FILE (~Q~Y~ RESTRICTEDFILE COPI Report No. DB-58a

This report was prepared for use within the Bank and its affiliated organizations.They do not accept responsibility for its accuracy or completeness. The report maynot be published nor may it be quoted as representing their views.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

INTERNATIONAL DEVELOPMENT ASSOCIATION

APPRAISAL OF

THE INDUSTRIAL DEVELOPMENT BANK

OF

PAKISTAN

January 26, 1970

Development Finance Companies

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

CURREICY E4MAIBPTS

US;$ 1.00 - Rs .762Rupee 1.00 - U$ 0.21RS 1.0 million US$ 210,000Rs 10 billion U S$ 210 xLllici

7JTDJ5¶VTh.J L D7LT2LC,PTh!T, ThD^ 9IC ''- ?A.St''A 'T

TABLE OF C ONTEN TS

Page Paragzraph

STJMPRy i-ii i- x

I- INTRODUCTIGN 1 1

II. IDBP?S ENVIRNTIMI'1T AND ROLE 1- 3 2- 11

Economic Environment 1- 3 3- 8Financial Institutions and IDBP's Role 3 9- 11

III. THE COMPANY 4-13 12- 44

Background of Establishment 4 12- 1.4T.he Ordinance 4 15Functions 5 16Share Capital 5 17Control by Govrernment 5- 6 18- 19The Board 6 20- 21Managenent 6- 7 22Staff 7 23Organization 7- 8 24- 25Tecb.ical Advisory Committees 8 26Delegation of Authority 8 27Procedures 9-10 28- 31Maragement Information andAccounting System 10-11 32- 33

Resources 11-13 34- 44

III. OPERATIONS AND POLICIES 14-21 45- 75

Operational Policies 14-15 45- 46Interest and Charges 15-16 47- 51Trend of Operations 16 52- 53Size of Loans 17 54Duration of Loans 17 55Purpose of Loans 17 56Industrial Distribution 17-18 57- 61East Pakistan Operations 19 62- 64Small Loans 19-20 65- 68Administered Loans 20-21 69- 71Securities Investment 21 72- 74Rupee Guarantees 21 75

This appraisal report is based on the findings of amission comprising Messrs. A. Nuramatsu, B. Pottkerand L. Svoboda (Consultant), which visited DBP inSeptember 1969.

-2

Pags Paragraph

V. FINANCIAL RECQCRD 22-26 76- 95

Financial Position 22 76- 79Quality of Loan Portfolio 23-24 80- 86Capital Structure 24-25 87- 90Earnings Record 25 91- 93Dividends and Share Price 26) 94Audit 26 95

VI. PROSPECTS 26-29 96-105

Forecast of Business 26-27 96- 98Rupee Resources 27 99Foreign Exchange Resources 27 100Financial Prospects 28-29 101-105

VII. CQICLUSIONTS AND RECOM UATICHS 29-32 106-115

Conclusions 29-30 106-111Recommendations 30-31 112 -113

LIST OF ANNEXES

1. Industrial Fir.ancial Institutions in Pakistan

2. List of Shareholders as of June 30, 1969

3. Board of Directors and Executive Committee as of June 30, 1969

4. Organization Chart as of December 31, 1969

5. New Accounting System

6. Rupee Resources as of June 30, 1969

7. Foreign Exchange Resources and Utilization as of June 30, 1969

8. Foreign Exchange Resources by Financial Year Received

9. Schedule of Current Interest Rates and Charges

10. Surai1ary of Operations: 1961/62 - 1968/69

11. Analysis of Loans by Size, Duration, Type and GeographicalDistribution, Cumulative up to June 30, 1969

12. Industrial Distribution of Loans Sanctioned up to June 30, 1969

13. List of Administered Loans as of June 30, 1969

14. Balance Sheets: 1964/65 - 1968/69

15. Statements of Earnings: 1964/65 - 1968/69

16. Quality of IDBP's Loan Portfolio

17. Projections of Loan Operations: 1969/70 - 1973/74

18. Projected Cash Flow Statements: 1969/70 - 1973/74

19. Projected Balance Sheets: 1969/70 - 1973/74

20. Projected Income Statements: 1969/70 - 1973/74

SUMMARY

i. The Industrial Developuent Bank of Pakistan (IDBP) was establishedin August 1961 through a reorganization of the Pakistan Industrial FinanceCorporation (PIFCO). It is one of a series of institutions, private, mixedand governmental, designed to provide finance for private sector activity.IDBP's peculiar role in the group is the promotion of medium and small-scaleenterprises.

ii. IDBP's main activity is lending. Up to the end of June 1969, IDBPhad approved 3,720 loans (including guarantees on foreign suppliers t credits)totalling Rs 2,137 million. Foreign exchange loans represented 80% of thistotal. Other activities such as equity investment are only incidental. Totalresources available as of June 30, 1969 amounted to Rs 1,362 million, includingforeign exchange resources of Rs 866 million.

iii. In accordance with IDBP Ordinance, the Government holds 51% of IDBPKoshare capital, now amounting to Rs 50 million. Altholgh the Government doesnot appear to exercise undue influence on day-to-day activities, the Ordinancedoes give it extensive control over the operations of IDBP, including theappointment of a majority of the Board and the Management, and the Ordinanceprovides for detailed regulation of IDBPts activities. The Government hasagreed to make a comprehensive review of the Ordinance, with a view tosimplifying and streamlining it.

iv. The Board consists of representatives of the Central and ProvincialGovernments and of private businessmen. The present Management has madespecial efforts to consolidate IDBP's organization and to improve its proceduresand the quality of its very large staff. In the six years since the Bank'sfirst contacts with IDBP, there has been considerable improvement, in appraisaland follow-up and in the system of accounts and internal controls. Muchnevertheless remains to be done and IDBP has undertaken to formulate, or toengage consultants to formulate, a program for further improvement.

v. The average size of IDBP's loans is Rs 0.6 million. IDBP's loansunder Rs 0.5 million represent 81% of the total number of its commitments(17% in amount). They absorb a large amount of professional manpower andbear heavily on administrative overhead. A part of the small business financeis done in cooperation with the West and East Pakistan Small IndustriesCorporation (WPSIC/EPSIC), with IDBP acting as the financing institution andWPSIC/EPSIC as appraising and supervising institutions. Profit and risk areshared between them. This program is not working effectively, since thefunction assigned to IDBP is essentially that of a commercial bank. Duringnegotiations the Government agreed to formulate measures to streamline themachinery for financing small business.

ii

vi. IDBP is also active in providing finance to East Pakistan, parti-cularly to the jute industry. IDBP cooperates with the East Pakistan IndustrialDevelopment Corporation (EPIDC) in a program to set up new small-scale jutemills with the latter's guarantee. Also important in IDBP's portfolio is thecotton industry.

vii. The financial structure of IDBP has been strengthened considerablyin recent years. Recent share capital increases, the build-up of reservesand particularly the recent decision by the Government to subordinate itsadvances to share capital, have improved the debt/equity ratio, which nowstands at 4.3:1. IDBP's earnings record appears to be stable and satisfactory.

viii. IDBP's portfolio includes a considerable amount of defaulted accounts.However, consideration should be given to the present difficulties beingexperienced by medium and small businessmen in Pakistan and particularly inEast Pakistan where IDBP has been particularly active. IDBP has beenendeavoring to improve the situation, with some success; and it has givenassurances that it wi11 increase its efforts to reduce the level of arrears.

ix. IDBP expects to approve Rs 1,404 million in the current and sub-sequent four years, a 34% increase over the past five years. This appearsto be possible given the prospects of investment opportunities in agro-basedand export-oriented industries and assuming the availability of foreignexchange resources. On this basis, IDBP will need new foreign exchangeresources totalling $63.5 million by June 30, 1971. Assuming $30-35 millionfrom bilateral sources and $10-15 million from ADB, an IDA credit of $20million onlent by the Government to IDBP would be appropriate to fill the gap.

X. The terms of the loan should be those normally applied to the Bank'slending to development finance companies, including a flexible amortizationschedule and normal commitment charge. The debt/equity ratio should belimited to 5:1. The free limit should be $200,000 with the aggregate limitof $6 million.

APPRAISAL OF TME INDUSTRIAL DEVELO0EMT BANK OFl PAKISTAN

I. INTRCDUCTICN

1. In April 1969, the Industrial Development Bank of Pakistan (DBP)applied for a Bank loan of $20 million. Although no loans have previouslybeen given to it, the Bank has long been in close contact with IDBP. Thecompany was appraised in 1964 and there were discussions between the Bankand the Government with a view to a Bank loan. This did not materializepartly because of the Bank's policy at that time not to lend to a Governmentbank and partly also because of the condition of IDBP. The Bank did,however, provide a fairly detailed analysis of IDBP's weaknesses and problemsand made some precise recommendations for improving accounts and operations.Following the change in the Bankts policy, IDBP renewed its request anda mission visited Pakistan in July 1969. This report is based on thefindings of the mission.

II. IDBP'S ENVIRCNM$MT AND ROLE

2. A recent review of the economy of Pakistan is found in the reportentitled "Current Economic Position and Prospects of Pakistan,," SA-4a,April 18, 1969. An Industrial Policy Mission was in Pakistan in September1969 and is now preparing its report. Reference is invited to these reportsfor detailed discussions on the current condition of the economy and industry.

Economic Environment

3. The economic performance of Pakistan during the Third Plan Period,which will end June 1970, has been seriously disturbed by hcstilities withIndia, bad crops in the initial years and, later, widespread political andsocial unrest. Mloreover, a shortfall in foreign assistance has aggravatedthe balance of payments position already squeezed by military and foodimports. Against a projected annual net flow of transfers from abroad(including private investments) of US$760 million per year, the actualtransfer is expected to amount to only US$ 530 million. The Government,nevertheless, has strenuously combated these difficulties. The averageannual growth of GNP during the Third Plan Period is expected to come closeto 6%/o, which is below the projected 6.5 % but still is an accomplishmentin the circumstances.

4. One of the measures taken by the Government to cope with thesituation is export promotion. The effective exchange rate for exportshas been raised through the export bonus scheme. Under this scheme exportersreceive bonus vouchers for 30-40 % of their export earnings which giveentitlement to import certain goods and can be sold at a price currentlyabout 1850o above par; this means an effective exchange rate of 56-74h9oabove the official rate. This scheme has had a favorable impact on exportindustries, notably jute and cotton.

- 2 -

5. However, the Government's measures are generally causing restraintson industrial investment and activity. Foreign exchange available forcurrent inputs is rationed so that only about 609'o of the installed capacitycan be operated. The cost of imported inputs has been raised by shiftingmore and more products from the free list to the cash-cum.'bonus or bonuslists. which means an excbange rate of nearly double or triple the officialrate. Although capital goods may be imported on credit which is to berepaid at the official rate, the investor/borrower has to take the exchangerisk w]hich would be large in the circumstances; also, in the case ofsuppliers 1 credit he has to pay the damn payment in bonus vouchers.

6. The present exchange system is thus based on maltiple exchangerates which not only float in accordance with the market price of bonusvouchers but whose application to different products frequently changes.Although this system has certainly helped to promote exports, it makes itdifficult to insure an orderly process of resource allocation in theeconomy as a wmhole, and for individual entrepreneurs to make far-sightedinvestment decisions. Investments tend to concentrate on such industriesas jute and cotton mills which assure a quick return under the existingincentives .

7. There are two noteworthy points in connection Ifith the presentforeign exchange regime. First, medium and small-scale businesses arenore severely hit by adverse conditions. Their financial structure isgenerally less able to resist the effect of low capacity utilizationresulting from the limited foreign exchange allocation for imported inputs.Furthermore, the cash-cum-bollus system increases the cost of current inputsand consequently of working capital requirements, which are often difficultto finance, This is the more difficult because the value of imported rawmaterials as collateral for borrowings is uncertain given the instabilityof Government policy. Secondly, the engineering industry has come into acost-price squeeze between, on the one hand, expensive imported currerrtinputs and, on the other, competitive imports of finished goods which arerelatively cheap under the prevailing official exchange rate. The Govern-ment has recently raised import duties on capital goods from 350/o to 0To0n West Pakistan and from 2509o to 300o in East Pakistan, which, however,

would not be enough to offset the relative disadvantages.

8. Private investments in industry are regulated through the TndustrialInvestment Schedule. Due to the foreign exchange shortage, the originalprovision of Rs 10.9 billion, as compared with actual industrial investmentsof Rs 5.9 billion during the Second Plan Period, was reduced to Rs 9.7 billion.The actual result is expected to be beiow this target, only Rs 5.2 billionhaving been sanctioned up to June 1969, and about 200/0 shortfall is expectedfor the wihole Third Plan Period. The Schedule gives detailed provisionsfor each sector of industry in each of the two Provinces and also both forexpansion and for new establishments. In certain cases the Governmentspecifies the minimum scale of each unit to be sanctioned. Vlithin thisframework, IDBP and the Palistan Industrial Credit and Investment Corporation(PICIC) are named as sanctioning agencies, but their discretion is now limited

- 3 -

mainly to export industries based on locally available raw materials, suchas jute and cotton. The Governmentts control over industrial investmentappears to be too rigid, although it is evident that the Government wishesto encoutrage private investment and to refrain from too much direct involve-ment in industry.

Financial Institutions and IDBP's Role

9. A brief description of industrial finance institutions is givenin Annex 1. Very briefly, two Governuent institutions, the 14est and EastPakistan Industrial Development Corporations (IwPIDC and EPIDC), with com-bined assets of around Rs 3 billion, finance public sector projects, suchas large-scale fertilizers, gas, chemicals, cement projects, which privateentrepreneurs are unable or unwilling to undertake. PICIC, a privateinstitution long associated with the Bank Group, finances medium and largeprojects in the private sector. Its total assets amount to Es 850 milllon.The Investment Corporation of Pakistan (ICP), a statutory institution,privately owned but Government controlled, is active in the capital marketby way of underwriting, direct investment and management of mutual funds.The total funds it has mobilized amount to Es 262 millionO In the smallbusiness field there are two Provincial Government institutions, the Westand East Pakistan Small Industries Corporations (WiPSIC and EPSIC). Theseare primarily engaged in promotion and teclmical assistance, but they alsoarrange financial assistance through commercial banks and IDBP. The totalfunds thus mobilized amount to Rs 75 million on a disbursement basis.Commercial banks are not active in term lending to industry despite theencouragement given by the refinance facilities of the State Bank ofPakistan. The total amount refinanced during 1968/69 was Rs 31.2 million.

10. The Government has recently announced the establishment of anEquity Participation Fund u-hich will help small business by providingequity funds. The Fund will have a share capital of Rs 50 million con-tributed by the Central Government (Rs 20 million), Provincial Governments(Rs 10 million), State Bank of Pakistan (Es 10 million) and privateinstitutions (Rs 10 million). It will underwrite or purchase up to 400%of the share capital of medium- and small-enterprises (with a sharecapital of Rs 2.5 million or less) promoted by newcomers. It will haveits own Board of Directors but will be administered by IDBP.

