Issue No. 606
Economy
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3 - 9 October 2002 Issue No. 606 Economy |
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Deconstructing defaulters
A range of factors has conspired against loan defaulters. This has made an already bad situation worse. Niveen Wahish reports
Over the past two years it has become common to hear of famous businessmen, weighed down by debt, fleeing the country. Although those who have fled are few, there are many more in the country who might be contemplating doing the same. Prime Minister Atef Ebeid's call on banks to desist from legal action against defaulters, giving them a chance to express their intention to settle debts may calm the problem for the time being, but is hardly a solution. The trouble runs much deeper.
Although official figures place debt defaults at around 14 per cent of LE350 billion in total loans, Mohamed Abdel-Fatah Ragab, head of the Alexandria Businessmen's Association believes that official estimates are too modest and that defaults stand at 60 to 70 per cent of loans.
When a couple of businessmen flee the country, it could be considered a fraud case, but when the phenomenon widens to include ever increasing numbers, there are serious problems, Shafiq Boghdadi, deputy Chairman of the Federation of Industries told a recent conference organised by the Egyptian Centre for Economic Studies (ECES) in Alexandria.
One of the factors highlighted by Ragab attributes the increase in the number of defaulters to the current slowdown in the Egyptian economy. "Nobody foresaw this extreme recession. Suddenly the markets came to a halt, sales dropped dramatically and debtors stopped paying their dues," he said. He added that even those who want to liquidate their assets to pay off debts have failed for lack of buyers.
Boghdadi, added a number of other reasons. He pointed out that internal factors such as mismanagement could have led to investor defaults. Additionally, he was critical of the role of banks in these defaults. "This means that something is wrong with the credit system, the supervision and follow-up on these loans."
Criminalising defaulters, according to a number of speakers at the ECES conference, was a bad move. Pacinthe Fahmi, general manager of Misr International Bank (MIB), does not believe that clients don't intend to pay. "These are people who have been working for years and don't want their efforts to be in vain."
Fahmi criticised the dependency of Egyptian banks on collateral when authorising credit. "This makes banks seem like pawnbrokers. Far more important are the risk assessments and feasibility studies of a given project," she said.
Fahmi stressed that above all there must be daily on-line position statement, provided by the Central Bank of Egypt (CBE). Currently these statements are provided by the CBE every couple of months, "by which time the damage is already done", she said. Without statements, she believes, banks cannot monitor clients adequately.
Despite the situation, Ismail Hassan, former CBE governor and chairman of the Misr- Iran Development Bank stressed that the size of defaults does not pose a significant risk to the position of Egypt's banks. He explained that, since 1991, the banking system began applying international standards on issues of debt. These impose quantitative calculations when considering which debts are actually irregular. According to Hassan, international standards classify debt as substandard, doubtful and non- performing, each according to certain criteria. In light of this, the CBE demands that each bank reviews the accounts it keeps and classifies each to a suitable category. Accordingly, banks have to make loan-loss provisions, that is, money put aside from a bank's profits. "This is a precautionary measure should the debt not materialise," said Hassan. As a result of this, loan-provisions rose from LE6.9 billion in 1991 to LE35.9 billion today. Even for well performing loans, provisions of one per cent are made. Moreover, when an account is classified as irregular, that account should be marginalised and not counted in the revenues of that bank. The size of marginalised profits today stands at LE40 billion.
But although banks are prepared for the worst, that does not mean that they are willing to give up their dues. Fahmi of MIB is of the opinion that banks should not give up on debts or debt servicing.
Hassan stressed that banks should aim to get all their money back. "Only if it is impossible for the debtor to repay, should the bank save what it can."
At the end of the day, the final goal is not just to get money back. Money should be provided for good investments and provide economic growth. But helping banks to get their dues back will be difficult. As Fahmi put it, "there is no magic quick solution to the problem."
She highlighted the fact that only banks will be able to take care of the default problem because they are the ones most aware of their clients' predicament. She also stressed that managing defaults is near impossible in the absence of adequate capital market tools.
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