INTRODUCTION: A simple definition of non-performing is: A loan that is not earning income and: (1) full payment of principal

and interest is no longer anticipated, (2) principal or interest is 90 days or more delinquent, or (3) the maturity date has passed and payment in full has not been made. The issue of non-performing loans (NPLs) has gained increasing attentions in the last few decades. The immediate consequence of large amount of NPLs in the banking system is bank failure. Many researches on the cause of bank failures find that asset quality is a statistically significant predictor of insolvency (e.g. Dermirgue-Kunt 1989, Barr and Siems 1994), and that failing banking institutions always have high level of non-performing loans prior to failure. It is argued that the non-performing loans are one of the major causes of the economic stagnation problems. Each non-performing loan in the financial sector is viewed as an obverse mirror image of an ailing unprofitable enterprise. From this point of view, the eradication of non-performing loans is a necessary condition to improve the economic status. If the non-performing loans are kept existing and continuously rolled over, the resources are locked up in unprofitable sectors; thus, hindering the economic growth and impairing the economic efficiency. In this project, we mainly focus on the impacts of non-performing loans on microeconomics, specifically, at the bank level to evaluate how non-performing loans affect commercial banks lending behavior which in turn affects the overall economy of that country. This project would cover many other aspects including the definitions of non-performing loans to understand what we actually mean by non-performing loans, classification system adopted by banks, the reasons and consequences of these NPLs on bank as well as on economy of a country. We will then move on to Pakistani economy and role of banks and how NPLs have hindered the growth of our economy in the last 65 years. Finally, we will have a look at the National Bank of Pakistan and its NPLs to see how our own organization has been coping with this economic issue of NPLs. We also have taken an empirical analysis of NPLs which was given by Yixin Hou in one of his research papers. Using the threshold regression technique, we will show some evidences that non-performing loans have non-linear negative effect on banks lending behavior. We also take the case of National Bank of Pakistan and see how this empirical model responds. DEFINITION OF NPLs: There is no global standard to define non-performing loans at the practical level. Variations exist in terms of the classification system, the scope, and contents. Such problem potentially adds to disorder and uncertainty in the NPL issues. For example, as described by Se-Hark Park (2003), during 1990s, there were three different

methods of defining non-performing loans in Japan: the 1993 method based on banking laws; the Banks Self-Valuation in March 1996; and the Financial Revival Laws-Based Debt Disclosure in 1999. These measurements have gradually broadened the scope and scales of the risk-management method. Similar to the trend in Japan, more countries, regulators, and banks are moving towards adopting and adapting better and more consensus practices. For example, in the U.S., federal regulated banks are required to use the five-tier non-performing loan classification system according to BIS: Pass, Special Mention, Substandard, Doubtful, and Loss. Presently, the five-tier system is the most popular risk classification method, or, in some cases, a dual system of reporting according to their domestic policy guidelines as well as the five-tier system. However, in Pakistan most banks are still using three tier classification method namely Substandard, doubtful and loss. Some of the renowned and accepted definitions of non-performing loans are here as under: 1. According to the International Monetary Fund, a non-performing loan is any loan in which: interest and principal payments are more than 90 days overdue; or more than 90 days' worth of interest has been refinanced, capitalized, or delayed by agreement; or payments are less than 90 days overdue but are no longer anticipated. Another definition of a non-performing loan is one in which the maturity date has passed but at least part of the loan is still outstanding. The specific definition is dependent upon the loan's particular terms. 2. Loans become non-performing when it cannot be recovered within certain stipulated time that is governed by some stipulated laws. So, non-performing loans is defined from some institutional point of view, generally from lending institution side. Loans may also be non-performing if it is used in a different way that for which it has been taken. This is user point of view. But here we will define it from the institutional point of view. In this case loans become nonperforming when it is classified as bad and loss for which bank requires 100% provisioning by scheduled commercial bank. Under Basel-II, past due for more than 90 days are to classified as non-performing as well. 3. By Bank regulatory definition non-performing loans consist of: a) Other real estate owned which is that taken by foreclosure or a deed in lieu of foreclosure, b) Loans that are 90 days or more past due and still accruing interest, and c) Loans which have been placed on nonaccrual (i.e., loans for which interest is no longer accrued and posted to the income statement). 4. A loan on which the borrower is not making interest payments or repaying any principal. At what point the loan is classified as non-performing by the bank,

and when it becomes bad debt, depends on local regulations. Banks normally set aside money to cover potential losses on loans (loan loss provisions) and write off bad debt in their profit and loss account. In some countries, banks that have accumulated too many NPLs are able to sell them on - at a discount to specially established asset management companies (AMCs), which attempt to recover at least some of the money owed.

CLASSIFICATION SYSTEM OF NPLs: Loan classification refers to the process banks use to review their loan portfolios and assign loans to categories or grades based on the perceived risk and other relevant characteristics of the loans. The process of continual review and classification of loans enables banks to monitor the quality of their loan portfolios and, when necessary, to take remedial action to counter deterioration in the credit quality of their portfolios. It is often necessary for banks to use more complex internal classification systems than the more standardized systems that bank regulators require for reporting purposes and that are intended to facilitate monitoring and interbank comparisons. Unless explicitly stated, this report discusses regulatory classification systems, not internal classification systems. Both loan classification and provisioning present a number of conceptual and practical challenges, and diverse systems are used in different countries. Though similarities exist, there is a lack of internationally recognized definitions. For example, the terms specific provisions and general provisions are present in many regulatory frameworks, but their definitions and uses vary across countries. As a result of these differences, the definition of regulatory capital in different institutional frameworks varies and makes it difficult to interpret crucial financial ratios, especially when comparing banks financial performance across countries. There are also differences in the amount of time that elapses before a loan is considered past due and in the extent of provisioning applied to impaired loans with the same characteristics and risk profile. Being aware of these differences is crucial to interpreting banks financial and capital ratios correctly Regardless of prevailing rules, the provisioning and loan classification process is often a matter of judgment. Thus, assessments may vary markedly between different assessors - such as bank managers, external auditors, and bank supervisors - and across countries. Also, the national legal infrastructure affects the timely enforcement of the terms of loan contracts. For example, in countries with a strong legal infrastructure loans tend to be classified as past due relatively soon after the borrower misses a payment. In countries where the quality of the legal infrastructure is weak, however, the period between an omitted payment and the revision of the loan classification may be longer.

Approaches also differ concerning whether and how collateral should be considered when classifying loans and determining the appropriate provisions. Not all regulatory frameworks recognize the same forms of collateral, and there is no consensus on the evaluation criteria of pledged assets, fo r example, according to their marketability. All these elements make it difficult to compare countries rules on loan classification and provisioning. Although the International Accounting Standards Board (IASB) has issued standards on asset valuation and disclosure, it has not yet provided detailed guidance on loan provisioning. As a result, countries that implement the International Accounting Standards still have different loan loss provisioning regulatory frameworks. With no international standard, national authorities and bank supervisors have designed their own regulations on loan classification and provisioning according to the specific nature of their regulatory environment. In some countries, the rules are developed by private sector accounting standard setting bodies; in others, the rules are issued by Parliament, the Ministry of Finance, or the banking regulator. In countries where the accounting rules for banks are not made by the banking regulators, regulators are normally consulted or offered an opportunity to comment on proposed changes in the rules (Table 1). As there are different regulatory bodies for different countries, there are differences in loan classification system adopted as well. Saying all that following is classification which is given by BIS is the most widely and extensively used by the banks throughout the world for loans: (1) Passed: Solvent loans; (2) Special Mention: Loans to enterprises which may pose some collection difficulties, for instance, because of continuing business losses; (3) Substandard: Loans whose interest or principal payments are longer than three months in arrears of lending conditions are eased. The banks make 10% provision for the unsecured portion of the loans classified as substandard; (4) Doubtful: Full liquidation of outstanding debts appears doubtful and the accounts suggest that there will be a loss, the exact amount of which cannot be determined as yet. Banks make 50% provision for doubtful loans; (5) Virtual Loss and Loss (Unrecoverable): Outstanding debts are regarded as not collectable, usually loans to firms which applied for legal resolution and protection under bankruptcy laws. Banks make 100% provision for loss loans.1 Non-performing loans comprise the loans in the latter three categories, and are further differentiated according to the degree of collection difficulties.
1

The details of the loan classifications are collected from various BIS documents.

