The State Bank of Pakistan has stated before the parliamentary panel on November 19, 2019, that the non-performing loans (NPL) of the banking sector have increased by more than twenty three percent during the fiscal year ending June 30, 2019 from Rs. 623.4 Billion to Rs. 768 Billion with an increase of Rs. 144.4 billion. The SBP team in its presentation further stated that “Most of this increase was due to energy and sugar sectors, as they together explained more than 50 percent of the rise”. Giving the main reasons for the rise of NPL the SBP stated that several factors contributed to the rise in NPLs, including the overall slowdown in the economy, tightening of macroeconomic conditions and constrained cash flow of corporate entities.

Pakistan has a long history of irrecoverable loans and advances / bank defaults cases. The State Bank of Pakistan (SBP) has been issuing guidelines on writing-off of the irrecoverable loans from time to time. The Supreme Court of Pakistan (SCP) also took suo motu notices of the cases in this regard. In 2007 a three-member bench of the SCP headed by the then Chief Justice Mr. Iftikhar Muhammad Chaudhry heard a suo motu case of Rs. 54 billion written off loans case. The SCP accordingly constituted a commission which in its report recommended action against two hundred and twenty-two individuals and companies on account of the fact that the loans were not written off in accordance with law. Later the two-member bench headed by Chief Justice Mian Saqib Nisar heard the same case of Rs. 54 billion and is presently being heard by the SCP.

Presently there is no law in the country which provides a legal framework for writing off non-performing loans. Nor there is any law in the country which confers the right on a borrower to seek or get a loan written off. Besides there is no law that imposes any duty on a bank to allow a loan write off. Writing off bank loans partially or wholly, is a matter of bank policy regulated by the Contract Act, CPC, the Financial Institutions (Recovery of Finances) Act in cases of recovery suits / enforcement of decrees and SBP’s guidelines in case of mutual settlement between the bank and the borrower. The banks lend the public money to the borrowers and any default on that account on the part of the borrowers should not be left to mere guidelines of SBP and amicable settlement between them.

The intent of one of the SBP’s BPD Circulars No. 29 dated October 15, 2002, which issued guidelines on write-off of irrecoverable loans and advances and also came under consideration of the SCP, was to write of the NPL, the quantum of which had shown a rising trend and the stock of NPL had severely affected the financial health of the financial institutions. One the benefits of the scheme, as envisaged by the SBP, was that the balance sheets of the banks would be strengthened and the drag of the NPLs in the lending rate to the borrowers would be eliminated.

The guidelines issued by the SBP, from time to time, are mere guidelines and have no legal standing as such. The SBP has also to resort to such guidelines as there exists no legal framework or law in the country which provides for writing of irrecoverable bank loans. There is a dire need for legislation on writing off irrecoverable bank loans so that that the matter is not left to mere guidelines issued by SBP and at the discretion of banks / financial institutions. The proposed legislation must take into account force majeure causes of bank defaults and willful bank defaults. Most of the bank defaults in the country earlier and even today are due to bad and poor economic governance and untimely government decisions which result in bank default cases caused by the factors which were not under control of business entities who acquired the loans for no fault of their own. These factors, inter alia, include (a) poorly negotiated Free Trade Agreements as also negotiated in the past, (b) abrupt changes in the customs tariff structure and other indirect federal taxes and duties, (c) arbitrary levy of regulatory and anti-dumping duties and other taxes, (d) poor control on currency management resulting in unchecked and uncontrolled depreciation of Pak Rupee, (c) irrational increase in energy tariffs and POL prices, and last but not least (d) under invoicing and smuggling.

The global financial crises which started in late 2007 adversely affected the financial institutions of not only developed countries but even those of developing economics. The financial crises turned the growth to recession and later to depression with unemployment, closure of industry and slack in economic activities.

