Commission may probe loans written off in Musharraf era

ISLAMABAD: The proposed Inquiry Commission has been given mandate to probe loan write-offs, paving the way for surfacing State Bank of Pakistan (SBP) circular BPD-29 issued in 2002 during Musharraf regime on the basis of which guidelines were given to banks for writing off billions of rupees loans to potential defaulters.

The Commission could ascertain whether these loans were written off on justified grounds or political clout was used to benefit ruling and influential classes of the society.

In background discussions, SBP and Finance Ministry high-ups argued that the loans were written off in the aftermath of decade of 90s when the banks were largely privatised and the central bank did not have much role for providing ‘relief’ to political class. Before 90s, the role of governments was too much for demonstrating influence to ensure loan write offs for politicians and those businessmen linked with influential. 

The SBP guidelines for circular 29 were finalised after extensive consultation with the banks/DFIs and the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) during the Musharraf regime when the bankers wanted to clean their balance sheet with the understanding that they were unable to recover these amounts.

These guidelines were developed to settle the cases of circumstantial defaulters. Borrowers against whom criminal cases were pending and whose cases had been referred to NAB were rendered ineligible for settlement under BPD-29.

The guidelines required banks/DFIs to design their own indigenous schemes with the approval of their respective Board of Directors (BoD) within the broad purview of SBP’s guidelines.

Before the approval of the write-offs amounting to Rs2.5 million and above each case had to be audited by the internal/external auditors of the financial institution. The borrowers could avail the write-off/waiver of the amount outstanding only after repaying the settlement amount agreed.  In case of failure to comply with the terms of the settlement agreement, the borrowers were not eligible for any concession/ benefit in the shape of a write-off.

During consultations on the implementation of BPD-29 the banks expressed their preference for a mandatory /uniform system/mechanism for settlement. Therefore, to resolve disputes between borrowers and banks/ DFIs the SBP constituted an independent committee under the chairmanship of a retired senior banker, with representation from FPCCI/APTMA and PBA with two members each. 

Only the Non Performing Loans (NPLs) which were classified as “Loss” for 3 years or more were eligible for settlement under the Scheme. In the event of a dispute  the cases were referred to SBP for on-site inspection to assess eligibility. 

But there is a criticism on BPD-29 that It provided relief to a certain class of borrowers/defaulters while denying the same relief to other class of borrowers/defaulters (there was a specific eligibility criteria i.e. the loan had to be in default for a certain time period on 30-06-2002 to be eligible to avail the benefit of the Scheme, thus eliminating those defaulters who did not meet the eligibility criteria). 

The circular 29 was discriminatory since it only benefited defaulters (violators of law) and no benefit was extended to borrowers who were not defaulters.

On this criticism, the SBP high-ups argued that it is an established principle that discrimination arises where recourse has been made to different standards for equally placed persons and parties while examining evidence of transparency and uniform application of a circular to all categories of borrowers. 

However, in case of BPD-29 the same standards were applied to equally placed persons without any discrimination. A number of Court decisions can be quoted in this regard. 

The banks cannot write off or be directed to write off performing/regular loans or loans which are not in default. Such a write-off would be against elementary principles and the rationale for write- offs by banks. In no jurisdiction do banks write off non-defaulting loans or are directed by any competent authority to do so.

Furthermore, a borrower who develops a good credit history is rewarded in future with loans on more favorable terms and conditions.

There was another criticism that the BPD-29 was issued in the form of guidelines and banks were advised to develop their own incentive schemes, an independent committee was formed for resolution of disputes between bank and borrowers and the decisions of the Committee were made mandatory. 

The objection also rose that why was settlement allowed on 75% of FSV (forced sale value) in cases where the FSV was more than the outstanding amount? The SBP high ups responded that the reasons underlying the relief built into this circular need to be explained to clear the confusion and misunderstanding about it being an overly generous incentive for defaulters. 

The reduction of 25% in the FSV was made because: The collaterals against some loans had been inflated in the records to justify the amount advanced. In most cases the values of the assets furnished as securities had been assessed some years ago, whereas technological development had rendered the plant and machinery and production processes out-dated.

It is simply impossible to realise the declared FSV of an asset if large volumes of similar assets of a host of defaulters are disposed of simultaneously in the market.