Recapitalize HBFCL and ZTBL

Governor State Bank of Pakistan Ashraf M. Wathra has raised the issue of settling the outstandings of SBP towards Zarai Taraqiati Bank Ltd (formerly Agricultural Development Bank of Pakistan) and House Building Finance Company Ltd (HBFCL). SBP was asked by the government to provide credit lines to both institutions as raising agricultural output as well as providing low income housing were considered laudable objectives. However, due to gross political interference in both institutions (government-owned and managed) bulk of the revolving credit from SBP turned into non-performing loans (NPLs). And now ZTBL owes around Rs 50 billion to SBP and another Rs 5 billion HBFCL owes to the central bank, which in effect means the burden on taxpayer. Even though SBP has frozen the credit lines and no fresh funding has been provided since 2001, the issue has been lingering for over a decade for want of an amicable settlement. This has resulted in both institutions not meeting the desired objectives for which they were created. But this has been, unfortunately, in the history of Pakistan. We have been first in creating financial institutions in the region; but are unable to sustain them because these institutions have been misused for political purposes and our weakening fiscal economic situation has resulted in our inability to sustain them as well.
What are the choices facing us? After all both ZTBL and HBFCL are not in a position to return their outstandings to SBP. Doing so will make them bankrupt and would definitely lead to their closure. The only option appears to be to Recapitalize this amount and convert it into an equity thus making them strong financial institutions, which could avail credit lines from both inside the country as well as from abroad. The present PML-N government has great plans for social empowerment to help out farmers; it is also launching a Prime Minister's low income housing programme. Prime Minister Nawaz Sharif received various presentations in October 2013. He has been told that for a population of 190 million, household size of 6.6 percent and population growth rate of 2.5 percent, the incremental demand for housing units is 0.7 million units per year. The overall backlog of housing is estimated between seven to eight million. Urban housing shortages alone are estimated around 3.5 million.
In the Budget for the current financial year, the amount of banking credit to the agriculture sector has been revised. The input cost to the farmers has also gone up. Secondly, the small marginalized farmers who constitute the bulk of our agri land holdings are still largely dependent on exorbitant interest rates of local money lender (Mahajan). Their dependence on the 'arthis' has also not reduced. Their weak financial position forces these farmers take advance from 'arthis' for purchase of agri inputs. This is precisely the reason we have made only marginal gains in per acre yield in this vital sector of economy. Crop insurance has been on the table of decision-makers for a long time. Unfortunately, however, the domestic insurance companies are too small to independently undertake this gigantic task. Unless the government lends a helping hand we do not see this materialising.
These institutions - ZTBL and HBFCL - can serve as a vehicle to meet the objectives spelled out in the PML-N manifesto as well as the Federal Budget 2014-15. But this is only possible if these institutions are manned by professional management and their Boards of Directors are reconstituted with the induction of personalities possessing the required expertise and experience in the relevant fields. And, above all, they are insulated against any political or bureaucratic interference by their respective board. For this to happen, ZTBL's head office needs to be shifted from Islamabad to either Lahore or Multan ie close to area of lending and away from physical influence of members of Parliament. Asian Development Bank has provided loans to ZTBL and International Finance Corporation (IFC) (a member of the World Bank) has shown interest in HBFCL. These institutions can lend the required support provided we undertake to restructure and revamp them. SBP has done well in raising the issue; however, recapitalizing HBFCL alone will not suffice. We need to bring technology into land records and undertake legal reforms as well as amendments into rent laws and also adopt an effective enforcement system for repossession by lenders. Only then can mortgage lending become an effective tool for economic upliftment. Let us not just throw good money after bad which will only mean losing more.