The system used by Pakistani banks is also similar to above one. Though, ideally, the above 5 tier classification system is to be followed but banks mostly go with Regular, Substandard, Doubtful and Loss only.

In addition to the standardized system, efforts have been made to improve the classification of loans. For example, more countries are shortening the period when unpaid loans become past due, intending to put loans on lenders timetable sooner and require them to address these loans before losses start to escalate. The

International Accounting Standard 39 revised in 2003 focuses on recognition and measurement of financial instruments and, most importantly, defines and establishes the measurement and evaluation of impaired loans. As lenders usually make little or no loss provision for impaired loans, they are at risk to be suddenly forced to reclassify such loans as a loss and take a full write-down if the borrowers go bankrupt. The initiation of this standard is to prevent lenders from being caught off-guard. In addition, many global economists, rating agencies, and organizations such as the World Bank and the Asian Development Bank have begun to evaluate the effects of NPLs on GDP growth. They reduce growth estimates to reflect the time and cost of resolving large non-performing loan issues. MAJOR FACTORS / REASONS OF NPLs Our focus in this section will be on the determinants of NPLs. Financial system shocks can emanate from firm specific factors (idiosyncratic shocks) and from macroeconomic imbalances (systemic shocks). Overall, the literature on the major economies has confirmed that macroeconomic conditions matter for credit risk. Keeton and Morris (1987) had already showed, for over 2400 insured commercial banks in the U.S. during 197985, that local economic conditions explained the variation in loan losses recorded by banks. Authors who looked at asset-price evidence also found a linkage between credit risk increases and adverse macroeconomic conditions (Mueller, 2000; Anderson and Sundaresan, 2000; CollinDufresne and Goldstein, 2001). Default culture is not a new dimension in the arena of investment. Rather in the present economic structure, it is an established culture. The redundancy of the unusual happening becomes so frequent that it seems that people prefer to be declared as defaulted. In developing and under-developed country, the reasons of being default have a multidimensional aspect. Various researches have concluded various reasons for a loan to be default. Some of them are discussed below that are very much pertinent to the study. a. Reduced attention to borrowers: This is related to the Hawthorne effect. Researchers at Hawthorne Electric Company in the US in the 1920s wondered what effect changes in lighting; heating and similar variables would have on factory workers. To the researchers amazement, productivity increased throughout the study, during which time lighting was varied greatly from normal to dim to brilliant and back, the heat was turned up and down, etc. The puzzled researchers eventually concluded that the workers were responding positively because they were the subjects of interest, not because of changes in their working conditions. Workers perceptions that someone is paying attention to them get better results than perceptions of inattention, of being ignored. Borrowers may also perform in this manner. b. Moving along the risk curve:

This might be called the Petroski Effect. In - To engineer is human: The role of failure in successful design, Henry Petroski, a forensic civil engineer fascinated with the failure of large structures notes that each new major bridge, for example, always has to be higher, longer, stronger or cheaper than the last bridge of similar design. Something that works tends to be the subject of attempts at replication and improvement in new environments. This means that risk increase and are always to some degree unknown as the low risk situations become saturated. c. Increasing loan size increases risk This may be called the Inverted Pyramid Effect. In the 1980s the manager of a donor funded project to develop rural credit unions in Malawi were pleased to note a large increase in deposit mobilization in a small credit union in a remote location. Project funds were used to enable borrowers to obtain loans equal three times their deposit or share balances. But one day, the expansion ended, as did the credit union. This may be easily explained with a numerical example: one farmer deposited 100 and borrowed 300. He kept 100 and gave a relative or friend 200, which that person deposited in the credit union. That person then borrowed 600, kept 200 and gave 400 to another relative or friend. After everyone in the village had participated and the loot was shared, the exercise ended. This is also seen clearly in loan use progressions by members of Grameen Bank in our country. d. Lenders lack plans to deal with risk Donor-funded credit programs are usually designed without a clear focus on risk. In micro finance promotion there seems to be no clear vision of risk or no industry-wide concern about means of addressing it, other than running a tight ship. The literature is largely concerned with outreach, measured by number of borrowers, and covering administrative costs. The jury is still out of micro-lender performance, which is currently supported by a tidal wave of donor funds that lifts all but the most leaky of ships. This inattention to risk may be called The Pollyanna Effect. e. Borrowers probe a credit operations weaknesses Credit programs have no special claim to infallibility. A borrower may be determined to repay on time but because of some unexpected events fail to do so. If the lender does not follow up promptly with a query, the borrower will take note. He / She may simply be grateful not to have been embarrassed. A second way in which borrowers are tempted to probe a credit programs weaknesses is when some borrowers blatantly refuse to pay on time or skillfully avoid payment. Borrowers probing of a lenders weaknesses may be called the Jurassic Park Effect. The dinosaurs in this popular film tested the structures and devices used to contain them within certain areas of Jurassic Park and eventually gained control over the entire park to the dismay, discomfort and eventual departure or demise of their human captors. In addition, the parks dinosaurs become more aggressive after the developers lost

control of dinosaur breeding as a result of unexpected risks. This was captured by the remark of one actor that life finds a way. f. Rent-seekers capture the credit program Credit programs attract rent seeking of all sorts, especially when some subsidy is involved. In certain cases hijacking is blatant, as when the pattern of funding follows election year cycles. This was a prominent feature of crop credit insurance in Costa Rica in one election year, and more egregiously in Mexico through the 1980s, when massive crop failures were reported every six years and massive indemnities were paid. In Bangladesh in 1991 a newly elected government decreed that agricultural loans of less than Tk. 5000, be forgiven, regardless of the source of the loan, which made collection on small loans more difficult generally for several years. It is proved to be almost foolproof recipes for unsustainable programs, the victims of the Hijack Effect. g. Lenders and project designers have low expectation In some cases credit is provided by donors because it is the easiest thing to offer, it makes many people happy and it corresponds to a certain view of development and the conditions required for it to occur. In this case repayment is not terribly important to donors because the objective is almost overwhelmingly to get the money working in order to stimulate development. This cause of declining repayment performance may be called the Something-must-be-done Effect. Lacking more precise and effective tools, donors and governments embrace credit to accomplish purposes that it cannot realize in a sustainable manner or that are highly unlikely to be achieved. Reasons for this include fungibility and the impact of other, non-financial constraints lowering retains to the activities for which credit is provided. h. The lender is unwilling to collect Another possibility is that the lender is unwilling to collect. Unwillingness may arise from a number of factors, but almost always requires soft funds that the lenders can afford to lose. Unwillingness to collect may result from the realization that the credit program was poorly designed, destined to fail. It may also reflect a view that the beneficiaries are poor while the sponsors are not, and that a sense of fairness precludes any serious action against defaulters. This can be called the Patronizing Effect. i. Lack of good models Another possibility is that lenders are simply not familiar with successful examples of dealing with bad and doubtful debts. This is likely in transaction economics in North and Central Asia where commercial banking is still something of a novelty compared to banking in service to economic planning. It also occurs, as in Pakistan and Bangladesh, where state domination of the banking system has been accompanied by

a high tolerance of non-repayment associated with politicization of financial markets. Legal recourse in these situations is remote, costly, and uncertain. This lack of credible models can be called High Default Culture Effect. j. Loan sanctioned by corruption In countries like Pakistan, sometimes loan sanctioning authority sanctions loans for satisfying their self-interested behavior. Thus, they engage themselves with the clients and corrupt the total system by giving some benefits for taking something in return. This may be called as Give and Take the Chance Effect. This is the result of too much politicization and power-relatedness in the institutional system. k. Donors give loans to dominate Till now, we depend on the donations made by donor countries. The strategies that most donor country follows are to weaken our system so that they can hold the bargaining option to ensure their dominance. They seem to help us by earning our bread and butter, but in the long run, they are paving the way to let us die in future. This may be termed as Live and Let Die Effect. l. Weak follow up weaken the system In our society, people give more importance on current consumption. So they do not mind to spend the borrowed fund to spend for consumption if they are not strictly followed up. People hold a very short vision of thinking for today leading sufferings tomorrow. So, a significant portion of capital goes to unproductive sector that may be termed as Die Another Day Effect. Here, the twelve above-mentioned causes and their ultimate effects are the direct outcome of various research works conducted throughout the globe in different time. More interestingly, the study that is conducted under the concerned topic also finds out the same reasons of major loans to be defaulted at the time of maturity.

