Politics of loan write-offs


The Supreme Court, while hearing a suo motu case on September 27, 2010, questioned the authority and jurisdiction of State Bank of Pakistan (SBP) to waive off Rs 256 billion bank loans during the period from 1971 to 2009 under Banking Companies Ordinance. The apex court directed the SBP counsel to submit details of at least ten cases from each year, which met two conditions set in Section 33B of Banking Companies Ordinance, 1962 and which were pre-requisites for writing off loans -Business Recorder, September 28, 2010. Banks have written off some Rs 125 billion worth of loans during the past six years – 2000-2006 period – against Rs 30 billion written off during 1985-1999, and larger number of loans have been written off under the SBP circular No 29/2002, of which major beneficiaries are politicians and industrialists – Business Recorder, January 27, 2008.

The country’s banks and other financial institutions wrote off a staggering amount of over Rs 30 billion during the governments of Muhammad Khan Junejo, Benazir Bhutto and Nawaz Sharif. During the two tenures of prime minister Nawaz Sharif – 1990-93 and 1997-99 – that the major chunks of these loans were written off. Two-thirds of the total loans – Rs 22.35 billion – were written off during the two stints of Nawaz Sharif. In his first tenure, a total of Rs 2.39 billion were written off and during his second, the amount went up to a staggering Rs 19.96 billion. The written off loans, during the two tenures of Nawaz Sharif, constituted approximately 74.5 percent of the total of Rs 30.18 billion, written off between 1986 and 1999. During the two terms that Benazir Bhutto was in power, a total of Rs 7.23 billion loans were written off, constituting 24.2 percent of the total written off loans – Rs 494.97 million in her first tenure and Rs 6.74 billion in the second – The News, March 13, 2000.

It is a matter of record that public money has continuously been looted by the rich and mighty in this Land of the Pure. The facts quoted in press reports cited above reveal how colossal wealth of this nation (public money lying in banks) was plundered pitilessly and ruthlessly. The criminal culpability of successive governments – civil and military alike – in this matter has pushed Pakistan in a corner where the global community perceives this country as a haven for the corrupt, plunderers, criminals and tax evaders.

The Supreme Court on January 21, 2008 asked the State Bank of Pakistan (SBP) to report in two weeks details of a scheme it allegedly approved in October 2002 for writing off loans of Rs 54 billion owed to commercial banks by business concerns run by some top politicians and other people. The court took suo motu action on a report appearing in a section of the press regarding SBP’s approval of a scheme to quietly write off a total of Rs 54 billion bank loans.

Based on a secret report to the Public Accounts Committee (PAC) of the National Assembly, the newspaper reported that 50,000 people, including politicians, civil and military business concerns and business tycoons of Karachi, Lahore and other cities, had been favoured through the scheme and their outstanding loans had been written off in 2002. The report had accused the then chief ministers of two provinces as being beneficiaries of the scheme because their families, having big business concerns like sugar mills and ghee mills also got a waiver on outstanding loans. Even some foreign firms and multinational companies and a private bus service operating from Lahore to different cities of Punjab were also extended this facility.

Soon after October 2002 elections, the news item pointed out, the then finance minister Shaukat Aziz and his financial team at the SBP approved the loan write-off scheme, having yielded to the pressure from certain top politicians of the then ruling party. Instead of launching an effective campaign for the recovery of non- performing loans (NPL), it said, the SBP issued an incentive scheme to the banks/DFIs in October 2002 for waiving the NPL of the organisations, showing ‘loss’ for three years or more after dividing them in three categories. Category “A” included NPL up to Rs 0.5 million, category “B” NPLs ranging from Rs 0.5 million to Rs 2.5 million and category “C” loan of more than Rs 2.5 million. The politicians and the big business concerns exploited the third category to get billions of rupees outstanding against them written off. Shockingly, the report said, the banks/DFIs were asked to recover maximum possible amount to settle loans, falling under categories “B” and “C” through forced sale of available assets. The purpose of the scheme was purportedly to clean the balance sheets owned by banks/DFIs. It was just an eyewash. The real purpose was to give unprecedented benefit to the rich and mighty.

This is not the first time that the Supreme Court has taken the matter of loan write offs. Way back in 1996, the Supreme Court took suo motu cognisance, under Article 189 of the Constitution, of mismanagement of public money and expressed its intention of studying all the laws governing the banking sector in this regard – see detailed report in Dawn, October 16, 1996. The apex court vowed to make authoritative pronouncement that “would eliminate the chances of misusing the laws for siphoning of public money.” There is, however, no track what happened to that public interest litigation case. From the latest proceedings, it appears that the issue is lingering on since 14 years. The said public interest litigation originated from a reference filed by the then President, the late Ghulam Ishaq Khan, against a PPP MNA, Rao Rasheed Ahmad, who as a member of loan write off committee, blatantly ordered to write off a loan of his wife.

