Loan Pyramiding Caught At Last
As a frequent critic of the country’s financial management, it is a privilege to note with the great pleasure (and pride) when such a senior financial manager as Dr Ishrat Hussain, Governor State Bank of Pakistan (SBP), takes up the challenge that I made to him in “Different Strokes” (THE NATION, Oct 04, 2003). To his credit Dr Ishrat did not respond to it in a negative fashion as an affront to his ego, SBP has initiated action on the “loan pyramiding” scam. Any senior manager in a responsible public appointment is expected to react positively to good advice and observations, accept the anomalies pointed out if they are right and made in good faith, and take the appropriate corrective measures. Unlike Dr Ishrat’s positive response against the “pyramid scam” artists, when two months ago I had pointed out something to a senior functionary in the public interest, it was taken as a personal attack. The negative response was for the (more loyal than the king) lower minions to drag my poor (and only) sister who died 26 years ago almost to the day (26 Oct 1977) into the “Get Sehgal” process!
The State Bank of Pakistan (SBP) has penalized about nine banks so far for willfully collaborating with their clients to form “loan pyramids”. This was done by using the rate differential between the high returns earned on National Savings instruments and the bank loans at lower mark-up. SBP’s prudential regulations prohibit lending for non-productive purposes. While it may be difficult for banks to ascertain the end-use of a loan, 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 quite aware that the NSS instruments being sold by them as agents of the National Savings Centre, were then kept with them as collateral to get additional funds for their clients, for purchase of more NSS certificates. To quote a knowledgeable source, “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,” unquote.
By taking advantage of the grey areas the bankers have also violated the corporate governance code of the SBP. It remains to be seen what action is taken against the bankers who have broken the moral if not the (strictly) legal tenets of the laws of the land. Some corporate cases are being referred by SBP to the Security & Exchange Commission of Pakistan (SECP) to ascertain the violations. Frankly, pyramiding is a white-collar crime where not only the banker but the client must be taken to task. In fact, if the loan pyramiding has not been sanctioned by the management of the bank, then the management must take to account the branch managers who misused this loophole, a moral plane was flagrantly violated here.
The second part of the challenge on “pyramiding of loans” was to Lt Gen Munir Hafeez, Chairman National Accountability Bureau (NAB), what is he going to do about the bankers who made the loan and the Banks’ clients who availed the illegal handouts at the cost of the public exchequer? NAB has done quite well upto now, this is a ready-made target for acquisition and action thereof. If there is an example that can be made on “The National Anti-Corruption Strategy”, those who took part in the “loan pyramiding” scam are certainly it!
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