Loan write-offs

Bank loan write-offs in Pakistan have a bad name – and for very good reason. While there are entirely legitimate loan write-offs, such as when farmers lose their entire crops to bad weather or when a company fails, in the public consciousness they are associated with the elite using their influence to get massive loans they have no intention of repaying. There are two different types of loan write-offs, those of loans taken from private banks and those from government-owned banks like the National Bank of Pakistan or the Bank of Punjab. Cracking down on the latter would be relatively simple – if the political will existed. All loans that are written off by government-owned banks must be approved by the State Bank of Pakistan, all of whose officers are meant to be independent. Were that truly the case, these officials would not allow loans to be written off just because of the status and power of the loanee and could even refuse to sanction the loan in the first place. The former case is more difficult to control since a private bank can write off a loan with the approval of its board of directors and there is little the government can do about it since the SBP rubberstamps what the private banks want. Private banks now seem to have accounted for such loan write-offs as the cost of doing business in the country.

In 2013, the Supreme Court of Pakistan conducted an investigation and released a report revealing that Rs256 billion worth of loans had been written off since 1971 under a scheme introduced by Pervez Musharraf. This figure on its own doesn’t tell us too much since there is no way of knowing how many of these loans were written off for legitimate reasons and how many because of political pressure. We can extrapolate that a large proportion of these loans were written off because of political pressure because that is what the Musharraf scheme intended to do. Banks were given incentives to write off loans of companies that had not shown any profit for three consecutive years. Since gimmicky accounting is an art form in this country, many politically-connected industrialists, politicians and other public officials had their loans written off. The damage done to the country’s economy extends beyond just the amount of the loans since this money tends to be taken out of Pakistan so that the individuals can show they do not have the money to repay their loan. On top of that, shell companies are formed for the sole purpose of securing the loan; these companies end up producing nothing. Although most people know these facts, nothing much is done about this issue since it works to the benefit of many in the political world.