Pakistan needs system to deal with insolvencies: Baqir

ISLAMABAD:

Pakistan needs to create expertise in the judicial system to be able to hear cases related to corporate insolvencies, said State Bank of Pakistan (SBP) Governor Reza Baqir.

Addressing a high-level panel discussion on corporate debt in developing countries, Baqir shared that it was difficult to do a corporate workout in Pakistan due to intricacies of the judicial system and partly due to a culture where, previously, some borrowers used strategic default to set up questionable activities and then get a free bailout.

"The combination of weak corporate governance and judicial system issues make it difficult to do corporate workouts," said the governor.

The webinar was part of the World Bank Group's insolvency series to improve understanding and explore solutions for heading off the rising threat to economic recovery in the wake of the pandemic.

Discussions by other panellists also highlighted the conditions for preserving value in corporate restructuring and how different countries were adapting legal and regulatory structures to the Covid19 crisis, including insolvency and out-of-court workout mechanisms.

Baqir said, "The most important area for Pakistan, where help from institutions like the World Bank can go a long way, is creating expertise in the judicial system to be able to hear case relating to insolvencies by having specialised benches of the court, judges and using technology to address the backlog of such cases that exist."

He said that following the Covid outbreak in Pakistan, there were constraints over the response to dealing with the situation. Baqir explained that since Pakistan has high public debt at nearly 80% of GDP therefore the response had to lean a lot more on the monetary instruments rather than a fiscal expansion.

"If, after Covid, Pakistan ends up with a high debt-to-GDP ratio it would actually undermine the goal of restoring financial stability."

He said that there was an understanding that monetary tools had to take the burden and in line with that the SBP introduced a number of schemes to provide liquidity support to businesses.

Hence, the SBP, in collaboration with the Pakistan Banks Association (PBA), announced measures, which included deferment of principal amount of loans and advances by banks and DFIs and restructuring of loan schemes.

The central bank received weekly reports from banks on the number of applications that sought principal extension and interest restructuring and was able to keep a check on if the banks were too risk-averse.

"As regulators, we were keen to preserve the credit culture, therefore we did not make it mandatory yet we had to figure out a way because we knew banks would become very risk-averse."

He said that they did not want liquidity problems to become solvency problems and because of the de-facto injection of a lot of liquidity "we believe we ended up avoiding a lot of insolvencies that later on would have become very problematic".

"We were keen to not have a rise in insolvencies because then the stock of non-performing loans (NPLs) would have taken a very long time to resolve."

Elaborating on further efforts, the governor shared that they had created a company called the corporate restructuring company to deal with problems of loans that have multiple creditors.

However, he added that was really needed to resolve distressed assets better is a partnership of working with the judicial system "We have been working with the government for creation of dedicated benches to be established at higher courts to hear the litigation under this corporate restructuring company. If we don't have quick resolution in courts, this company will not be very successful."

He added that there was also a memorandum of understanding in progress with the provincial government and high courts to promote interaction between officials of the central bank and judicial system.