According to a recent circular from the State Bank, banks follow a discriminatory lending policy that hurts the economy and violates rules set for financial institutions. They have been advised to desist from adopting discriminatory practices on the basis of trade, region, gender, ethnicity, specific profession, class or group of citizens, such as lawyers, politicians and officials of law enforcement agencies (LEAs). This advice was issued due to repeated concerns shown by the affected groups about banks' discriminatory practices in relation to consumer finance and general banking facilities. The SBP has further asked banks to explicitly convey reasons - in writing - for the refusal of loans to the applicants and maintain a separate file for all approved and rejected cases. It was also stated that such discriminatory practices militate against country's Constitution and that such complaints have been viewed seriously by the SBP. As usual, it was also made clear that any violation would attract a punitive action under the relevant provisions of the Banking Companies Ordinance, 1962.

The above instructions, on the face of it, would appear to be a wonderful idea to those whose applications for loans are routinely rejected. The banks are generally blamed for not providing loans to lawyers, journalists, policemen and security officials and no specific reasons are given for such a policy. The applicants are merely told that loans are not provided to people belonging to their category. Banks seem to believe that if the loans are disbursed to borrowers like lawyers, policemen and journalists, they would either refuse to pay back loans or enter into litigation on one pretext or the other. The case of politically exposed persons (PEPs) is even more strange. The lending policy of banks could change, depending on the influence of the PEPs involved. If the politician is in the government or powerful, his application will be favourably treated and vice versa.

Although, the advice of the SBP could be defended on the basis of virtue of uniformity of treatment, it does not meet the criteria of a sound lending strategy and, to a certain extent, violates the principle of independence of banks in selecting their own borrowers. It is only logical that banks would be inclined to lend to those categories of people or sectors of the economy whose repayment record is good and vice versa. Groups like lawyers and policemen often find it difficult to get premises on rent because of a widely-held perception that they could ultimately occupy the rented premises by hook or by crook. The experience of bankers suggest that these categories of borrowers would find excuses not to repay the loans and somehow would pressurise banks in this regard. So far as various sectors or categories of trade are concerned, banks would avoid lending to the sectors which are less vibrant and unprofitable. They could totally refuse to lend to the sectors which are accumulating losses and are, therefore, least likely to repay loans. It must also be recognised that it is depositors' and not their own money, which the bankers lend to various parties. As such, they have to be extra careful in the selection of borrowers. At the same time, they have to ensure a reasonable return on the equity and pay a comparable rate of return to depositors to retain their employment. Keeping all these factors in view, banks should be given enough flexibility to choose their borrowers and that is happening all around the world. If the circular of the SBP is followed in letter and spirit, we are afraid that banks may be forced to lend to less creditworthy borrowers and there could be more infected loans in banks' portfolios.

Copyright Business Recorder, 2017