Todays headline reads that Pakistan has asked donors to write off $50 billion plus worth of loans. Last weeks headline was that the Supreme Court thinks all people who have had loans written off are crooks. Does that make us a nation of crooks? Or does that mean the Supreme Court is barking up the wrong tree?
To understand the Supreme Courts apparent position regarding loan write-offs, one needs to go back in history. In 1974, the government of Zulfikar Ali Bhutto nationalised the major banks in Pakistan. The ostensible rationale for this step was that the banks were all tied to major industrial groups and thus less inclined to help out the common man.
The nationalisation of banks worked about as well as the nationalisation of most things. As time went by, public sector banks in Pakistan became notorious for both giving out and writing-off loans on political considerations. During the Zia years, the issue was standard cocktail-party chatter. But as Pakistan turned once again towards democracy, it increasingly became a public scandal.
During the 1990s, the state responded to the write-off problem in multiple ways. The State Bank responded by making it not just difficult but practically impossible for banks to write-off loans. The legislature responded by making written-off loans a disqualification for public office. And the executive responded by starting the process of privatising the banks.
Decades of stupidity was obviously not going to be rectified overnight. And so it was that the demonization of loan defaulters continued unabated in Pakistan. This process reached its apogee with the NAB Ordinance of 1999, a law which actually presumed that all loan defaulters are criminals, and that they would all cough up their ill-gotten gains if only threatened with sufficient force by a suitably moustachioed SHO.
The problem though is that all loan defaulters are not criminals. Banks make money by lending money to businesses. Businesses make money by taking risks. Every time you take a risk, there is a chance that you will fail. And therefore, every time banks lend money to a business, they are taking the risk that their investment will fail.
The smart observation at this point would be to note that lending money does not mean lending money without collateral. Of course, some businesses fail. But as long as the bank has adequate security, why should any loan ever need to be written off?
The answer is that getting adequate security is very difficult. Property valuations are notoriously unreliable. Trying to actually sell a property pledged as collateral notwithstanding all our attempts to come up with speedy recovery laws is often frustrated for years. And as for trying to get money out of people who have given personal guarantees, fuhgeddaboutit!
The actual issue though is slightly different and more abstract. I have no doubt that given enough effort the ingenuity of man could devise a system in which no loan would ever remain unpaid. The problem is that such a system would be terrible for the economy and terrible for businesses.
To insist that all loans must be repaid in full is the equivalent of insisting that your car must be willing to withstand all accidents. Yes, you can design a fortress on wheels. But you wont be able to drive it anywhere and the mileage will probably be horrendous.
The point being made is that every system has to make compromises. There is nothing morally wrong with loan write-offs per se. Banking is a business and to make money banks too have to take risks. Moreover, it is good for banks to take risks on customers because those customers (i.e., businesses) get to take risks. And if there is one thing that we should have learnt by now, it is that dynamic economies not only permit but reward risk-taking. Obviously, one can go too far down the permissive route. The sub-prime mortgage fiasco in the US, for example, teaches us that allowing banks to grant mortgages to people without identifiable incomes is not a great idea. But before reaching that deregulated extreme, there is a vast amount of territory in which the great majority of advanced economies function quite happily.
Not surprisingly then, I would be considerably happier if the Supreme Court were to leave this particular hornets nest undisturbed. Yes, loan write-offs given for political reasons are bad. But there is no way that the Supreme Court can tell from the list of all post-1971 write-offs requested by it as to which write-offs were justified and which were not. The only way to make such decisions would be through a detailed factual inquiry. Not only does the Supreme Court not have the time to conduct any such exercise but also that is not the job of the apex court. The NAB law makes politically motivated write-offs a crime. It also created Accountability Courts to deal with these crimes.
Leaving aside practical issues, the bigger-picture problem for me is the demonization of loan write-offs. Our economy cannot afford a legal system which does not permit loan write-offs. For better or for worse, write-offs are a fact of life. Shouting at that problem does not make it better.
The author is an advocate of the Supreme Court of Pakistan. The views given above are his individual views and do not represent the views of his firm. He can be contacted at [email protected]
