The Credit Squeeze (or Scam)
Anyone darkening the doorstep of a financial institution nowadays looking for credit is usually informed that the “ceiling” has “burst” meaning that the bank’s lending limit has been exceeded. In the case of foreign banks who have limited credit ceilings and blue-chip corporate clients, this is an understandable reply, the response of the nationalised banks becomes intelligible only when you begin to understand the deep-rooted nepotism and cronyism practiced in the higher echelons of these financial institutions.
The sacking of M R Khan as Chairman Pakistan Banking Council (PBC) saw Tajammul Hussain, then President of United Bank Limited (UBL), being appointed Chairman. The reason advanced for the unceremonious exit of Mr Khan orchestrated by our great economic Czar, Dr Mahbubul Haq, was that the PBC hierarchy was guilty of condoning large unsecured advances on personal and political preferences, rather than on merit. Six months or so later, Tajammul Hussain was fired by the newly inducted PPP Government for the same reasons, it transpired that UBL had been the worst offender all along as regards bad debt. Mr Kassem Parekh, unsullied President of Habib Bank Limited, was raised to Chairman PBC, has gone on and become the Governor of the State Bank of Pakistan. Mr Aziz Sakrani, formerly removed summarily from MCB by former PM Junejo, has been installed as Chairman of a moth-eaten PBC. As regards the President and Members of the nationalised Banks there have been mind-boggling permutations and combinations tried, though one daresays that the musical chairs seemed to have ended, at least for some time. One of the more deserving appointments after unending delays on various pretexts of the multifarious kind has been that of Mr MI Gurwara as President of Muslim Commercial Bank (MCB). By denying promotions to deserving officers, the banking professionals were kept thoroughly demoralised.
We have still not been able to clearly identify the worst offenders, both among the recipient of the credit and the processing/sanctioning entities/individuals. One must establish accountability, just by shuffling financial players around the government cannot really bring about any measure of credibility, the surgical scapel has to be used more deeply. From time to time the lists of defaulting debtors are published but these are neither comprehensive or for that matter accurate. We must first define a bad debt, signifying the period of time before the bank decides it is irrecoverable. A likely proforma, which could be made bank-wise, would be (1) serial number (2) name/s of individual corporate bodies, etc. including those who signed the promissory notes (3) amount of loan granted (4) securities (with values) offered against the loan (5) name of recommending bank official and the loan processing/sanctioning individuals and authority (6) amount recovered (7) amount of bad debt (8) whether securities encashed (9) what other action taken to recover the bad debts (10) present appointment of recommending/processing bank official and loan sanctioning authority.
From time to time we hear that the government will take action to rejuvenate sick industries, while this long-awaited action is still awaited, why are there no sick industrialists? How come that the nationalised banks keep on giving credit to industrialists/entrepreneurs with bad track record as regards repayment of loans? The answer is simple, the same people are still in the bank hierarchy who had processed and/or sanctioned the bad debts in the first place, there are only cosmetic changes across the broad spectrum of the banking industry. Some particular industrialists have become professional at making an industry sick, to their own personal financial advantage of course. Some extremely competent managers are in place in senior appointments but the dynamism is missing because an unsavoury lot still have tight control over the bank. Honest and well meaning financial managers like AGN Kazi and VA Jafarey, both former Governors of the State Bank of Pakistan, have not succeeded in reforming the banking sector because of the demands imposed on their time by the economy.
Despite the fact that the senior members of the banking hierarchy are not paid as well as they should be, they are the richest class in this country on a pro-rata basis, retired and serving, since their salaries and perquisites are still modest, the source of their acquired wealth can only be the kickbacks they have been (and are) receiving with respect to advances made. If one were to go back to the aforementioned proforma, with particular reference to serials 5 and 10, i.e, the names of those who had recommended/ processed/sanctioned the loans, we would make out if a pattern emerges, such as whether the loans were one or two odd cases or were a series of bad debts. If a pattern emerges, then the assets of the erring officials must be investigated by professionally competent people, preferably a private investigation agency. Only by a complete rendering of accountability will we be able to stop the present total corruption in the nationalised banking sector. Maybe a private sector group can confidentially select certain banking officials for detailed scrutiny of their assets as a public service. Relying on data from a number of different sources (including members of a cooperating banks’ unions), this group can publish for public censure a comprehensive report in the media.
While the PPP Government has certainly effected some excellent changes in manpower, what the banking sector needs is to have a complete overhaul of senior manpower, care should be taken that innocents do not fall by the wayside, but if there are such casualties these should be taken as acceptable losses in the total war against corruption. By not moving against the banking mafia, the government becomes guilty by association, in effect becoming accessories to any malfeasance. In the private sector very few senior banking officials would last in their posts, a test case may be made by completely privatising one nationalised commercial bank, let us then see how many survive the discerning scalpel of entrepreneurs who give short shrift to such conduct?
The major problem deterring rapid industrialisation is the lack of easy availability of credit, a must for enterprise-oriented growth and development in the Third World. The nationalised banks have utterly failed in mobilising internal resources, the banks are used as a routine necessity, mostly for security against theft, etc, not as an investment-oriented opportunity. Unless and until we succeed in mobilising funds from the masses by giving them an adequate return on their hard earned savings, we are facing potentially a serious financial crunch.
The funds are badly needed by existing and intending entrepreneurs, even the public sector cannot sustain growth on its own steam. The personal crunch is felt by our large salaried middle class who have to turn to loan sharks to upkeep their standard of living, credit from banks for personal reasons is virtually denied to them.
Pakistan is blessed with the finest banking manpower potential, despite receiving severe adverse (and in the circumstances, unfair) propaganda in recent times, BCCI is an example of international corporate excellence in finance. Mostly staffed by Pakistanis, managed almost exclusively by them, BCCI has served to show up the inadequacies of our own senior banking professionals. If BCCI can be internationally successful based on the enterprise, innovation and hard work of Pakistani banking professionals, why have we failed with respect to nationalised banks in Pakistan?
One of the most successful ploys adopted by this lot is to rope in those who matter in power, whether they be politicians or bureaucrats as willing collaborators. No sooner has a government come to power than these experienced sycophants start operating their spider’s web, exhorting them to ask for credit, easily given. Even before the gullible go out of power, rumours are started by those who had encouraged them in the first place about their “misdemeanours” and high-handedness in exacting credit on “dubious” pretences. Once out of power, they are vilified for their rapaciousness during their tenure in power, the real criminals escape justice year after year.
While the entrepreneur translates the credit squeeze as meaning lower profits, the individual person, particularly the small businessman and the salaried class feel the maximum pinch because of the shortage of credit. Since a majority of our population are salaried or self-employed agriculturists or small businessmen, this is an unacceptable situation. One can safely say that other than credits to public sector institution, less than 1% of the population takes over more than 90% of the available credit leaving the 99% of the population to fend for themselves trying to get some of the balance 10%. Invariably people turn outside the banking system to loan sharks to get credits at exorbitant rates, sometimes at an average of upto 5% per month (60% per annum). Naturally this causes a debt cycle, a morass that is difficult for individuals or small time businessmen to fight one’s way out of. The debt morass of the small agriculturists in Pakistan is horrendous, some have even hocked their children’s future because of moneylenders.
Obviously something has to be done to bring fair standards back to our banking system to make the credit squeeze more evenly spread across the spectrum. This action has to be administrative and must be taken immediately by a democratically elected government.
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