11. Jithin this framework, IDBP's major task is to finance (mainlyby medium and long-term lending especially in foreign exchange) privateprojects Which are smaller than those financed by PICIC. It also financessome large projects, especially in the traditional fields such as textilesand jute. Together with PICIC, it acts as sanctioning agency for privateinvestment and helps the Government in formulating and implementing in-dustrial policy.

- 4 -

III. THE COI1SANY

Background of Establishment

12. IDBP was established in August 1961 through a reorganization ofthe Pakistan Industrial Finance Corporation (PIFCO0), which was created inFebruary 1949. PIFC0 had a share capital of Rs 20 million, of which 519owas subscribed by the Central Government and 9%o by institutional andindividual investors. The business it was authorized to transact was toprovide assistance to industrial, mining and electric utility enterprisesin the form of loans, against the security of existing assets (therebyexcluding new enterprises), for texTs not exceeding 20 years. It couldalso underwrite share or debenture issues and guarantee loans made by otherentities. PIFCO was hampered in its operations by the lack of foreignexchange resources, by its restriction to assisting only existing enter-prises, and, later on, by competition from PICICI, which was establishedin 1957.

13. In 1959 the Government appointed a Credit Enquiry Commission tomake recommendations for a more adequate credit system in the country.The Conmission found a lack of institutional arrangements for financingmedium-scale enterprises and recommended that PIFCO be reorganized intoan industrial financing institution mainly dealing with medium-scale in-dustries, and that PICICp although an institution primarily for largerindustries, be also encouraged to extend its activity into this field.It also recommended that commercial banks extend financial assistance tosmall enterprises in cooperation with the Small Industries Corporationwhich would provide the technical appraisal of the projects and share therisk.

14. IDBP wias established to implement these recommendations. However,at that time commercial banks were not prepared to make long-term invest-ments in small industries and accordingly IDBP was entrusted to financesmall as well as medium-size enterprises.

The Ordinance

15. The Industrial Development Bank of Pakistan Ordinance waspromulgated on July 29, 1961. It provides for the scope of IDBP'sactivities, the principles guiding its operations and organizationalmatters. The Government holds 510/o of the share capital and is given awide range of powers over the operation of IDBP. The Ordinance givesIDBP the powers it needs to function as a development finance company,but it is unnecessarily detailed and sometimes unclear or illogical. Forexample, the Ordinance provides for the kinds of industries eligible forIDBP's assistance in detail. Also, in limiting the borrowing power tofive times the paid-up share capital and reserves, debt is dofinedto include bonds, debentures and contingent liabilities but to excludeother borrowings. The Ordinance needs a thorough review. The Govern-ment and IDBP agreed, during negotiations, to make such a review, witha view both to clarification and streamlining.

-5-

Functions

16. The objectives of IDBP are very broadly defined as "making creditfacilities expeditiously available to industrial concerns in Pakistan."IDBP is empowered to carry on all activities usually undertaken by develop-nent banks such as medium- and long-term lending, granting guarantees,underwriting and direct subscription of shares and debentures. It canalso engage in commercial banking activities such as acceptance of depositsand providing short-term accommodations. However, the main emphasis ison medium- and long-term loans and guarantees to finance the fixed capitalrequirements of medium- and small-scale enterprises, and other activitiesare allowed usually under certain restrictions.

Share Capital

17. IDBP's paid-up share capital remained at Rs 30 million from 1962until December 1968, when it wias raised to Rs hO million by a rights issue.The issue was successful. A list of shareholders as of June 30, 1969, isgiven as Annex 2. In accordance with provisions of the Ordinance, theCentral Government holds 5109o of the total shares. The National Bank ofPakistan, Port of Karachi and West Pakistan Provincial Government holdanother 7.4h%. The remaining 41.60/ is distributed among 222 privateshareholders including three foreign-owned institutions cperating inPakistan. IDBP again increased its share capital, to Rs 50 million, inDecember 1969. The Ordinance allows the Government to guarantee a minimumdividend on and ultimate redemption of shares, but this provision hasnot been resorted to.

Control by Government

18. Under the provisions of the Ordinance, the Government has extensivecontrol over the operations of IDBP. First, the Government may appointand remove at any time the Chairman of the Board, the Managing Director,and six of the remaining nine members of the Board. However, the Govern-ment's appointments are earmarked for various institutions which do notalways act with a single viewpoint or policy, so that the number of Govern-Iment appointments per se is not the means of Government control. Secondly,operations not specifically authorized by the Ordinance, as well as certainimportant decisions of the Board, require the Government's approval. Suchapproval is needed, for instance, for loans exceeding specified limits,loans to industries not specified, loans to local bodies, direct subscriptionfor shares, foreign exchange borrowings, declaration of dividends, andappointment of Deputy Managing Directors. Some of these provisions, however,

-6 -

are apparently designed as safeguards against too detailed restrictionsimposed by the Ordinance. Thirdlyg the Government at its own initiativemay take certain direct actions affecting IDBP's operations; for example,it may instruct IDBP?s Board on questions of policy, and if the Boardfails to carry out such instructions, may over-rule the Board.

19. The Central Government has thus in theory the effective control ofIDBP. However, in practice the Government has made very little use of itspowers and it has never used any of the discretionary provisions. Normally,the Government exercises its influence through its Board representation.More important, however, the Government gives its directions through theinvestment Schedule and the Priority List of Industries, and by fixinginterest rates and relending terms on foreign exchange made availablethrough the Government, which apply to IDBP as well as PICIC. Apart fromthe so-called "administered loans" which will be discussed later inparagraphs 69 through 71, no undue influence on IDBP's day-to-day operationsappears to be exercised. No administered loans have been given IDBP since1965.

The Board

20. The Board of IDBP has 11 members: the Chairman, six Directors andthe Managing Director are appointed by the Goverment, while three Directors(one from Karachi, one from D,cca and one from Lahore) are appointed bythe respective groups of private sbri.reholders. The six Government directorsare appointed as follows: two persons serving under the Central Govern-ment, two persons from each of the Provincial Governments, and two non-officials (busines3sairen) one from each Province. The present Board Membersare listed in Annex 3. lbr. K.A. Marker, a merchant and industrialist,has been Chairman since inception. He is not involved in day-to-dayoperations of IDBP. The Board usually meets once a month, and decideson all important matters including investment proposals not delegated tothe management. In view of its composition, the Board is essential4rthe place where the Government keeps watch on IDBP8s operations and whereProvincial or regional interests are coordinated.

21. There is an Executive Committee of the Board, consisting ofseven of the 11 Board members, but the delegated powers are not significant(dealing with loans up to Rs 1.5 million). The Executive Committee thereforeserves little purpose and meets very seldom.

Linagement

22. The present Managing Director is Mr. Zahirul Huq who wras appointedin November 1966 after serving for many years in the State Bank of Pakistan.

Mr. Huq is an experienced banker who has been instrumental in consolidatingthe organization. The Deputy Managing Director in the Head Office isMr. Abdul Jabbar Khan, who succeeded in November 1969 Mr. Ziaur RahmanAhmed, who left IDBP to join the Bank. Mr. Khan is on deputation fromthe National Bank of Pakistan, but has been with IDBP for nine years. TheDeputy generally assists the Managing Director and also supervises theKarachi Office. Mr. A.M.N. Sulaiman Chaudhury, the Deputy ManagLng Directorin the Dacca Regional Office, represents IDBP in East Pakistan. He joinedIDBP in 1966 after serving in the State Bank of Pakistan, and was promotedto his present position in January 1969. Mr. Masood Akhtar has recentlybeen promoted to Deputy Managing Director in charge of the Lahore RegionalOffice. He has been with IDBP since 1961. Another Deputy Managing Director,Mr. A.F.M. Nurul Matin, has also been appointed recently to take charge ofthe Equity Participation Fund. He is on loan from the State Bank of Pakis-tan, where he had about 20 years' experience.

Staff

23. IDBP has a total staff of 953, including 321 professionals. Theaverage length of service of professionals is estimated to be about 5-6years. Of the total, 304 are in the Head Office and the rest are in threeRegional Offices and 11 Branch Offices. The staffing in the Head Officeas well as Regional and Branch Offices is shown in Annex 4. The largesize of its staff is necessary to deal with a large number of projectsIDBP accommodates, but it presents a difficult problem of personnel admi-nistration. The staff quality is a mixture of various degrees of compet-ence, and IDBP is endeavoring to raise the level of the staff's work.In 1966, it started periodic staff training courses at the Head Office.So far there have been 11 such courses with the total participation of136. Also, many of the senior staff who first came to IDBP on loan fromthe State Bank and commercial banks have been induced to become permanent.At present, there remain four senior officials on loan. In general, itappears that IDBP, which started with a staff of persons relatively inex-perienced or with persons experienced only in commercial or central banking,has now built up a fair cadre for development banking. It could now probablydispense with deputation from outside, thereby improving the morale amongits own staff.

Organization

24. Overall organization of IDBP is shown in Annex 4. Three RegionalOffices in Karachi, Lahore and Dacca are the centers of day-to-day operations.They control several branch offices which number 11 in total and keepcontact with clients in their respective regions. Recommendations in con-nection with loans originate from Regional Offices.

25. The Head Office has 14 Departments. Some of these Departmentsare primarily responsible for supervision of the operations of RegionalOffices. These are the Deposit Banking Department, which supervises thedeposit business of Regional and Branch Offices, the Loan Department and

- 8 -

Engineering Department, which review appraisals sent from Regional Offices,the Foreign Exchange Department, which allocates foreign exchange forindividual loans, the End-Use Department, which supervises the follow-upwork of Regional Offices and the Special Studies Department, which wasestablished in early 1968 to take over the responsibilities of the End-UseDepartment as regards problem projects. Also, the Audit Inspection andMethods Department conducts inspections of all offices. The remainingdepartments are primarily responsible for the overall affairs of IDBP notdelegated to Regional Offices. These are Central Accounting, PublicRelations, Board, Establishment, Staff Training, and Economic Researchand Statistics Department.

Technical Advisory Committees

26. The Ordinance provides that no loan may be made which has notbeen considered by a Technical Advisory Committee (TAC). There are threeTACs, one for each region. Their function is to provide IDBP with outsideadvice on broader technical and economic aspects of the projects itconsiders. Membership comes from the Central and Provincial Governmentsand from private business, and includes one or more Board Directors in-cluding the Managing Director, who is the chairman but normally does notattend meetings. The committees are supposed to meet monthly but thisis not always done, thus creating delays. Although there might have beena valid reason at the time of IDBP's inception for the TACs, their contri-bution is very limited in view of the present level of IDBP's projectappraisal. Moreover, as representation on TACs is similar to that on theBoard, their consideration of projects, when it happens at all, is largelya rehearsal for the Board's consideration on a regional level. In thecircumstances, the Government should consider abolishing the TACs, whenthe Ordinance is revised.

Delegation of Authority

27. In view of the large number of small operations, IDBP's Boardhas found it convenient to delegate part of the loan-sanctioning power toHead and Regional Offices. Such delegation has been stepped up progressivelyand at present is as follows;

For Loans Up to and Including: Sanctioning Power by:

Rs 150,OOO/Rs 100,000 in Foreign Exchange: Chief Manager of the Karachiand Dacca Offices

Rs 550,000/Rs 450,000 in Foreign Exchange: Deputy Managing Directors

Rs 650,000/Rs 550,000 in Foreign Exchange: Managing Director

9-

Procedures

28. IDBP's processing of loan applications involves complicatedprocedures and entails delays. First, the appraisal of projects beyondthe discretionary power of Regional Offices is reviewed in detail by theHead Office, and any points wihich the Head Office finds unsatisfactory(and this happens very often) are referred back to the Regional Offices.Secondly, all appraisals are considered by a TAC. Thirdly, the approvalof a project does not mean the earmarking of a certain line of foreignexchange credit. This is done later by a special IDBP committee and aconsiderable time is needed before the loan is committed and a letter ofcredit is opened. This delay, as discussed later, is mainly due to thelack of untied foreign exchange resources and usable bilateral resources.Recent experience in the Dacca and Lahore Regional Offices indicates that

the average time lag between application and approval is 7.5 months, andthe time lag between sanction and I/C opening is 17 months.

29. IDBP has recently taken measures to somewhat streamline itsprocedures, which will hopefully speed up the processing. First, thedelegation of sanctioning power has been increased as stated before.Secondly_ within each Regional Office and each major Branch Office therehas been established a screening committee which is required to decidewithin four days after receipt to proceed with, or to turn down, anapplication. Detailed applications are filled out only after passingthis committee. Thirdly, a loan-processing time-record is attached toeach application to help insure speedy processing and to detect bottleneckcs.Fourth, appraisal reports which are to go to the Head Office are thensubmitted to TAC; formerly, clearance from the Head Office was requiredbefore that submission. Fifth, for loans up to R1s 500,000, less detailedinformation is now required from the applicant and a si-mplified appraisalreport is prepared. Emphasis is given to the creditworthiness and standingof the sponsor. Finally, the foreign exchange wihich was allocated tocertain projects but not used by the sponsors within a certain period,is now reallocated to others.

30. Although thorough checcidng by the Head Office involves delays,this is nevertheless helping in improving the standard of IDBPts appraisalwork. Also, the Head Office tries to standardize appraisal reports. Thequality of appraisal is thus improving. All relevant financial and technicalpoints are analyzed. Special attention is given to inquiries to bankersand trade :onnections on the creditworthiness of promoters. The weaknessappears to be that reports mechanically follow the prescribed patternand often fail to focus attention on specific aspects according to thenature of the project. Also, markcet aspects and economic justificationare sparsely covered. As long as the project is covered by the PriorityIist in the Industrial Investment Schedule, it is almost automatically

- 10 -

assumed to be justified. In all, IDBPfs appraisal, although it is notsophisticated enough, has tailored itself to IDBP's business, which ismostly in traditional industries and for medium- and small-size enter-prises.

31. The Regional and Branch Offices are responsible for follow-upof loans, under the supervision of the Head Office's End--Use Department.Projects are generally visited at least once a year, more frequently wbiJleunder construction and for larger projects. TDBP usually requires thedeposit of an amount equal to 200/0 of its foreign exchange loans to insurethe borrower's ability to pay local costs, particularly custom duties.This is released only upon satisfactory evidence of the progress of theproject. Progress reports and financial statements are required. However,many clients who are private companies, are delinquent in submitting suchreports. In the light of the large number of projects in arrears, aSpecial Studies Department was established in January 1968 to make adetailed study on each of the projects in arrears for over a year. Super-vising similar departments in Regional Offices, it identifies the causesof existing problems, devises means to overcome them and gives advice tothe Regional Offices and the management on remedial actions to be taken.Its activities are helping to deepen IDBP?s expertise in dealing withdifficult projects and to detect the iweakness of original appraisals.Also, the Department has a healthy influence on the attitude of borrowers,now that it has become clear that IDBP wants to take more firm actionagainst defaults.

