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State Bank governor urges government to enact bankruptcy law

KARACHI (July 27 2003) : The Governor State Bank of Pakistan, Dr Ishrat Husain, has called upon the government to enact bankruptcy law and legal procedures allowing businesses to restructure their financial position, thereby creating a mechanism for settlement of defaulted loans between banks and borrowers in a transparent manner.

In an apparent rejoinder to both the parliamentarians and the courts, as well as the media, the SBP Governor in his keynote address at the Institute of Bankers Prize Distribution Ceremony, in Karachi, on Saturday, gave a detailed analysis of the write-offs undertaken in the public sector banks and development financial institutions between 1999 and 2003.

He said business failures are a normal event in the life cycle of an economy and banks are in a business of risk-taking and there are occasions when economic shocks or business cycles or frequent changes in government policies do turn some of their assets (loans) sour.

“Until and unless there is personal motive of the bankers or any political pressure, the write-off of irrecoverable loans and clean-up of the balance sheets is a normal practice of the banks all over the world,” he said.

He said that since October 1999, an aggregate of Rs 20.2 billion or about 2 percent of total outstanding and about 8 percent of all non-performing loans have been written off on merit basis and army generals and politicians are not main beneficiaries, which is totally inaccurate but also misleading.

Later, at a press briefing, the Governor further elaborated that the bulk of loans write-off or waived since 1999 was concentrated in four public sector banks–National Bank of Pakistan, Habib Bank Ltd, Zarai Tariqqati Bank and SME Bank.

He said that contrary to popular perception, as many as 262,209 small borrowers benefited from this policy and got relief of Rs 7.6 billion. Of this, Rs 5 billion was written off for small scale agricultural borrowers and Rs 1 billion to SME borrowers.

Thus, the reported allegations that army generals and politicians were the main beneficiaries of the banks' write-offs since October 1999 were not only inaccurate but also misleading.

It is true that 1408 borrowers also got relief of Rs 9.7 billion but this list consists of those businesses which met the criteria set up by the respective banks' board of directors.

There was no directive given by President House, Ministry of Finance, State Bank of Pakistan or any other Government Ministries to the banks in these cases.

“I can say without fear of contradiction that during the last three and a half years neither the President nor any of his generals or Cabinet members ever interfered or exerted any pressure to grant any new loans or to write off any old loan.

Thus, the decisions on write-offs were taken by the Management and the Banks' Board according to their own professional judgment or in compliance of court judgements, acquisition by CIRC decisions of CRSIU or general amnesty granted for calamity affected borrowers of Agricultural Development Bank of Pakistan.

The President only agreed to provide relief to the calamity struck small farmers in Balochistan and Sindh from their ADBP loans and this was done across the board for the whole areas rather than for specific individuals.”

Ishrat said that the government has embarked to privatise banks along with introduction of strong regulatory and supervisory regime and corporate governance rules. With the HBL out of the government hands, 80 percent of banking assets in Pakistan will be held by the private sector but under the vigilant eyes of the State Bank of Pakistan.

Effective credit policies and professional management have already led to an enormous improvement in the quality of new loans booked eg at HBL nearly Rs 50 billion of new loans booked in the last five years show a loss ratio of less than 0.5 percent.

This will be further reinforced by the private owners of the banks as they will be interested in maximising profits, and will also ensure that the loans are given purely on commercial considerations so that they can be serviced and repaid on time.

If the private banks do not follow these rules, they will have to make provisions which have to come out of their profits and the owners will earn no return on their investment.

The managers of these privatised banks will either lose their jobs or their bonuses and increments.

Thus, it is in the overall interest of the shareholders and managers that the quality of assets is ensured and recovery is prompt.

Dr Ishrat said since October 1999, an aggregate of Rs 20.2 billion has been written off or charges waived.

As against this, the banks have recovered Rs 124 billion in the same period, or 58 percent, of 1999 outstanding stock of NPLs.

The amounts which have been written off thus represent the cumulative total of the decretal judgements awarded by the courts of law, the discounts at which loans were acquired by CIRC, the implementation of the decisions of CRSIU, general amnesty schemes to calamity affected small borrowers and the decisions taken by the Banks' Boards on merit of each case.

“The existing private banks and foreign banks have such low ratios of NPLs to advances and their write-offs and waivers are insignificant.

I believe this is the way forward in which we can ensure that the customers get better service, the quality of banking assets is satisfactory and the overall banking sector is in good financial health”, the SBP Governor said.

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