Every economy undergoes various ups and downs and business cycles caused by many internal and external factors affecting businesses in general and some in particular. Pakistan in its history of 71 years has seen many such upheavals starting with Korean War and subsequent devaluation. There was another major shock resulting of dismemberment of Pakistan in 1971 affecting the businesses owned by West Pakistan Businessmen and those from West Pakistan for whom East Pakistan was a captive market. Immediately thereafter in December 1971, there was Nationalization of ten basic Industries including shipping, heavy chemicals, iron and steel, oil refineries, heavy engineering, heavy electrical, petrochemicals, cement and electric utilities. Again on January 1974, government announced nationalization of Banks and Insurance companies. Once again on July 1, 1976 government announced the nationalization of cotton ginning, rice husking and flourmills. Besides the foregoing the reforms in health sector introduced generic formula system abolishing branded drugs production, nationalization of schools and colleges including higher education engineering colleges e.g., Dawood College for Engineering, Karachi. This period also witnessed abolishing the multiple exchange rate system, which provided for varying rates of Bonus Vouchers freely tradable at the stock markets for the importers to meet their requirements and from official rate of exchange of Rs.4.75 per US Dollar to Rs.11.00 per US Dollar. The above brought about a sea change in overall business climate and morale and almost ruined many businesses and businessmen without any recourse.
After change of regime and imposition of Martial law in 1977, the atmosphere saw a change in different way and government became more interactive with businessmen.
In circa 1980, there was a major cotton crop failure. As per my vague memory, the normal cotton crop, which used to produce about 4 million bales of cotton it dropped to 2.2 million bales. Economist say that if there is a 5% over supply of a commodity the prices crash, similarly if there were 5% short supply, the prices sky rocket what to talk of 45% drop in cotton output. The cotton prices saw a meteoric rise. Textile Industry, which was 70% of the country’s industry, went into a tailspin. The industry was still struggling with the negative effects of devaluation, which had booked their foreign currency liabilities at Rs.4.75 per Dollar or equivalent in the other currencies had to revise their bank liabilities. A few survived and government came to the rescue in a half-hearted manner and set up a committee under the stewardship of then Secretary Ministry of Finance, Mr. H. U. Beg, famously known as the beg Committee. In the final report as far as my memory goes the help were to be given only to those industries, which were willing for a management change.
Following the above stated cotton crisis, the background of various packages and reliefs for delinquent loan accounts provided by Federal Government directly or through SBP.
A decade or so later, during the caretaker administration of Mr. Moeen Qureshi as Prime Minister (August 1993 to October 1993) he was briefed that there was an infected portfolio of Rs.80 Billion and if by some coercive action the loan could be recovered and the economy will take an upward turn. Government also announced that all those bank officers who were involved in the approval process would not be spared. The government came out with a novel idea of publishing the names of all defaulting companies and names of their Boards of Directors/ partners/ proprietors. This was the most drastic and unpleasant move by any government ever that shattered the business and investment climate and dishonoured the Pakistan’s business community world over. This was done and all newspapers were full of supplements with such lists and names. The defaulting community was also threatened of raid on their businesses and residences to acquire there precious belongings e.g., household furniture, carpets, jewelry, paintings and automobiles of their families and dependents. This scheme however failed to achieve any meaningful results. The entire business community was ridiculed and demoralized affecting investment climate adversely.
Thereafter during the regime of Benazir Bhutto (Nov.1993-1997) as Prime Minister, she announced measures to recover the defaulted Loans. The trade bodies engaged with the government and as a result of prolonged parleys a scheme was announce to restructure the defaulted loans. SBP and Pakistan Banking Council formed committees for each Bank comprising bankers, representatives nominated from Federation of Pakistan Chambers of commerce and Industry and a Chartered Accountant. These measures did have a positive effect to some extent but write offs were not allowed.
During the Government of Caretaker Prime Minister Malik Mairaj Khalid (November 1996 to February 1997) by an ordinance Federal Govt. announced the establishment of Resolution Trust Corporation to take over from the commercial banks the assets of companies/ firms, which were defaulting the bank loans. This couldn’t take off at all.
Again, during the Government of Nawaz Sharif (1997-1999) the Prime Minister announced his resolve that his Government will ensure recovery of all defaulted loans and punish the defaulters even if any new laws need to be introduced or constitution needed any amendment. Government announced that all defaulters pay up by 16th of March 1998 with principal amount plus 5% in lieu of accumulated mark-up or face prosecution. Again the trade bodies engaged the government and told the Prime Minister that at that time the default portfolio in the most advanced economies such as Japan amounted to $1.0 trillion, which was 1/3rd of the Japanese Annual GDP. Also business failures and Bank defaults in free economies were matters of routine and part of the risks involved in lending. There are foreclosures or restructuring/ rescheduling as normal practices and market based economies have their own dynamics that deal with such routine mishaps. It never stops the wheels of economy and moves on. Again, through SBP resolution committees were formed on the same lines as done during Benazir Bhutto Administration and substantial advances were made and restructuring/ rescheduling carried out.