Management Information and Accounting System

32. IDBP$s procedures are currently undergoing a process of rationaliza-tion, essentially through decentralizing authority for normal transactions(viz. delegation of sanctioning power) and strengthening the Head Officetssupervision on matters needing special attention (viz, Special StudiesDepartment). This appears to be a move in the right direction. Howfever,it is a fact that the complicated system of internal checking withinIDBP, although entailing delays in action, helps to ensure sound invest-ment decisions at all levels. In this connection, consideration shouldbe given, once the ground work is laid, to assigning capable staff fromthe Head Office to Regional Offices in order to improve day-to-day operations.Also, a system should be developed providing the rnanagement with accurateand complete information on operations. The provision of managementinformation is now being improved by introducing, for example, lists ofprojects under study and pending commitments as wiell as monthly reportson arrears; but much remains to be done.

33. IlMore importantly, IDBP is now changing its accounting system,as described in Annex 5. The new system envisages centralizing IDBP'saccounts. This appears to be very ambitious, given the distances betwDeenRegional Offices and the fact that no telet-ype and computer system are

- 11 -

being introduced. However, IDBP and its consulting accountants (A.F.Ferguson & Co.) are confident that the proposed system is feasible, andthere is no doubt that, if it works, it would help expedite and improvemanagement's information on the affairs of IDBP. Improvement inorganization, procedures, management information and accounts continues tobe sufficien- y i2impcrtant to juLtify close cttention. During negotia-aions,IDBP agreed to formulate, or to retain conzultan`s to £orvrriulate, a progiari£or ' fur tlaer improvement.

Resources

34. IDBP's resource position as of June 30, 1969, is shown in Annexes6 and 7 and is summarized below:

(inr million Es)

Capital and Reserves 86.04Government's Advances 121.33KfW Counterpart Fund 26.53Domestic Credit Lines fromState Bank of Pakistan 138.50

Deposits 123.50

Total Rupee Resources 495.90Foreign Exchange Resources 865.91

Total Resources 1,361.8111

1/ Net of cancellations and repayments; all amounts havebeen drawn except for Rs 30 million of the credit linesfrom State Bank of Pakistan and Rs 191 million offoreign exchange resources.

35. /a pital and Reserves. In addition to the share capital of Rs 40million,_ reserves and a Special Development Fund amount to Rs 46 million,bringing IDBP's own funds to Rs 86 million. The Special Development Fundamounting to Rs 9.0 million was established with Government grants made in1964 through 1966 by refunding income tax, interest on Government loans anddividends on Government-held IDBP shares. The Fund may be used only forwrite-offs of loans in underdeveloped regions.

36. Government Advances. The total of Rs 121 million includes Rs 8million loans made by the Government through WPSIC/EPSIC which IDBP uses tofinance WPSIC/EPSIC operations. These loans are repayable in 40 yearsstarting 1964, with an interest of 4% per annum. The remaining Rs 113million represents loans made directly by the Government out of budgetaryallocations. The terms of these loans were revised on September 12, 1969.

1/ This was increased to Rs 50 million in December 1969.

- 12 -

All loans outstanding as of that date (Rs 111 million) are repayable in 9equal annual installments, after a grace period of 17 years with an interestrate of 6%, except for Rs 24.5 million which were and remain interest-free.The average interest is thus 5.2% per annum. All loans thus consolidatedare subordinated to all other debt and to share capital.

37. Kfw Counterpart Funds. IDBP repays foreign credits to the Govern-ment in accordance with the amortization schedule of sub-loans; but, in thecase of KfW loans, IDBP may use repayments on sub-loans for financing rupeecomponents of projects pending scheduled repayments to KfW. The Governmentbears the foreign exchange risk on such counterpart funds.

38. Domestic Credit Lines. Five lines of credit in the amount ofRs 138.5 million have been provided by the State Bank of Pakistan. Four ofthese credits are guaranteed by the Central Government, whereas the fifth isagainst Government securities. These credits are for fixed periods rangingbetween 1 and 3 years, but can be renewed when due. Bank rate, now 5%, isapplicable except for one loan of Rs 50 million, which is at 4.5%.

39. Deposits. Deposit banking was started on August 4, 1966. Thegrowth of this source of rupee funds has been spectacular, with depositsnow standing at Rs 123.5 million. Fixed deposits amount to 86% of thetotal, while savings and current accounts make up the rest. Nearly half offixed deposits are for a term of one year or more. A large part of depositscomes from pension funds and other stable sources. On current accounts nointerest is paid; on savings accounts with checking facilities, the interestpaid is 4% and without this facility, 4-1/2%. Interest rates for fixeddeposits range from 5-1/2% (for 3 months) to 7% (for 3 years and over).-/The average interest paid on fixed deposits is 6.2% and on total deposits,5.5%. IDBP estimates that the administrative cost involved is about 0.5%.

40. The Ordinance requires that 40% of the deposits be invested inliquid assets. At present, Rs 48 million of the deposits are invested inmarketable Government securities which yield about 5%. Another Rs 77 mil-lion are invested in the interbank call-money market, in which IDBP mayoperate as a Scheduled Bank. The yield on these investments has gone downsubstantially in the past year, from 6.5%-7% in 1967/68 to 5-1/4%-5-3/4% in1968/69. Accordingly, all the deposits are backed by lirluid assets, whichdo not give enough yield at present. Nevertheless, deposits are a usefulsource of liquid funds which IDBP has to keep anyway to meet contingencies;in the absence of deposits, IDBP would have been forced to use a part ofits long-term resources.

1/ These rates are regulated by the State Bank of Pakistan and are 1%above the interest allowed to large commercial banks. When IDBP'sdeposits amount to Rs 150 million, this differential will have todecrease to 3/4%.

- 13 -

41. Foreign Exchange Resources. IDBP has received foreign exchangeloans between 95971960and19 6 6/1979 in the amount of $286.75 millionnet of cancellations (for details see Annexes 7 and 8). These loans areof three types:

a. Loans negotiated by the Government of Pakistan andallocated to IDBP in full or in part. The totalamount of these loans is $130.43 million.

b. Supplier's credits negotiated by the Govenmient ofPakistan and passed on to IDBP. Legally IDBP onlyguarantees repayment, but in all other respectsthere is no difference with these and loans under a.The total amount of these supplier's credits is$141-37 million.

c. Loans directly negotiated by IDBP with a Governmentguarantee. There are only three such loans, twowith US Eximbank and one with the Asian DevelopmentBank. They total $14.95 million.

42. As shown in Annex 8, new foreign exchange resources madeavailable to IDBP declined substantially in the past two years, being$13 million a year (excluding the $10 million Asian Development Bankloan) as compared with $35 million for 1966/67, $16 million for 1965/66and $19 million for 1964/65. All these loans, except for the ADB loan,are tied to procurement from the creditor countries, and sometimes evento specified goods. Some of the credits come from the countries whosemachinery are not familiar in Pakistan. Also, supplier's credits whichrepresent about half of the foreign exchange resources are generallyless advantageous to borrowers in that they provide for shorter repaymentperiods and also for down payments wihich have to be made above the officialexchange rate due to the Government's requirement of bonus vouchers inmeeting down payments. These factors have substantially inhibited thelending activities of IDBP.

43. As of June 30, 1969, letters of credit in the amount of $247.03million were opened, so that $39.72 million in foreign exchange was stillavailable. Outstanding commitments pending opening of letters of creditwere $30.11 million, leaving the uncommitted amount of $9.61 million.

44. Foreign exchange loans are passed on to IDBP at an interest rateof 6%, unless the original loans provide for higher rates. TWith a re-lending rate of 8-1/2o%, IDBP generally had a 2-1/2% interest spread(compared with PICIC's 2o%). Foreign exchange risk is passed on to theborrowers.

- 14 -

IV. OPERATIrnS AND POLICI

Operational Policies

45. The broad outline of operational policies is laid down in theOrdinance. Important features are as follows:

a. Finance may be short-, medium- or long-term (upto 20 years), but short-term accommodations appearto be discouraged.

b. The purpose of finance should be mainly for fixedcapital, and working capital finance is limited to259o of the total finance granted to any individualborrower.

c. The maximum amount of finance allowed is Rs 2.5million including a foreign exchange component ofRs 2.0 million to any limited compary.r and Rs 1 mil-lion including a foreign exchange component ofRs 0.5 million to others. (This compares with PICI0susual lo-ver lending limits in foreign exchange ofRs 1.5 million in West Pakistan and Rs 1.0 million inEast Pakistan.)

d. iiining, jute, cotton and inland transport are exemptfrom the foregoing limitations. Also, exception maybe made wqith Government approval for any other in-dustry or enterprise.

e. Securities investment appears to be considered assubsidiary business. Underwriting may be done, butany securities taken up must be disposed of as earlyas possible and within not more than 7 years. Directsubscription to shares is subject to specific Govern-ment approval.

f. Foreign exchange risk must be passed on to theborrower.

g. All loans mst be secured by property, includingproperty to be acquired in future.

46. Apart from these general policies, IDBP is also subject to theGovernment's guidelines concerning investment criteria contained in thePriority List and supplementary instructions issued from time to timeas well as directions concerning the conditions of sub-loans under foreign

- 15 -

credits. Although the discretionary r;wer of IDBP in deciding on itsown operational policy is limited, nevertheless there appears to be alack of willingness on the part of IDBP's management to demonstrate itsinitiative. Cne of the few decisions made on its own initiative is thepolicy to discourage, in general, applications for finance belowRs 100,000.

Interest and Charges

47. Interest rates on rupee loans were increased by the Board withGovernment approval, as follows) effective August 28, 1968:

PreviousAmount of Loan Rate New Rate

up to Rs 100,000 6-1/2% 3%o above Bank rate (5g9)subject to a minimum of 7-1/29o

from Rs 100,000 to Rs 400,000 6-3/4% 3-l/49o above Bank rate subjectto a minim=u of 7-3/49o

from Rs 400,000 to Rs 600,000 79'o 3-1/20% above the Bank ratesubject to a minimum of 8%o

above Rs 600,000 7-1/2 9 o 40'o above Bank rate subject toa minimun of 8-1/29o

48. Although this schedule favoring small loans is in line with theGovernmentts policy of encouraging small business, it is contrary to theusual banking practice and, it appears, could be revised without too muchreal burden on small businesses. PICIC is charging a 9%0 interest on allits rupee loans, and the interest rate ceiling on comiercial bankts advanceis 100%. IDBP's interest rates were discussed during negotiations. Govern-ment and IDBP agreed to review the present rates, for both rupee and foreignexchange loans, within the context of a general review of the adequacy ofPakistants interest rate structure for the mobilization of savings and theeconomic allocation of resources.

49. The standard interest rate chargeable on loans in foreign exchangemade from allocations of various foreign lines of credit is fixed by theGovernment and was increased from 7-1/20% to 8-1/2%o effective December 10,1968. The margin between the relending rate and the rate paid by IDBP tothe Government has been fixed at 2-1/29o (2% for PICIC) unless theinterest payable by the Government exceeds 60'o.

50. 1DBP charges a comnitment fee of 1/4 of 1%/ p.a. on loans inlocal currency on the undisbursed portion of the loan. It charges 1/4 of191o per quarter on loans in foreign currency from the date of allocationof the foreign currency until the opening of the letter of credit or issueof guarantee, this rate being increased to 1/2 of 19'o if the allocationis not utilized within 6 months.

- 16 -

51. Penalty interest of 2% p.a. is charged above the stipulated rateof interest on installments in arrears. This applies to rescheduled loans,as well. IDBP also derives additional income from other charges and com-missions. A full list of IDBP's interest and charges is given in Annex 9.

Trend of Operations

52. IDBP's annual volume of business (approvals, commitments anddisbursements) from 1961/62 to 1968/69 is shown in Annex 10. During thisperiod IDBP has approved 3,720 loans totalling Rs 2,137 million. Foreignexchange loans represent Rs 1,704 million or 80% of the total. Foreignexchange loans include both (1) loans made from the proceeds of fundsborrowed from abroad and (2) guarantees on suppliers' credit. Since bothoperations are very closely analogous in actual operation, IDBP does notdifferentiate these two in operational and financial statistics, exceptthat in the case of guarantees only commissions accruing to IDBP areconsidered as income and that in the audited balance sheets guarantees areshown separately as contingent liabilities. In this report, guaranteesare treated as a part of foreign exchange loans. Local currency loanslargely represent finance conpl.amentary to IDBP's foreign exchange loans.Also, it is the practice of IDBP to convert arrears in the repayment offoreign exchange loans into local currency loans. This explains the rela-tively high percentage of local currency loans outstanding (31% of thetotal outstanding loans).

53. The volume of business has been declining in recent years asshown in the table below. This naturally reflects the general investmentcllmate, but the shortage of foreign exchange resources also appears to haveinhibited IDBP's business significantly. This is illustrated by the factthat PICIC, which is in a more favorable position due to the availability ofthe Bank funds shows better performance.

(in million Rs.)IDBP PICIC

Approvals Commitments Approvals Commitments

1963/64 399 283 1963 131 1151964/65 252 215 1964 224 1451965/66 228 168 1965 158 1881966/67 324 206 1966 253 1941967/68 181 143 1967 257 1451968/69 174 106 1968 383 151

The shortage of foreign exchange resources is also illustrated by anincreased gap between approvals and the resources available to finance them.It is IDBP's practice to approve loans in excess of available resources,which is reasonable in view of the time lags involved until commitment anddisbursement. However, such excess in approvals amounted to Rs 127 millionand Rs 141 million, respectively at the end of 1967/68 and 1968/69, comparedwith about Rs 30-40 million in the previous three years.

- 17 -

Size of Loans

54. Annex 11 gives the breakdown of loans committed by size. Theaverage size of loans is Rs 0.6 million, which is considerably smaller thanPICIC's average of Rs 2.5 million, reflecting the function of IDBP. Smallloans not exceeding Rs 500,000 each represent 17% in amount but 81% in number.On the other hand, loans exceeding Rs 2.5 million (the normal lending limit)represent 55% in amount. Of this, 64% in amount are for the e.el-pted indus-tries (jute and cotton) and 36% for such industries as chemicals, sea trans-port and hotels.

Duration of Loans

55. The breakdown of loans by duration is shown in Annex 11. IDBP fol-lowed the Government's directives with respect to the duration of foreignexchange loans. These provided that loans larger than Rs 1 million had tobe for 15 years while smaller loans could be between 10 and 15 years (unlessthe original credit provided for a shorter repayment period). It was pointedout to the Government, in connection with both PICIC and IDBP operationsthat the duration of loans should be fixed in accordance with the nature ofthe project and the financial position of the borrower. The Government hasaccordingly withdrawn its directive in this regard. Also, in cases wherethe short term of suppliers' credits has resulted in difficulties for theborrower, consideration should be given for refinancing early maturities inlocal currencies.

Purpose of Loans

56. As shown in Annex 11 about three-fourths of total loans wereextended to finance new enterprises. All loans were made in connection withnew capital expenditure and no finance solely for working capital was ex-tended.

