ISLAMABAD, March 31: The State Bank told the Supreme Court on Monday that commercial loans of about Rs54 billion owed by businesses run by top leaders and other influential people were quietly written off in October 2002 under a scheme to “clean up non-performing loans” that had surpassed Rs231 billion.

In a reply comprising about 1,400 pages, the SBP contended that its guidelines devised in 2002 under Section 33(b) of the Banking Companies Ordinance, 1962, were aimed at providing an opportunity to the borrowers to settle their liabilities on flexible terms and, wherever possible, help them in reviving their businesses or sick units.

A bench comprising Justice Mohammad Nawaz Abbasi, Justice Mian Hamid Farooq and Justice Mohammad Farrukh Mahmud had taken suo motu notice of a press report that the SBP had approved the writing off of Rs54.6 billion loans of different banks.

“We will also look into why widows, orphans, small borrowers or the loanees of the House Building Finance Corporation (HBFC) are sent to jails on default but large defaulters are provided relief for misappropriating public money,” observed Justice Abbasi.

“Fugitives are always put at the exalted place, but honest borrowers are subjected to strict implementation of law,” Advocate Hafeez Pirzada said, adding that honest and law abiding people should not be discriminated against to favour ‘crooks’.

Attorney-General Malik Mohammad Qayyum also asked about the fault of honest borrowers who were always punished for defaults.

The court asked Advocates Pirzada and S.M. Zafar to assist it in the case as amici curaie (friends of the court) but rejected a request of Indus Valley Oil Extraction Company, Karachi, to implead it as a party.

The bench adjourned the case for April 10.

The SBP contended that one of the major problems faced by the banking industry was the huge volume of non-performing loans, the stock of which had accumulated to Rs231 billion as of June 2002, largely because of continuous accrual of mark-up on the principal amounts that had been in default. The colossal level of non-performing loans had adversely affected the financial health of banks and DFIs, affecting their profitability and creating hurdles in the process of restructuring or privatisation.

Balance-sheets of banks, especially large banks, reflected a poor financial condition as a majority of the cases had been in default for over seven years and no significant recoveries had been made despite several measures having been taken for the purpose, it said.

Recovery efforts through legal channels had also failed to show significant results, it said, adding that the accumulating burden was not only making the operations of the banks unsustainable but also unnecessarily inflating their assets.

Based on a secret report to the Public Accounts Committee (PAC) of the National Assembly, the press report had suggested that 50,427 defaulters, including political leaders, civil and military business concerns and business tycoons of Karachi, Lahore and other cities were favoured through the scheme.

It had named former chief ministers of two provinces as beneficiaries of the scheme as their families having big business concerns like sugar mills and ghee mills, respectively, also got a waiver.

Some foreign firms and multinational companies and a private bus service operating from Lahore to different cities in Punjab were also extended the facility.

Soon after the October 2002 elections, the then finance minister Shaukat Aziz and his team at the SBP approved the loan write-off scheme after succumbing to pressure from certain top leaders of the ruling party to ease financial burden on their business concerns, it said.

The SBP issued an incentive scheme to the banks and DFIs in October 2002 for waiving the non-performing loans of organisations showing ‘loss’ for three years or more. Three categories were made to deal with the cases: category A of loans up to Rs500,000, category B from Rs500,000 to Rs2.5 million and category C of non-performing loans of more than Rs2.5 million.

The big business concerns exploited the third category to get billions of rupees outstanding against them written off.

On the other hand, the banks and DFIs were asked to recover maximum possible amount to settle loans falling under categories B and C through forced sale of available assets, the report said.

The purpose of the scheme was stated to be to clean the balance-sheets of the banks and DFIs.

As a result of the scheme, the banks and DFIs settled cases involving an outstanding amount of Rs80.656 billion.