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Reason for inadequate recoveries of advances allowed by nationalised commercial banks.

Reason for Inadequate Recoveries of Advances Allowed by Nationalised Commercial Banks

An efficient market economy requires healthy credit delivery system, which entails sufficient provision of funds to the business, industry and agriculture as well as timely repayments of the same. Unfortunately over here, there had been overemphasis on provision of funds, theoretical for socio economic considerations as well as due to socio-political pressures commensurate stress was not laid on repayments of advances obtained from the Credit giving agencies. Consequently a highly distorted perception of nationalised banks took roots in the psyche of the businessmen, industrialists and agriculturists. Getting advances was considered a matter of while repayments were taken as extortions.

It is, therefore, needed that thorough public education is imparted (not in a formal sense), regarding the rights and duties of borrowers in a market economy and the prerequisites of a strong and healthy credit system, so that importance thereof is brought home to all concerned. It should be adequately highlighted that when someone borrows not only is he duty bound to pay back. It is only he who has taken a business decision and is as such responsible for its consequences. If a profit is made all of it rightly belongs to him, and if there is a loss it is his loss and not the loss of credit giving agency or that of community at large.

The greatest harm to the credit system was done by the one, who first of all encouraged the system of write-offs on a large scale, much beyond prudence of banking profession. Restructuring and rescheduling of advances is an accepted practice for a normal credit system. But writing-off an advance, is not justified when someone proclaims that he has made a loss in a particular transaction or business wherein the advance was utilized. A typical borrower and average debtor pleaded that he should be allowed concession or write-off, despite otherwise being quite capable of liquidating his liability. This is definitely only a little short of misdemeanor.

The system of write-offs was introduced, perhaps in good faith and innocently, for the benefit of widows and other economically disadvantaged people. However, the practice took over the credit system by storm, and ate it like termite. If seen objectively, it is a deadly disease for the system and does require urgent curative measures. The step in the desired direction ought to be immediate stoppage of this practice by all the financial institutions. The word stoppage should have all capital letters.

We must allow the bankruptcy law, to work and judicial system to rule supreme in this sphere. If some one has taken advance let him repay to the last penny and if his affairs have deteriorated to the extreme and repayment is not possible after liquidating of all of his assets, let him go bankrupt. Banking is a business, even if nationalised. Banks, therefore, are exported to perform like a business enterprise. Similarly, clients have to behave like businessmen and follow the requisites of business practices.

Let us put an end to paternalism in the field of business and industry, so that the sense of responsibility stemming from maturity must prevail. The motto of "No more spoon feeding" should be applied. It will be good for both the loaners and loanees. At the same time government has to protect the nationalised banks from undue interference or pressure from politicians who have become or have tried to become businessmen. Let us look briefly at the historical background.

Feudal system, although a little bit weakened over the period of time after independence, still has a very strong stranglehold on our society. Feudalism naturally has values which are quite at variance with the values needed by the market economy. Before partition under the yoke of British Imperialism, not to speak of small farmers, even the big landlords of those days had been leading miserable lives, far below the poverty line. The returns from agriculture productions were so meager that even bumper crops of those years (grown without present day chemical, biological and mechanical aids) were hardly sufficient to pay revenues levied by the then Government agencies.

Under the circumstances, almost all agriculturists had to fall victims to money lenders who had their land holdings and other properties mortgaged. They also charged exorbitant rates of interest and thus inculcated a psychological aversion and fear in the minds of agriculturists against creditors. Naturally, it was for the creditor (money lender) to squeeze the loanees as much as he could. It was for the loanees to avoid and dodge the money lenders as much and as long as humanly possible. In that background non-repayment of loans, or attempts to avoid repayment, was understandable. In the present day situation, there is no justification for that attitude.