Industrial Distribution

57. IDBP's loans heavily concentrate on the textile (33% of total) andjute industries (17%), as shown in Annex 12. These are the principal indus-tries under the present economic structure of Pakistan, and also the mostencouraged sectors as export industries based on domestic raw materials.According to Government statistics, the textile manufacturing sector has ashare of 29%. In the original investment schedule of the Third Plan, provi-sion for textiles formed 30% of the total provisions and in the PriorityList this was increased to 40%.

58. Textiles. The bulk of IDBP's financial assistance to the textileindustry is to cotton mills. IDBP has so far financed 111 mills to provide1.1 million spindles. This compared with the total 4.1 million spindlesinstalled or sanctioned up to March 1968. Most of these are new unitswith 12,500 spindles cach, tho Gstablichrient of which the Government

- 18 -

encouraged in ear'ier years. Mow many of these units ar e erpinding to25,000 spindles, but IDBP is having difficulty in financing them due tothe lack of suitable foreign exchange resources. Some of the IDBP financedmills are located in East Pakistan which does not produce raw cotton and theyare encountering difficulties. But mills in West Pakistan are generallyprospering with substantial Government incentives.

59. Jute. The jute industry has a particular importance since this isat present the most suitable industry for industrialization in East Pakistan.IDBP has so far financed 34 jute mills in East Pakistan with a total of8,000 looms, compared with the total capacity of 25,000 looms installed orsanctioned up to March 1968 in Pakistan. The largest part of such assistancewas effected under a special scheme sponsored by EPIDC. The aim was to bringnew enterpreneurs into the jute industry with technical and financial assist-ance from EPIDC and financial support from IDBP. EPIDC is responsible forconstruction and management of jute mills of 250 looms each, which are owned40g% by sponsors, 40O% by the general public and 20% by EPIDC. IDBP has pro-vided loans totalling Rs 237 million to 26 mills, its loans being guaranteedby EPIDC until the plants start operations and mortgage is established. Dueto delays in construction, unreliable power supply, increased labor costand other adverse factors, these projects had difficulty in meeting theservicing requirements of IDBP loans after the grace period of 21½ years.However, the situation has been generally improving due to revised bonusrates and a gradual increase in efficiency. Most of the mills have startedpaying their overdues. These mills are equipped with conventional loomsand several of them are planning to install broadlooms. The present size of250 looms, although small, is considered to reacha minimum economic scale.

60. Other Industries. Other industries of significance in IIBP's port-folio are chemicals (1107o), food products (5.h4), non-metallic mineralproducts (3.8%P), hotels (3.7%), engineering (3 5%) and sea transport (3.2%).The high percentage of chemicals is mainly due to a small number of "adminis-tered loans", which are discussed later in paragraphs 69-71. Loans tohotels also include large administered loans. Loans to shipping companiesinclude a loan ; Rs 10 million to a single company, majority-owned bythe Government.-/ Inland transport and mining, like jute and cotton, areexempted from the regular lending limits under the Ordinance. However, IDBP'sfinancing in those sectors has so far been very small due to lack of viableprojects. IDBP is trying to promote some mining projects.

61. PICIC's industrial distribution of portfolio, does not show anystriking difference from IDBP's. However, relatively speaking, IDBP placesmore stress on cotton, jute, hotels and miscellaneous manufacturing andservice industries, whereas PICIC places more stress on engineering, sugar,non-metallic minerals (cement, etc.), and recently chemicals.

1/ In addition there are 3 loans totalling Rs 10 million extended to publicsector companies.

- 19 -

East Pakistan 0r2eratiolis

62. With a total of 1,674 loans in the aggregate amolunt of Rs 876 million,East Pakistan has had 45g of the number and 41), of the total amount of IDBPloans committed to date (including administered loans). In cooperation withGovernment policy to further the development of East Pakistan, IDBP has beenplacing increasing emphasis on lending to East Pakistan. At present, it is thepolicy of IDEP to allocate 60% of credit lines from consortium countries toEast Pakistan. Tne increased emphasis on East Pakistan is evidenced in the factthat, during the past four years, 60% of the total number of projects approvedby IDBP were located in East Pakistan as compared with 39% in the proceedingfour-year period.

63. The bulk of the financial support in this Province went to the jute andtextile sectors (70%), while the greatest number of loans benefitted the EPSICsmall industries programs. The EPIDC jute program represents a major portion oflending to the jute sector.

64. Because of shortage of capital, technical know-how, entrepreneurialspirit and managerial competence, setting up projects in East Pakistan needsspecial promotional efforts and involves considerable risk. IDBP, being awareof these facts and, at the same time, of its role as a national developmentinstitution, has been promoting its business in the Province mainly in cooperationwith EPIDC and EPSIC, as in the jute program already discussed and the small loanprogram discussed below. Under those programs, these two institutions are respon-sible for technical aspects of the projects as well as partly for the financialrisk on IDBP's loans. IDBP's approach appears to be generally sound as a financialinstitution. Nevertheless, East Pakistan operations contribute to weaken thequality of its portfolio. Also, as will be discussed in the following paragraphs,its operations through EPSIC appear to have inherent problems.

Small Loans

65. Loans to small enterprises form a major part of IDBP's activities; loansunder Rs 500,000 amount to 81 of the total number of its loan commitments todate (17' in amount).!/ They absorb a large amount of professional manpower andjear heavily on the administrative overhead. Nevertheless, given the lack ofinstitutional set-up for financing small businesses and the fact that IDBP,together with PICIC, are practically the sole agencies for channeling foreigncredit to private industry, there is, at present, no alternative for IDBP other'than taking up this difficult job.

66. One of the measures devised to solve this problem is the program underwhich 1DBP cooperates with WPSIC/EPSIC. Under the program, WPSIC/EPSIC promotesa project, prepares the appraisal report and submits it to IDBP. IDBP assessesthe creditworthiness of the promoter and extends a loan. Although money flowsdirectly betwieen IDBP and the borrower in connection with disbursement and debtservice, the direct responsibility of supervising projects, particularly at theinitial stage, rests with l?SIC/EPSIC. IDBP follows up projects only through theprogress reports subomitted by Wr7PSIC/EPSIC. The interest spread on loans isshared between IDBP and EPSIC/WPSIC at 1:2, and the risk of default is shared at 1:3.Moreover, in the case of WPSIC, 1DBP has priority on secured property.To provide finance for a part of local currency loans, the Government made a

1/ Reservation should however be made about the significance of the data onIDBP's small loans since these include-loans for expansion of larger businesses.

- 20 -

deposit with IDBP through WPSIC/EPSIC in the amount of Rs 10 million-/withthe interest of 4% per annum. Also, parts of foreign credits allocated toIDBP are earmar.ked for this program. Since the program started in 1962,IDBP has approved 1,1438 loans totalling Rs 71 million, consisting of 732loans totalling Rs 52 million for WPSIC and 706 loans totalling Rs 19 mil-lion for EPSIC (with an average size of Rs 71,000 and Rs 27,000, respectively).

67. Apart from IDBP's heavy burden of overhead due to the small sizeof the loans, this program has two organizational deficiencies. First, atthe appraisal stage, although IDBP is better equipped than WPSIC/EPSIC toassess the creditworthiness of the small borrower, its capability in thisregard is limited compared with commercial banks with wide branch networks.Its strength rather rests in the appraisal of projects, which IDBP underthe the EPSIC/WPSIC program cannot do. Secondly, the fact that IDBP followsup projects only thlrough TPSIC/EPSIC impedes prompt, appropriate action indealing with problem projects.

68. EPSIC has recently developed a lending program for providing AIDfunds to small business through commercial banks. Since commercial banksare generally reluctant to finance small projects, the smallest loans con-tinue to be made by IDBP, which explains the small ave-:age size of its loanswith EPSIC compared with WPSIC. Both ZPSIC and W'SIC are now trying todevelop this lending through the commercial banks with the help of the WorldBank and other international institutions. However, both EPSIC and WPSICare at present not equipped properly to function as financial institutions.The Government should study measures for setting up machinery for effectivefinancing of small business; when such machinery has been established, IDBPcould terminate its operations with WPSIC/EPSIC. During negotiations,the Government agreed to study this matter and to for;i-late app.2opri& aereasures.

Administered Loans

69. Between 1961 and 1966 the Government referred to IDBP various indus-trial projects in the promotion of which the Government had taken an activepart. IDBP was requested to "administer" these loans, for a fee of 1/4% perannum, provided it wias satisfied with the creditworthiness of the promoters.The arrangements for "administration" were not clear since there were nocontracts and the arrangements were set out in official instructions issuedfrom time to time. During the negotiations the Government confirmed itsresponsibility for the payment to IDBP of all amounts due to IDBP in respectof, or on account of the guarantee of, loans "administered" by IDBP atthe request of the Government.

70. At present, IDBP classifies 10 loans as "administered" (the totalamount outstanding as of June 30, 1969, being Rs 137 million), includingthree chemical projects (acetate rayon, soda ash and polyethylene), onecement project, four Intercontinental Hotels, one tire plant and one municipal

1/ Almost Rs 2 million has already been repaid.

- 21 -

slaughterhouse proJect. These are shown in Annex 13. All three chemicalprojects have encountered. serious financial difficulties because of basicproblems arising from design, construction and production. There was, asof end of June 1969, an amount of Rs 29.3 million overdue in payments ofprincipal and interest in respect of two of these projects. (Another projectis servicing regularly from the promoter's own resources.)

71. Although somewhat different from the administered loans, anotheroperation was done at the Government's direction. In 1967, IDBP investedRs 50 million in debentures of the Sui Northern Gas Pipe Line. This wasto finance the local components of a project assis bed by the World Bank.The State Bank made an advance in the equivalent amount to IDBP wyith Govern-ment guarantee. IDBP receives 5% per annum on debentures and pays 4-1/2%to the State Bank and 1/4% to the Government, retaining 1/4% for itself.

Securities Investment

72. IDBP's equity investments are small. On the one hand, many of itsclient companies are family-owned and are not willing to part with or toshare control of the companies. On the other, considerations of risk mayoften prevent IDBP from taking equity participations in such industrialventures. In the case of larger projects, IDBP cooperates with ICP, theformer providing loan capital and the latter underwriting or taling upshare issues. At present, IDBP holds shares in six companies (four indus-trial and two financial), at a total cost of Rs 7.7 million. The bookvalue is Rs 6.0 million, reflecting write-offs in line with market value.

73. In order to provide equity capital to small businesses, theGovernment has recently announced the creation of an Equity ParticipationFund with an initial resource of Rs 50 million. IDBP is expected to admi-nister this Fund under the direction of the Board of the Fund.

74. IDBP's portfolio includes government bonds and industrial deben-tures totalling Rs 100 million, but these are for the purpose of short-terminvestment of liquid funds, except for the Rs 50 million Sui Northern GasPipe, already mentioned.

Rupee Guarantees

75. IDBP generally does not extend guarantees on rupee loans, butin exceptional cases, it does so, for example, in connection with paymentof customs duties or rupee borrowings of client companies whose assets arepledged to IDBP. There was Rs 32 million outstanding in rupee guaranteesas of June 30, 1969.

- 22 -

V. FINANCIAL RECORD

Financial Position

76. Comparative balance sheets for the last five years are shown inAnnex 14. The principal items of the balance sheets have been summarizedaccording to their significance and liquidity.

77. The balance sheet as of June 30, 1969, is sunmarized below.

(in million Rs )

Assets Liabilities and Capital

Liabilities

Cash and Call Loans 99 Deposits 124Accrued Interest, etc. 12 Current Liabilities 66Government Bonds 48 Government Advances 121Other Investments 66 Other Rupee Borrowings 135Loans Foreign Currency Borrowings 675Rupee Loans 305Foreign Currency Loans 675 1,121

980 Capital

Fixed Assets 1 Paid-in share Capital 40Contingent Liabilities 32 Reserves 37

Special Development Assistant 9Fund

Contingent Liabilities 321,239 1,237

78. IDBP's assets increased from Rs 870 million on June 30, 1965, toRs 1,239 million on June 30, 1969, increasing by Rs 140 million andRs 102 million in 1965/66 and 1966/67, respectively, and by only an averageof Rs 64 million annually for the subsequent two-year period. This reflectsIDBP's rapid expansion through 1967, followed by a marked slow-down inbusiness.

79. The portfolio of loans (including guarantees) increased 22% overthe 1965 level to Rs 980.3 million, and together with other investments(Rs 66.3 million) represented about 845 of total assets. Foreign exchangeloans represent 69% of total loans. Loans in local currency totalledRs 304.8 million (31%) including accounts of loans in arrears, local(Rs 48.1 million) and foreign (Rs 78.0) million. Other investments atRs 66.3 million showed a significant increase mainly on account of theacquisition of Rs 50 million debentures of the Sui Northern Gas Pipe Line.

- 23 -

Qualit of Loan Portfolio

80. IDBP's loan portfolio includes a considerable amount of defaultedaccounts. As of June 30, 1969, Rs 698 million of outstanding loans iwerein arrears, involving a total amount of Rs 126 million overdue in paymentof principal and interest. However, these include minor arrears for daysand weeks. If arrears for six months or less are excluded, the amountsdecrease to Rs 331 mi.lion and Rs 107 million, respectively.

81. About half of the Rs 331 million loans in arrears for more thansix months represent loans in which IDBP's interest is protected consider-ably through special arrangements.

Loans Outstanding$ of Total Aw.ount in

No. Amourt Portfolio Arrears

(in Rs million)

Administered loans 2 80.8 8.2 29.32EPIDC - Jute program 8 73.2 7.5 13.27EPSICIWPSIC 370 20.6 2.1 6.24

Others 375 156.4 15.9 58.64

Total 755 331.0 33.7 107.47

82. Such special arrangements exist as regards the first three cate-gories of loans shown above. The Government guarantees the ultimate repay-ment of administered loans. Arrears on jute projects are covered by EPIDCguarantee, and some payments have since been made by EPIDC and borrowers.EPSICAWPSIC loans are covered by EPSIC/7-PSIC guarantees to the extent of75% and, in case of l,PSIC, by priority on security as well.

83. In view of these, the real risk to IDBP is virtually limited tothe remaining 375 loans totalling Rs 156 million, representing 16% of totalportfolio. This percentage is still high and essentially reflects the lowstandard of IDBP's appraisal and follow-up in the past. However, consider-ation should be given to the faet that IDBP is assisting mainly medium andsmall industries which are less resistant to the present difficulties ofindustry in Pakistan and also the fact that IDBP has been placing stress onthe development of East Pakistan. Furthermore, IDBPs -management has becomeincreasingly aware of tle need to improve the situation. Establishment ofthe Special Studies Departrent is a move in this direction. More efforts arenow made to effect collections. In 1968/69 there was a slight decline inthe total amount of arrears (includirg less than six months) from Rs 132 mil-lion to Rs 126 million.

