Loan write-offs: strictly for influentials

Synopsis of a letter written by Dr. Shahid Hasan Siddiqui, to Chief Justice, Supreme Court of Pakistan, Islamabad.

Loot and plunder of billions of rupees through “write off” of advances by banks on their own and also under SBP circular No. BPD 29 dated 15th October, 2002 in violation of 1973 Constitution of Pakistan

“I am a senior banker having over 30 years banking experience including in senior management positions in banks in Pakistan, Europe and Middle East. I am presently Chairman, Research Institute of Islamic Banking and Finance, Karachi.”

For the last many years I have been observing that the banks in Pakistan, in my opinion, are not only exploiting their depositors but are also indulging in various mal-practices, breach of trust, un-professionalism and write-off of advances at an unprecedented pace.

I had filed a petition in Federal Shariat Court (FSC) in 2008 (No. 03/K of 2008) in which I had among other things submitted as under: The SBP, during the tenure of Dr. Ishrat Hussain as Governor SBP, issued a BPD circular No. 29 dated October 15, 2002 under the caption “New guidelines on write-off of irrecoverable loans and advances.” This circular, among other provisions, says that:

Category B: Where the outstanding amount is more than Rs.500,000/- but less than Rs.2,500,000/-

Criteria

Amount to be recovered

Forced Sale Value (evaluated by the banks / NBFI) of the security is more than the outstanding amount.

75% or more of the outstanding should be recovered in cash.

Forced Sale Value (evaluated by the bank/ NBFI) of the security is less than the outstanding amount

A sum equal to Forced Sale Value (evaluated by the bank / NBFI) should be recovered in cash.

Where no tangible security is available.

Efforts should be made to recover maximum possible amount.

Category C: Where the outstanding amount exceeds Rs.2,500,000/-

Criteria

Amount to be recovered

Forced Sale Value of the security is more than the outstanding amount.

75% or more of the outstanding should be recovered in cash.

Forced Sale Value of the security is less than the outstanding amount.

A sum equal to Forced Sale Value should be recovered in cash.

Where no tangible security is available.

Efforts should be made to recover maximum possible amount.

Forced Sale Value should be determined by an independent professional valuer who should be listed on the panel valuers maintained by the Pakistan Banks’ Association (PBA)

These guidelines in plain language mean that banks could not lay their hands on those assets of the defaulters which are not under lien to the banks including deposits, National Saving Certificates, shares, immovable properties and stock-in-trade etc. held even by the proprietors or partners of the defaulters. Under this circular, banks have also written-off advances of chronic defaulters, and advances written-off notwithstanding that some of these defaulters have huge known assets in the country.

The comparative figures assessed from the annual accounts of some big banks indicate the position of the advances written-off by banks /DFIs as under:

(a)          Advances written-off between 1984 and 1999

          (15 years) Rs. 30 billion.

(b)          Advances written-off between 2002 and 2008

          (7 years) Rs.125 billion (approx.)

The perusal of various reports suggest that banks / DFIs have only under the SBP Circular referred to above written-off advances to the order of about Rs.100 billion. The bulk of the facility of write off was provided by banks to defaulters of big amounts of stuck-up advances. All indications are that 90 per cent of the total advances written off by banks between 2002 and 2008 under the SBP Circular were to the benefit of borrowers who had defaulted in repayment of outstanding advances of Rs.2.5 million and above.

The facility of write-off has been allowed to defaulters including the following:

(a) Those who had availed advances against hypothecation of stocks but misappropriated the sale proceeds.

(b) Those who did not utilize the funds availed from banks for the purpose of which they were taken but diverted the amounts else-where.

(c) Those who have huge known assets in the country and even abroad.

I had in 1997 written as under:

“Wafaqi Mohtasib Committee in its reports had observed that banks and DFIs were not sanctioning loans on business considerations but for other consideration which ‘ranged from simple political expediency or bureaucratic interference, to personal gain down the line. The Wafaqi Mohtasib Committee found State Bank and Pakistan Banking Council responsible for this colossal default. The Wafaqi Mohtasib in his report submitted to President of Pakistan in early 1995 had also observed that huge bad debts have been accumulated mainly due to misconduct of banks’ officials.

This was obviously against all norms of banking and was in clear violation of the directive which says that the defaulters of a bank cannot avail advances from other banks.

(Research Biannual Pakistan Perspectives, Vol. II, NO.2 December 1997, published by Pakistan Study Centre, University of Karachi.)

The following are some extracts from the Statement made by Dr. Mohammad Yaqub Governor SBP:

“Debt defaults have been massive, some of them willful and reflect a collusion between the bankers and borrowers at the expense of small savers and tax payers.” (November 17, 2003)

Former president, General Pervez Musharraf has also made the following statements:

“The process of accountability is being directed towards loan defaulters and those who have their loans rescheduled or condoned (written-off).  All defaulters should come forward and settle their debts within a period of four weeks, after which their names will be published and the law will take its due course. (TV Speech dated October 17, 1999)

“About 322 people have eaten up over Rs.220 billion which we intend to recover at all costs. (Dawn: November 2, 1999)

I have for the last many years been expressing my serious concerns regarding the stuck-up advances and their write-off.  I am attaching the photo copies of my articles published in the Editorial Page in Daily Jang, Karachi for your kind perusal:

In my book “Pakistan: Economic Growth and Stabilization: Myth or Reality? Published in 2005. I had stated:

This is not correct, as at least since 1993 it has been an established fact that bulk of defaulters are willful. SBP’s earlier contention also was that “Most of these are not defaults which are natural in character and fall in the category of willful defaults with character and fall in the category of willful defaults with collusion”.

Incidentally I may also submit that Dr. Ishrat Hussain, while working as Governor SBP, in his Book “Economic Management in Pakistan 1999 – 2002”, published in 2004 wrote as under:

“The  NAB has been functioning quite effectively”. “The successful example of the NAB can be used to build up a strong legal and institutional framework for detecting corrupt practices”.

“The Musharraf government has put in place a strong and well functioning accountability mechanism.”

As mentioned earlier my petition with FSC was regarding declaring SBP Circular No. 29 dated 15th October 2002 as unlawful and that the advances written-off under this circular should be recovered with upto date mark-up. After two hearing, the Learned Bench of FSC had admitted the petition for hearing and issued notices to Governor SBP and Presidents / Chief Executive Officers of Commercial Banks. The SBP and other banks were directed by the Learned Bench to submit their comments on the petition by first week of April 2009. It is however, regretted that after the retirement of the then Chief Justice of FSC, no date of hearing has been fixed by the learned Bench despite expiry of about nine months time.