EFFECTS / CONSEQUENCES OF NPLs ON BANK AND THE ECONOMY: Economic development will always be in its infancy if sufficient capital cannot be formed. Capital formation has at least two dimensions, i.e., domestic and international. The attraction should be institutionalized so that the savings can be utilized in economic process. Households should be motivated to save and to deposit the same so that the idle savings can be used economically. Sometimes, they are self-motivated. Economists have identified at least three broad reasons for saving (Frank, Bernanke, 2001); life cycle saving: savings to meet long-term objectives, such as retirement, college attendance, or for the purpose of a home; precautionary saving: savings for protection against unexpected setbacks, such as the loss of a job or a medical emergency; bequest saving: savings done for the purpose of leaving an

inheritance. But, sometimes they require external inducement that is basically done by the financial institutions or government. Along with household savings, there is another form of investment that basically comes from corporation. Akyuz and Gore (1996) argue that the most important contribution to high savings and investment rate in the East Asian Tigers was not exclusively household savings, but the investment profit nexus. Corporate profits were actively encouraged by the state and this corporate savings were one of the main contributors to the sustained high investment rate.

Savings can be held in different forms, as financial assets, as stores of value, as well as informal financial assets such as savings in informal financial institutions. The financial liberalization paradigm maintains that savings in the informal sector are as a result of inefficient and repressed financial markets. The lack of access to financial saving instruments and the market fragmentation means that people have to resort to non-financial savings (Gupta, 1985). S. Nissanke (1991, mimeo) points out the prevalence of non-financial savings in rural households of East African countries, where financial savings at times constitute only 5-6% of total household savings. Household savings in India are remarkably high (Singh, 1995), as well as Italy (Jappelli and Pagano, 1994). Getting the small savings from the households, financial institutions form large capital so that it can be invested in the development of various sectors like industry, business, development and others. When savings get investing status, it works for the economic development, provided that the investment is rightly done. In an article entitled The Vice of Thrift, The Economist (1998, p. 85) states, It has become clear that the surge in investment in East Asia in the 1990s was a sign of weakness, not strength. Much of the money was wasted on speculative

property deals or unprofitable industrial projects. The very logic of investment function should be to ensure sustainable development in a country like us. Because, sustainable development paves the way of further development. The consequences have both positive and negative dimensions to the investing authority though in the economy it always should have a positive result upto a limit. If the invested funds can be captured timely, it can again form new capital creating a good option of reinvestment or consumption. Both of these reinvestment and consumption functions create a positive impact on the economy. Because, economy gets some value added jobs to do. But, in case of non-recovery, the investing party should have to go a long way that is not expected and sometimes this unexpected happenings cause a great harm to the economic framework and structure. Apparently, it may seem that its good so far as economic development is concerned, as the money remains invested in the economic process. But the reality is that the funds may fail to achieve its ultimate target, it may be unutilized or underutilized or even in extreme case, the funds may flow out of the economy. Then the loss will be a total loss both to the investing authority and to the society as well. Thus, it will lead the economy to be stagnant for the time being, and if not checked, forever. It will also accelerate the path of being and remaining poor for the time being. Assurance of a timely recovery of the invested fund ensures societal economic development as these funds again flow into the economy in the form of either investment or consumption. The fast the loop moves, the fast the economy develops. In case of a different consequence, when the loop breaks, economy ex periences a different look like the above where the rate of savings and investment declines leading to lower the income that hamper the process from both perspective; at one side, standard of living declines (by lowering the expenditure for living), and on the other, by saving nothing as the total earnings are expensed to continue the livelihood

Non-performing loans can lead to efficiency problem for banking sector. It is found by a number of economists that failing banks tend to be located far from the mostefficient frontier (Berger and Humphrey (1992), Barr and Siems (1994), DeYoung and Whalen (1994), Wheelock and Wilson (1994)), because banks dont optimise their portfolio decisions by lending less than demanded. Whats more, there are evidences that even among banks that do not fail, there is a negative relationship between the non-performing loans and performance efficiency (Kwan and Eisenbeis (1994), Hughes and Moon (1995), Resti (1995)). The phenomena that banks are reluctant to take new risks and commit new loans is described as the credit crunch problem. According to the United States Council of Economic Advisors (1991), credit crunch is a situation in which the supply of credit is restricted below the range usually identified with prevailing market interest rates and the profitability of investment projects. A credit crunch is a disequilibrium phenomenon. It is present when banks are unwilling to lend, especially when a firm with profitable projects cannot obtain credit in spite of low interest rates (lower than the expected marginal products). Credit crunch results in excess demand for credit and hence credit rationing, where loans are allocated via non-price mechanism. Eventually, it imposes additional pressure on the performance of the monetary policy. The idea of credit crunch has drawn attention when the traditional view failed to satisfactorily explain the economy state for those countries that suffered from the South-East Asian financial crisis in 1997. Under the traditional view, the link between the interest rate change and the real economic activity occurs through investment and consumer durable expenditure. In response to the currency crisis in 1997, the interest rate was raised. It was strongly believed by IMF that the hike would help stabilise the foreign currency market and eventually induce banking reform by crowding out low-profit projects. However, the persistent fall in economic growth rate and the lasting economic recession cast doubt on the true benefits of the policy and the effectiveness of the traditional view of the transmission mechanism. The idea of credit crunch addresses an alternative explanation for the transmission mechanism. During a crisis, in order to restore the credibility among creditors and depositors, failing financial institutions not only try to expand their equity bases, but also reduce their risky assets or change the composition of the assets portfolio. As a result of such defensive action, the corporate debtors are always targeted, thus stalling the overall economic growth. Specially, the reluctance of banks to lend can be caused by several reasons, such as the increased capital adequacy requirement imposed by Basel Accords; impaired debt-servicing capacity, especially small-to-medium enterprises (SMEs); risks of a further fall in collateral value, etc., which make the interest rate not to serve as the main determinant by banks in credit approval. Non-performing loans have been viewed to constitute one of the most important factors causing reluctance for the banks to provide credit. In a high NPL condition, banks increasingly tend to carry out