8h. As of June 30, 1969, I.-BP considered 204 loans totalling Rs 25.3million (with arrears of Rs 21 million) as bad or doubtful. (These included51 loans totalling Rs 11.3 million under litigation.) On the basis ofindividual assessment of possible losses on these loans, provisions havebeem made in the amount of Rs 13.6 million. In addition a provision ofRs 2.6 million has been made and the outstanding loan portfolio in the

- 24 -

published financial statements has been reduced by that anount. As regardsthe portfolio of shares, its book value of Rs 6 million is, after wirite-offs of Rs 1.7 million, in line with market value.

85. It is evident that IDBP must redouble its efforts to reduce thelevel of arrears, by improving appraisal, by enforcing collections morestrictly and by allowing rescheduling in meritorious cases. IDBP concursthat this must be done and it intends to do so. Nevertheless, the situa-

tion is now improving and the ultimate loss to IDBP should not be veryserious. An accounting firm, A.?. Ferguson & Co., has recently carriedout a thorough study of IDBP's portfolio. In its opinion, any potentialloss to IDBP is covered by the specific provisions of Rs 13.6 million and

the hidden reserve of Rs 2.6 million mentioned in the preceding paragraph.The present reserves, the Special Development Assistance Fund and provisionsfor bad debt total Rs 59 million which is 6% of total portfolio and 38% ofthose loans which are in arrear for more than six months and not covered by

special arrangements. This should provide a satisfactory cushion forprobable losses.

86. The quality of portfolio is discussed in more detail in Annex 16.

Capital Structure

87. IDBP's capital structulre has been strengthened considerably inrecent years. First, as a result of increasing profit and conservativedividend policy (pay-out ratio ranging from 19-31% in the past five years),reserves have been built up, now amounting to Rs 36.9 million or 92% ofthe paid-in share capital before the December increase. Secondly, theGovernment granted, from 1964 through 1966, a Special Development Assist-ance Fund in the total amount of Rs 9.1 million. Thirdly, the sharecapital was increased by Rs 10 million to Rs 40 million in 1968 and againto Rs 50 million late in 1969. Lastly, but most importantly, the Governmenthas recently modified the terms of its loans to IDBP totalling Rs 111 mil-lion, subordinating them to all other debt and to share capital.

88. Reflecting this last change and on the basis of balance sheetsas of June 30, 1969, IDBP's capital structure is saummarized as followis:

(in Rs million)

Net wforth 86Subordinated loans illTotal equity/quasi-equity 197

Foreign exchange borrowings/guarantees 67,Rupee borrowings 1L5Deposits 123Rupee guarantees 32Miscellaneous liabilities 67

Total liabilities 1,042

- 25 -

89. Total deot, consisting of foreign exchange borrowings/guarantees,rupee borrowings/guarantees and deposits, amounted on June 30, 1969 to Rs 975million. Compared with total equity and quasi-equity, the debt/equity ratioTuas slightly less than 5:1; in fact, the ratio is considerably better nou,given the increase in share capital in December and generation of earnings.Given the present quality of portfolio, a 5:1 ratio is considered to be aprudent limit of debt to equity.

90. Against the outstanding amount of deposits totalling Rs 123 million,as of June 30, 1969, IDBP held Rs 99 million in cash and inter-bank loans aswell as Rs 48 million in government bonds. The liquidity position is thuscomfortable.

Earnings Record

91. Comparative income statements for the past five years are shownin Annex 15 and analyzed below:

(in Rs million)1964/65 1965/66 1966/67 1967/68 1968/69

Gross Income 21.05 54.46 59-64 64.76 70.26Financial Expenses 4.68 30.08 34.34 37-67 41.78Gross Spread 1 37 3 _. Th27.09 2LM.(Administrative Expenses 5.95 7.73 8.88 9.59 11.01Gross Profit 10.4 16.63 16.4 177 17.47Provision for Bad Debts 2.65 1.25 2.50 2.55 1.07Income Tax 3.54 6.25 64 6.05 6.64Net Profit 77.2 9 8.90 9.76

Percentage of Average Assets (21-)

Gross Spread 2.3 2.6 2.4 2.3 2.3Administrative Expenses 0.8 0.8 0.8 0.8 0.9Gross Profit 1.5 1.8 1.6 1.5 1.4

Net Profit as % of

Average Net Worth 10.4 18.5 14.0 13.5 12.6Share Capital 14.1 30.5 27.6 29.7 24.5

92. Low gross income for 1964/65 was due to the fact that IDBP followedup to that year the practice of showing only net income of foreign exchangeloans/guarantees. Since then, gross income has included gross income onloans but only net income on guarantees. The unusually high profit for1965/66 stemmed from the inclusion of income (about Rs 2.5 million) accruedin previous years. Taking into account these special factors, IDBP's profit-ability has been following a more or less consistent pattern.

93. IDBP's earnings record appears to be fairly stable and satisfactory.

Dividends and Share Price

94. As already stated, IDBP has been following a conservative dividend

- 26 -

policy, although the rate of dividends has been increasing gradually(4.5% for 1963 through 1965, 6% for 1966 and 1967, 7.5% for 1968 and 8%for 1969). The market price for shares is now Es 105, which is considerablylower than the book value of Rs 215.2i However, the market price is basedon a very small number of tradings and does not necessarily represent anyreal market assessment of the situation.

Audit

95. IDBP's accounts are audited by two accounting firms (Haslmi & Co.and A. Zasem & Co.) which have approved all past accounts without qualifica-tions. IDBP has undertaken, for the future, to have its financial statementsaudited by independent auditors MMOQ-t-Wpeto the Bank, in accordance withsound auditing principles. aC

VI. PROSPECTS

Forecast of Business

96. The investment targets for the Fourth Plan, which will start inJuly 1970, have not yet been formulated. However, a preliminary estimatemade by the Government indicates that total investment in the large andmedium industrial sector will increase by 40% compared with actual invest-ments in the Third Plan Period. This does not seem to be too ambitioussince the level of investment in past years was considerably depressed dueto adverse circumstances. There are many investment opportunities inagro-based and export-oriented industries such as cotton textiles, jute,and food processing.

9-7. Projections of IDBP's operations for 1969/70 through 1973/74 areshown in Annex 17 and indicate that total ne. &Approvals will amount LoRs 1,404 million, showing a 34% increase over Rs 1,048 million during thepast five years. This is slightly lower than the Government's preliminaryestimates for the nest Plan Period, although the periods covered are notprecisely comparable. Given the continuing interest of entrepreneurs ininvestment in textile and jute industries, which are the major sources ofbusiness to IDBP, and assuming the increasing availability of foreignexchange resources, this estimate appears to be reasonable.

98. Approvals during the current year are estimated to amount to Rs 216million, which is comparable with the average in the past five years (Rs 232million), and are expected to moderately increase to Rs 243 million in1970/71. Actual approvals in the first half of the current year amounted toRs 84 million. Although this is lower than the estimated rate for the entireyears, there has been a considerable pick-up in recent months, and it isplausible that approvals for the current year will not be much out of linewith the estimate. A slight increase in rupee business is estimated (from20% to 25% of total business) in view of the increasing availabilityof locally

1/ By comparison, PICIC's shares were quoted at Rs 19.53 in January 1969against a book value of Rs 20.4. Its dividend rate is 10%.

- 27 -

produced capital goods and also the necessity of refinancing repaymentsof foreign exchange loans. No equity investments, except for the purpose ofliquidity reserves, are estimated. Foreign exchange loans to be approvedduring 1969/70 and 1970/71 would amount to Rs 162 million and Rs 133million, respectively, as compared with Rs 140 million for 1968/69 andRs 166 million as average for the past five years. Commitmients of foreignexchange loans would increase considerably from Rs 88 million in 1968/69to Rs 169 million in 1969/70. This is based on the assumption that IDBPwould be able to process a substantial part of the existing backlog, con-sidering better lines of credit now available and in prospect, particularlyuntied loans from ADB and eventually the Bank. In later years, the increasein commitments would be gradual. Total commitments over the 1969/70-1973/74period would be 1t3% above the last five-year period.

Rupee Resources

99. As shown in Annex 18, requirement for rupee resources is virtuallylimited to the need for disbursements on rupee loans. In the five-yearperiod from 1969/70 through 1973/74, total rupee disbursements will amountto Rs 399 million. 1/ This will be provided by recovery on rupee loans(Rs 136million), Government loans (Rs 93 million), cash generation andshare capital increase (Rs 84 million), KnI' counterpart funds (Rs 47 million),totalling Rs 360 million, as well as a part of deposits (Rs 113 million).This appears to be feasible.

Foreign Exchange Resources

100. On July 1, 1969, IDBP had $9.61 million in foreign exchangeloans available for commitment. On the basis of the projected new commit-ments, the evolution of foreign exchange resource requirements will be asfollows:

Opening New Closing PositionPosition Commitments (Resources Required)

July 1, 1969-June 30, 1970 9.6 (35,5) (25.9)July 1, 1970-June 30, 1971 (25.9) (37.6) (63-5)

Of the shortage of $63.5 million, as of June 30, 1971, about $30-35 millionis expected to be covered by bilateral sources, leaving the need of addi-tional resources at $30-35 million. Assuming another ADB loan of $10-15million, a Bank loan of $20 million would be appropriate to fill the gap.

1/ This sum includes, not only disbursements required to finance new commit-ments forecast for over the several years, but also an amount to coverpossible refinancing of arrears on foreign currency loans.

- 28 -

Financial Prospects

101. Projected earnings statements are shown in Annex 20. Net profitafter tax is expected to grow grardually, from Rs 9.8 million in 1968/69 toRs 0.8 million, Rs 11.5 million and Rs 12.6 million, respectively in thecoming three years, concurrently with increasirg portfolio. Gross spread andadministrative expenses will remain at about the same level. Profit on sharecapital will show a decrease in 1968/69 due to the forthcoming share capitalincrease (by Rs 10 million) but will remain at a comfortable level. IDBPassumes continuation of an 8% dividend.

Actual1°68/69 196X/70 1970/71 1071/72

Percentage of Average Assets

Gross Spread 2.3 2.4 2.6 2.5Administrative Fxpenses 0.9 0.9 1.0 1.0Gross Profit 1.4 1.5 1.6 1.5

Net profit as % of

Average Net WPTorth 12.6 10.4 10.8 11.0Share Capital 24.5 19.6 23.0 25.2

Pay-Out Ratio 29 37 34 31

102. Repayments on debts are expected to be covered by recoveries ofloans by at least 1.3 times, and profits before financial expenses will bemore than 14 times interest payable. These ratios are expected to holdfor the period 1970-1974 and, assuming the same pattern of operations, there-after. Debt service coverage appears to be satisfactory, given the comfort-able liquidity position of IDBP.

103. Projected balance sheets through 1974 are shown in Annex 19. Theannual growth of assets in the first two years will be respectively 8.8% and8.1%, but will be accelerated thereafter till it reaches 11.5% in 1973/74.The total loan portfolio increases from Rs 980 million in June 1969 toRs 1,638 million in June 1974, at an average rate of 11% per year. Borrowingson the other hand increase from Rs 932 million to Rs lg466 million over thesame period.

104. IDBP's debt/equity ratio with "debt" considered as borrowings/guar-antees (excluding subordinated Government borrowing) plus deposits and"equity" as share capital, reserves and subordinated Government borrow-ing, will decrease from 4.95-1 in 1969 to 4.6:1 in 1973. These ratiosassume that future Government loans will be subordinated long-term borrowings;if this assumption proves wrong, action will have to be taken to increase networth. The total debt/equity ratio will remain almost on the same level,wxhich is one of the reasons of a fairly stable level of return on equity asshown above.

- 29 -

EridDebt Equity 1968/69 1069/70 1970/71 ,71/72 1972/73

Borrowings, Share capital, 5.0 4b3 .46 4.9 4.6guarantees and reserves anddeposits subordinated

Government loans

All debt Share capital and 13.4 12.- 12.3 12.5 12.8reserves

105. The capital structure thus appears to remain within prudent limits.However, given the continued softness in IDBP's portfolio, IDBP should increaseits equity as soon as it can to provide adequate protection. It proposes toexplore the prospects of doing so.

VII. CONCLUSIONS AND RECOMMENDATIONS

Conclusions

106. During the eight years since its establishment, IDBP has developedinto one of the two most important financial irstitutions for private industrialdevelopment in Pakistan. Compared with the other institution (PICIC), it placesmore stress on the difficult tasks of financing rmdium and small industries,and on traditional industries such as cotton and jute mills, and it also helpsmore to industrialize East Pakistan.

107. The Government gives all necessary financial assistance for IDBP'soperations and at the same time maintains considerable powers over its operationsunder the Ordinance. In practice, the Government does not at present appear toexercise undue influence on IDBP's day-to-day operations as permitted by theprovisions of the Ordinance. However, IDBP, both as a recipient of foreignlines of credit and as a sanctioning agency of industrial investment, is understrict control by the Government. Government control over the terms and condi-tions of individual loans and investment criteria should be relaxed althoughthe overall coordination of investment should remain to ensure desirableresource allocation.

108. The present management of IDBP has made special efforts-in consoli-dating the organization and building up the level of appraisal and follow-up.They have reached a fairly good level and are improvirg. However, the manage--ment has long been accustomed to the rigid regime of the Government, and oftenfails to demonstrate its initiative in running an independent institution.

1/ After the share capital increase by Rs 10 million.

- 30 -

109. In operations, small loans in cooperation with EPSIC/tiPSIC donot appear to work efficiently. A new organizational set-up for smallbusiness finance should be considered so that IDBP can withdrawi from thisfield particularly from the joint operation with PTSIC/EPSIC. The Govern-ment has agreed to review the mechanism for financing small business witha view to streamlining it. Also, "administered loans" impose on IDBP aconsiderable burden of supervision at a very small gain (if any) and castsome doubt on the soundness of portfolio due to the ambiguous nature ofthose loans. This situation will be clarified, and the Government hasreaffirmed its responsibility for these loans.

110. The financial structure of IDBP has recently been considerablystrengthened and is now reasonably satisfactory. However, continuing effortsshould be made to improve the arrears position, and a further injection ofshare capital would be desirable. IDBP will pursue both. Profitability issatisfactory.

111. IDBP's business is now seriously constrained due to the lack offoreign exchange resources. Particularly the lack of untied resources(exoept for the recently obtained ADB loan) makes it difficult to utilizebilateral funds by combining these two kinds of funds. IDBP and accordinglyits clientele are thus at a considerable disadvantage compared writh PICICand its large clients.

Recommendations

112. IDBP is a suitable recipient for Bank Group's financial assistance.An IDA Credit of $20 million, channelled through the Government of Pakistan,is recommended. This would cover about one-third of the total foreignexchange requirement approximately over a two-year period, and would notonly increase IDBP's foreign exchange resources but also enhance the utili-zation of other foreign lines of credit through their use in combinationwith IDA funds.

113. The terms of the Government's onlending to IDBP should be thosenormally applied to the Bank's lending to development finance companies,including flexible amortization schedule and standard commitment charge.IDBP should pay the Government interest at the rate applicable to Bank loansat the time of the Board's approval. The loan would provide that

(a) The debt/equity ratio be limited to 5:1. Debt willinclude all borrowings, long-time guarantees anddeposits; equity will include share capital, reserves,the Development Assistance IFund and such portions ofthe Government's subordinated loans which mature afterthe last maturity of the Government's onlending of theproposed credit.

