Loan Default
The State Bank of Pakistan (SBP) had to invoke on short notice little-used sections of the Banking Ordinance to change the management of United Bank Limited (UBL). Great fanfare had been made about UBL being privatised. Government of Pakistan (GoP) had already accepted an offer from Saudi Basharahill, a little known company owned by Saudi magnate Dr. Basharahill, capitalised at ú 2000 in an off-shore UK tax haven. For reasons suspected but not really known, the UBL privatisation deal seems to be in doldrums and SBP’s drastic action, ostensibly on behalf of GoP, seems to be a desperate move not only to shore up UBL’s defences against depositors’ run on the bank that was gathering momentum but also to divert attention from the privatisation debacle. Despite UBL being systematically looted by its own managers and by its powerful Union over the years, the strong foundation and inherent strength of the bank had ensured that the bank remained profitable till 1993. With the advent of the Ms Benazir regime, a sustained campaign began to induct only “loyalists” into the UBL hierarchy without any thought given to their integrity and competence or its adverse effect on UBL’s credibility as a financial institution. The appointed functionaries started dishing out questionable loans that far exceeded mismanagement and malfeasance (M&M) pre-1993. Haemorrhaging badly, UBL was put on the auction block for privatisation in what really amounted to be a rather motivated fire sale. That the whole edifice of cards was bound to come down on detailed scrutiny was a foregone conclusion that only the most optimist of GoP’s decision-makers could have been hoping to camouflage and/or avoid.
Pakistan’s Nationalised Commercial Banks (PNCBs) and Development Finance Institution (DFIs) are suffering from chronic bank default. If UBL is seen as an offender, it is only because privatisation has brought it into focus. Default has been taking place for over two decades. Probably the worst case of financial bungling may be in Habib Bank Limited (HBL) where excesses by banking executives, both professional and non-professional, reached such alarming proportions that in comparison Younus Habib (remember him) seems to be a petty thief. Once this scribe himself approached VA Jafarey to intercede in what was clearly an outrageous scam by the present bank management, Younus Dalia included. VA Jafarey, PM’s Advisor on Finance replied he could only advise the Pakistan Banking Council (PBC) to look into it but was powerless to take any action himself. With such toothless tigers in charge of financial monitoring, what does one expect? Put VA Jafarey out to pasture and/or put him out of his misery. One hopes that the saying “the bigger they are, the harder the fall”, does not come true for Pakistan’s biggest retail bank. National Bank of Pakistan (NBP) seems to be in a healthy state but figures (like appearances) can be deceptive, only time will tell whether NBP is doing as spectacularly as M B Abbasi is professing or whether the media projections are just another window-dressing for poor banking practices that may have fooled all (including this scribe) into glorifying him personally. As far as the DFIs are concerned, the lesser said the better, almost all of them are in trouble of some kind or the other due to loan default. Some like the NIT, ICP and NDFC are facing a liquidity crunch in being caught up themselves in the share market whirlpool or in trying to bolster a sagging share market on behalf of GoP.
The domestic debt crisis is likely to blow up in our faces if depositors decide en masse that their money is not safe in the banks. Since major loan defaults are exclusively in the public sector financial institutions, the problem is either of management and/or prompting by “remote control” from influential people or a combination of both. In 1993, the Moeen Qureshi (MQ) Caretaker government updated the list of defaulters prepared by the Mian Nawaz Sharif government and published it in the newspapers. The defaulters raised a hue and cry because their “privacy” was violated and the “sacred trust of banking confidence” breached. No matter they had looted the banks at will and there was no difference between them and traditional bank dacoits. Let us give MQ credit for the publicity that removed the veil of how many of our rich and famous had become rich and famous, mainly by looting the banks! However, the rich remain rich and escape retribution by exercising the potent factor of influence that have made them rich in the first place. Even a cursory glance at the list would have shown that default was not confined to dubious loans made on political basis but took place across a wide spectrum of business and industry, in particular the textile sector over the past two decades, Martial Law period included. The yellow cab scheme of the Mian Nawaz Sharif government went out of control into the hands of con men and scam artists, resulting in losses of billions. However, the list of the defaulters makes interesting reading. It serves as a “Who’s Who” of the captains of commerce and industry with quite a few legislators thrown in for good measure. Most of those who have taken loans are not really doing any business and as such do not seem to have any intention to return their loans they have obtained. The pattern is that of the Finance Minister of a South American country who when asked why he was requesting for US$ 100 million when he only needed US$ 10 million, said “If I take US$ 10 million I am in trouble, if I take US$ 100 million, whoever has loaned me this money is in trouble”. Well, most of the public sector financial institutions are in deep trouble, no matter what figures they trot out in their well presented Annual Reports to show off their efficiency and expertise.
