KARACHI (October 16 2003): The State Bank of Pakistan has so far penalised about nine banks for wilfully collaborating with their clients to form a loan pyramids using the rate differential between the high returns earned on National Saving instruments and the bank loans at lower mark-up.
SBP's prudential regulations prohibit lending for non-productive purposes, but it is difficult for banks to ascertain the end-use of a loan.
However, the paper trail unearthed by the SBP inspection teams clearly showed that some bankers not only offered seed money for creating the loan pyramid but were also aware that the NSS instruments being sold by them to their clients, as agents of the National Savings Centre, were later kept with them as collateral to get more funds for purchase of additional NSS certificates.
“This was a clear violation of the principal-agent relationship. The agent gets commission for service rendered to the principal for sale of these certificates. They are not expected to hurt the interest of the principal,” said a knowledgeable source.
According to the central bank rules, the errant banks have to pay Rs 20,000 plus Rs 1000 per day until these NSS instruments are encashed.
Since there is no loss of interest earned after the lapse of six months from the sale date, most banks are expected to obtain encashment in November/ December as generally their activity took place in the months of March and April, 2003. As far as the clients are concerned SBP has no direct jurisdiction over them.
While guesstimates of pyramiding range from Rs 20 to 40 billion, it is very difficult to do a correct assessment until the inspection exercise is complete, said a source.
In cases where the initial collateral is a property or NSS instruments bought in 2002 has been used as initial collateral and the clients have created the loan pyramid using several banks or several branches of the same bank, it is difficult to punish the banks.
The evidence has to be water-tight and maintainable in a court of law, say the bankers.
Secondly, not all borrowings against NSS instruments are of unproductive nature. But in case where more than one company of the same group – as defined in law – are involved in a loan pyramid, the issue is to be passed to the Securities and Exchange Commission of Pakistan to probe if any violation of inter-company borrowing rules has occurred.
So far all three categories of banks have been reportedly penalised, ie government owned big network banks, private banks as well as foreign banks.
Ethical practice demands strict adherence to laws of the land and regulations. Adopting best practices means even avoiding the grey areas as well as, says the corporate governance code of SBP.