Open up any national newspaper and chances are that you will find 2-3 court notices against the loan defaulters — recovery cases — filed by creditors. There may also be notices of auction of mortgaged property of the borrowers and guarantors.
Borrowing for grabbing a promising business or for capital gains is highly risky. It has much to do with borrower-lender relationship, the way banks work and business skills of the borrower.

The banks currently awash with cheap deposits are aggressively introducing new loan products, using various media including telephone; often unsolicited calls are made by bankers to the potential loan candidates and in cases, telephone calls may be followed by personal visits.

Mostly, the rosy side of the picture is shown during these visits and the people sometimes fall for the facility. Chances are that some of those living a contented life are also enticed for availing a loan to be used for a holiday abroad, home maintenance, modernising a kitchen or purchase of domestic appliances or a car.

The people earning low monthly incomes are also selected for granting consumer or other loans if they are in a position to offer valuable commercial or residential property as loan security. The property may be owned by the prospective borrowers or their parents. A large number of such cases are potential defaulters. As a consequence, valuable property may face threat of foreclosure. The society has to work with the government for bringing equity and fairness in the whole process of borrowing and lending.

Borrowing and lending are not prohibited in any society; however, the relationship needs to be managed according to the religious teachings, laws of the state and the norms of the society. Truth and fairness are two attributes that need to be upheld by both the parties in any borrower-lender relationship.

The lenders’ approach is pro-active but the lenders are not there to deceive their customers in the lender-borrower relationship. The lenders have prevailing recovery laws on their side, but the loan recovery process is not without problems. Non-performing loans (NPLs) are on the increase. Some of the banks are requesting expression of interest from the firms specialising in the settlement of stuck-up loans.

Others are developing a list of firms that can help them estimate the income of prospective borrowers. With these and similar measures, the lenders plan to keep their loan losses to the minimum. In future, the lenders may be more strict for recovery of stuck up loans. The Karachiites may not have forgotten the roughing up of small loan-defaulters by lenders’ recovery inspectors.

The borrower has to be careful to avail a loan from a bank or a money lender. The need and urgency of the loan must be analysed. There is no harm if the matter is discussed with relevant people or friends. If there is no option but to borrow, it is the time to go to the best lender. The lenders looks at the borrowers’ status, their proposed schemes or projects, loan security including guarantees and the hard cash they will themselves be investing in businesses.

If the schemes do not turn out profitable as originally envisaged, they would be unable to service the loans fully. A time may come when the lenders would classify the loans to be bad and foreclose the security as per loan documentation. In most cases of foreclosure, the borrowers lose heavily including the entire hard cash they invested in their schemes.

Pakistan has a number of commercial, investment , microfinance, leasing companies and Islamic banks. The would-be-business man would be better off if he searches lenders, their products, terms and conditions, requirements as to loan security, pre-conditions, documentation, fees and charges, effective cost of loan, repayment period and disbursement of loan proceeds. He should collect brochures, draft letters of terms and conditions or loan agreements, security documents and other promotional material handed out by different lending institutions. The entrepreneur should himself / herself make enquiries and compare the terms and other requirements offered by different banking institutions.

Some of the entrepreneurs show little interest in market-research, pre-feasibility or feasibility through consultants and consider it waste of money. In most of the cases, such borrowers learn their lesson the hard way.

In case, the borrowers face problems with banks, they can approach the Banking Mohtasib for redress and they can also file cases under the Recovery Laws. Business and industry associations can play an important role in facilitating new entrepreneurs. These associations should take up the cases of small borrowers, which sometime are allegedly exploited by the banks.

With a view to facilitate the small borrowers to start business, the governmentand the SBP may consider the following measures: (i) Prescribing a threshold limit for petty loan defaulters (say Rs10,000) below which no adverse credit report to be circulated to the banks under the CIB arrangement; (ii) The SBP to notify the defaulting borrowers that their names have been placed on defaulters list under CIB system, on recommendation of their respective banks; (iii) The banks may be asked to start cash flow based lending and thus obviating the need for loan guarantees which often are impossible to arrange by the borrowers; (iv) Maximum interest or mark up rate to be charged by the banks on lending to be linked with profit margin (say four per cent) over the average rate paid by the banks to the depositors; (v) Clearly defining the criteria of distinguishing between wilful loan defaulters from the defaulters who suffered losses due to external factors; (vi) Preparation of special laws to protect the borrowers from deceptive, illegal or oppressive policies and procedures of the lenders.