The federal cabinet, which is scheduled to meet on Friday (today) with Prime Minister Syed Yousaf Raza Gilani in the chair will decide the fate of sick Industrial Development Bank of Pakistan (IDBP) as a high level committee has failed to identify those who caused losses to the bank.
The cabinet in its meeting of January 6, 2010 decided to constitute a committee to fix responsibility on those who caused losses to IDBP through of imprudent lending and written-off loans. Accordingly, a committee was constituted comprising Muhammad Akbar Achakzai, Sr. JS, M/o Law and Justice (resigned before finalisation of the report), Arif Hanif, Additional Director, FIA, Karachi Zone, Sajjad Ahmed, Joint Director, SBP, Kalimur Rehman, President, JS Bank Limited and Muhammad Yousuf Adil, Chartered Accountant, and M/s Yousuf Adil Saleem & Co.
The State Bank of Pakistan as convenor of the committee has submitted its report. The focus of the report is mainly on the write offs under various categories including incentives and settlement schemes introduced by the SBP and the Federal Government from time to time some of which were initiated for the revival of sick industries.
The committee selected 38 out of 647 write-off cases amounting to Rs 8 billion that cover 58% of written-off amount during the period 1971-2009. Out of the selected 38 cases 15 were settled through Corporate and Industrial Restructuring Corporation. The committee has identified the following reasons resulting into bad loans and substantial write offs:
(i) some times a business that is viable and capable of generating a market return for the investors in the future is found over burdened with debt on account of the earlier cash flow projections having to be revised downwards in view of changed market circumstances. In addition, the non business assets of the borrower or the guarantors might not be adequate to discharge the defaulted liabilities of the borrower and enforcement of the security interest available would result in the closure of the business. In such circumstances a creditor institution may agree to reduce the liabilities of the debtors so as to keep the business alive. Such a "write-down" is considered to be in the interest of the creditors, the debtors as well as the economy in general although often it is difficult to justify it;
(ii) a second category of write offs arises on account of the fact that court decrees allowed are sometimes less than the amount claimed by the financial institutions as receivables in their books which result in write offs. However, at present there is no frequent divergence between the commercial financial cost of a loan to the financial institutions and what are legally recoverable through the Courts. Similarly, in some cases court decrees were issued for the full amount of the outstanding loan liability plus mark up etc but the assets of the borrowers and/or guarantors were not enough to realise the proceeds for full settlement, especially where the assets were auctioned;
(iii) a third category of write off cases is that in which write offs were allowed in accordance with some framework authorised by the Federal Government and/or the State Bank of Pakistan. Such steps were necessitated at some point in time due to accumulation of a high quantum of old NPLs on the books of the banks;
(iv) a fourth category of write-offs resulted from the loan liability and debt servicing liability ballooning because of the devaluation of the Pakistan Rupee versus currency of the loan and accounting policy of IDBP, rendering debt servicing unviable, if not impossible, from the normal cash flows of the business. This was probably the most important cause of the IDBP loans going bad and resulting in write-offs;
(v) another significant reason for loans going bad were the changes in government policies, eg big incentives were given to investors to set up industries in the Gadoon Amazai Industrial Estate near Tarbela, and soon afterwards the incentives were either reduced or withdrawn with the change in the Government, leading to most of the industries set up in such industrial areas becoming unviable.
Based on study of 21 cases, the committee identified some key reasons for business failure and related non-payment of loans which ultimately hit IDBP with huge write-offs. It is pertinent to mention here that project financing generally involves some waivers /write-offs especially when there is a social cause behind that project. Major causes of default by borrowers, identified from the review of the selected cases, are as follows:
(i) increase in the prices of imported raw materials in the international market, continuous devaluation of Pakistan Rupee, non-availability of foreign exchange cover, custom duties and taxes levied by the government on the inputs products resulted in the higher cost of production and the products became uncompetitive in the market;
(ii) sometimes late shipment of imported machinery resulted in delays in the completion of the projects /COD, disrupting the projected cash flow of the companies and causing financial problems;
(iii) non availability of working capital finance from commercial banks resulted in projects running into severe cash flow problems and seriously affecting their viability;
(iv) availability of smuggled low cost products in abundance, and in particular the existence of Afghan Transit Trade (ATT) which resulted in duty-free imported goods under ATT entering the local markets, badly affected the market of the local high cost and good quality products;
(v) sometimes ill conceived inadequate capital investment decisions (eg over expansion/investment), inefficient marketing and poor sales strategies led to financial problems for the borrowers;
(vi) successive cotton crop failures in the country in the mid-1990s resulted in a scarcity of the raw material and very high prices, which precipitated a crisis in the textile sector. Further, imposition of antidumping duties by importing countries affected exports adversely and led to low profitability and cash flow problems;
(vii) no hedging of foreign currency loans due to high forward cover fee in the wake of substantial devaluation of PKR against the dollar and bank''s accounting policies especially for accrued mark-up resulted in ballooning of the liabilities and the inability of the projects to meet their debt servicing obligations; and
(viii) inexperienced management caused the projects to run into financial difficulties by making inappropriate marketing and sales decisions.
Out of the randomly selected 38 cases, 21 projects were directly or indirectly linked with the Textile Industry. In relation to this it was noted that in addition to other reasons, specific to each case, the crisis of mid 1990''s in the domestic textile industry was the common denominator for failure of all such projects. Also some external factors like law and order situation, inconsistent government policies, poor management etc were the other common denominators which resulted in the failure of these projects.
Finance Ministry argues that IDBP was not an exception; other public sector banks like HBL, UBL and ABL also suffered huge losses after their nationalisation in 1974. But the distinguishing aspect was their timely restructuring and privatisation after which the GOP was able to recover around Rs 100 billion in addition to the tax revenue currently being generated by these banks. The restructuring decision of IDBP was taken in 2003, although SBP had recommended its liquidation. However, the restructuring of IDBP is still pending and the losses of IDBP are increasing with each passing day.
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