Although the World Bank had cautioned the “crises-hit” West not to turn to protectionism, as during the times of economic crises, growing protectionism may be the greatest danger to economic recovery, yet most of the crises hit countries resorted to protection of their domestic industry. Even countries like Britain, Japan, Germany and USA suffered from the crises in manufacturing, as global demand for the investment goods and vehicles, in which their industries specialized had evaporated. Likewise, industry collapsed in Eastern Europe, Brazil, Malaysia and Turkey. Thousands of factories in Southern China were shut down, laying off millions of workers. The developing economies also proportionately faced the crunch on account of industrial collapse, unemployment, reduction in export, foreign exchange earnings, short fall in government revenues and soaring difference in balance of payments.

To refresh the memory of the worthy readers Pakistan’s vulnerability to the adverse impacts of the global economic crises were much more serious and graver than any other developing country in the world. Its economic condition, even prior to the global economic crises was deteriorating because of many obvious reasons. The economy in recent past had witnessed (i) overall deterioration it had to face due to fight against terrorism, (ii) artificial hyper-inflation, (iii) depletion of foreign exchange reserve and extremely unfavorable trade imbalance and fiscal deficit. In wake of such a weak and vulnerable economy which had no economic shock absorbers faced, inter alia, with the following immediate economic problems (a) downturn of industrial production and productivity; (b) aggravation of trade imbalances and balance of payments resulting from decreased foreign remittance, (c) increased unemployment due to layoffs both domestically and that of overseas Pakistani’s who returned home as a result of substantial foreign layoffs reducing foreign remittances, (d) unfair competition for domestic industry against the supply of cheap and increased foreign goods by the countries who either had piled up inventories or were financially supporting their industries for continued production to keep them economically operational ensuring economic activity and employment, (e) closure of textile sector, upon which Pakistan’s economy was heavily dependent, and last but not least (f) closure of industrial units for long period which made it difficult to re-start without injecting huge amounts etc.

Presently Pakistan is again in a phase of general economic decline and slowdown with contraction in the GDP for the last one year. Marked with high unemployment, stagnant wages, and fall in retail sales, the recessionary phase should not be allowed to last longer than one year as if not reversed could develop into depression as significant signs of depression have started appearing. Major indicators, inter alia, being (i) worsening unemployment rate, (ii) rising inflation, (iii) declining property sales, (iv) increasing credit card and bank defaults. The famous economist David Rosenberg, in his recent article, lays out the evidence that recession risks are alive. According to Chinese National Bureau of Statistics and Producers Price Index as of October, 2019 profits of Chinese firms contracted at its fastest pace in eight months due to trade disputes with USA. The President FPCCI has also recently registered serious concerns on the decline in the indigenous private sector credit by about Rs. 4.00 billion in the first four months of the current fiscal year attributing it to high cost of borrowing and slow economic activity in the country, which will subsequently affect the next year’s economic growth and employment.

However, these factors, forcing bank defaults, have never been brought up before the banking and superior courts based on the economic, financial, and legal analyses. In many cases the government included domestically produced products in free and preferential trade agreements without assessing the individual needs of the industry as legally required under the WTO regime. Resultantly many industrial units were either forced to go into red account or were just closed consequently to bank defaults. Likewise, industrial production activities with gas and electricity as their inputs are not even able to operate at a breakeven level due to uncalled for increase in energy tariffs and POL prices.

The uncontrolled and colossal depreciation of Pak Rupee has also considerably eroded and eaten up the capital and networth of many trade and industrial entities by 30% to 40%, especially those with larger imported component in their businesses. Besides in many cases the respective departments also failed to control clandestine and under-invoiced imports which adversely affected the domestic industry and imports effected through legal channels forcing many bank defaults for no faults of their own.

In most of the bank default cases the loanees have paid more than the principal amount in the shape of interest and have pledged / collateralized their assets with banks / financial institutions, the market value of which have appreciated multiple times than the original outstanding / principal amount and are helpless. The existing remedy available to such forced bank defaulters is just lingering on the cases which ultimately result in confiscation of the collaterals / assets or land in NAB with arrests.

The concerned government departments and SBP should come up on war footings with a draft legislation and a legal framework on the subject to decide the bank default cases, in accordance with the proposed laws based on factual and realist economic, financial, technical and legal analyses, instead of leaving the public money on mere SBP guidelines and the discretion of the banks.

M. Abbas Raza

The writer is former Chairman National Tariff Commission and ex-Economic Consultant NAB.