(b) The free limit be $200,000 with an aggregate limit of$6 million.

- 31 -

114. During negotiations the Government and IDBP confirmed that, inconducting its business, IDBP:

(a) will, in making investment decisions, be governedby its oi'm assessment of the economic and financialviability of the project;

(b) will gradually reduce its operations in the field ofsmall industries as soon as suitable machinery hasbeen established for this purpose;

(c) will establish charges for its services and capital,which take account of the cost of the services andcapital provided, the risk involved and the interestrate structure in Pakistan;

(d) will ensure that amortization schedules are deter-mined by the nature and financial aspects of theproject.

AN0NEX 1

INDUSTRIAL DEVELOPM3NT BANK OF PAKISTAN

Industrial Financial Institutions in Pakistan

1. At the time of Pakistants independence in 1947 the Government wasfaced with a number of handicaps. The country was mainly a producer ofagricultural raw materials and trade, industry and the lending system was fora large part in the hands of the Hindus and Sikhs. In the first two yearsthe lack of financial institutional arrangements became apparent. To copewith the situation and to engage in an active industrialisation policy theGovernment in 1949 created three financial institutions: The National Bankof Pakistan, a commercial bank, PIFCO (Pakistan Industrial Finance Corporation),a development bank and Pakistan Industrial Development Corporation, aninstitution which would establish and operate industrial enterprises.

2. A second development was the creation of financial institutionswhich would cater to the specific needs of the two Provinces. It was feltthat East Pakistan posed special problems which required that separatearrangements would be made to channel funds to East Pakistan for thedevelopment of its industrial sector. In 1955 the National Small IndustriesCorporation (NSIC) was established from which in 1957 the East Pakistan SmallIndustries Corporation (EPSIC) was split-off as an autonomous entity. TheNational Small Industries Corporation continued to exist to serve the Karachiarea. In 1960, the West Pakistan Small Industries Corporation (WPSIC) wasestablished to serve West Pakistan, excluding the Karachi region. These twowere in 1962, absorbed into WPIDC (West Pakistan Industrial DevelopmentCorporation), but in 1965 WPSIC was reconstituted.

3. Over the years, Pakistan has established a number of financialinstitutions which serve different types of customers and cater to thedifferent type of financial assistance required. The Credit Engquiry Commissionconcluded in 1959 that Pakistan's industrial development would be servedbest by the creation of three types of financial institutions specializing infinancial assistance to industrial enterprises, according to their size.PICIC (Pakistan Industrial Credit and Investment Corporation) was alreadyestablished in 1957 and served at that time the same clients, i.e., largeenterprises, as PIFCO (Pakistan Industrial Finance Corporation). The CreditEnquiry Commission advised to reorganize PIFCO in such a way that it couldcater to the financial needs of medium size industries. IDBP was accordinglycreated. At present IDBP is also engaged in the financing of smallindustries and works as the financial intermediary for projects sponsoredby EPSIC and WPSIC.

4. PICIC has a paid-in share capital of Rs 50 million, with an IFCparticipation of Rs 2 million. The Bank has granted loans totalling$ 184.2 million. PICIC has a lower lending limit in foreign exchange ofRs 1.5 million in West Pakistan and of Rs 1.0 million in East Pakistan.The average size of its loans is Rs 2.5 million. Until June 30, 1969PICIC's total approvals of loans and investments was Rs 1.45 billion.

Annex 1Page 2

5. EPSIC and ItIPSIC are promotional institutions. The Credit EnquiryCommission had originally reserved the financing of small industries for thecommercial banks, however, this recommendation was not followed becausecommercial banks were not well enough equipped to carry out this function.EPSIC/WPSIC are engaged in the sponsoring and promotion of industrial enter-prises, the development of industrial estates and the establishment of serXn%cacenters. The funds put at their disposal to establish small privateindustrial enterprises are channeled through either IDBP or a consortium ofcommercial banks. Under this scheme, parts of foreign lines of credit areallocated to IDBP and earmarked for EPSIC/WPSIC projects. Also a loan ofRs 10 milllion was made by the Central Government. Risk of defa-alt is borne25% by IDBP and 75% by EPSIC/WPSIC. In the case of IWPSIC, IDBP has a firstcharge on security. The interest spread is distributed between IDBP andEPSIC/WPSIC in the ratio 1:2. In the last five years 1963/64 - 1968/69,total loan operations under this program have been Rs 37.1 million for WPSICand Es 6.9 million for EPSIC. The technical and economic appraisal ofprojects is done by EPSIC/WPSIC while IDBP appraises the financial andcreditworthiness aspects.

6. There have been two so-called "loan programs" to EPSIC involvingcommercial banks, each utilizing a $ 1 million AID commodity loan fumd whicd;is matched by rupee funds pledged by commercial banks which are alsoresponsible for creditworthiness screening. Risk of default is shared on a50 - 50 basis between EPSIC and the lending bank, while of the interestspread of 3% EPSIC receives 1% and the commercial bank 2v-. This arrange-ment is now in its third year of operation. In the first two years itdisbursed Rs 24.22 million. Projects call for a total investment betweenRs 100,000 and Rs 1 million, and an average investment of is 450,000.

7. For the carrying out of their other function EPSIC/hTPSIC depend onyearly budgetary allocations from the Provincial Government.

8. Besides the institutions to finance the private sector, there aretwo entirely Government-owned promotion institutions EPIDCA/PIDC (East andlWest Pakistan Industrial Development Corporations), which invest directlyin and operate newly established large-scale industrial enterprises whichprivate industrialists are unable or unwilling to undertake. Such enter-prises are ultimately transferred to the private sector if private investorscan be found and other conditions do permit. IDBP and EPIDC jointly finance28 jute mills in the private sector. Total assets of each Corporationamounted to around Rs 1.5 billion as of end-June 1967.

9. Although PICIC can participate in equity and IDBP and PICIC canunderwrite public issues, the Government of Pakistan decided to create a newinstitution specializing in the undenrriting and distribution of new issues.Accordingly, in Februaxy 1966 ICP (Investment Corporation of Pakistan) wasestablished with an initial paid-up capital of Rs 50 million and a long termloan of Rs 100 million from the Central Government. ICP's objectives are(a) broaden the base of equitiy investments and (b) develop the capital market.

Annex 1Page 3

In general ICP will dispose of its holdings whien they begin to declaredividends. IFCP has launched in January 1967 an "Investor's Scheme" underwhich accounts can be opened which are used for the purchase of securitieson behalf of the account holder. ICP also manages 3 closed-end mutual fundswith an initial issue value of Rs 40 million. ICP further cooperates closelywith other financial institutions in the financing of projects.

10. National Investment Trust (NIT) is an open-ended mutual fund whichis controlled by 10 shareholders including PICIC and IDBP. With total assetsof Rs 322.4 million and net sales of over 25 million units, NIT is an impor-tant factor in the stock market.

11. Also there is Industrial Promotion Services, Ltd. (IPS) which isowned by the Ismaili Group and is engaged in promotions and equity invest-ment. It provides equity financing to industries of all sizes and givesadvice to prospective investors in the form of feasibility studies and helpsthem to meet the requirements of other financial institutions e'ICIC, IDBP).At the end of 1968 total investments amounited to Rs 2.6 million.

12. With the proposed Equity Participation Fund (EPF) to be administeredby IDBP, the Government hopes to increase the supply of equitky capital parti-cularly to medium and small enterprises. Thus ICP will provide capital tolarge-scale enterprises and EPF will serve medium and small scale enterprises.Initial share capital will be Rs 50 million: a provision of Rs 20 millionhas been made in the current central budget.

13. Insurance Companies enter the industrial finance field in two ways:(a) as participants in underwriting consortia and (b) as general investors incorporate securities. Investments out of life funds are regulated by theInsurance Act. Presently they can invest '00 out of these funds in approvedsecurities which include most corporate securities. They may not own. morethan 5'% of the paid-up share capital of any company and they are restrictedto companies iith a paid-up share capital of Rs 5 million and more. In 1967the premium income from non-life insurance amounted to Rs 222 million andlife insurance in force amounted to Rs 3.9 billion.

14. Commercial Banks. At the end of June 30, 1969 there were 35scheduled banks with total demand and time deposits of around Rs 11.5billion. In February 1968 commercial banks wzere permitted to undertaketerm financing up to a ceiling fixed by the State Bank for each bank.On June 30, 1969 the aggregate of the ceilings was around Rs 200 million.Also in February 1968 a scheme was introduced to refinance term loansmade by commercial banks to industries. The maximum duration wasoriginally 5 years but was extended to 10 years in June 1969. Thetotal amount refinanced under this provision on June 30, 1969 wasRs 31.2 million.

IBRD/DFCJanuary 26, 1970

ANNEX 2

INDUSTRIAL DEVEiLOPMET BATK OF PAKISTAN

List of Shareholders as of june 30 99/

_hares (Rs 100 par) Held

Shareholders No. % of Total

I. Government (Directly and Indirect4y)

Government of Pakistan 204,COOThe National Bank of Pakistan 11,429

(24% Government owned)The Trustees of Port of Karachi 11,456The Government of West Pakistan 6,740 233,625 58.41

II. Pakistani Private Interests

The Muslim Commercial Bank Ltd. 6,,740The Premier Ins. Co. of Pakistan Ltd. 4,137Ideal Life Assurance Co. Ltd. 5,700IDBP Employees Provident Fund 4,778The Eastern Federal Union Ins. Co. Ltd. 8,303The International General Ins. Co. of

Pakistan Ltd. 8,680Pakistan Insurance Corporation 4,971Dada Limited 7,170Muslim Ins. Co. Ltd. 12,645Adamjee Sons Ltd. 4,909 66,033 16.51

III. Foreign Interests

The Chartered Bank Limited 6,909The Norwich Union Life Ins. Soc. 7,440National & Grindlays Bank Ltd. 16,013 30,362 7.59

Total holdings of moare than 1 shareseach 330,020 82.51

IV. 109 Pakistani Shareholders holdingless than 1% of paid-up capital 69,980 17.49

Grand Total 400,000 100.00

1/ There have been no substantial changes in the shareholdings following theshare ca4ital increase of December 1969.

IBRD/DFCJanuary 25,. 1970

ANN:EX

INDUSTRIAL DEVELOHVET BANK OF PAKISTAN

Board of Directors and Executive Conm.tteeAs of June 30j96

OrigilalRepresentation/ Date of

i'ame Background Domicile Apointment

(A) Appointed by the Government

1. Mr. X.A. Marker, S.K.Chairman Business Quetta (WP) 6-'-1960 *

2. Mr. M. Majid Ali, C.S.P. Ministry of Finance Islamabad (-WP) 12-12-1964

3. *Mr. S.R. Karim, T.Pk., hinistry oZC.S.R. Industry Karachi (WP) 7-2-1969

4. -*Mr. M.A. Haq, C.S.P. West PakistanProvincialGovernment Lahore (WP) 4-20-1969

5. *Mr. M.M. Islam, C.S.P. East PakistanProvincialGovernment Dacca (EP) 8-19-1969

6. Dr. A. Waheed Business Nowshera (WP) 4-26-19627. *Mr. Ahmed Hussain Chamber of Commerce Dacca (EP) 12-12-19648. *Mr. Z. Huq, S.K. Managing Director Karachi (WP) 11-11-1966

(B) Elected by Shareholders other than the Government

9, *Mrs. Anwara Begun Business Dacca (EP) 6-20-196610. *Mian Allah Bakhsh id Lahore (WP) 7-2-196911. Mr. G.R. Arshad id Karachi (WP) 7-2-1966

(*) Members Executive Committee(**) As Chairman of DBP's predecessor PIFCO

IBRD/DFCNovember 24, 1969

INDUSTRIAL DEVELOPMENT BANK OF PAKISTANORGANIZATION CHART AS OF DECEMBER 31, 1969-

DEPUTY MA AGiNG DIRECTOR ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~DEUY ANGNGDRETO EPT MNAIG IECO

PROPOSED EGUI TY Mr. IArod Akht,DM EREAIT]rSPARTICIPATION FUND STAFF~ Prl,of.i.-hl RDHA FIESff-T~ITPKIA

M,. A.F.M. NuroI M.tio Oth-r 79M bu .b,K-MEANM u.-C.du

ToI I1

- - - - - - - - - - - - - - - - - - --- - - - - . .. . . . . . .CHIEF MA NAGERI HEAD REGIONAL OFFICE - DACCA~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~RG OA FFC-IAC

RAVWALPINDI BRANCH HFFAE HE O_O FICEf M. A.H-M K.,roLoddi~CONTROLLER OF OPERATIOSCNRLRF SPECIAL STUDIES AND INSPECTION STAFF: P,oBf-Lo-o, 85

STAFF: Prof~ IOo 5 Otr.Mh-hd4n 31~qOt= r, 22 M.Mb.d~F-. 7 ,H .P- ..

LOAN DEPARTMENT END-USE DEPARTMEN AU DIT IN NEPCTION SPECIALI STUDIES IAND METHODS DEFIEARMN

PESHAWAR B NCH ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~CHILTTAGONG BRANCHPESHAWAR ERANCH I ~STAFF: Prof-ot-iorl LU STAFF: FrFeino, 1 TAFF:FrrNol9 STF:rfetrl

Orhr 12 .Le, L OEr OEr - STAFF: Profeari-ro 3 ToLol 22 TotI T.t.1 IT TeM 5 jSTAFF: ProferrioreL 15

Oth-r LU Ot- 4

BOARD DEPARTMENT ~~~ESTABLISHMENT FOREIG EXCHANGE ENGINEERING REERHSTATITC IDEPARTMEN'T DEPARTMENT DEPARTMENT _DIVISION DIISO

GUJEANWALA BRANCH STF:jfP ISAF rf -, SAF ~f.- 1 SAF:ffi-, 9BOGRA BRANCH

Orher 4 Othtr S9 Orh-r 2 Oth-r Ohr 6 Other,6- STAFF: Poleci r.. I T-Io 75 DTN, Z6 Total 2 Tor,o1 17 T.r.l Ts-oN S STAFF: FNr,oo, 2

Toto1 T2 T..

FLELIC RELATIONS CENTRAL ACCOUNTS DEPSTBNIGSTAFF TRAININGDEPARTMENT DEFARTMENT ~~~~~~DEPARTMENT DEPARTMENT

MULTAN BRANCH IjKHULUA BRANCHSTAFF: Profeteorol I STAFF:Proftoni-nl IA STAFF: PfrioL 3 STFF: Frfetion-I 3

Orhor. 4 ~~~~~~Other, 28 Orhr 3 0rlro- 2 ISAF efeinl- STAFF: Profeei-ro 3 ITrl ST.ro T3 Tooh oNII

Oth'r 9H.. .. TotNI T2 t.

