Banking like any other business involves risk taking and at times owing to economic shocks, natural calamity or poor business judgment situations arise where assets become sour. Until and unless there is some personal motive of the banker or some political pressure is involved loan write off is the norm for banks across the world.
Pakistani public and private banks are not exceptions the norm. In response to a financial meltdown, they either write off loans or waive off charges that accumulate over a period of non-payment, whereas cases of wilful defaulters are referred to NAB. However, not all write-offs are illegitimate. There are legitimate business and individual borrowers who become victims to erratic government policies, business downturn or changes in regulatory environment. Due to the radical changes in circumstance, the debtor is unable pay of the loan.
Both the debtor and the creditor are better off, if they make timely changes to the structure and make it a performing loan. For that creditors (banks) have to either waive off charges which are mostly mark up that accumulate over a period that the loan was not performing. Otherwise they have to write-off the loan from the balance sheet. Hence, the asset which was sour before is upgraded to a performing asset. The debtor is now in a position to operate the unit and in certain situations even the debtor is provided with working capital which is subject to credit satisfaction and collateral coverage.
A common misconception about loan write offs is that once the accounting entry recognizes that a loan has become uncollectable ,the bank or the creditor cannot recover the liabilities; even if the borrower’s assets surface at any time in point later.
Another important misconception regarding loan write off is the difference between the collateral value and outstanding liabilities. Usually the gestation period of Industry and Home financing is 5 years, and if the loan becomes non-performing the mark up gets added which increases the amount of outstanding liabilities. In case of an industrial unit the collateral value keeps on receding because the unit is shut down. If banks aren’t allowed to write off loans then NPLs would add up to their accumulated losses, diminishing the bank’s capital. Then usually the Federal Government or the bank has to mediate and inject capital to make up for the shortfall in capital adequacy.
Recently the Supreme Court issued notices to 222 companies for having their loans illegally written off from 1971 to 2009. A statement issued by the Apex court read,’As per report of the Commission constituted by this Court, action against 222 individuals/companies has been recommended on account of the fact that the loans were not written-off in accordance with law’.
Any kind of judicial jingoism on the part of Supreme Court of Pakistan in policy matters is likely to seriously jolt the already crumbling economy of Pakistan, subjecting it to international penalties as seen in the RekoDiq case where the World Bank tribunal imposed a hefty penalty
I went to see the Former Attorney General of Pakistan Aushter Ausaf and sought his views on Loan write offs. During our conversation, Mr.Auster Ausaf explained, “Loan write-off is given on multiple grounds; one such ground is of commercial consideration. For instance there is an entrepreneur whose project is based on Agricultural products and a flood which is a natural calamity inundates his factory. How can we hold that entrepreneur responsible for that? Banks these days especially Islamic banks don’t give loans, they are business partners. So what happens in situations like this, a banking committee is formed to re-evaluate and restructure loan for the debtor. The debtor is provided with another loan, which he usually has to seek from another creditor. So as to enable the debtor to acquire more loans and to further do business his loan is written off. After the loan is written off the debtors name is noted in CBI’s record, changing from red to black, making him eligible to have a Letter of Credit (which is basically a letter from importer’s bank guaranteeing that in case buyer is unable to make payment to the seller the bank will make the payment). The other option is to enforce deadweight debt which would be a useless practice because that way you can’t recover anything from the debtor. Therefore, in such circumstances loan write off is normal phenomenon.”
The Attorney General went on to say that “There are other kinds of write offs as well where either debtor and banker are involved, or there is a situation in which political influence is used to write a loan off. Such write offs are illegal and must be dealt with. The Supreme Court formed a commission regarding this matter, which unearthed loan write offs amounting to 16 Billion. 7 Billion rupees were written off legitimately where as the remaining 9 billion are suspect to political influence. Furthermore, it is up to financial and banking experts to advise the Chief Justice on how to deal with such situations. Out of 222, 160 write offs belong to the textile sector which has faced a lot of trouble recently.
Therefore, it is safe to declare that loan write-offs and waivers are an integral part of banking business but what adequate policy measures, regulatory and incentive structures should be incorporated to prevent major defaults. Any kind of judicial jingoism on the part of Supreme Court of Pakistan in policy matters is likely to seriously jolt the already crumbling economy of Pakistan, subjecting it to international penalties as seen in the Reko Diq case where the World Bank tribunal imposed a hefty penalty.
The writer is a Political Activist based in Lahore. He is currently working as a Market Research Analyst for a German Engineering Consultancy. He can be reached at [email protected] Twitter: @beingkamil
Published in Daily Times, August 26th 2018.