are used through guarantees and\or influence with the bank management. At times, they are not even aware of bank borrowing shown against them and are surprised when approached for recovery of the loans.
Restricting the table to 4 institutions is rather intriguing, to say the least. It cannot be for want of information, as the details for all banks and DFIs are published in their annual account, as a mandatory requirement of the central bank, as mentioned above, and these accounts regularly become available to the SBP. The State Bank is sitting on a mountain of unclassified information concerning various aspects of banking and other financial institutions but is rather niggardly in sharing it with the public. This is quite surprising in the era of ‘transparency and good governance’. Sharing the information with the public would ultimately serve the State Bank itself by enlightening the public to elicit rational response and active support to the central bank policies by way of social pressure. It is for this very reason that monetary authorities all over the world publish a vast number of relevant studies and statistics.
It may be argued that anyone interested in more details should have access to the published balance sheets and annual accounts of individual financial institutions. For an individual with limited time and resources this is difficult, if not impossible. Moreover, this would apply to all information currently collected and published in a meaningful way by the SBP.
The SBP would be well advised to put out a comprehensive white paper on NPLs and write-offs\waivers, not missing the minutest published detail with regular frequent updates. It should also classify the borrowers in economic groups like agriculture, industry, commerce, housing, consumer credit, etc. to provide the economic perspective for write-offs. This should be no problem for the SBP, given the in-house availability of information and computerization in which it is making large investment. It would only need a few minutes’ computer run.
Knowing the individual borrowers by name, which is no more secret, is necessary in Pakistan because of the general practice of borrowing from multiple sources. In their individual dealing with a specific bank, they may be a small borrower by the given definition but their total borrowing from all banks and financial institutions would certainly put them in the category of big borrowers.
Economic managers in Pakistan are wont to cite the situation in other countries to assure the general public that they are not worse off, if not better, than many other countries. This is like telling a patient crying in pain to stop shouting because there are many others much worse than him. This would be no comfort to him and no cure to him. All he wants is relief and recovery, which should be palpable. In the comparison, the economic managers forget or do not care to point out the difference in culture and institutional arrangements.
For the purpose at hand, 43,000 business failures in England have been cited. These are business failures and not bank loan write-offs, the two are quite different in the English context. It would have been instructive if the number of write-offs were also cited. Business failure in that country, or for that matter in any developed country, Japan being another prime example, is a healthy sign of competition ensuring survival of the fittest. These failures are subject to due process of law which are very stringent and protects the lender, thus obviating the need for write-offs.
The loan delinquencies there are not allowed, by law as well by actual practice, to drag on for years or decades as in Pakistan. If the need arises, lenders promptly possess the collateral, not allowing its value to diminish. The lender is further protected by his first charge on the assets in a bankruptcy case, which is obligatory. The whole process makes write-offs very rare and in small magnitudes.
Pakistan has a very peculiar, rather unique, corporate culture with little legal support to the lender until recently. Normally, if a business falls sick so does the owner—financial- health-wise. He, therefore, makes frantic efforts for improving the unit. In sharp contrast, in Pakistan, the owner of a sick business unit remains in the pink of health and is least bothered about a couple of sick units in his portfolio. He is interested mainly in their value as a piece of urban real estate. In most cases, he himself makes it sick by draining it of its limited equity for investment to expand his other business.
As a result, almost the entire burden of highly leveraged business falls on the lender who has to wait till the hell freezes. The legal redress has been very tardy and expensive. No less than 80,157 cases pending with courts have been cited. In consequence, in Pakistan while mortality rate among human beings is disturbingly high, it is inversely very low, rather nil, among corporate bodies. How many official bankruptcies have taken place during the last half a century? They can be easily counted on fingers.
Clinically dead on life-support are being carried on the shoulders in very large numbers with a tremendous cost to the society and the economy. The earlier they are buried the better for every one. The laws have been recently made supportive to recovery of loans and let us hope that they see proper early implementation. The whole thing boils down to the human factor which makes or mars the institutional arrangements.