It is perhaps a welcome day in Pakistan when loans owed by businesses affiliated with politicians can be written off and nobody need bat an eyelid about the stability or health of the financial system, let alone fret over the possible need for a government bailout of the banks. The news that more than Rs20 billion worth of loans owed by businesses owned by politically connected individuals were written off by banks over a two-year period was greeted by a collective yawn by the financial services industry. Here is why: the amount in question represents less than 0.2 per cent of the Rs11,643 billion in loans outstanding at banks across Pakistan. Simply put, as far as the banking system as a whole is concerned, the amount is not material enough to be bothered by.
That the amount is small, relative to the size of the financial system is not just a coincidence, of course. One of the biggest benefits of the privatisation of the previously state-owned banking system is precisely that it is no longer possible for politicians or their associates to exert political pressure on the banks to either give loans or to write them off. In the old days of the nationalised banking system, bank employees were civil servants, part of the overall organisational structure controlled by politicians. Now they are relatively well-paid employees of privately-owned businesses, and as such almost immune to political pressure. As a result, while these loans may be owed by politicians, no observer of our financial system seriously believes that any undue pressure was exerted on the banks to get these debts written off. And lastly, the one final benefit of a privatised financial system is that any losses from written off loans will be borne not by the taxpayer through bailouts, but by the shareholders of the banks themselves. Gone are the days when the banks used to need public bailouts every year. Instead, banks today are some of the largest taxpayers in the country. One wonders how much the energy sector would transform if it too were privatised.