NON-PERFORMING LOANS

When loan goes default for more than 3 months then that loan is considered to be as non-performing loan. This can also be depending on terms of loan contract. (www.enowikipedia.org/wiki/nonperforming) Central bank of Pakistan classifies non-performing loans into following categories (State bank report 2009)

Substandard:NPL type in which amount has been recovered is less than 60% of the amount receivable and where mark up/interest or principal is overdue by 90 days or more from the due date. Provision of 25% of the different resulting from the outstanding balance of principal less the amount of liquid asset realizable.

Doubtful:NPL type in which amount has been recovered is less than 40% of the amount receivables and has been overdue by 180 days or more from the due date. Provision of 50% of the different resulting from the outstanding balance of principal less the amount of liquid assets realizable.

Loss:NPL type in which amount has been recovered is less than 20% of the amount receivables and has been overdue by one year or more from the due date. Provision of the 100% of the different resulting from the outstanding balance of principal less the amount of liquid asset realizable.

Privatization:Different authors define privatization in different ways. According to Chowdhury F.L, privatization is a pure process of ownership transfer from public to Private Chowdhury F, L (2006). Privatization is a pure conversion of productive items from public to private ownership and change in control of the firm. Privatization has also been considered as a major player to improve the economy of any country. Firstly privatization started in united kingdom and then slowly and gradually started to take place in other parts of the world, especially industrial countries Robel Netsarab Debassay, (2004)/ Government has implemented the method of privatization hoping that new private owners will increase the efficiency of the firms and reduce the demands of state owned enterprises. Philosophers think that converting public enterprise to private enterprises would lead them to enhance their overall efficiency. (Richard and Mansoor, 1998).

Importance and Significance:Privatization till 1978 there was no such thing to implement. It was first time in 1979 when British government introduced a word privatization with many modern policies. For the first twenty years not so many countries believe in this thing but slowly and gradually countries understood the importance of privatization and now all over the world private companies Ratio is more than state owned firms. (Megginson, price and Neltr 1998). A strong favor in privatization can be proved when in early 1990s more than 1500 state owned firms turned privatized. (Kikeri, Nellis and Shirley, 1998). In Pakistan when banking sector was state owned, banking sector was suffering from huge losses and banks were unable to meet the requirements. Main reasons which can be seen to adopt the policy of privatization by the state owned banks were competition, political intervention and corporate governance. From a study by Shirley and Walsh 2003, according to their analysis privatization brings competition in the market and pushes the firm performance in positive manner. From their study they found that state owned enterprises are less competitive because politicians use them for their self interest. From the studies of (Shirley and Nellis 1991, World Bank 1995), it is concluded that after privatization the firms performance normally improves because politicians are unable to use the firms resources for their own interest, i.e. in private banks, the managers are more independent in decision making regarding their branch operations and decision regarding loans and cost minimizing. Privatization improves the corporate governance structure in firm by giving more incentives to their employees in order to use their skills in efficient and effect ive manner which in turn improves the firm performance. (Schmidt 1996, Vickers and Yarrow, 1999).

Relationship:According to the IMF report privatization has helped commercial banks to maintain their NPL issues and records show that NPL trend is going downward. Write off guidelines were issued in October 2002, which enabled banks to clean the stock of Non Performing loans more quickly. If we look at the overall position of asset quality in five largest banks of Pakistan is generally poorer than other small banks especially foreign banks. According to Otchare (2003), study of privatized banks of low and middle income developing countries are less efficient in their banking activities because of political intervention and less effective use of managerial qualities in favor of financial institutions due to political intervention. As a result, the ratio of Non Performing loans is increase due to lack of corporate governance, political influence, lack of efficient and effective policies and procedures.