internal consolidation to improve the asset quality rather than distributing credit. Also, the high level of NPLs requires banks to raise provision for loan loss that decreases the banks revenue and reduces the funds for new lending. The cutback of loans impairs the corporate sector as they have difficulties in expanding their working capital, blocking their chances of resuming normal operation or growing. Unavailability of credit to finance firms working capitals and investments might trigger the second round business failure which in turn exacerbates the quality of bank loans, resulting in a re-emerging of banking or financial failure. In a worse case, it triggers an endless vicious liquidity spiral: As a result of poor economic condition and the depressed economic growth, the level of NPLs increases the weaker corporate sector makes banks more reluctant to provide additional credits with insufficient capital, the production sector is further weakened, resulting in decreases in aggregate demand again, even worse borrowers condition creates more NPLs Krueger and Tornell (1999) support the credit crunch view and attribute the credit crunch in Mexico after the 1995 crisis partially to the bad loans. They point out that banks were burdened with credits of negative real value, thereby reducing the capacity of the banks in providing fresh fund for new projects. Agung et. al. (2001) using the macro and micro panel data analyses to study the existence of a credit crunch in Indonesia after the crisis. Both the macro and micro evidences show that there was a credit crunch, characterised by an excess demand for loans, starting to emerge in August 1997, one month after the contagion effects of the exchange rate turmoil in Thailand spreading to Indonesia. They investigate the relationship between the loan supply and real lending capacity, lending rates, real out put, banks capital ratio, and non-performing loan. The results show that the coefficients on NPLs are negative and significant, which indicate that bank credit supply declines with the worsening of the NPLs problem. Westermann (2003) compares the cases of Germany after the credit boom of the late 1990s and Japan aftermath the bubble burst in early 1990s. He argues that even though the German banks were in a better condition than Japanese banks were, as the path of Germans aggregate credit looks so similar to that of Japan, it is at least unlikely that the German credit slowdown was entirely driven by demand, while that of Japan was mostly caused by a lack of supply. There must at least be some supply side changes that affect the aggregate credit, and differences only exist in the magnitude of the problem. He further points out that the one of the main reasons in Germany for the credit crunch is the increased risk of nonperforming loans after the credit boom.

REMEDIAL ACTIONS THAT CAN BE TAKEN AGAINST NPLS: There have been many researches on finding the options that can best check the NPLs of a bank and can help increase efficiency of economy as a whole. Some of the measures that can be taken by banks in this regard are discussed here as under: 1. Small size loan can outperform large loan: Loans that are small in volume are less sensitive and less risky. The present structure of most banks show that most of the small loans are unclassified and financial institutions have to spend less time and effort to deal with such loan. So opting for more of smaller loans can be an option. 2. Go for short-term and avoid long term loan if possible Long-term loans are very common to create problem at maturity. But, in case of short-term loan, most often it is serviced within the specified period. Again, after maturity, the fund can be reinvested in similar situations. In this way, the single amount can be invested for three to four times in a year and the actual return is higher than the nominal rate. 3. Go for syndication in case of large loan In case of large loan, loan syndication ensures both earnings and timely repayment on part of the borrower. In our country, loan syndication is a recent phenomenon and the use of this facility is not common. 4. Micro credit is less risky than industrial loan Micro credit is self-liquidating in most of the cases whereas the servicing of industrial loan depends on the success story of the industry for which the loan was sought. 5. Bai is superior to money for money

Bai means buy and sale. In Islamic Banking, Bai mechanism is followed. They purchase goods or services on behalf of the clients and sale these goods and services to them. But, the conventional banking believes to lend fund directly. In this case, sometimes it becomes very difficult to look after the use of the ultimate fund and if used in unproductive areas, the fund is very common to be defaulted. Realizing this less risky mechanism of fund investment, most of the conventional banks are trying to open some Islamic branches and some other deciding to transfer their complete operation from conventional to Islamic type of banking. 6. Commercial loan is self liquidating than infrastructure loans Loan for commercial purposes is less risky than loan in infrastructure purposes. So invest more in commercial areas. Here commercial loans include working capital loan, trade loan, L/C etc. Infrastructure loans are composed of loans for various physical assets to be installed inside or outside the business premises. 7. Risk is primary and return is secondary consideration Presently, most of the financial institutions give more importance on risk assessment than on return. But, traditionally, return is given more importance and even in some situation, risk was not considered at all. This tendency, on part of the loan sanction officer, poses a great threat to the timely recovery of the loan. So, present day officer wants to have a detailed risk analysis before sanctioning loans to the clients. The main theme of all of the findings is that risk and return is positively related. Risk less investment will bring less return for the investing company carrying the guarantee of getting the money back at maturity. But, if the investing party wants to earn premium in the market, they have to deal with risk where the probability of getting the invested funds back will be reduced greatly as the risk increases. This is the consideration of the investing parties basically. So, they have to make a wise bundle of investment areas to diversify their risk with a view to earn maximum profit. This is not the objective of the study. Now the question of capital formation-investmentrecovery loop comes with an expansionary status. Because, investment function holds not only an individualistic focus but also it has a socialistic approach, more importantly. In a developing country like Bangladesh, it does something more than a developed one. Ways to recover timely to turn non-performing loans into a performing one: a basic learning from the study Recovery is not a problem, just the end of one process that fed into the next process. This is our self-developed problem due to our lack of knowledge, negligence, inefficiency and lack of commitment. As this is the social devil we should avoid this. Following are some other options that can also be considered for eradication of NPL issues. 1. Law and order situation

Most of the respondents are dissatisfied with the present law and order situation prevalent in our country. Loans often become defaulted as the defaulter can use the loopholes of the law to reap unusual benefit. The climate should be extortion free that will help to generate surplus, thus recovery will be more. Above all, political stability is the precondition for ensuring a stable business climate and due to this reason; recovery problem becomes a social crisis in our environment. 2. Risk assessment In our previous discussion, risk seems to be an uncontrollable factor but is a must for dealing with investment. But, this sensitive and crucial factor is bypassed most of the time. Some financial institutions, even, have no satisfactory guidelines to be followed to assess risk. State Bank makes it mandatory to follow guidelines for provision of loans but the situation should be different where individual banks are supposed to develop their own tool depending on their own needs and specification. 3. Motivation A high level of motivation works like a tonic of loan recovery problem. A national level award may be arranged for the best loan performer. He may also be given some monetary incentives in the form of tax deduction or others. A congenial relationship with the banker and the borrower also helps a lot where borrowers are kept regular contact with the banker. 4. Recovery Agency The concept of recovery agency is not new. But, in our country, it is not developed till now. In developed countries like USA, such agencies have really worked wonders to save the banks from being default. 5. Less relaxation From the management point of view, loan recovery should not be relaxed by a single moment. It may go to be a time barred debt. As the age of the loan lingers, the possibility of getting the fund back becomes dimmer. So, relaxation should be strictly prohibited. Most of the national banks loans became defaulted due to the lingering process. 6. Collateral management For each and every type of loans, it is important to maintain sufficient collateral. Keeping collateral is not enough; it should be managed properly with the regular check of the value, ownership, physical condition and other legal status etc. Collateral should always have sufficient value to recover the debt. 7. Developing situation specific models

Different cases, in terms of the types, sensitivity and complexity; require different treatment. Professional management can be used to develop situation specific tools that may help to deal with different situation differently. In present situation, most of the loan officers still use traditional ways to deal with such situations that ultimately leads to an unsatisfactory conclusion. 8. Real time training Repayment prospects of the loan depend to a large extent on the competence of the management of the borrowing unit. People, in practice, warrants that they are badly in need of training to be introduced with the modern complex business solutions that will increase the competence level. These are necessary from time to time just to update the knowledge and to be in a position to handle the real life problems smartly. 9. Trade-offs Each and every bank can design their own investment portfolio depending on their opportunity. Investment may be done in some areas where the option to be defaulted is less. Investment portfolio may include more short term and small sized loans that are self-liquidating. 10. Monitoring Bank must ensure periodic monitoring and proper feedback so that the borrower cannot reveal any weakness from bankers side. A strong post-sanction inspection with pre-sanction inspection guarantees the timely recovery of fund to a greater extent. Credit information Bureau (CIB) of Bangladesh Bank (BB) can work in a better way to supply with timely and accurate credit information. The credit information which so far been collected by BB from scheduled banks and other financial institutions are not broad-based and systemized to be used for credit policy and other purposes (Chowdhury, 2002). This is unsatisfactory for us as in other countries there are some organizations that collect credit information and supply the same if required for some charges. BANKING SECTOR OF PAKISTAN AND NON-PERFORMING LOANS: AN OVERVIEW Scheduled banks enjoy a unique position in the economy Pakistan. As of August 10, 2010, total deposits held with them aggregated to Rs 4.63 trillion. Advances given by above banks as of the above date amounted to Rs 3.32 trillion. This unique position is not enjoyed by any other institution in Pakistan. It may be interesting to note that the total Federal budget for 2010-11 is Rs 2.77 trillion (current expenditure: 2.0 trillion + ADP Rs 0.77 trillion). As against this amount net Federal Revenue is forecasted at Rs 1.38 trillion - leaving a shortfall of Rs 1.39 trillion to be financed by several sources including external and internal debt and bank borrowing etc.

