Pakistan Introduces Better Banking Laws To Recover Loans

PAKISTAN is enacting tough new banking laws to turn around rampant mismanagement of public-sector banks that resulted in a staggering 80 billion rupees (US$2.66 billion) in defaulted loans.

These loans were handed out over the past 20 years, mostly under heavy political influence, to what some Pakistani newspapers have called ``the loan rangers.'' The campaign to recover bank loans is related to another effort to collect on $532 million of unpaid electricity and telephone bills.

The banks' portfolios have deteriorated since the banks were nationalized in the early 1970s - thanks to the pressures brought upon them by politicians, bureaucrats, and leading businesses.

``Gradually, over time, the management became powerless in the face of such pressures,'' says one top banker who spoke on condition of anonymity. ``Senior managers were told to either give the loans or lose their jobs.'' Banks were not allowed to foreclose or liquidate loans held by politically powerful interests.

But recent laws, introduced by the government of Prime Minister Moin Qureshi, have given autonomy to the country's central bank, the State Bank of Pakistan, allowing it to closely regulate commercial banks.

New laws are also expected to be introduced soon which would allow banks to liquidate bad loans. Many observers say such reforms are necessary to improve the credibility of the country's financial system.

AS a first step toward recovering the loans, candidates running in the Oct. 6 national elections were told to either pay up or be barred from the race. The case of Ghulam Mustafa Jatoi, a former prime minister, highlighted the issue. Mr. Jatoi and his three sons were all barred from the contest because they had failed to repay their bank loans by the last date for filing nominations.

``We have a very permissive judicial system,'' says Aftab Ahmed Khan, a former finance secretary and a leading financial analyst based in Karachi. ``Most of our entrepreneurs thought that they could get away with it [defaulting on loans].''

Two years ago, there were 40,000 court cases filed by financial institutions (commercial and development finance banks) against defaulters which were still undergoing trial, according to Mr. Ahmed Khan. Some of those cases were filed up to 18 years ago.

The recovery could become bogged down in ``legal entanglements,'' says Yunus Khan, a leading foreign banker in Karachi and head of the Pakistani branches of the Deutsche Bank. ``The payback will not be easy'' he says. ``If a public limited company has gone under, the directors will say that their liability is only limited to the shareholders.

``I don't see how the government can recover [loans] from the directors.''

Some officials hope that the new laws will introduce fresh opportunities for commercial banks to get early judgments out of the courts; for example, cases could be heard before special banking tribunals and processed faster than in ordinary trials. And there would be clearer guidelines on liquidating companies which have shown neither the desire nor the ability to return bank loans.

Beyond such immediate progress, some officials call for more responsible use of credit, as well as payment of electricity, gas, and telephone bills within the time limits set by utility companies. Mr. Qureshi, whose government began these initiatives, is due to leave office after the Oct. 6 elections.

Pakistan has received a commitment for a $377 million IMF standby loan. Reducing the government's fiscal deficit and improving the performance of the financial sector are important requirements of the loan agreement.

Islamabad also is expected to formally request a $1 billion three-year IMF loan once a new government is voted into office.