Even bankers are banks defaulters!
Talking about the Non-Performing Loans (NPLs) the other day a sarcastic businessman quipped at a party “why don’t you talk about the biblical saying that one who hath not sinned shall cast the first stone.” Interestingly on inquiry the bankers confirmed that while the media and the judiciary are concerned on the increasing non-performing loans (NPLs), there are thousands of bankers and media persons and organisations which fall in the category of defaulters.
Agreed but this does not mean that those who have not defaulted should not cast the stone. And I think many working journalists who raise alarm about the rising NPLs are not defaulters. (Don’t blame me for being biased about my community but mark my emphasis on “working journalists’). Now the allegation that many bankers and even some central bankers are defaulters was surprising for me. To counter check I had to ring up some bankers, who on condition of anonymity confided, that out of almost 150,000 commercial banks employees around 11 to 12 percent are defaulters. Now I take this figure as high, but it can only be confirmed if the State Bank of Pakistan or Pakistan Banking Association takes notice of it.
But one thing is sure that the problem seems to be serious and that is the reason that two commercial banks Human Resource chiefs said they are working on introducing rules that all employees will have to certify that they are not defaulters of any bank. Banking sources said that though these defaulter bankers, who include some very senior executives also, do not default to the bank they are working for, they are not shy in defaulting to other banks. In most cases the other bank is their previous place of employment.
A senior banker said that while SBP has a circular BPD 13 of 2004 regarding “Fit & Proper Test” for any director of a bank, which disqualifies any defaulter of banking institute, it has no such restriction on any banking executives. Section 4 clause (ii) of the circular on Solvency & Financial Integrity says that no directors and CEOs of the banks: “Has not been in default of payment of dues owed to any financial institution and/or default in payment of any taxes in an individual capacity or as proprietary concern or any partnership firm or in any private unlisted and listed company.” But there is no law of propriety for other bank employees although they hold the trust of the depositors. Inadequate inquiry at the time of employment in banks is also resulting in many frauds in which bankers of the second and third tier are involved. “It’s natural that who is a defaulter himself has usually a soft corner for another defaulter and finds it difficult to push for the recovery,” a senior banker observed.
These sources said while the amount defaulted on credit cards is smaller the major problem is where these bankers had taken house building loans where the average amount is about Rs6 million. “The problem with these professional bankers is that while the get loan at very low interest rates from the bank they work for, on change of job the rate of interest is raised automatically to the market rate. This thus becomes unaffordable for them and they default,” he explained.
According to the State Bank, total consumer credit in September 2010 was Rs 311 billion. This does not include Rs75 billion which is outstanding to the bank employees’ personal loans. Consumer banking default rate which had shot up last year to over 20 percent has come down to around 13 percent. “The default rate has come down firstly because now the banks are using Credit Information Bureau and not pushing cards on to the consumers who have cards or have a default track record. Secondly after taking a bad hit the banks had provided for NPLs in the last year’s balance sheet,” a consumer banking head explained.
Most of these defaults fall under the category of auto loans, credit cards and personal loans. Limited defaults are towards mortgages and other loan categories. An analysis of the entire industry shows that there are 1.5 million credit cards issued by the entire banking system and average default rate is around 16%. In September last the bank’s exposure credit card market is about Rs27 billion, auto-loans Rs61 billion, housing Rs53 billion and personal loans Rs91 billion.
Most bankers I talked to said that while in auto and housing loans the banks have some comfort as they can repossess the car or a house, in the case of credit cards “we are quite helpless particularly eversince SBP has introduced new recovery guidelines in late 2008.”
Senior banker Shaukat Tareen who is considered to be the pioneering leader of consumer banking in Pakistan says that Pakistan consumer banking defaults should be seen in broader prospective. “In US where this industry is very developed there has been major default in housing and credit cards loans because of the economic crunch,” he explained. “Pakistan” he says, “is no exception where because of the economic meltdown the default rate has gone up, but this is cyclical and the market will bounce back.”
Low growth rate followed by the floods has particularly affected the banks, which had large SME and consumer banking portfolios and that includes the foreign banks. With total commercial banks NPLs touching Rs462 billion, which is 4.6 percent of the net loans portfolio of the banks ??. The ratio is higher because of the public sector banks, while the private sector banks ratio is 3.88 percent. The banks have provided for this amount as per the prudential regulation and now if they concentrate on recovery their 2011 balance sheet may improve. The Supreme Court, which has taken up the issue of NPL should be focusing on fast-track decisions of the banking cases which at present take years and cost a lot of money to the banks. Though consumer financing is just a small part of this awesome Rs 462 billion NPLs, it is in the interest of the regulators and the court to pay attention to their recovery, as it benefits the middle classes and stimulates the economic growth.