Consequently, it is high time that the financial sector of Pakistan is well protected against all risks, particularly against bank advances to be written off. The Supreme Court of Pakistan is ceased with this financial grim situation of write off of advances from 1972 - 2007 for Rs 256 billion and during the current democratic regime for Rs 51 billion in two years. A suo motto action has been initiated in this respect by the Supreme Court and the State Bank of Pakistan has been asked to provide significant information in this respect. Banking in Pakistan: All types of banking services are being provided in the country. Data are available in respect of formal banking system. However, authentic data in respect of informal banking system is not credibly available. Agri finance has a great element of informal banking - to the detriment of the small farmers, as loans are available at exorbitant rate of interest. Out of total advances of scheduled banks of Rs 3.32 trillion, one quarter of a trillion is available for formal advances to agri financing, which is ridiculously low. Agriculture, being the backbone of the economy of Pakistan, deserves a better deal rather than living with the above situation. However, a survey was carried out in the year 2009 relating to banking practices in Pakistan. Presentation was given to the State Bank of Pakistan. A summary of the survey results was published in the print media last year and is an eye opener for the banking system in the country. Only 11% Pakistanis have bank accounts - leaving a potential of 89% to be tapped. The position in this respect is Azad Kashmir is 30%, Punjab 12%, Sindh 11%, Khyber Pakhtunkhwa 11% and Balochistan 4%. Only 4% women maintain bank accounts. Thirty-two percent are said to use formal banking. It is surpris0ing to note that 71% of adult population of Pakistan has a perception that there is no need to maintain bank account. In this backdrop, the whole banking system must use out of box solution with a breakthrough to change the landscape of Pakistan on the financial front. The foregoing figures as a wake up call for all of us. New breed of bankers is the crying need with an innovative approach to increase the spread of banking network in the country to pave the way for documentation. Written off bank loans: A bank earns its revenue from three major sources namely; (1) Advances given to borrowers (2) investments made in various avenues and (3) services rendered by the banks. Ordinarily, incomes earned from advances is called mark-up/interest. It constitutes significant segment as a revenue driver. It serves as a lifeline for the solvency of banking, if greater amount of bank advances become either bad or doubtful of recovery, the probability of a bank becoming insolvent becomes greater and greater. No wonder, there is a great interest on global and domestic fronts for ensuring that Prudential Regulations are followed and implemented properly. Together with this,

supervision by central banks as well as by commercial banks should continue to be on vigilant lines. Monitoring is the name of the game. Every bank is expected to undertake risk analysis and ensure that the probability of risk is as low as is possible. For this, the globally known model of risk management namely, RMMM (Risk Mitigation, Monitoring and Management) should be religiously implemented. However, all types of risk exist. There are genuine risks where a borrower has an intention to pay, but less capacity to repay. This may be due to slow down in the economy, recession, internal catastrophe, floods etc. In such a situation, several options exist with the bank. First option is to reschedule the recovery over a longer period rather than ask the borrower to immediately settle the amount borrowed for which the borrower may not have financial capacity to settle his/her loan, despite his/her best intention to do so. As a last resort, if the amount involved is a small one and the probability of recovery is low. The bank has a better choice to write it off as a normal business loss by treating it as bad debt. However, there are situations where a borrower has capacity to re-pay but no intention to do so. Such a situation is exploited to one s advantage by vested interest due to several clouts, eg political, influential, coercive, undue influence and such other factors. These people ultimately prove to be stronger than the strength of a bank to recover. Unfortunately, this is mostly due to lack of ethics and with the intention of taking loans and not to re-pay. In such a situation, banks will have disastrous effects not only on its bottom line, but also on affecting the position of the government in collecting lower income tax and the society in terms of growing default culture with a domino effect. A crackdown by all stakeholders ought to be a positive response against these elements. The civil society must rise to this occasion. The courts must deliver their goods and the entire financial system must be geared up to tackle these elements and curb their negative attitudes for restoring the financial discipline in the country. This is the crying need of the hour in the society. In the above backdrop, a quantitative analysis of the bank advances written off and as discussed in the press and as reported to the Parliament of Pakistan is now presented with a brief review. From 1972 to 2007, it is reported that a sum of Rs 256 billion was written off as bad debts by banks in Pakistan. This gives an annual average of Rs 7.11 billion. The Supreme Court of Pakistan, in suo motu action, has taken a serious note of it and asked the State Bank of Pakistan to furnish complete details so that the cases of bank advances, written off to the extent of Rs 256 billion can be fairly and properly examined.

NPLS IN PAKISTAN During Musharraf s regime (1999-2007), a sum of Rs 55 billion was written off as bad debt, representing write off advances with an annual average of Rs 7.8 billion. However, it was reported to the Parliament of Pakistan that during the current democratic regime, in two years, a sum of Rs 51 billion was written off as advances by the banks, involving an average of Rs 25.5 billion. A total of 212,114 people and companies are reported to have benefited from this write off. The names of the banks and the beneficiaries have yet to be made publish. Consequently, the situation is getting from bad to worse. It is high time that this trend is arrested immediately, failing which banks will be heading towards low profitability in the short-run and insolvency in the long run. This financial debacle must be avoided with prudence and strong monitoring. The financial system must rise to the occasion and reverse the above adverse trend, notwithstanding, powerful vested interests. The tested hypothesis is that with growing amount of NPLs, the financial health of the banks will continue to be deteriorating. Prudent banking requires declining trend of NPLs. It is unfortunate that from December 31, 2008 to March 31, 2010, NPLs have grown by Rs 112 billion as additional burden on the banks. In terms of time series, this NPLs amount as of 31st December 2008 was Rs 345 billion, which till March 31, 2010 was Rs 457 billion. This now represents 14.4% of banks advances. Accordingly, there is a wake up call for banks and for the State Bank of Pakistan to arrest this unfavorable trend, failing which banking system will grow from a healthy position to a sick one with consequential adverse effects on banking system, lower taxes to the government and sad effects for the society as a whole. The sooner this growing adverse and unfavorable trend is arrested the bearer it will be for all the stakeholders. Way forward: This piece has addressed only one theme namely, need to organise banking sector house in proper shape in the larger interest of strengthening Pakistan s financial front. The Supreme Court of Pakistan has already taken up this issue. Now, the Parliament is requested to get serious and earmark at least two days for a fullfledged debate for studying the root cause of growing NPLs and upward trend of write off of bank advances.

This piece has highlighted consequential domino effects of this situation and the democratic government will be strengthened. If our house has to stay in order, we must take serious note of the grim financial situation and rise to the occasion for a positive and productive solution to the challenges facing the country on the foregoing fronts with determination and will power.

The increase in NPLs and written off advances should be firstly grounded to zero level and later the trend should be reversed to the ultimate advantage to various stakeholders in the country. There is a need to have a fresh look at the existing laws and amend these to curb the unhealthy trends stated above. The challenge is big, but our response should be bigger and by Allah s grace, we after exercising the willpower, can find solution to the foregoing problems. Let us get committed to the job and deliver the goods in a befitting manner. Time is on our side and we should translate it to our solid advantage. According to a survey conducted by KPMG following statistical figures were found regarding banking NPLs: The average ratio of non-performing loans as percentage of gross loans and advances of all banks included in this survey increased 10.83% compared to 8.43% in 2008. The average ratio of non-performing loans as percentage of gross loans and advances of Large Size Banks increased to 10.45% as against 8.42% in 2008.