In October 1999, Army Chief General Pervez Musharraf took the reins of the government and Lt. General Syed Amjad was appointed as Chairman NAB. Similarly Army Serving Major Generals serving senior officers headed all provincial NAB’s. It was announced by the government that all defaulters must pay up by 15th of November 1999 or face NAB action. It was the most formidable formation the business community was faced with. Within that month a new National Accountability Ordinance was promulgated on 23rd November 1999. All of a sudden, on a very cold evening in the last week of November 1999, some 27 top most prominent businessmen of Pakistan, mostly from Punjab were arrested from their residences in their pajamas without giving them a chance to pick up their clothing, woollies, toiletries, and medicines. They were taken to a police station in Lahore and stuffed 4 each in 12’X12’ open air cells like cages of steel rods. There was one “L” shaped toilet with two sides open with oriental WC without roof. There were straw mats on the floor for sitting and sleeping and no pillows, blankets or quilts in the freezing cold at night. No family, friends or employees were allowed to meet and what to talk of quality of food supply and water. This carried on till first week of December 1999 when a group of businessmen managed to see the CEO General Pervez Musharraf and wailed before him and described the state of the apprehended businessmen and that all business activity and investment in the country was at a halt. The whole business community was in panic and most of them must have sworn never to borrow from banks ever again because there is always a chance of businesses to fail and if the consequences of un-willful default are to be so ugly then better do something else. People set up industries not for themselves but for their families and generations. Hardly anyone would undertake these ventures for cheating or fraud. Government relented a bit but coercive handling by NAB still continued till the end of the one way or the other till regime change without much success. Thereafter the government set up a Committee for the revival of Sick Units (CRSIU) and authorized to restructure Non Performing Portfolios and revive the sick units found to be financially viable. Government also created an asset resolution framework in the form of Corporate and Industrial Restructuring Corporation (CIRC). This corporation were to acquire the bad loans from Nationalized banks at a discount and auction them publicly thus taking away the assets from existing owners and repaying to the banks in the form of 5 year bonds. The overall private sector advances meanwhile as a result of all above measures and change of credit culture attributable to risk aversion on the part of businessmen and bankers alike.
In March 2001, the CEO General Pervez Musharraf approved the sale of 868 sick units through open public auctions. These sick units were identified by CIRC in consultations with concerned banks as these units were closed for years and owed Rs.107 billion to the nationalized commercial banks. Under this scheme CIRC were to take over the assets of sick companies owned by banks and financial institutions at their book value (Total debt minus provisions) and in return the government were to issue bonds to these banks at the time of privatization of the units after three years of take-over. The bonds at the book value of units were to have 5-year maturity period with a government guarantee at a profit fixed by the federal government from time to time in accordance with State Bank rates.
Initially, the CIRC had selected 101 cases for the process from six banks and financial institutions, namely the National Bank of Pakistan (NBP), United Bank Limited (UBL), Habib Bank Limited (HBL), Industrial Development Bank of Pakistan (IDBP), National Development Finance (HBL), Industrial Development of Pakistan (IDBP), National Development Finance Corporation (NDFC) and Agriculture Development Bank of Pakistan (ADBP). The CIRC became operational after promulgation of two ordinances, in September and November 2000. Under the ordinances the original borrowers were given the chance to settle their dues within 30 days or otherwise the CIRC starts executing cases through high courts.
The strategy to auction the irretrievable sick industrial units having been approved by the Chief Executive was seen as a last ditch attempt by the government to solve the twin problem of sick industries and non-performing loans of the NCBs/DFIs which constantly threatened their operational liability. It appeared that the creditor banks and DFIs have not been able individually to change the management of the sick units owing sizable amounts of loans through open auction in the market. This may have been due to partly for the fact that the task required concerted action by the management of the banks and that would have destabilized their daily working as the number of defaulting units has been increasing rapidly in each bank. In this context creation of a single specialized institution like the CIRC was considered the right step to exclusively attend to the task.
From slow pace of work assigned to CIRC it appeared that not many buyers/investors both domestic and foreign were coming forward as was initially expected. It was hoped that some overseas Pakistanis may enter the scene to buy suitable enterprises from among the sick units Additionally, foreign investors from the Middle East countries may also be interested in exploring the opportunities to make investments in relatively medium scale amounts. These expectations, however, did not prove correct.
The Committee for Revival of Sick Industrial Units (CRSIU) had restructured loans worth Rs.44.1 billion and helped revive 163 sick units by allowing waivers and write-offs.
Despite the above measures, there still remained age-old loans of the Banks, which had not been serviced for at least five years and fell into loss category. There being very low probability that these loans could be recovered as with the passage of time the value of their collateral was, by and large, eroding while mark-up on outstanding but non-performing loans kept on adding. This led to a situation where the units were closed but their outstanding bank liabilities were increasing every day .The banks thus were inflating their balance sheets applying highest rate of mark-up and penalties, which could never be recovered. The protracted and cumbersome legal process and prolonged litigation for execution of decrees had been a major stumbling block in the recovery of loans.
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:-
- Bona fide business loss necessitating write-off.
- Change in Government policies affecting business.
- Liquidation of the company by order of the Court.
- Settled by National Accountability Bureau or under settlement cases.
- Gap between the amounts repaid and availed being insignificant or principal outstanding recovered.
- 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.
By: Wajid Jawad