1980-2008: Chronology of govt packages for industrial revival, loan write-off — II

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.

To be continued

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