The average ratio of non-performing loans as percentage of gross loans and advances of Medium Size Banks increased to 10.80% as against 7.70% in 2008.

The average ratio of non-performing loans as percentage of gross loans and advances of Small Size Banks increased to 15.43% as against 11.54% in 2008.

The average ratio of non-performing loans as percentage of gross loans and advances of Islamic Banks increased to 7.28% as against 3.87% in 2008.

Classifications of Non-performing loans The ratio of provision against NPL is approximately, 70.7%, 66.1%, 53.7% and 52.2% for Large, Medium, Small Size and Islamic Banks.

Written off loans amount to Rs 300bn The infected portfolio or non-performing loans are posing a serious threat to the financial health of the banking sector. The written off loans amounted to Rs50 billion during last year alone while the total written off amount is now estimated to be around Rs300 billion. Well placed sources in banking circles mentioned that about 50% of consumer portfolio is infected and the situation calls for serious corrective measures to allow the financial sector to play its due role in rebuilding of the economy. Broad line characteristics indicate a clear picture of the working pattern of the banks during last 40 years: 1970 - 1980 Banks were nationalized. Borrowings were influenced by political families or political influence with sole purpose of taking money from business/projects. Long term projects did not exist 1980 - 1990. Almost same situation continued in this decade. Misuse of World Banks supplier credit for project for industrialization 1991-2000 Dr. Yaqoob joined the government of Pakistan as Special Secretary/Principle Economic Advisor and was appointed Governor, State Bank of Pakistan in 1993. He bought reforms in the banking sector as the Governor. IMF and mainly the World Bank pressurized for Banking Reforms. Basel Accord required Capital adequacy. 2000-2010 CIRC formed in September 2000 to clean up the balance sheets of the nationalized banks in the public sector for sale to the private sector It was the same model as adopted in USA as Resolution Trust Corporation.

Circular 29 of State Bank of Punjab was introduced in October 2002 for settlement of NPLs 2004 onwards witnessed government back consumer finance expansion for demand side economy or pull economy. It is pertinent to mention that advocate Syed Iqbal Haider, the counsel for the SBP, submitted to the court two lists of top 50 beneficiaries of the loan write-off. The first list includes the names of companies and industries which got loans of Rs47.109 billion written off on a standalone basis, and the other contains the names of those who got Rs15.556 billion of loans waived under BPD-29, a special banking circular. The lists have been submitted in compliance with the courts earlier directives to the central bank to cite at least 10 cases between 1971 and 2009 to prove that loans had been written off after fulfilling banking rules and regulations.

OVERVIEW OF WRITTEN OFF LOANS IN PAKISTAN A three-judge bench, headed by Chief Justice Iftikhar Mohammad Chaudhry, had taken notice of press reports that the central bank had quietly allowed commercial banks to write off loans of Rs54.6 billion under a scheme introduced by former president Pervez Musharraf. It had names on it like Eurogulf Enterprises, Younus Habib, West Pakistan Tank Terminal, Mercury Garments Industries, Siraj Steel Ltd, Spinning Machinery Co, Saad Cement Ltd, Pakistan National Textile, Mehr Dastagir Spinning Mills, Mohib Textile Mills, Redco Textiles, Chaudhry Cables, Abdullah S Al Rajhiest, Quality Steel Works, Mekran Fisheries, Kohinoor Looms, Aziz Spinning, Farooq Habib Textile, Northern Polythene, Firdous Spinning Mills, Balochistan Foundry Ltd, Tawakkal Group of Industries, Mian Muhammad Sugar Mills, Punjab Cooperative Board for Liquidation, Pakpattan Dairies, Adamjee Industries etc. Among the top 50 beneficiaries is Redco Textile Limited owned by Saifur Rehman Khan, former chairman of the Ehtesab Bureau. His brother Mujeebur Rehman Khan was director of the company which managed to get a Rs1.1 billion loan write off by the United Bank Limited in 2006. Saddruddin Gangji and Hasham A.H. Gangji of the West Pakistan Tank Terminal (Pvt) Ltd got a loan of Rs1.9 billion written off by the Allied Bank Limited in 2005; Younus Habib, the main character in the Mehran Bank scam, got Rs2.4 billion waived by the Habib Bank Limited in 1997; Mohib Textile Mills (Pvt) Ltd of the Saigol family, got a Rs1.1 billion loan written off by the National Bank of Pakistan in 2002; Mian Muneer Ahmed of the Firdous Spinning and Weaving Mills Ltds Rs780 million loan was written off by the HBL in 2005; Bayindir Insaat Turizm Ticarets Rs734 million loan was written off by the ABL in 2008; and Glamour Textile Mills Ltd of Lahore got a loan of Rs533 million written off by the NBP in 2002. Meanwhile, the central bank of Pakistan has recently convened a meeting of commercial banks and development finance institutions today to work out a strategy in response to the observations made by the Supreme Court regarding written off loans. The issue of written off loans was discussed at length during the meeting that was attended by the Presidents and Chief Executives of banks. The representatives of the commercial banks apprised the SBP Governor that banks had already issued notices to defaulters in line with the directives of the Supreme Court.

The banks representatives informed the meeting that a write-off is undertaken after all remedies to recover have been exhausted. They said that the writes-offs are allowed by their Boards. Banks representatives informed the meeting that a number of prominent industrialists were made to suffer jail sentences and large scale liquidations or

auction sales were carried out. At the same time it was also pointed out that a substantial number of borrowers, 47,911 to be precise having loans of Rs 500,000 and below were allowed write off. The bankers said that they would consult their key managements and the legal counsels and devise strategies in respect of write offs and report to the State Bank. It was agreed in the meeting that the Apex Court must be facilitated by providing all necessary information/data and all efforts should be made to deal with respect to write offs. The participants of the meeting were of the view that this initiative of the Supreme Court could be used as an opportunity and hoped that it would result in discouraging willful defaults, improve recovery position and bring stringent laws on recovery. The participants of the meeting were of the view that the Supreme Court may be informed that the litigation process with regard to the recovery of loans takes a lot of time. However, the meeting resolved that they are committed to adhere to the directives of the honourable Supreme Court to satisfy the Apex Court. It may be mentioned here that a three-member bench of the Supreme Court comprising Mr. Chief Justice Iftikhar Mohammad Chaudhry, Mr. Justice Ghulam Rabbani and Mr. Justice Khalil-ur-Rehman Ramday is hearing a suo motu case on write offs. As desired by the court, the central bank submitted a list of written-off loans from 1999 onward. The court desired that the period covered should be 1971 onward. The SBP has thus furnished a new list indicating that the one supplied earlier, giving the figure of Rs193 billion, may be ignored. According to this list, loans worth Rs256 billion have been written off since 1971.Does this tell the whole story? The answer is emphatic No. The first State Bank list covered 33 banks and four development financing institutions (DFIs) whereas the present list is confined to only commercial banks, leaving out DFIs. This is a significant omission as DFIs include ZTBL, which has written off loans of big landowners in large amounts. The real picture will emerge if all financial institutions are duly covered. In other words, the list should include all commercial banks whether scheduled or nonscheduled, DFIs, non-bank financial institutions (NBFIs), Cooperatives and Taqawi loans by government. The figure of written off loans is quite shocking even as such but would be more revealing if the coverage is comprehensive and the period covered is taken back as far as possible. Dr Hafiz Pasha, as Prime Minister`s Advisor for Finance, had earlier given to the Senate the position starting from 1985 and ending on end-March, 1998, year and sector wise. According to that list, the amount of defaulted loans increased from Rs23.4 billion to Rs184.5 billion, of which agriculture accounted for Rs21.8 billion and

