Loan write-offs by financial institutions occasionally make the news as mutual accusations among the beneficiaries. Surprisingly, there is no systematic comprehensive study of this sensitive and crucial issue on a continuing basis, even though the data is no problem.

Scheduled banks are required by law to list individually large debt write-offs of Rs0.5 million and above. This is given as an annexure to their annual reports.

The State Bank publishes in its Annual Banking Statistics the financial position of scheduled banks, which, among other things, indicates the provisions\ bad debts written off directly.

Scheduled Bank’s Provisions Debt write-off: This data does not show separately the amount of actual debt written-off.

Loan write-off by five major commercial banks during calendar year( CY) 05 was discussed in an earlier article (EBR, June7, 06) The process of loan write-offs not only continued in CY 06, but assumed a much larger proportion. As a result, the amount of loan write-offs and other financial relief by five major commercial banks, namely Allied Bank, Habib Bank, MCB, NBP and UBL increased to Rs29.5 billion during CY 06 from Rs22.3 billion in the preceding year, or by 32.3 per cent.

The striking discrepancy between the provisions\bad debt written off directly by all scheduled banks and the loan write-off by the five major banks may be noted.

The most intriguing aspect of the situation is that the amount written-off is 52.8 per cent more than the amount due. The difference is more pronounced in case of individual banks. This was due to “Other Financial Relief Provided”, apart from principal and markup\interest. The nature of relief is not indicated, even though this was 46.8 per cent of the total write-offs and 71.5 per cent of the amount due at the beginning of the year.

As to the loan size of the write-offs, those of Rs100-499 million each were 41in number worth Rs7.5 billion. Loans in the range of Rs500-999 million were two worth Rs1.3 billion. The loans of Rs1 billion or more were four worth Rs9.4 billion representing 31.9 per cent of the total write-off. The highest individual loan was of Rs5.3 billion. Some borrowers got their loans written-off from more than one bank. For instance, National Motors\Ghandara had this benefit of Rs259 million from HBL and Rs123 million from UBL.

Major Banks’ loan write-off during CY 2006

The largest increase was recorded by UBL from Rs4.8 billion in CY 05 to Rs13.4 billion in CY 06 while the number of loans went up from 180 to 386. The most significant feature is the sharp increase in the loans to non-residents in Middle East, where the number of loans was 197 as compared with 42 in the preceding year. They were worth Rs9.7 billion, up from Rs0.8 billion in the preceding year representing 72.4 per cent of the loans by the bank and 32.9 per cent of the total for the major banks. The biggest write–off was Rs5.3 billion for Euro Gulf Enterprise, Dubai individually owned by Abdul Khalique Chagla. His liability to the bank was Rs342.2 million as principal, and Rs1.1 million as markup\interest. Against this, the amount, written-off was Rs342.2 billion as principal. Markup\interest was shown nil but other relief provided was massive Rs5.0 billion.

Other important cases were Muhammad Murad Ibrahim, Bahrain, Rs748 million; Al Jamea & Al Qaisi Trading Est., Manama, Rs462 million; Solo Industries, Sharjah, Rs 421 million; Al Nasi Trading Org., Doha, Rs250 million; Bulbul Trading Est. Dubai, Rs 224.3 million and Unique Textile and Garments Industry, Fujairaha, Rs153.0 million. Among Pakistani clients of the bank, the largest write-off was Rs1.1 billion for Redco Textile Ltd. Rawat.

Significantly enough, among the beneficiaries were Karachi Development Authority and Bankers Equity. The KDA owed Rs104 million as principal and Rs5.3 million as interest\markup but the amount written-off was Rs127 million, all against other financial relief. The liability of Bankers’ Equity was Rs284.2 million in principal and Rs156 million in interest\markup. The amount written-off was Rs347 million, all under other financial relief. . . . The banks indicate the overall figure of write-off of small loans less than Rs0.5 million. This is only to the extent of principal. In this, they were led by HBL with Rs2.1 billion as compared with the comparable position of Rs2.8 billion for larger loans, up from Rs879 million in the previous year. The position of other banks during CY06 was NBP, Rs23 million; ABL, Rs510 million; MCB, Rs5.million: and UBL, Rs299 million.

In addition to the major commercial banks, ZTBL and other smaller commercial banks also wrote off loans. Though small individually, they would collectively, due to their number, add up to a tidy sum The ZTBL alone wrote-off Rs650 million in CY06 as against Rs1,332 million a year earlier.

Loan write-off by financial institutions is not normal but there is a big difference between this course in the rest of the world and in Pakistan. In other countries, this extreme step is subject to a very rigorous legal and administrative procedure and ends up in extinction of the business concern overseen by an official liquidator

What makes Pakistan perhaps unique is that there is no bankruptcy law and the authority to write-off a loan rests with the financial institutions who exercise it by simply assuring themselves that the loan is not recoverable. The beneficiaries are often quite thriving and the write-off only adds to their net worth..

The State Bank, the prime guardian of the country’s financial system, is expected to take due cognizance of this problem. However, it has been content to lay down the process for loan write-off. The non-performing loans are discussed by the State Bank but that too in terms of changes in numbers without any analysis of the factor involved. The mention of subsequent more important stages of defaults and loan write-offs are conspicuous by their absence. The only reference one can, at best, find in the State Bank publications is that in the Third Quarterly Report on the State of the Economy FY 07 is this foot note, “ 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 FY06.” This was given as one of the reasons for the slow growth of bank credit to the private sector. The latest Annual Report of the Bank for FY 07 mentions, “Specifically, the reduction in NPLs constituted mainly of cash recoveries and upgraded NPLs during FY 07 compared with FY 06 when write-offs constituted most of the reduction.”

It is a sad commentary on the system of loan sanction by banks, their subsequent monitoring, recovery and supervision of the whole process by the State Bank as the supervisory and regulatory authority. The amount of loan write-offs is large enough to seriously undermine the soundness of the financial system, distort the monetary picture, particularly the actual use of bank credit for real economic activity and frustrate any effort for a more equitable distribution of income and wealth for poverty alleviation. This makes a strong case for a more proactive approach by the central bank

The State Bank should exercise its influence to expedite the much needed bankruptcy law said to be on the anvil. To begin with, the Bank should start regularly releasing, in line with NPLs, the data on loan default and write-offs, large as well as small , and explicitly show the three elements as adjustment in the causative analysis of changes in monetary assets. It will be a great national service if the State Bank issues a white paper giving a detailed objective analysis of the problem since the very beginning of publication of the data by the banks as the legal requirement.

The problem of write-off of loans by financial institution needs to be taken more seriously as it has the potential to undermine public confidence in financial institutions and this will have very serious implications for the economy and make economic management difficult.