Bank Defaulters

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PATRON Lt Gen (Retd) SARDAR FS LODI discusses the financial problems the economy has faced due to bank defaulters

Dealing with loan defaulters is an important national issue these days. I am writing on this subject in a military magazine because this issue is a major factor in our economic slide and fast approaching financial bankruptcy. This in turn is likely to have an adverse affect on our national defence policy. Some efforts have already started to suggest a down-sizing of defence budget, conveniently forgetting that the real cause of the problem is the debt servicing which is twice as large as the defence budget. A result of our own follies, personal interests and financial gains.

Our financial problems started way back in 1974 when the first ever elected government in the country found it financially gainful, to nationalize all the Pakistani banks and much of the industry. This placed in the governments hand and within its control, most of the nation's wealth, with a stroke of the pen, so to say. This allowed the political government to appoint their own nominees to head the nationalized banks from where large amounts could now be borrowed at will. The industries taken over were over-staffed by party workers eventually making them financially not viable and under going losses which the government was accumulating as the new owners.

The situation stabilized during the military rule of General Zia ul Haq primarily because the finance minister during the period was Ghulam Ishaque Khan an experienced civil servant who was able to impose strict financial discipline on the government departments and control public spending. The result of this financial management and above-board dealings was that Pakistan's GDP growth rate rose to 6.4 per cent during the 11 years period of military rule from 1977-88. Unfortunately during the next decade of elected representative government from 1988-98, the GDP growth rate fell to 4.5 per cent on average.

It is the considered opinion of economists that this loss in the growth rate responsible for retarding the economic development of the country, was due mainly to political uncertainty, frequent changes in government policy, financial mismanagement and poor performance of the public sector, including financial institutions and banks. The mismanagement of the country's finances had reached such a volatile and uncertain state that the World Bank and IMF refused to meet the government's financial expert a few years back, as he was reported to have 'cooked his figures' to mislead the world financial institutions and the leading European nations.

A World Bank report on Pakistan's economy states that the stock of Pakistani bank's Non-Performing Loans (NPLs) grew by almost 600 per cent between the end of June 1989 and end of June 1998. This is the period covered by our free-spending elected representatives working in a democratic set-up under a written Constitution and in accordance with the law. The World Bank report goes on to say that the total NPLs by end-June 1998 stood at Rs. 146 billion. The NPLs of nationalized commercial banks constituted around one third of their total loan portfolio, which is a large amount by any standard.

When the Army took over the government on October 12 and made the recovery of bad debts its first priority, giving November 16, as a deadline for defaulters to return the amounts due from them, official reports indicated that the figure of non-performing loans stood at Rs. 211 billion. That is an increase of Rs. 65 billion since June 1998, the period covered by the World Bank report. The latest figures however indicate that the non-performing loans are around Rs. 250 billion. This figure is in sharp contrast to the Rs. 80 billion non-performing loans as reported by the Moeen Qureshi's caretaker government in 1993 when this problem was first brought to the public's notice.

The loans have been taken from the nationalized commercial banks, agricultural and other banks and institutions meant for the country's development. Large amounts were also taken from the country's Development Finance Institutions (DFIs). These loans amount to around Rs. 250 billion. Added to this already large figure is a larger amount of Rs. 350 billion which consists mainly of taxes due, by and large from the very same persons who are also bank defaulters. These include income and wealth taxes not paid for over a decade or so. Utility bills have also not been paid for many years. These have accumulated into large sums causing financial strains on WAPDA and the KESC. The total amount due from influential people now rightly called 'defaulters' would be around Rs. 600 billion. A large amount taken away from a poor country.

Regarding our foreign loans it would be pertinent to mention that in 1988, during the first 41 years of Pakistan's existence 6.3 billion dollars had been borrowed from abroad. This figure rose to 42 billion dollars in the next 11 years by the duly elected and representative government under the constitution.

This amount included 11 billion dollars taken away surreptitiously by the government after declaring a state of emergency in the country. 41 billion dollars is a large amount. After the Second World War, the United States pumped into Europe, 80 billion dollars in present day value, for its reconstruction and revival after five years of fighting. Our governments have spent half that amount, with nothing to show for it except debts and debt-servicing, which is eating away half the national budget and is still increasing.

The deadline given by the present military government for the return of bank loans has come and passed. The results have not at all been satisfactory. An amount equal to about Rs. 8 to 9 billion have been returned. Per force the government has had to arrest some of the top defaulters while others have gone underground. Some 3,000 major loan defaulters have been placed on the Exit Control List (ECL). This is over and above 746 MNAs, MPAs and Senators who are already on the ECL to prevent them leaving the country without paying their dues.

The public's demand for accountability is so loud and persistent that they have welcomed the Army's role in dismissing an elected government. The public is aware that their trusted leaders, their friends and relations have plundered the national wealth entirely for their personal gains. This was done with impunity and an increasing sense of greed, with no end in sight. There was no accountability or fear of being caught and punished, so the robbery continued with both hands, so to say.

The big fish being arrested for default had no intention whatsoever of ever returning the loans which were taken without any collateral security pledged to the bank. Therefore in case of default, the bank was unable to recover any amount as nothing was pledged. Some of the defaulters had no intention of setting up any industry, as a foreign economist said, 'these are not loans but outright transfers'. These defaulters have committed an outrage against the people of Pakistan. Partners in this crime are also the senior bankers who granted loans without any security to the banks or the public money entrusted to their care.

By granting huge amounts to the influentials the banks were in fact depriving the genuine borrowers who would have been expected to set up industries, provide jobs to the people and help in exports. But the unreturned loans stagnated economic activity in the country and over the years 3,000 to 4,000 industrial units were completely or partially destroyed. These are now 'sick' units and a drain on the country's economy, having rendered thousands of workers jobless and added to the already long line of unemployed. These practices of our leaders have created grave social and economic problems for the nation.

The Army faces a difficult job owing to a host of problems left behind by 11 years of elected government. Dealing with the loan defaulters is the primary one and in fact the starting point. All those, the bankers and the borrowers who violated the rules for personal gains must be tried and punished in accordance with the law. Nobody, howsoever mighty should be allowed to get away after committing crimes against the nation, that is the demand of the public.

It would also be desirable for the present Army administration to leave a foolproof system in place to avoid such unethical banking practices in future as well. We cannot afford to have this repeated all over again when democracy is restored.