industry, Rs98.3 billion. The amount written off during this period was Rs16.6 billion - Rs1.4 billion for agriculture, Rs4.9 billion for industry.. Interest is often shown to know who the actual individual beneficiary is. The list of borrowers does not help in case of corporate borrows as only the name of the firm is given. A seeker need not go very far to know the actual individuals behind the companies. Fortunately, this information is already published in the annual report of scheduled banks. The banks are required to give the total figure for the written-off loans below Rs0.5 million and details about the loans of Rs0.5 million and above For corporate borrowers, the names of members of their board of directors, along with their addresses, are also given. NPLs are indicative of what is in the pipeline for future loan write-offs These loans have reached the figure of Rs421.6 billion as of end-September 2009.These loans are categorised. The loans outstanding for three years or more are categorised as loss. Annual Reports of five major commercial banks, namely, ABL, Habib Bank, MCB, NBP and UBL report a very high proportion of NPLs under this category, which is expected to be ultimately written off. The State Bank would be well advised to come out clean by publishing a White Paper on the subject. The purpose should be to enlighten, rather than confuse, an issue, which is a real mess, even though of great economic importance not only for the general public and other policy makers but also for the SBP itself for proper and effective monetary management. The paper should give a detailed and comprehensive account of at least the following issues. How the default evolved over the years and what policy and administrative measure were taken by the SBP? The amount written off under the auspices of the bank itself and by banks on their own. The basic criterion for the write off The number of cases with the amount involved with ordinary courts and the banking court. What has been the role of Banking Ombudsman? Recommendations of various committees, particularly the Beg Committee, set up to deal with problem. A detailed analysis of the written-off loans, their components, distribution by period of default, size, sectors, nature of the borrower, whether public or private, initial rate of interest, amount due and actually written off, etc. The problem is important enough to be discussed on a continuing basis. It is fervently hoped that State Bank will at long last give up its studied silence and deal with it in its regular publications like Annual Report, Financial Stability Review and Quarterly Report on the State of the Economy, The need for early enactment of a bankruptcy law cannot be over emphasised. Pakistani Banks had quitely written off Rs. 50 billion fresh loans outstanding against the borrowers during the last two years and at the same time, Pakistans total borrowing from World Bank, Asian Development and IMF reaches $31 Billion.

Now seeing such figures one can easily think that on one side we are showing our socalled economic recession and asking for help in terms of loans or donations etc and on the other hand our banks are writing off fresh loans which a very high percentage. According to the figures given by Dr. Khuwaja Amjad Saeed from 1947 to 2007 banks have been writing off loans with the average of 6.8 billion per year but during this freshly democratic government this average has reached to 25 billion rupees. Ofcourse, if we have to monitor the companies whom loans have been written off, we still their luxurious lifestyles but on paper who are unable to pay their debts. NPLS AND NATIONAL BANK Build case to get $53b debts written off At this crucial point of time and grim situation, one shudders to imagine the emerging economic scenario. In the wake of havoc played by unprecedented floods and the resultant deprivation among the flood affectees, and other people too, Pakistan may further plunge into uncertainties of all sorts. The economy is already in a shambles and to add to the dismal situation, the Ministry of Finance has come out with an assessment that the economy is heading for zero per cent GDP growth rate and a whooping inflation of 25% during the ongoing financial year. It is indeed a horrible scenario. Over and above, the Government of Pakistan is trying to keep the future generations of Pakistan hostage to foreign debts that have accumulated to a staggering $53 billion. According to experts this debt would rise to $ 73 billion in 2015-16 and one never knows if the present state of affairs may ultimately land us with a $ 100 billion debt in the next ten years. It is no rocket science to arrive at the conclusion that an individual or a nation that is entangled in the cobweb of debt, which often comes with humiliating conditions, loses self-respect and sovereignty. Those who know the IMF conditions, their impact and the extent of intrusion by its officials in policy formulation, say that Pakistan has been mortgaged to the Fund. After the floods, the IMF team is due to discuss the emerging economic scenario with Pakistani finance and economic managers. In addition, the IMF representatives are already sitting in the economic ministries in the garb of experts and time is not far-off when there would be more such officials sitting in the rooms next to the Federal Secretaries. It is also to be mentioned here that World Bank, IMF and other institutions employ quite a significant number of Indian nationals and their presence in the corridors of power in Islamabad may jeopardize our national security interests because their (Indians) first loyalty would be with their country and then to the employer. Pakistanis being a conscious and self-respecting nation are against acquiring loans and they think, rightly so, that this nation can stand on its own feet and that is why when former Prime Minister Mr Shaukat Aziz used to say proudly We have broken the begging bowl, people felt their heads raised on prospects of the country moving

towards self-respecting economically independent State. Those statements were not just political gimmicks because we not only stopped receiving financial facility from the IMF but also the country had emerged as one of the fastest growing economies in Asia, Stock Index touched over 16,000 marks/points and foreign exchange reserves reached at the highest level of $ 18 billion. Now that it is recognized internationally and by the UN that losses from the unprecedented floods were more than the 2004 tsunami, 2005 Pak earthquake and the 2010 Haiti earthquake, therefore, I think Pakistan needs much more than just assistance for relief and rehabilitation. The losses to infrastructure alone are so high that Pakistan would not be able to recoup in the next five years. Almost the entire Kharif crop of the country has either been washed away or adversely affected by the floods translating into losses worth trillions of rupees to the farmers and the national economy. In view of the unprecedented devastation to economy, infrastructure, industry and agriculture, I recommend a case should be built to approach the donors for the loans write-off. It will not be the first case of its nature. International laws, the UN Charter, ethics and morality all support Pakistan's case for getting a write-off. Various countries have invoked these laws and in the recent past Iraq and Afghanistan loans were written off as their case was strongly supported by the United States. The IMF waived a debt to Haiti and the World Bank also deferred repayment of its debt for five years. At the same time, the international community pledged $ 5.3 billion to fund the initial phase of Haiti's reconstruction where the Government reported to the international community that in addition to the many dead, 300,000 were injured and one million made homeless. A total of 250,000 houses had collapsed or severely damaged. Comparing to the losses of Haiti, the damage in Pakistan is colossal. Here twenty million people have been affected by floods, over one million houses damaged in addition to destruction of the entire crop on which the country's rural economy and textile industry depend. If we look to the response of international community received so far, though we do not want to make any comparison, it is like peanuts to the assistance given to Haiti. We have been pledged just over $ 815 million as against $ 5.3 billion aid to Haiti. The international community went in a big way for Haiti because two former American Presidents Clinton and Bush pursued the case of relief and reconstruction of the tiny Island State. There are many other justifications. But I think the justifications I have enumerated in the preceding paragraph would be enough if these are presented with a proper documentary proof to the international community and a write-off is sought.

Keeping all this in view, I pleaded to President Asif Ali Zardari on August 16, 2010 when he invited a group of 7 Editors at the Presidency for an informal and frank interaction, that Pakistan should build a case for a write-off of all the foreign debts. I also mentioned how according to my assessment Pakistan, in the perspective of flood-related world sympathy wave, can approach the donor countries and institutions for this one-time substantial relief. I asked the President as to why Pakistani nation and leadership set aside vital State interests and only cared about self-interests. I also mentioned that former President Pervez Musharraf who did a lot of good things for Pakistan failed, however, to get a substantial support when he decided to respond to the US query/threat by saying, We are with you in the aftermath of 9/11 tragedy. Now it is a known fact that the US was ready to give $ 10 billion to Pakistan for cooperation in the fight against terrorism as they gave substantial assistance to Egypt and Turkey at the time of invasion of Iraq. President Musharraf, perhaps, thought it below his dignity to demand for due compensation. But President Zardari did not appear to be interested in my submissions.Therefore, what I am talking about is building a case quantifying the facts by the experts and with input from the Provincial Governments and endorsed by the DNA of WB and ADB about the huge flood losses. Aid for the flood damages should also be accompanied by a demand of $ 60 billion which according to my assessment Pakistan suffered in the war on terror and the resulting losses of human lives, infrastructure and so many other expenses. In fact Pakistan has been suffering continuously since 1979 when we joined the civilised world to oust the Soviet Union from Afghanistan. On the basis of the two issues i.e. floods and war on terror devastations, Pakistan can field a genuine case to the international community for either writing off of all loans or their swap, to use those loans for development and social welfare of the people of Pakistan affected by floods and war on terror. If need arises, Pakistan can give sovereign guarantees that the swap would be utilized under the monitoring of any international financial institution. In case it is done, and Pakistan puts across a well-documented right message through the entire machinery available i.e. Government channels, political leadership of the country, media and foreign friends, it may meet success. But it has to be an orchestrated all-out campaign. I am sure, this would receive a positive consideration. Even if you go to the court of world public opinion and managements of the donor organizations, I am sure, that may carry a lot of weight. There is no harm even in engaging an international lobbying firm to build up the Pakistani case. I also propose the Government to show large-heartedness and, in the best national interest, to entrust the task to Mr Shaukat Aziz as he enjoys good rapport with Governments, World Bank and IMF as well as with the world's leading bankers and knows fully well how they work. I am confident he can charm the donors.

