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Friday March 29, 2024

1980-2008: Chronology of govt packages

July 02, 2018

for industrial revival, loan write-off — III

SBP initiative of issuance of Circular No. BPD 29 October 2002 for one time cleaning the Banks’ Balance Sheets: Based upon the foregoing experiences and studying the best banking practices and initiatives all over the world in many years, State Bank of Pakistan being aware of the non-performing Banks’ portfolios on account of continuous booking of profits by charging high and compounded mark-up and penalties banks were decorating and doctoring their Balance Sheets. Based on the analogy that eventually the banks’ would auction the recovered assets through official Assignee/ Nazir of the High Court and only recover forced Sale value of assets. SBP designed a policy for not only giving a chance to the banks’ but also to the businesses to rid them of the huge burden of carrying the piled up debt and interest and channel their energies to core business. This was the most thoughtful out of the box and successful initiative and did result in revival and rehabilitation of thousands of affected businesses to revive and thrive besides cleaning up of Balance Sheets.

It may not be out of place to mention that over past one decade or so many businesses and industrial units have become sick in all sectors particularly exporting textile, clothing, textile made ups leather etc. on account of massive load shedding of power/ electricity and gas besides the cruelty on the part of government/ FBR withholding their refunds/ drawbacks resulting in mounting debts and becoming unfeasible unless some major relief is introduced. The recourse of getting due refunds was also denied or circumvented despite clear orders by Superior Courts and Tax Ombudsman.

This period also witnessed the US Junk Bond crisis, which resulted in failure of banks and insurance businesses affecting housing sector and household incomes. Similarly with collapse of some European economies e.g., Spain, Italy, and Greece and some others rendered almost bankrupt, affecting the economies of major lending countries such as Germany and France affecting their overall economy. Huge corporations and departmental Stores went bust affecting our exports adversely and that put pressure on our selling prices.

Government and SBP are however very reluctant to consider any such moves based upon the criticism they have faced shattering their confidence and initiative.

On a press report published in some newspaper in October 2007, titled “Deadbeats got loans of Rs.54b Written off”, The Honorable Supreme Court of Pakistan took a Suo Motu notice of the report on November 3rd, 2007 bearing SMC No. 26 of 2007 and issued notice to SBP to submit a report on the contents of the news report. After a number of hearings, the Supreme Court on 3rd of June 2011 ordered the formation of a Commission as proposed by SBP to examine and report comprehensively.

Within one year, on diverse aspects of the case as reflected in Terms of Reference of the Commission which sought commission’s opinion and/ or make recommendations as to the legality, validity and justification “of all the written off, remitted, reversed and / or waived off loans/ advances/ finances of Rs.2.5 million and above, for the period from 1971 to 1991, and Rs.25 million and above from 1992 onward”, and to particularly inquire into, examine, as to whether there were any;

Political or malafide considerations or for reasons other than legal or bonafide commercial and business considerations.

To file proceedings for other action(s) under the applicable law(s) or under the National Accountability Ordinance, etc.

Fresh loans, advances, or finances allowed to the defaulters under any policy, notification, circular, instruction, guideline, provision or agreement including any Circulars of SBP applied or used for purpose other than for which the same were granted and/ or were not applied or used for the revival of sick units in terms of the grant(s) thereof,

Advise the SBP and/or the concerned bank/ financial institution to recall and recover such loans/advances/finances and shall also require the borrowers/ customer to pay or reimburse or return such amounts within a period of not exceeding six months and on non-payment thereof, shall make recovery of such amounts;

Whether any executive, officer or employee of the bank/ financial institution was responsible or instrumental or helpful in approving or recommending or providing, the above said amounts on inadequate or insufficient or sham or false securities and if so what action be taken against such executive, officer or employee of the bank/financial institution.

The Commission may seek orders from Supreme Court of Pakistan for the removal of legal impediments or difficulties that may arise or are likely in arise in the recovery of the monies under terms above.

The Commission headed by Justice Syed Jamshed Ali submitted its comprehensive and voluminous report on 31st January 2013. Supreme Court ordered on 20th of February 2013 to make the report public.

Salient features and main observations and recommendations are as follows:

Over 50,000 borrowers were beneficiaries of SBP Circular No.29 of 2002 with a gross amount written off/waived in all cases was Rs.84.641 billion.

For First Period (1971-1991), The Commission did not recommend any action for recovery for the reason that in majority of the cases the principal of loan had been paid off and recovery was twice the total principal amount of the loan besides a period of 31 years had elapsed and there may have been multiple irreversible changes in the ground situation such as existence or non-existence of the company or the project and the Board of Directors and a number of them may have died.

The Second Period (1992-2009) had been sub-divided into two phases; first from 1992 to 14.10.2002 and second from 15.10.2002 to 31.12.2009.

For the first phase of second period of 620 case examined, advances amounted to Rs.55,668 million of which Rs.44,310 million was repaid An amount of Rs.88,621 million was written off which comprised the principal amount of Rs.20,945 million and interest of Rs.63,776 million and the total recovery was about 80% of amount advanced.

For the second phase of Second period only 232 cases had been left to be examined (above a write off of Rs.25.00 million) and 222 cases recommended for “further proceedings”. The gross amount written off/waived in all over 50,000 cases was Rs.84.641 billion out of which Rs.35.286 billion related to 222 cases. The commission further recommended under sub-title “Recovery from Defaulters” that shortfall in “repayment due” (in principal amount) in all cases may be considered for recovery through a judicial process.

The report further adds, “The provisional figure case-wise based on the record supplied by the Banks is computed by the Commission through summary inquiries, as a more comprehensive enquiry case-wise in synopsis appended in Vol. II of this report. It is emphasized this figure is indicative also for the reasons that in some cases the sanctioned amount was not fully disbursed while in a number of cases all recoveries are not correctly/ fully shown by the banks. Besides, the mark-up is often capitalized and shown as principal amount. Different banks follow different practices. Likewise during hearings by the court number of exemptions may have to be made. The Commission however made all possible effort to fine tune the figures.”

Commission recommendation following exceptions to close the cases belonging to the private sector in the following categories:-

1. Bona fide business loss necessitating write-off.

2. Change in Government policies affecting business.

3. Liquidation of the company by order of the Court.

4. Settled by National Accountability Bureau or under settlement cases.

5. Gap between the amounts repaid and availed being insignificant or principal outstanding recovered.

6. Non-availability of Record.

On a cursory analysis, I must commend on the objective analysis and realistic assessment and recommendations by the Commission and that any further action should be taken in light of letter and spirit of the observations including that where ever further action needed to be taken, the cases must be processed and sifted through the sieve of the criteria laid down by the worthy Commission and recovery be made through a judicial process.

The issue before the Honorable Supreme Court can be summed up that an amount of Rs.35.286 billion related to 222 cases has to be recovered of which principal amount stands at Rs.11,769.485. The amounts are un-verified and indicative only and in many cases mark-up had been capitalized. Many of the cases may qualify for exemption under the criteria recommended by the Commission. In many a cases a forensic audit to determine the correct figure of Principal may be necessary. To avail of the incentive scheme, many businesses may have sold their plants including Land Building and Machinery and personal properties. Some might have revived their industries and done well.

The Commission report is in essence a testimony to the success of the scheme introduced through SBP BPD 29 of 2002 that it has endorsed the action in 99.50 % of the cases and only selected about 222 cases for review/ verification and may be further action through a legal process.

(The writer is former Chairman, Export Promotion Bureau, Government of Pakistan. wajidjawad@yahoo.com)

Concluded