REGIONAL OFFICE - KARACHI~ ~ ~ ~~~~~~~~~~~SL TBRNC

MANAGER: Mr. .A.AZ. Zodi t

STAFF: Prfe,i.- o 48Orher, 72

STAFF HEAD OFFICE REGIONAL OFF.ICE TTAL

Frofe,ion-l 107 214 321 CMLABACOrbh- I_97 435 AD2

204 649 P53 QUETTA BRANCH HYDERAaAD BRANCH SAF fi..k

STAFF: PFEoR.-;noL I STAFF: Prof-oior-I, 2 TOther, B Other, 9

N-rber ofDoF Stf o f Jo.- 3D, 1969. TtNI S Total 71

7Jo- 0 ,5, 1970Z

I BRD -4743

ANNEX 5

INDUSMRIfAL DEVELOJ4ET BANK OF PAKISTAN

New,, Accounting, Syte,m

On the recommendations of an earlier Bfaik ivMission, IDBP.has undertaken to reorganize its accounting system and has retained A.F.Ferguson. & Co, Chartered Accountants, for the purpose. Ferguson's review ofthe tDBP's accounting organization generally confirmed the inadequacy of thepresent syste; which may be suitable for a commercial banking operation, butdoes not meet the requirements of a development finance institution. Itsaudit also revealed the generally poor book-keeping standards of IDBP. Becauseof a complete decentralization of the accounts between IDBP's Head Office andRegional Offices and Branches, the accounting records did not providecomprehensive and accurate infor-mation on IDBP's business affairs and theyconsiderably lacked in efficiency and speed.

In February 1965, Ferguson submitted a first outline of a proposednew system based on a complete centralization of all accounts in the KarachiHead Office. This proposal, after long deliberation and discussion, in April1967 was amended into a dual system with a separate unit set up in the DaccaRegional Office complementary to the Accounts Department at the Karachi HeadOffice. On this basis, Ferguson prepared an Accounts Manual which afterconsiderable delay was submitted in September 1968 and approved by IDBP forimmediate implementation. Preparations have progressed during the past yearand it is expected that the transition to the new system will be completed soon.

Under the new system the Karachi Head Office will maintain a fullrecord of Wiest Pakistan operations as well as a record of the share capital,reserves and all its foreign borrowings. The Dacca Regional Office will keepa record on IDBP's East Pakistan operations, of its Rupee borrowings fromthe Government or other sources in East Pakistan and of all other assets andliabilities in East Pakistan. A complete system of ledgers, memoranda andauxiliary accounts will be maintained to provide a complete record Qn thediverse aspects and phases of IDBP's financial activities. Regularstatements by the Karachi and Dacca Accaouts Departments will keep the BranchOffices updated on the movements in their client's accounts. The Bank'saccounting procedures in regard to credit operations in foreign currency havebeen reviewed to give a complete and accurate record of these operations inaccordance with their contractuial arrangements, including a proper distinctionof IDBP's financial commitment as a borrower/lender or as a guarantor underthe loan.

The new systen has been designed for mechanical operation (punchcards) and, pending the final selection of equipment, is now being testedunder hand-bookkeeping procedures. Adequate room is provided for in thesystem to cover a multiple of the bank's present accounts (about 2,000) andto supply all statistical data on the operation. However, no program has asyet been prepared for this part of IDBP's record which represents an importantsource of information for the conduct of IDBP's over-all financial activities.

Annex 5Page 2

It is expected that the introduction of the new accounts system willstrengtheil and speed up IDBP's accounting procedure, help to streamlineand amplify the flow of statistical information and in particular:

(1) ensure a complete, accurate and up-to-date accounting recordof IDBP's operations;

(2) provide daily statements of trial balance and profit and lossaccounts for management's current information;

(3) eliminate duplication of work and allow for costs savingswithin a properly planned integration in the over-allorganization;

(4) facilitate the setting up of a comprehensive statisticalinformation service.

The new accounting organization is still in the early stages ofimplementation, and some allowance has to be made for breaking in theoperation. The ultimate benefits to IDBP of the new system will equallydepend both on the effective utilization of its facilities and on the carefulselection and continual maintenance of a qualified staff for its operation.

IBIT/DFCNovember 6, 1969

ANNEX 6

INDUSTRIAL DEVEL0flIOMT BAN OF PAKISTAN

Rapee Resources as of, June 30. 1969(in al-li Ron F )

Amount R emarks

Share Capital 40.00

Reserves 46.04

86.04

Goverrunent Advances 112.96 terms of all Government loans were changed in September 1969, now repayablein 9 annual installments commencing from September 15. 1986. Interest willbe charged at 6% except for the interest free loan of RJ 246 million which willcontin*e to be ao. Theas loans are subordinated to,share capital. (Letter datedSeptember 12, 1969.) Because of repayments between June 30 and September 12,1969, the amount affected was Rs 110.9 million.

Small Industries 8.37 To be used for EPSIC/WPSIC projects. Interest rate 4% and repayable inCorporation Advanoe 40 years in semi-annual installments starting July 1, 1964.

KfW Counterpart Funds 26.53

Credit Lines from State 138.50 These are the credit lines on which IDBP can draw as necessary. As ofBank of Pakistan 1/ June 30, 1969, the total amount outstanding was Rs. 108.50 million, as

compared with the available line of credit of ts. 138.5 million.

Deposits-/ 123.50

495.90

L/ Five credit lines as follows:Amount Interest Rate Remarks

1st Credit Line 200 Bank rate ( The Bank2nd " " 30.00 "( rate is3rd " " 50.00 4( at4th " 8.50 Bank rate resent5th It 30.00

2J I. Fixed or Term Deposits

Up to 6 months 42.7From 6-12 months 16.8One year and over 48.7

(of which over 4 years) (311

108.2

II. Savings Bank Accounts 2.3

III. Current Accounts 13.0

123.5

IBAD/DFCNovember 24, 1969

ANNEX 7

INDUBFRIAL DEVELOMENT BANK OF PAKISTAN

Foreign Exchange Resources and Utilization aa of June 30. 1969

(us $ millions equivalent)

Procuxrement Terms ofYear of Interest-/ Tied to Lending Repayment

Lenders Loan Agreement AmountY Comitted Rate ) Country (Years) Down payment

UK 2nd 1959 11.54 11.54 ) ( ¼l above Yes repaid No3rd 1960 3.72 3.72 ) ( the UK do 14½ do5th 1962 8.82 8.82 ) ( Treasury do 1, do6th 1962 10.73 10.73 ) ( rateg/ do 17½ do8th 1964 6.33 6.33 ) ( do 17½e do9th 1965 8.11 8.11 ) ( do 17½ do

14th 1966 8.64 8.60 ) ( Interest do 17½1 do16th 1967 5.04 4.73 ) ( free do 17½m do18th 1967 5.04 0.143 ) ( do do 17½ do

UK Platt Brothers 1966 7.13 7.13 6 do 9½e Yes

Germany let 1961 38.59 38.59 6 do 9½ Yes2nd 1961 3.12 3.12 6 do 9½ doAl 58 1962 15.00 15.00 5½ Partly32' 15 NoAl 62 1962 0.75 0.75 5½ do 15 doAl 87 1963 5.00 5.00 53p do 15 doAl 1140 1964 1.00 1.0C 53½ do 15 doAl 206 1966 1.25 1.25 3 do 18 doAl 281 1967 2.50 2.50 5fe do 15 doAl 363 1967 3.00 2.05 3 do 17½ doAl 403 1968 6.50 0.44 3 do 17½2 do

Japan Suppliers 1st 1960 20.30 20.30 5-3/14 Yes 71f Yes2nd 1962 12.45 12.45 6 do 91½e do3rd 1965 9.84 9.84 6 do 9½ do

Yen 1st 1961 3.26 3.26 6 do 9'fe No2nd 1963 0.99 0.99 6 do 9½ do3rd 1963 4.81 4.81 5-3/4 do 9 fe do" 4th 1964 0.98 0.98 5-3/4 do 12½m do5th 1966 0.97 0.97 5-3/4 do 12'- do6th 1967 2.59 2.59 5-3/4 do 12'- do7th 1968 2.67 0.06 5½ do 12 do8th l269 2.50 -- 5A do , do

France 1st 1963 5.24 4.94 5 e8 9- Yes2nd 1969 1.00 -- 3;7-W do 10-20-/ do

tlW ('.xirqbank) 1961 6.21 6.21 5-3/4 do 6- No5/ 1961 3.46 3.46 5-3/4 do 17 do

_ 0.962 O.80 O.80 5-3/4 do 7 ao1963 2.46 2.46 5-3/4 do l' do

i/ 1963 3.35 3.35 5-3/4 do lib do5/ 1963 2.08 2.08 5-3/4 do 174ii do:/ 1%964 2.20 2.20 5t do 17-c5 do

1966 2.49 2.49 5-3/4 do 64 do

Y , gosl avia 1st 1969 6.96 6.96 3 Yes 7½ Yes2nd 1964 2.33 2.33 3 do 7½fe do

ODemark 1st 1966 1.00 0.47 free do 114½ ND

Poland 1st 1966 1.00 -- 21½1 do 8fe do

USSR 2nd 1966 1.20 1.15 2½i do 9½ Yes14th 1968 2.50 0.71 2½- do 5 do

Switzerland 1st 1966 1.48 1.43 6-3/4 do 9½ do

Belgiuin 1st 1966 6.10 1.95 6 do 9k do

Italy 1st 1966 6.00 4.92 6 do 9- do2nd 1967 0.72 0.72 6 do 9½-, do3rd 1968 5.00 2.31 6 do 9,. do

ADB 1st 1968 10.00 -- Varying7/ No 114' NoNot allocated to specific line

of credit 30o11TOTAL 268.75 277.12

Available for commitment:

1/ Net of Cancellation2/ Effective rate 8%3/ Preferably to be used for purchases from Germany;/ Treasury loan 3Y, Bank loan 7%, Treasury loan 20 years, Bank loan 10 years

For Intercontinental Hotelsi;/ For General Tyre project7/ Depending on current ADB interest rate (currently 6-7/8%)8/ Interest Rate payable by the Govw_ intIBnD/DF0November 214,1969

INDUSTRIAL DEVELOPENT BANK OF PAKISTAN

Foreign Exchange Resourzes by Fibancia r*M Received

(in US $ million equivalent)

1959/60 1960/61 1961/62 1962/63 1963/64 1964/65 1965/66 1966/67 1967/68 1968/69 Total

County Li/1 /2 C- LY C/G Li/ / C. _ L1/ / C2/ I1/ / C&/ L // /cG/ Li/ / 2/ L/ / Cx2/ Li/ L1 / C, /

ADB 10.00z/ 10.00

Belgium 1.00 5.10 6.10

Denmark 1.00 1.00

France 5.o0 0.24 1.00 6.24

Germany 41.71 20.75 1.00 1.25 5.50 6.50 35.0° 41.71

Italy o.5o 6.22 5.00 11.72

Japan 20.30 3.26 0.99 12.45 4.81 0.98 9.84 0.97 2.59 2.67 2.50 18.77 42.59

Poland 1.00 1.00

Switzerland 1.00 0.48 1.48

UK 11.54 3.72 8.82 10.73 6.33 8.11 8.64 5.04 3,-13 5.04 67.97 7113

USA 6.21 3.46 O. 80 2.4W- 7.(3 2.49 - 11.16 11.89

usSa °6 40.44 0.71 0.05 2.50 3.70

Yugoslavia 6.96 2,33 9.29

TOTAL 11.54 -- 9.93 62.01 12.08 10.42 32.147 18.25 14.60 9.96 9.09 9.84 12.86 3.18 16.10 19.16 7.71 5.05 19.00 3.50 145.38 141.37

Total 11.54 71.94 22.50 50.72 24-56 18.93 16.014 35.26 12.76 22.50 286.75

NOTES: 1/ Loans negotiated by the Government of Pakistan and allocated to IDBP

2/ Suppliers' Credits negotiated by the GDP and passed on to IDBP3/ Loans directly negotiated by IDBP with Government guarantee

IBRD/DFCNovember 24,1969

I'

ANN~EX 9

INDUSARTEAL D'XELOPThENT BANK OF PAKISTAN

Schedule ofICurrent Interest Rates and Chages

A. Rates of Interest

1. Local Currency Loans

a) For advances under ER 1 lac. 3% above Bank Rate '1subject to a minimumof 7½2 p.a.

b) For advances above Rs 1 lac. 3V6 above Bank Rate subject to a minimumand up to Rs 4 lacs. of 7-3/4% p.a.

c) For advances above Rs 4 lacs 3Y1, above Bank Rate subject to a minimumand up to Rs 6 lacs. of 8% p.a.

d) For advances above Rs 6 lacs. 4% above Bank Rate subject to a minimumof 89 p.a.

2. Foreign Exchange Loans 8% p.a.

3. Penal Interest (Foreign Exchange 2% per annum.& Local Currency)

B. Charges

1. Examination & Technical @ < with a minimum of Rs 150 and aAssistance Fee: maximum of Rs 25,000. For EPSIC/WPSIC nil.

For inland transport and trawler minimumRs 50 and maximum Rs 10,000.

2. Documentation Charges: At a uniform rate of o¼% with a minimum ofRs 150 and a maximum of Rs 25,000 , oractual expenditure incurred whichever ismore. Minimum and maximum are respectivelyRs 50 and Rs 10,000 for EPSICAiPSICand inland transport and trawlers.

3. Commitment Charge:

a) Rupee loans i of 1% per annum from the date ofcommunication of sanction on undisbursedportion of the loan.

b) Foreign Exchange Loans i of 1% per quarter from the date ofallocation of foreign exchange till thedate of establishment of L/C or issue ofguarantee. If -the allocation is not usedwithin 6 months: la per quarter.

4. Amendment Charge: (i) @ 1/8% with a minImum of Rs 25 and amaximum of Rs 1,000 for amendment eitherin the security or in the repaymentschedule.

(ii) For EPSIC/WPSIC, Rs 10.

1/ The present Bank Pate is 5%.

Annex 9Page 2

L/C Commission on Forei Loans: or Vo for the first quarter and1/8% for the subsequent quarters or partthereof.

6. Guarantee Commission: i of 1% for every quarter or part thereof.

7. Exchange Risk Comission: -'< per annum on the principal balance ofthe loan outstanding. Only in cases wherethe repayment period of sub-loans isshorter than the period for which the loanhas been obtained by the Government fromthe foreign lender. This commission ispassed on to the GovernmAent.