In any case, it is incumbent upon the leadership of the country that instead of going into trivial things like getting the IMF loans restructured or asking for a waiver of certain conditionalities, they should think big and do some loud thinking. Don't dwarf Pakistan which is a big country in all respects. Our leaders should develop confidence in themselves and at least make an attempt, a serious one, to save our poor future generations from the clutches of the crushing loans. We owe this to our future generations. May I ask our leaders If you don't get the debt of US$ 53 billion written off then who will, and how, pay these loans? Every child of Pakistan is not Balawal, therefore, it is incumbent upon the leadership to think of non-Balawals also. Banks wrote off Rs74.38 bn loans in 08-09, NA told At a time when Pakistans economy is in shackles after accepting hard conditions of the donors for getting new loans and its borrowing from the State Bank of Pakistan (SBP) has gone to Rs281 billion till November this year, the government has presented a shocking revelation in the National Assembly that commercial and nationalised banks have written off Rs74.384 billion loans in the last two years of Prime Minister Yousuf Raza Gilani headed coalition government during the year 2008 and 2009. The federal government in a single directive has written off this hard earned money of Pakistanis on the one hand, while on the other hand, it has put the whole system at the stake to impose flood surcharge, RGST and excise duty to generate additional revenue of Rs60 billion. In a written reply in the National Assembly on Thursday, Finance Minister Dr Abdul Hafeez Sheikh made the starling revelation of written-off loans worth Rs74.384 billion, while giving a written reply to a question asked by Tasneem Siddiqui. It is to be mentioned here that the issue of written-off loans is subjudice. According to record of written-off loans presented in the National Assembly during the question hour session, the public sector banks have written-off loans worth Rs8.08 billion. The Zarai Taraqiati Bank Limited is top of the list with writing-off loans worth Rs3.44 billion, National Bank of Pakistan wrote off loans worth Rs 3.18 billion, SME Bank Limited wrote off Rs679.37 million loans, Industrial Development Bank Rs525.42 million, Pak Kuwait Investment Co Ltd Rs68.99 million, Saudi Pak Industrial and Agri Inv Co Rs65.59 million, The Bank of Punjab Rs57.58 million, Pak Libya Holding Company Limited Rs7.55 million, Pak Oman Investment Co Limited Rs2.82 million and First Women Bank Limited wrote off loans worth Rs2.46 million. Foreign banks have written off loans of Rs29.98 billion. Albaraka Islamic Bank BSC (E.) has written off loans worth Rs7.61 million, Citibank NA Rs8.18 billion, The Royal Bank of Scotland Ltd Rs5.24 billion, Standard Chartered Bank Ltd Rs16.05 billion and HSBC Bank Middle East Ltd wrote off loans worth Rs486.14.

The private sector banks has written off the loans worth Rs36.31 billion during the year 20018-2009 that includes United Bank Limited, which has written off loans worth Rs12.51 billion, Habib Bank Limited Rs7.16 billion, NIB Bank Limited Rs4.87 billion, Allied Bank Limited Rs3.82 billion, MCB Bank Limited Rs3.62 billion, Askari Bank Limited Rs1.63 billion, Bank Alfalah Limited Rs1.03 billion, Silk Bank Limited Rs872.37 million, MyBank Limited Rs201.05 million, KASB Bank Limited Rs158.66 million, Atlas Bank Limited Rs136.54 million, Habib Metropolitan Bank Ltd Rs100.96 million, Samba Bank Limited Rs89.88 million, Soneri Bank Limited Rs40.69 million, Faysal Bank Limited Rs21.65 million, Bank Al Habib Limited Rs7.46 million and Meezan Bank Limited has written off loans worth Rs5.88 million. In a reply to another question asked by Raja Muhammad Asad Khan regarding the total amount of loan obtained from State Bank of Pakistan by the government during the year 2009-10, the finance minister in a written reply stated that the government has obtained Rs17.08 billion. He informed that the State Bank of Pakistan had printed new currency worth Rs153.75 billion (Rs153,750.00 million). According to details, 600 denomination of Rs5 value of Rs3 billion, 600 denomination of Rs 10 of a value of Rs 6 billion, 200 denomination of Rs20 of value of Rs4 billion, 225 denomination of Rs50 of a value of Rs11.25 billion, 75 denomination of Rs500 of a value of Rs37.50 billion and 92 denomination of Rs1000 of a value of Rs92 billion. IMPACT OF NPLS ON PAKISTANS ECONOMY
WRITE-OFF ADVANCES

Advances of Rs.500000 and Above written-off: Between 1972 and 1996 (25 years) Rs. 11.22 billion Rs.449 million per year Between 1997 and 2009 (13 years) Rs.202.56 billion Rs.15600 million per year
GREY AREAS The following important questions arise, answer to which must be debated in the public openly * What has been the role of the State Bank, the custodian and regulator of the financial system, in terms of policy formulation, which facilitated the write-offs, the amount written off under its own auspices and by banks on their own? * In the present age of transparency, the State Bank is surprisingly very secretive about loan write-offs. The bank publishes the figure of non-performing loans (NPLs), which is the first step towards loan write-off but not the next more important ultimate

step of actual write-offs when this information is regularly published by individual banks. However, the State Bank prefers to maintain discrete silence. It is not realised that by doing so and not adjusting the figures of bank credit for the private sector for NPLs and loan write-offs, the SBP distorts monetary analysis. By their sheer size, they render monetary policy ineffective. * Why the situation was allowed to drag on for years with the result that the amount of principal is only a fraction of the amount written off. According to the information recently supplied by NBP to the Parliament for three years, 2007 to September 2009, the amount written off was Rs6.8 billion. The amount of principal as ratio of the total amount written off declined from 38 per cent in 2007 to 25 per cent in 2008. * The most intriguing aspect of the phenomenon is that in some individual cases, the amount written off is far in excess of the amount due from the borrower. It is hard to imagine why this gift to defaulters? This even affects the overall position of the banks. For instance, for the above mentioned banks, in 2006 the amount due was Rs19.3 billion but the amount written off was Rs29.5 billion, or an excess of Rs10.2 billion or 53 per cent. For this, the most prominent bank was UBL which wrote off Rs13..4 billion as against Rs6.7 billion which was due. * All civilised countries have bankruptcy laws but Pakistan has no such law. It is some times given out that one is on the anvil and will be enacted soon. However, nothing happens. What stands in the way of introduction of this essential law? * Huge amounts are involved. For instance, the largest loan written off by NBP in 2007 was of Rs406 million and of Rs304 million in 2008. It is not clear whether this impaired the credit worthiness of the defaulters or they continue to enjoy bank credit facility as usual. * It is significant that at times loans to public institutions backed by government guarantee are written off. NBP wrote off Rs71 million for Punjab Cooperative Board of Liquidation in 2008. Why the government guarantee was not enforced?