The government has backtracked from its commitment to introduce legislation to curb loans being written off on political grounds, after being advised against such a move by the State Bank of Pakistan (SBP).
The central bank and the finance minister had issued an advisory note to the parliamentary Public Accounts Committee (PAC), saying that special legislation would not be necessary. The PAC had constituted a subcommittee to review the draft of such legislation after the finance secretary testified that the government would introduce a law to prevent the misuse of loan write-off regulations.
“The PAC was under the impression that the government has already conceived a law to prevent loan write-offs on political grounds but official statements have put a question mark on the very constitution of the sub-committee,” said Zahid Hamid of the Pakistan Muslim League Nawaz (PML-N), the convener of the panel.
In 2002, the State Bank issued Circular 29, a detailed guideline for commercial banks to write off non-performing loans from their balance sheets. At the time, the banking sector has just completed its transition from being majority government-owned to majority-owned by private shareholders.
“We are not working on separate legislation but have submitted amendments in the existing Recovery Ordinance,” said Inayat Hussain, the Banking Executive Director at the SBP. He said the section 8 of the Recovery Ordinance 2001 needed to be expanded for making the recovery effective.
Under the section 8, a financial institution may, within three years from the date of coming into force of the law, file a suit for the recovery of any amount written off, released or adjusted under any agreement, contract, or consent.
The central bank has argued in the past that its regulations of non-performing loans – those on which borrowers are struggling to make payments or are on the verge of default – are adequate and that its record of supervising the banking sector suggests that the policies are working.
According to SBP data, the total amount of non-performing loans on the banks’ balance sheet is Rs562.4 billion, which comes out to 10 per cent of the total lending book of the banking sector, much lower than the 26 per cent recorded in 1999, when the government owned most of the banks.
The Supreme Court has constituted a judicial commission, headed by Justice Jamshed Ali, which is examining loan write-offs from 1973 to the present day.
Published in The Express Tribune, April 22nd, 2011.
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