National Bank of Pakistan Limited – Organziational and Managerial Report

national-bank-of-pakistan

national bank of pakistan

 

National Bank of Pakistan Limited is the largest bank in Pakistan. Underlying Organziational and Managerial Report focuses on areas such as debt, non-performing loans and downsizing.

 

2%NON-PERFORMiNG LOANS (nPLs)

 A COMPARISON BETWEEN HBL AND OTHER INSTITUTIONS

FINANCIAL INSTITUTION BAD DEBT PORTFOLIO

(As on December 15th, 1999)

HBL Rs 44 billion
NBP Rs 24 billion
UBL Rs 22 billion
IDBP Rs 14 billion
ADBP Rs 9 billion

 

REASONS ATTRIBUTABLE TO THE HUGE NPL PORTFOLIO

1.    Political and bureaucratic pressures

After nationalization HBL came directly under government control. To a very large extent heavy accumulation of Non-performing Loans is attributable to the misuse of the Bank by successive governments after nationalization as instrument of political patronage for conferring unjustified political favors on certain influential individuals.

2.    Project financing

Since the early 1990s HBL expanded its loans and advances from short and medium term loans to long term financing of large industrial projects, which obviously pose greater risk due to the bank due to their uncertain and often negative returns.

3.    Poor initial appraisal of loan requests

Credit management has unfortunately not been of high quality. Credit analysts and decision makers at HBL were not equipped with latest techniques and tools of financial analysis and interpretation.

4.    Lack of follow-up on loans

Credit was not adequately monitored after disbursement and warning signals were not picked up in time for remedial measures.

5.    Imperfect legal system

An inadequate legal and judicial framework, that encouraged blatant misuse of the financial system by unscrupulous borrowers who adopted various delaying techniques to save themselves from accountability.

6.    Absence of accountability for defaulters

Until now all steps taken by successive governments to grab the defaulters have been fruitless. Several times have they received their “last chance to clear their debts” yet they have continued to ignore it. Even with the stringent measures announced by the present government the response seems muted.

7.    Incompetent bank employees

Banks employees are not trained in the latest methods of credit analysis and management. They have failed to recognize unviable projects or did not carry thorough investigations before extending loans.

8.    Absence of accountability of bank employees

While National Accountability Bureau (NAB) is now pursuing the defaulters of large bank loans, no banker who gave those loans has been punished or even questioned.

9.    Poor control of SBP

Prior to 1997, SBP was merely a figurehead central banking institution having virtually no say in how banks conducted their operations. Even after 1997, while it insists that banks follow the Prudential Regulations strictly, it has yet to carefully monitor the functioning of the banks.

 

LOAN RECOVERY BY MAJOR BANKS, BY NOV 16TH 1999

BANK NPL PORTFOLIO CASH RECOVERY RESTRUCTURED LOANS
HBL 44 billion 1.629 billion 5 billion
NBP 24 billion 915 million 5 billion
MCB 9 billion 1 billion 2 billion
UBL 22 billion 850 million 1.3 billion
ABP 10 billion 800 million N/a

 

RESTRUCTURED LOANS

HBL has regularized some of the loans at an average down payment of 15%-25% with the balance of the loan repayable up to 3 months to 2 years depending on the merit of the borrower.

The payments of these restructured loans are received either monthly or quarterly and are allowed against securities.

EFFECTS of the npl portfolio

The huge NPL portfolio has resulted in uncountable problems for the bank. The frustrating feature is that despite measures taken by the management, recovery has not been adequate or fast. Among several problems posed by this situation, some are:

1.    Lower return on assets

2.    Lower rates on deposits

3.    Lower financial savings

4.    Constraint in expanding credit facilities

5.    Loss to the bank

6.    Loss to economy

 

 

Solution

RTC

Case-to-case study

Out-of-court settlement

 

 

 

BALANCE SHEET

(Rupees ’000)

  1999 1998

ASSETS

   
Cash 22,726,139 20,543,868
Balances with other banks 20,470,125 20,232,569
Money at call & short notice 2,713,117 1,414,198
Investments 64,615,598 71,020,403
*Loans and advances 153,890,845 136,814,324
Operating fixed assets 5,690,582 5,523,401
Capital work in progress 462,823 459,312
Net investment in finance lease 32,382 28,530
Other assets 34,365,876 33,744,157
304,967,487 289,780,762
LIABILITIES    
*Deposits 251,779,188 239,055,416
*Borrowings from other banks 31,350,670 19,214,501
Bills payable 5,611,698 6,024,517
Other Liabilities 11,944,724 12,498,437
300,736,280 276,792,871
Net assets 4,231,207 12,987,891
REPRESENTED BY    
Share capital 12,718,495 12,718,495
Reserve fund & other reserves 6,173,534 6,021,095
Accumulated loss (17,934,389) (9,060,224)
*Shareholders’ equity 417,640 9,139,366
Surplus on revaluation of fixed assets 3,813,567 3,848,525
  4,231,207 12,897,891
     

 

 

 

 

 

BREAK-UP OF LOANS AND ADVANCES

1999 1998
Loans, cash, credits, overdraft, etc. 163,143,422 144,657,336
Bills discounted and purchased 17,661,846 15,205,976
180,805,268 159,863,312
Provisions against non-performing loans (26,914,423) (23,048,988)
Net 153,890,845 136,814,324

 

Loans and advances include Rs. 58,393 million (1998: Rs 48,011 million) which have been placed on non-performing status.

These non-performing loans also include government-guaranteed debts of Rs. 508.02 million (1998: Rs. 1,359 million).

 

 

BREAK-UP OF DEPOSITS

1999 1998
Fixed deposits 77,107,508 72,311,009
Savings deposits 122,184,027 109,850,404
Current accounts 40,563,829 39,865,909
Deposits and accounts of other banks 11,923,824 14,408,094
251,779,188 239,055,416

 

*Items marked with an asterisk show the greatest variance therefore they have been discussed in greater detail in the next few pages.

 

OTHER FACTORS

Freezing of FCAs

Lack of business development planning

Lack of research and innovation of products

Heavy administrative cost

High rates of taxation

58 as opposed to 45 for other companies

Mismanagement

CHANGES BEING INTRODUCED

RELATIONSHIP BANKING

Credit for Small borrowers

PRIVATISATION

WHY PRIVATISATION

Pakistan is one of those countries where IMF and World Bank policies towards Structural Adjustment Programme and other strategies are being implemented. The most controversial and debatable of these policies is Privatization of State-Owned Enterprises (SOEs).

The objectives of Privatization are:

  1. To make available the much-needed cash from investors
  2. To improve the working of the bank

FACTORS RESPONSIBLE FOR DELAY IN PRIVATISATION OF HBL

In 1991 the government made public its decision to privatize Habib Bank Ltd and other SOEs.

RISKS POSED BY PRIVATIZATION

As there do not exist large parties in the country who can legitimately qualify for purchasing the bank.

OPTIONS

Sell on, as is where is basis

Sell after bad debts have been recovered

Establishment of Resolution Trust Corporation (RTC)

The RTC would first separate the bad loans from the good ones. The bank could then be sold off as a clean bank.

The RTC over bad debt portfolio of the bank.

The bank receives government bond of say 7 years maturity with face value of bad debt

Bank receives market rate of interest on the bond thus strengthening bank’s cash flow.

Major improvement in sales proceed from privatization

Use sale proceeds to buy back bonds or retire other debt

Uncollectible debts remain a cost to taxpayer

LIQUIDATE THE BANK

Risks

Formation of private monopolies

 

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