The State Bank has been indicating the position of non- performing loans but has been indifferent to the more serious problem of loan write offs by banks. More recently, it has dealt with it but in a very cursory manner.

For the first time, the Third Quarterly Report FY 07 on the State of Pakistan’s Economy carried the following footnote: “In specific terms, loans amounting to Rs16.1 billion were written off during July March FY 07 by commercial banks compared with Rs6.9 billion in the same period of FY 06.” The first issue of Financial Stability Review, 2006 by the State Bank says in the context of non-performing loans (NPLs): “Changes in the level of NPLs indicate that the banking sector has written off NPLs worth Rs.42.5 billion during CY 06 compared to Rs17.1 billion during CY 05.”

However, the annual report of the bank for FY 07 is silent on the issue.

The figures of write offs of Rs17.1 billion in CY 05 and Rs42 5 billion in CY 06 do not make any sense. It has already been on record that the five major banks alone had written off loans of Rs0.5 million and above, each worth. Rs22.3 billion in CY 05 and Rs29.5 billion in CY 06, as per the annexure to their annual reports. Even as such, the central bank’s figures point to an alarming exponential rate of increase.

Under Sub Section (3) of Section 33A of the Banking Companies Ordinance, 1962, banks are required to provide details of large sized loans of Rs0.5 million and above, written off by them. The information is given in Annexure 11 of their annual reports. Unlike previous years, Habib Bank has not released this information. It is thus not possible to construct a complete picture of the five major banks. However, the total figure of Habib Bank is given in the financial statement. which is used here. The amount written off by the bank during CY 07 was Rs3.2 billion as against Rs5.6 billion in the previous year.

During CY 07, these banks continued to write off big loans. The written off loans of Rs05 million and above worth Rs15.1 billion were written off during CY 07 as compared with Rs29.5 billion in the ‘preceding year. The fall in the total amount written off was mainly due to UBL whose written off amount was down to Rs6.8 billion from Rs13.4 billion.. The largest individual written off amount was Rs2.4. billion by NBP for Yunus Habib Accounts (69 accounts). Their liability was Rs2.1 billion for principal, Rs1.6 billion for interest\markup and nothing against others. The amount actually written off was Rs0.8 billion by way of principal, It was nil against markup\interest but was Rs1.6 billion as “Other Financial Relief\Waiver Provided”.

The most intriguing feature of the write off is that amount was often much more than the amount due. Here is a typical case of UBL. For the bank as a whole, the amount of written off loans was Rs6.8 billion against the liability of Rs3.7 billion, an excess was of Rs3.1 billion. This was under “Others”, which in this case rose from Rs0.009 million to Rs4.1 billion.

Quite a mind boggling is the case of Synthetic Leather Industries, Karachi, whose total liability was Rs295.5 million, consisting of principal and markup\interest but nothing as “Others.” Against this, the amount written off was Rs620.6 million, of which”Others” claimed as much as Rs420.9 million. Another noteworthy feature of UBL lending was that, like last year; a good part of the write off was to the clients who were residing in the Middle East. Those whose addresses were given were 54 with the written off amount of Rs3.1 billion against the liability of Rs1.5 billion. There were 205 cases whose only names were indicated without any address. They sound like residents of Middle East and accounted for Rs245 million as against their liability of Rs232 million. There were six cases in the US to claim Rs475 million as against the liability of Rs91 million.

The most interesting case in the US was that of NLS Alico International (USA) Inc. 350, 5th avenue, Suite 1014, NY, New York whose liability on account of principal was Rs66.8 million which was written off. In addition,” Other financial Relief Provided” was Rs211.7 million making the amount written off Rs278.6 million, or four times the liability.

Bank advances to public sector enterprises are secured by government guarantee, which can easily be enforced in case of default. Nevertheless, some times, banks prefer to write ff the loan. The cases of Punjab Road Transport and KDA are already on record. During the year, Rs.538.3 million were written off for The Punjab Cooperative Liquidation Board by UBL against their total liability of Rs262.8 billion, or more than twice the liability. Of the written off amount, Rs336.2 billion was “Other Financial Relief Provided” whereas the liability under “ Others” was nil.

Loan write off is too serious a business to be left to the sweet will of banks. The State Bank should wake up and take a serious notice of the havoc being played by banks and do some thing to restore sanity. It has to take due cognisance of it for many very cogent reasons. It reflects on the health of financial system, supervisory and regulatory role of the central bank, rich making a mockery of for poverty alleviation, and distorts the picture of actual use of credit by the private sector for real economic activity.

For effective policy formulation, the bank must know whether the problem is unit specific or of sectoral and general nature. The need for an early promulgation of a bankruptcy law cannot be over emphasised. The State Bank should use its influence with government to implement it. Meanwhile, it should also give up its benign neglect and regularly make public a detailed analysis of loan write offs. Its analysis of the causative factors of changes in money supply should indicate the behaviour of NPLs, loan write off and the actual use of credit for real economic activity by the private sector separately.