There are many such examples where the haves (big borrowers of financial institutions) of this society managed to plunder the savings of the have-nots (small depositors) in a shameless manner. An unholy alliance of bankers, businessmen-cum-politicians and bureaucrats destroyed the entire banking/financial system and now they are advocating elimination of riba (which is, according to them, exploitative!). What about the sanctity of a contract under the Quranic injunctions? What about plundering of public money? Who exploited whom? Who exploited the banking system in Pakistan? Who promoted the culture of kickbacks in sanctioning of loans? Who engineered the default in the most skilful manner to get the benefit of write-offs, whereas the personal wealth of directors kept on increasing?

During the so-called transparent era of Musharraf, the loans write offs in just seven years (2000-06) crossed the figure of Rs 125 billion, whereas in the much-publicised “corrupt eras” of elected governments (1985-1999), it was just Rs 30 billion. This comparison speaks for itself and does not require any further comments.

The politics of writing-off of loans in this country requires proper investigation and study as it will unveil many “big names” that are responsible for corruption and failure of the democratic process in the country. The country lost billions of rupees in the form of public revenues on account of bad debts written off by the banks. The following passage from the “Audit Report Vol. III B Income Tax Receipts and Workers Welfare Fund 1988-89” published by the Auditor General of Pakistan, is an eye-opener.

“Loss revenue due to irregular allowance for bad debts: Three nationalised banks claimed in their computations of income, deductions on account of bad debts as shown in the accompanying table.

Bad debts claimed as above were allowed by the income tax officer, not on the basis of his own findings as required under Section 23(1)(x) of the Income Tax Ordinance, but on the basis of a certificate issued by the State Bank of Pakistan, as instructed by the Central Board of Revenue in its confidential circular letter C. No 1(48) IT-1/82, dated 3.8.1983 addressed to two commissioners of income tax at Karachi and Lahore. It was instructed that ‘in case of an assessee, being a bank wholly-owned by the government of Pakistan, production of certificate from the State Bank to the effect that provision of bad debt as specified therein has been approved by the State Bank of Pakistan should be treated as sufficient evidence. In such cases, the claims may be accepted on the basis of the said certificate without further investigations the instructions would apply to assessments for the assessment year 1983-84 onwards.

Assessment         Amount of
year               bad debts
1980-81           11,768,743
1981-82           20,716,730
1982-83           81,122,489
1983-84          315,000,000
1984-85          155,000,000
1985-86          176,000,000
1986-87          185,000,000
1987-88          400,000,000
Total          1,344,607,000
1983-84          144,640,000
1984-85          110,800,248
1985-86           92,004,416
1986-87           63,848,560
1987-88          149,894,000
1988-89          140,000,000
Total            701,187,224
1983-84          297,200,000
1985-86          247,350,615
1986-87          213,100,000
1988-89          217,300,000
Total            974,950,615
Grand Total    3,020,745,801

The power to allow deduction on account of bad debts from the gross business income of an assessee vests with the income tax officer vide provisions of Section 23(1)(x) of the repealed Income Tax Ordinance, 1979, which is reproduced below:

“Deduction shall be allowed…

“(x) in respect of bad debts, such amount (not) exceeding the amount actually written off by the assessee) as may be determined by the income tax officer to be irrecoverable.” The Central Board of Revenue took away the said powers of the income tax officer and gave these powers to the State Bank of Pakistan, which was an illegal act.

As provided under Section 8 of Ordinance, all officers of the Income Tax Department were bound to follow the orders of the Central Board of Revenue. Further, the Central Board of Revenue was competent to make rules for carrying out the purposes of the Income Tax Ordinance and in particular to provide for the determination of the value of any allowance vide Section 165(2), but such rules have to be notified in the official Gazette.

The CBR did not frame any rule nor was any rule notified in the official Gazette. Thus, the said circular letter dated 3.8.1983 issued by the CBR divesting the income tax officer of his assessment powers in the matter of determination of allowance for bad debts and conferring such powers on the outside agency of the State Bank of Pakistan was null and void.

Not only that the instructions issued were illegal, but such instructions that were effective from the assessment year 1983-84 onwards were also applied to earlier years as noted above. Moreover, certificates issued by the State Bank of Pakistan covered both bad debts and assets (which were allowed in full) and did not specify the amount of bad debts separately.

On account of illegal instructions, issued by the CBR, the government suffered a huge loss of revenue. It was not possible for audit to make an accurate estimate of this loss of revenue. Bad debts are incidental to money lending business to some extent. Technically speaking, the income tax officer, if left to himself and not restrained in the illegal manner, would have allowed, / disallowed either in full or in part the claim of bad debts after scrutinising the accounts of the assessee-banks. However, evidence placed on the assessment records suggests that the debtors had furnished substantial securities to the creditor-banks so that the loans could have been recovered by taking legal action.