In day to day recovery process one comes across people, who have availed advances a few years back and appear perplexed by the present outstanding increased due to the application of mark up. They simply ignore the fact that money has time value or does not like to understand that money which means a power to purchase goods or services and a given quantity thereof at a given time has different present and future values. To make it simpler if a person took an advance of Rs. 100,000 four years back, and invested it in Defense Saving Certificates and gets Rs. 2,000,000/-for the same, he considers it as his right. On the other hand when creditor asks him to return say Rs. 1,75,000/-he not only appears perplexed, but feels victimized. But lender could have perhaps hardly absorbed the impact of erosion in value of money due to inflation, not to speak of time value of money otherwise. In the above instance if loanee had invested the borrowed amount real estate etc. he might had quadrupled the investment. However, his perception about the creditor is that of a blood sucker or a "Dracola". The poor loanee, who becomes rich in the process would attribute his good fortune to his stars and hardwork, without giving a tiny bit of credit to the lender.

The low quality of advances, is perhaps the most important reason for low recovery of loans. Pakistan's place in international Banking is well recognised as far as its "quantitative" coverage is concerned, i.e. spread of the branches and the number of personnel worldwide. But the "qualitative" side leaves a lot to be desired. Soon after the creation of Pakistan Banking was started by migrant Gujrati traders and businessmen, who were extremely conservative and very stringent in lending operations outside their family and community. The personnel employed by them were therefore, also trained to be highly conservative, and groomed to go according to the written rules and instructions in conjunction with the wishes of "Saiths". As such quality of advances in the beginning used to be excellent, and the portion of stuck up advances was negligible.

Then, suddenly Pakistani Banking was struck by a viral disease, which one may call AHAS (Aga Hassan Abidi Syndrome). The emphasis in banking shifted from efficient lending to salesmanship in attracting deposits. Quality of loan portfolio was bad. Although, the policy changed in one bank established by the gentleman, others also initiated. The employees were selected for their salesmanship and not for their technical or professional aptitude or skill. Books containing rules and instructions were contemptuously thrown outside the window. The inherited and original conservatism was replaced by recklessness. Expanding business through influence peddling entailing means of all sorts devoid of any scruples became the order of the day. Pakistani Bankers started operating like members of some sort of Costa nostra. Personalized services gave way to real banking services. It also infected the quality of advances. Bank officials did not hesitate to arrange advances for buying shares, housing and items of conspicuous consumption for those who could help them, mostly without even their asking. These means of enticement were given away at the expense of the bank. Such advances could neither be sufficiently secured nor returned by the borrowers having no business experience or acumen.

Commercial Banking System was nationalized in early seventies which over a period of time brought in its wake bureaucratic political, and unionist pest attacks. A large number of the advances had to be allowed and/or manipulated on the instance of someone or the other and used for political bargaining besides other lowly unbusiness like motives. The unions created by politicians to serve them, turned into Frankanstiens and also started influencing advances operations for obvious reasons. Pest control measures are already underway through privatisation of banking which will eventually do away with the menace to some extent, but do require stronger and larger doses of pesticides.

In addition to what is said above the introduction of Agricultural loans in commercial banking also told upon the quality of advances. The agriculturists had always been given grants in the form of "Taqavi loans" which had to be written off later. It was not fair to bring them under the umbrella of normal bank advances. Actually, there is a need for special system in line with USA or other Western Countries which should be devised specially for agriculture. Subsidies ought to be provided to this sector within a blanket support system, to alleviate their undue feelings of guilt parasites which they are not.

Inefficient recovery system is another bane of Banking Industry. If we look at the working of any Bank it is found that there is an army of employees and all sorts of supporting gadgets are available. However, no effective system for recoveries of stuck-up advances exists. There are cells, departments, divisions with high sounding names manned by scores of impressively designated Executives, Officers and other staff. The achievements are most deplorable.

It is, therefore, imperative that besides other measures effective recovery systems are introduced which should keep track of all advances at all levels. they should pursue the borrowers through written communications, telephones and personal calls regularly and constantly. Moreover, legal action, wherever and whenever necessary, should be taken without loss of time and followed up effectively.
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Title Annotation:Pakistan
Author:Chaudhry, Maher Elahi
Publication:Economic Review
Date:Aug 1, 1991
Words:1689
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