Loan default case: Court unhappy with SBP inaction

Court threatens to prosecute each defaulter in banking courts.

ISLAMABAD:

While expressing confidence in the governor of the State Bank of Pakistan, the Supreme Court seemed to be deeply dissatisfied by the progress made by the central bank in recovering money from loan defaulters, threatening to order prosecution against each defaulter.

Chief Justice Iftikhar Muhammad Chaudhry was presiding over a case in which the court took suo motu notice of commercial banks in the country writing off loans worth as much as Rs256 billion over the past several years. The court alleges misuse of banking regulations in the write-downs.

“Circular 29 was misused in waiving of loans,” said the chief justice, referring to the State Bank’s regulations on dealing with non-performing loans at banks.

The chief justice, however, seemed to be confused as to where any money recovered from defaulters would be deposited.

“The written off loans must be deposited in the national exchequer otherwise the court will order to register cases against loan waivers,” said the chief justice.

However, if recovered, under current laws, the money from defaulters would go to the respective banks from which those loans were taken in the first place. The money would appear as shareholders’ equity on the bank’s balance sheet. Nearly all banks in Pakistan are privately owned, though the government owns the largest, the National Bank of Pakistan.

The State Bank of Pakistan denies that banking regulations are too lenient. The central bank insists that, barring a few cases, all loans written off by the banks were in accordance with the SBP’s guidelines which they insist are reasonable.

The court, however, did not seem satisfied with this explanation and threatened to initiate prosecution against every defaulter unless the State Bank took action.

The chief justice, however, seemed to have kind words for the governor of the central bank itself.

“We have heard the name of Shahid Kardar. He is a competent officer. We expect that he will use his authority and recover the money,” said Chief Justice Chaudhry.

The court adjourned until March 14.

Published in The Express Tribune, March 11^th, 2011.