One must separate genuine loan default from the scams. There are many business and industries that have come to grief due to various reasons but not because of lack of honest effort on the part of the entrepreneur. In a Third World environment such as Pakistan, commerce and industry are at the mercy of the changing rules and regulations of government. That these keep changing many times a year in some cases drives the entrepreneur into bankruptcy as he (or she) cannot make long-term commitments based on any long-term policies of the government. There may be many other reasons, natural and/or artificial, not the least being the inefficiency of the entrepreneur or a bad dishonest staff that may contribute to the decline of business and loan default. Most salaried class obtain small loans because of various personal commitment but they are the best clients as far as loan repayments are concerned. In such cases, understanding is necessary, including the need for re-structuring if possible. In worst-case scenarios, the collateral that the entrepreneur gives as guarantee against the risk, can be encashed. However, some unscrupulous characters make it a habit of acquiring loans but take their venture deliberately into bankruptcy. One must conclude that repayment was never an option as the collateral they gave can never be encashed. It would be interesting to make a survey of all those who have taken loans in the last two decades and made their industries “sick”. A gentleman who bears an impeccable family name in industry has made dozens of industries “sick”, he lives on comfortably without anyone to hold him accountable. What is the difference between him and a masked dacoit except the mask?
The worst of all the offenders are those who deliberately set out to obtain major loans on false pretences and misrepresentation with most collateral dubious or fraudulent. Some of these people have even opened private banks of their own on the strength of these loans. One gentleman presently in default to many banks (and being prosecuted presently) was in the forefront of trying to obtain permission for a private bank. Somehow they always escape accountability by greasing the palms of whoever is in power. Having plenty of funds to go around, this is considered “acceptable expenditures” for “goodwill”. Such people tend to react badly to enquiries and investigations, even trying to bring down the government in power in order to escape retribution. With the money they have acquired they are not averse to entering politics themselves to combine political clout with monetary strength within the corridors of power. In order to stop this evil from proliferating, first the MQ Caretaker Government in Pakistan (1993) and now the Habibur Rahman (HR) Caretaker Government in Bangladesh (1996) have made loan defaults a disqualification for political candidacy. However this is only a negative initiative, a positive move can only be made by making loan default equitable with drug smuggling. Anybody who owes more than Rs. 1 million (or near figure) and is in default must be prosecuted by Special Tribunals, his (or her) entire property confiscated and his (or her) running businesses or industrial enterprises handed over to a “trust manager”.
What do loan defaults mean? It means that once money that would normally be recycled in the economy is taken out, that others who could have put it for productive use, particularly at the lower end of the spectrum, are denied its use. As for the banks, they start to face a liquidity crunch which eats into their assets in a force-multiplied way as liabilities mount. When banks began to face shortage of funds, depositors began to get scared and turn to safer havens. As banks close their doors, the entire economy comes under the gun, first psychological then real. One is likely to face economic apocalypse in the same manner of the famous Depression in the US of the late 20s/early 30s when millions and millions faced unemployment because of a prolonged credit crash that destroyed businesses and financial institutions. We have to take loan default seriously, bringing it firmly into the ambit of accountability, otherwise we will be in far serious financial trouble than what we are presently in.
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