The Politics of Loan Write Offs

By Dr. Ikramul Haq*

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. 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 period 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. ‑ News item in The News, March 13, 2000.

The facts quoted in Press report reveal how colossal wealth of this nation (public money lying in banks) was plundered in a ruthless manner, which is unprecedented in recent history. The report shows the gravity of the issue and the quantum of money involved. The criminal culpability of successive governments in Pakistan 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 honourable Supreme Court of Pakistan in 1996 (Reference: Dawn dated 16^th October, 1996), taking suo moto cognizance under Article 189 of the Constitution of Pakistan, took up this issue of mismanagement of public money    and expressed its intention of studying all the laws governing in this regard. 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, it appears the same is still pending even after a lapse of three and a half years.

The said public interest litigation originated from a reference filed by former President, 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 have (big borrowers of financial institutions) of this society managed to plunder the savings of the have not (small depositors) in a shameless manner. An unholly alliance of bankers, businessmen-cum-politicians and bureaucrats destroyed the entire banking/financial system and now they are advocate of elimination of riba (which is, according to them, exploitative!). What about breach of contract with banks? Is not the same against the injunctions of the Holy Quran? Who exploited the banking system in Pakistan? Who promoted the culture of kickbacks in sanctioning of loans? Who engineered the default in the most skillful manner to get the benefit of write-off, whereas the personal wealth of directors kept on increasing?

The politics of writing-off of loans in this country requires proper investigation and study as it will unveil may “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.”

Assessment year		Amount of bad debts (Rupees)
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 Rs. 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 Rs. 701,187,224
1983-84		297,200,000
1985-86		247,350,615
1986-87		213,100,000
1988-89		217,300,000
		Total Rs. 974,950,615
Grand Total		Rs. 3,020,745,801

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 power to allow deduction on account of bad debts from the gross business income of an assessee vests with the Deputy Commissioner of income Tax alone as contained in Section 23(1)(x) of the Income Tax Ordinance, 1979. According to the Accountant General:“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.”

The money involved during 1980-81 to 1988-89 in respect of three nationalised banks alone was over Rs. 5 billion. The period 1990-91 to 1998-99 involves even bigger amounts. According to a conservative estimate it is not less than Rs. 150 billion. The Government of Pakistan, State Bank of Pakistan and Income Tax Department never considered the audit objections framed by the Auditor General of Pakistan seriously. Had this special immunity not been granted, the revenue to public exchequer would have been to the tune of Rs. 100 billion under the head of income tax alone.

The Central Board of Revenue in the presence of this audit report from the Auditor General of Pakistan kept on issuing such instructions in utter violation of law. It instructed the subordinate officers in 1993 and 1999 that the present procedure as prescribed by the CBR’s Circular No. 1(48) IT-1/82 dated 8^th 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. These instructions constitute blatant violation of the Constitution of Pakistan on the part of CBR. The Auditor General’s observations of 1989 are ignored even today to save the plunderers of public money. The banks through these instructions have been extended the facility of not disclosing the names of defaulters who are beneficiaries of write-off of their loans.

These facts pose a challenge to the National Accountability Bureau (NAB) to unearth the process in which banks, state functionaries and politicians joined hands to deprive this nation of colossal public revenues. The big bosses of the State Bank and CBR should be summoned to explain who had asked them to issue “administrative instructions” in gross violation of law. The entire episode proves beyond any doubt that under well-designed modus operandi public money was siphoned.

---

* The writer, a leading International Tax Counsel, specialises in international tax, corporate and constitutional laws. He is Chief Partner of Lahore Law Associates (Email irm@brain.net.pk). He is member of Visiting Faculty of Institute of Direct Taxes in Lahore.  From 1984 to 1996 he was associated with Civil Services of Pakistan as Deputy Commissioner of Income Tax. He is author of numerous books on Pakistani Tax Laws, some of which are co-authored with his wife, Mrs. Huzaima Bukhari. He has recently been awarded Doctorate of Law for his research on Tax Reform in a Quasi-Constitutional Perspective.