The banks took no such recovery action. It could thus be very reasonably said that the income tax officer would have disallowed the bulk of he claims of bad debts. The government might well have suffered a staggering tax loss of Rs 1,967,057,641 in the instances noted above which were by no means exhaustive.

The matter was taken up with the concerned commissioner of income tax who tried to defend the impugned action of CBR and subordinate officials. However, he has not offered any tangible comments on the validity of CBR’s action. The audit requires justification for the said action involving huge loss to government.” The above self-explanatory paragraphs revealed that the total amount involved during 1980-81 to 1988-89 in respect of three nationalised banks alone was over Rs 5 billion. The period 1990-91 to 2006-07 involves even bigger amounts not less than Rs 400 billion.

The government of Pakistan, State Bank of Pakistan and Income Tax Department never considered this audit paragraph seriously. Had this special immunity not been granted, the loss to public exchequer of Rs 120 billion could have been averted. The Central Board of Revenue [now Federal Board of Revenue] in the presence of this audit report from the Auditor General of Pakistan, issued another circular instructions on February 4, 1993 vide its letter No 13(26)/IT-1/79 which read as under: “In suppression of the Board’s letter of even number dated 21st September, 1992 on the subject, I am directed to convey the following decisions for necessary compliance:

– The present procedure as prescribed by the CBR’s Circular No 1(48) IT-1/82 dated 8th August, 1983 should be continued and the verification of State Bank of Pakistan on the level of provision for bad debts by a bank should be taken as final; and;

– The operation of CBR’s circular dated 9th August 1983 should be extended to all those privatised, private and foreign banks, which are legally subject to the regulatory framework of the State Bank of Pakistan.

– These decisions shall have effect for the loans that are certified bad after the 21st September, 1992.”

The instructions constitute blatant violation of law on the part of CBR [now FBR]. The Auditor General’s observations of 1989 were ignored in 1993 and even today to save the political masters. The banks were extended the facility of not disclosing the names of defaulters who were beneficiaries of write-off of their loans.

The case of the Industrial Development Bank of Pakistan was under process, when the CBR [now FBR], on the instructions of its political masters, came to its rescue and issued the following instructions to protect the disclosure of defaulters:

— “The undersigned is directed to refer to your letter No RCIT-Jud (Misc)/94/2145 dated March 28, 1994 on the subject and to say that a uniform treatment be extended to all banks (including IDBP, which are covered by CBR’s Circular No 13(26) IT-1/79 dated February 4, 1993) in respect of “bad debts” only.

— Consequently, the instructions contained in Circular C. No 1(48) IT-1/82 dated August 8, 1993, would continue to apply. It may kindly be noted that the applicability of the said instructions was extended to all those privatised, private and foreign banks also, which was legally subject to the regulatory framework of the State Bank of Pakistan, and that the extension of this treatment was to take effect retrospectively i.e. w.e.f. September 21, 1992.

— The representation of IDBP may kindly be disposed of accordingly.” [CBR Letter C. No 13(26) IT/79 dated May 9, 1994]”

The politics of writing-off of loans in this country involve many “big names”, who are responsible for failure of the democratic process in the country. The country lost billions of rupees in the form of public revenues on account of bad debts written off by the banks. The cases relating to plundering of public money to the tune of billions and blatant abuse of powers by rulers and their henchmen need proper investigation.

It is hoped that this time the Supreme Court will succeed in unveiling the unlawful process under which banks, unscrupulous businessmen, state functionaries and politicians joined hands to deprive this nation of billions of rupees and causing colossal public revenue losses. The big bosses of the State Bank and the FBR should be taken to task to explain who had asked them to issue “administrative instructions” in gross violation of law for loans write offs. The inquiry into loans write offs can expose the big sharks and their modus operandi. If we want to establish true democracy in Pakistan, the public money looted by these criminals, should be recovered and state functionaries who joined hands with them, should be awarded exemplary punished.
The writers, legal historians, authors and tax lawyers, teach at Lahore University of Management Sciences (LUMS)
NOTE:This is a cross post from Business Recorder.

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  • Parvez Amin  On October 2, 2010 at 1:02 am

    Looted money must be recovered. A way to do it quickly and without the rigors of an extended judicial process is needed. How about voluntary admission and return in exchange for less punishment and an assured minimal monthly payment and forgiveness?

    • Laila  On October 2, 2010 at 5:39 am

      100% agreed Pervez. Unless & until we continue with the culture of the culprit keeping the loot, it will only encourage more corruption as there is no punishment.I totally agree monies MUST be returned.

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