IBRD/DFCNovember 24, 1969

INDUSTRIAL DEVELOPENT BANK OF PAKISTAN

Summary of Operations: 1961/62 .+o 1968/69(Amounts in mil ion Rupees) -

Total1961/62 1962/63 1963/64 1964/ 65 1965/66 1966/67 1967/68 1968/69 Amaui5t

Approvals 1 /

Local currency 55.7 55.7 83.1 104.8 44.7 33.4 21.1 34.6 433.0 1,694Foreign exchange 211.2 255.2 316.2 146.8 183.8 290.6 160.1 139.8 1703.7 2.026

266.9 310.9 399.3 251.6 228.5 324.0 181.2 174.4 2136.7 3,720

Commitments

Local currency 86.8 53.3 55.0 35.7 36.1 38.8 22.1 17.9 345.8 1,158Foreign exchange 14.5 136.8 227.5 179.3 131.8 167.8 121.3 88.4 1186.9 1,274

222.3 190.1 282.5 214.9 167.9 206.1 143.4 106.3 1532.7 2,432

Disbursements

Local currency-/ 29.9 47.3 49.9 44.5 30.5 48.4 64.9 44.5 359.8 1,145Foreign exchange 95.4 91.5 125.3 293.0 230.5 114.1 129.5 85.6 1164.9 1,228

125.3 138.8 175.2 337.5 261.0 162.5 194.3 130.1 1524.7 2,373

1/ Include 761 loans later cancelled, totalling Rs 159.6 million consisting of 350 local currency loanstotalling Rs 43.3 million and 11 foreign exchange loan totalling Rs 116.3 million.

2/ Include transfer of arrears from foreign exchange loans.

IBRD/DFCNovember 6, 1969

INDUSTRIAL DEVELOPMENT BANK OF PAKISTAN

Analysis of Loans by Size, Duration, Type and Geographical Distribution,Cumulative up to June 30, 1969

(Amoimt in million Rupees)

Local Currency Foreign Currency TotalNo. Amount % No. Amount % No. Amount %

DURATION

Up to 5 years 762 67.12 15.5 - - - 762 67.12 3.1From 5 to 10 years 854 302.27 69.8 1915 I102.76 64.7 2769 1405.03 65.8From 10 to 15 years 76 59.11 13.6 107 536.66 31.5 183 595.77 27.9Over 15 years 2 4.55 1.1 4 64.27 3.8 6 68.82 3.2

Total 1694 433.05 100.0 2026 1703.69 100.0 3720 2136.74 100.0

SIZE

Re 150,000 and below 1137 45.47 10.5 990 51.11 3.0 2127 96.58 4.5Over Rs 150,000 - Rs 300,000 219 50.65 11.7 328 72.47 4.3 547 123.12 5.8Over Rs 300,000 - Rs 500,000 140 53.75 12.4 203 87.54 5.1 343 141.29 6.6Over Rs 500,000 - Rs 1 Million 140 97.67 22.6 207 150.96 8.9 347 248.63 11.6Over Rs 1 Million - Rs 2.5 Million 45 83.71 19.3 137 202.56 11.9 182 286.27 13.4Over is 2.5 Million 13 101.80 23.5 161 1139.05 66.8 174 1240.85 58.1

Total 1694 433.05 100.0 2026 1703.69 100.0 3720 2136.74 100.0

New Enterprise 1174 309.78 71.5 1184 1275.14 74.8 2358 1584.92 74.2Existing Enterprise 520 123.27 28.5 842 428.55 25.2 1362 551.82 25.8

Total 1694 433.05 100.0 2026 1703.69 100.0 3720 2136.74 100.0-==== ====== ===,= ===, ======= ===== ... =a=== sssms........ ann ==

GEOGRAPHICAL DISTRIBUTION

East Pakistan 1010 201.67 46.5 664 674.26 39.5 1674 875.93 40.9West Pakistan 684 231.38 53.5 1362 1029.43 60.5 2046 1260.81 59.1

Total 1694 433.05 100.0 2026 1703.69 100.0 3720 2136.74 100.0

IBarD/DFCJanuarv 19, 1970

ANE 1.2

r:J.:5, 1%L DE7EXi.ZCPMENT BIANK OF PAKISTAN

Tnl;is ar-; ~Dis tribu tion of Loans Sanctioned cpto June 30, 1969

(in million Rupees)

ALL PAKISTANiOver Rs. 2.5

Industry No. Amount _ million

Cotton Ginning 271 25. sl 1.2jute Ba-ing 6 4.21 0. 00t,iirIcals 106 235.90 11.0 193.2E. ectrical 46 15.55 0.7E:ngineeringg 166 75.46 3.'5Food Prodocts 289 115.66 5.4 13.4Milling 65 29.64 1.4Non-'<ietallic Mineral Products 87 81.36 3.8linirng 14 1.35 O.:1natur-al Gas aLd Motive Power 4 51.23 2.4 50.5Paper awid Stationery 52 27.78 1.3Textale (Cotton and Other) ( 694.07 32.5 442.oJute ( 365.37 17.:L 338.2r;,Ibber Prodiucts 20 10.19 0.l5 3.8:,4Žeei-,el and Leather Products 27 8.68 0.4Road T,a sport 148 13.45 0.6 ;iv e raort 73 31.62 1.5 3.1't'a 5':Yrsio.vs,t)l't 10 67.68 3.2 57.4V0oo Products 45 16.34 0.8

O.' StoC and Distribution 3 17.09 0.8 14.2T-^h?;.->',; os and Pr-oductIon 75 32.13 1.5

29 78.08 3.7 53.4S'Lt-i>.~. 1Goods 4 0.71 -~.rinting ard Pablishing 106 29.35 1.4-Yill Scale Indulstries 1438 71.12 3.3'II.Ecellaneous 78 37.31 1.7 46.o

3,720 2,136.74 100.0 1,215.9

INreD/DFCNo-veiiber 214,1969

INDUSTRIAL DEVELOPMENT BANK OF PAKISTAN

List of Adn'iriistered Loans as of June 30, 1969

Original Amount Outstanding AmountRupee Rupee Commission

In foreign equivalent In foreign equivilent Interest Charged by

Exchange (million) Exchange (million) Rate IDBP

1 Valika Chemical Industries DM 39,355,000 51 DM 13,774,250 16 6% v

2 Indus Chemicals and Alkalies Ltd. DM 21,830,530 31 DM 14,382,486 17 6% -do-

.3 Kohinoor Rayon Ltd. DM 78,150,000 102 DM 27,352,500 33 6% -do-

4 Pakistan Cement Industries Ltd. DM 27,500,000 40 1M 15,900,000 19 6% -do-

Pakistan Service Ltd.5 Hotel Karachi Intercontinental US $0 3,462,800 17 US $ 2,597,103 12 5-3/4% -do-

6 Hotel Dacca Intercontinental US $ 3,348,500 16 US $ 2,882,848 14 5-3/4% -do-

7 Hotel Lahore Intercontinental US $ 2,081,000 10 US $ 1,907,565 10 5-3/4% -do-

8 Hotel Rawalpindi Intercontinental US $ 2,200,900 11 US $ 2,017,458 10 5½% -do-

9 General lyre and Rubber Co. (PAK) Ltd. US $ 800,000 4 Us $ 350,000 2 5-3/4% -do-

10 Karachi Municipal Corporation L Stg. 562,908 6 i, Stg. 326,596 4 3% -do-

TOTAL 288 137

IBRD/DFCNovember 6, 1969

ANNEX 14

INTDUSTRUL DEVEBLOPNET BAINK OF PAKISTAN

Balaice Shets: 19614/65 - 1968/69

(in million Rupees)

Assets 19614/6i. 1i965/6 1966/67 1067/68 1968/69

Cash and bank balances 6.63 21.93 10.81 25.21 22.58Call and short-term interbank loans 10.00 19.25 3h.25 33-55 76.77Accrued interest and other current 10.01 10.51 6.41 10.87 11.46assets 26.64 69M 11

Government bonds 12.14 25.25 34.37 38.02 48.11Industrial shares 1.92 6.51 5.80 5.80 6.01Debentures and Unit Trust 0.50 0.50 24.05 53.54 60.29

1.3^6 32.@ 64.22 9T 14141

Local currency loans 201.34 228.84 274.52 291.31 304.85Forcign currency loans 1/ 605.01 660.95 687.16 693.70 675.47(of which, Administered loans) (211.94)(199.35) (181.25) (160.64) (137.26)

R06.1 3 BS.7-9 961T-8 97S0 9-50.72

Fixed assets 0.73 o.85 1.24 1.35 136

Contingent Ruiee liabilities 21.28 35e34 33.92 32.12 32.37TOTAL: 1112739 1009,93 TT rT. 7 T 3-927

Liabilities

Deposits -- 1.60 26.24 94.76 123.50Accounts payable and other accounts 52,79 61.14 51.70 49.83 48144Provision for bad debts 6.80 8.06 10.56 12.61 13.65Provision for taxation 1.15 3.73 1i06 __ o.64Proposed dividend 1.35 1,80 1.80 2.25 2.80

62- 7S3-3 91.36 13945 179.03

Uovernment and SIC advances 68,88 76.46 83.94 98.04 121.33Lines of Credit 69.02 105.12 153.89 133.07 135.03Foreign currency borrowing 605,01 660.95 687.16 693.70 675.47

74y91 b4-253 924.99 92T471 T9 3W1

Paid-in share capital 30.00 30.00 30.00 30.00 40.00Reserves 9.47 16.82 23.29 29.95 36.90Special Development Assistance Fund 3.81 8.91 8.91 9.14 9.14

73T-28 55.73 62.20 69-.09 Er.0

Contingent Rupee liabilities 21.28 35.34 33.92 33.12 32.37

TOTAL: 869.56 1009.93 1112.48 1186147 1239.27

l/Includes foreign currency 1964/65 1965/66 1966/67 1967/68 1968/69guarantees of n.a. 329.18 303.51 311.15 289.11

IBRD/DFCNovember 2 4,1969

I.NDlUSTRIIAL DEV¶ELOPMENT BANE OF PAKISTAN

Statements of Earnings: 1964/65 - 1968/69

(in milion Rupees)

Income 196t/65- 1965/66. 966/67 1967/0. 1968/69;

Interest on investmentand deposits 2.12 4.88 5.68 7.30 10.03

Interest on loans toIndustries 14.36/ 5.082 49,57 54.45 57.09

Commission income 4.57 4.50 4.39 3.01 3.14

Total Gross Income 21.05 54.46 59.64 64.76 70.26

Expenditure

Administrative -expenaes 5.95 7.73 8.88 9.59 11.01Interest and other L/financial expenses 4.68- 30.08 34.34 37.67 41.78

Provision for bad debts 2.65 1.25 2.50 2.55 1.07

Total Expenditure 13.28 39.06 45.72 49.81 53.86

Income before Taxes 7077 15.40 13.92 14.95 16.40

Income tax 3.54 6.25 5.64 6.05 6.64

Net Income 4.23 9.15 8.28 8.90 9.76

Dlividend Allocation:

Amount 1.35 1.80 1.80 2.25 2.80

( of par value) 4.5 6.0 6.0 7.5 8.0

Pay-out 1atio (%) 31 19 21 25 29

1/ Interest payable and received on foreign exchange loans is shownon a net basis.

2/ Includes income of about Rs 2.5 million accrued in previous years.

IBRLT/DFCNovember 24,1969

ANTEx 16Page 1

INDUSTIRI&L DEVELOPIENT BALNK OF PAKICSTAN

Quality of IDBP's Loan Portfolio

Loans in Arrears

1. Arising from the credit activities under its specific assignmentin the medium and small industries sectors, DB? over the years has accu-mulated a greatly mixed loan portfolio with a less than satisfactory repay-ment performance.

2. The following is a review of the IDBP's loan position based onthe material available in 1DBP and the mission's field investigations.A summary of the status of loans overdue on June 30, 1969 is given below(for further details, see Table A).

Loans Outstanding/ Arrears(principal and

interest)_Amount Amount

No. _ B1. Rs. % IMi. Rs. %

Overdue not more than 6 months

Medium and small loans 630 367.4 52.6 18.70 14.9

Overdue more than 6 months

Medium and small loans 375 156.4 58.64(of which in litigation and/orcovered by provisions) (138) (24.1) (20.17)SIC - small loans 370 20.6 6.24(of which in litigation and/orcovered by provisions) (66) ( 1.2) ( 0.84)EPIIDC - Jute mill projects 8 73.2 13.27Adrninistered loans 2 80.8 29_2

Subtotal 755 331.0 17E 107.47

TOTAL 1,385 698.4 100.0 126.17 100.0

(of which in litigationand/or covered byprovisions) (204) (25.3) (21.01)

Total loans outstandingJune 30, 1969 980.3

1/ Including principal and interest in arrears.

ANNEX i6Page 2

3. Total loans overdue, net of deferments (Rs 120 1 million in 1968/69),on June 30, 1969 amounted to Rs 698.4 million. Loans in arrears for morethan six months totalled Rs 331 million, representing 33% of total loansoutstanding. However, this latter amount includes (1) Rs 80.8 millionadministered by IDBP for the Central Government in regard to which theultimate risk is borne by the Government and (2) Rs 20.6 million relatedto small loans sponsored by EPSIC and WPSIC in which IDBP's risk Ls linitedto 25 of the loan amount. Also included in this total is (3) Rs 73.2million in regard to loans to the EPIDC jute mall projects which are fullyguaranteed by EPIDC until all arrears of these loans have been cleared anda first mortgage has been created on the projects in favor of IDBP. If items(1) and (2) are excluded from the total of these overdues, the amount re-lated to IDBP operations is reduced to Rs 230 million, representing 23.4%of total loans outstanding, and it is further reduced to Rs 157 million, or16%, if item (3) is excluded. This is still a high proportion, reflectingon the efficiency of the Bank's past operations. However, in forming aconsidered judgment on the position, due consideration must be given to thedifficult circumstances under which IDBP operates and to the present manage-ment's apparent determination to improve IDBP's operational performanceThe management's increased efforts in the recent past are clearly visible andthey seem to have already been showing up in a gradual izi-provement, as isindicated by the decline in total arrears from Rs 132.1 in June 30, 1968 toRs 126.2 million on June 30, 1969.

Analysis of Loan Portfolio

4. As regards the composition of portfolio, it will be noted that ofthe 755 loans overdue for more than six months, aLmost half (370) were inrespect of small loans extended through the East and West Pakistan SmallIndustries Corporations (EPSIC/wPSIC). However, wfith a total Rs 20.6 millionoverdue, these accounted for only 6% of the total amount overdue. Percontrast, loans overdue on account of eight EPIDC jute projects and the twogovernment loans administered by IDBP accounted for a combined Rs 154 millionor 46% of the total. The balance, Rs 156.4 million, representing overduein regard to 375 cases of what may be considered the Bank's operations proper.

5. An analysis of the loans overdue by geographical region is given, inTable B. Of the total Rs 270.7 million loans overdue for more than one year,Rs 140.3 maillion were from East Pakistan representing 52% of the total amountoverdue and 53% of the number of projects. Total arrears in principal andinterest wfere Rs 99.8 million, in which West Pakistan shared Rs 58.1 millionand East Pakistan Rs 41.7 million representing 45% and 29% respectively of thetotal outstanding amounts of loans overdue in each region. The relativelyhigh proportion of arrears in the total of loans overdue in West Pakistanlargely reflects the incident of a number of larger projects in particular inthe chemical sector which, because of poor technical and financial planning,have been facing serious financial difficulties.

6. A sectoral analysis of the loans in default, for more than one year isgiven in Table G. Of the 618 such projects totalling I1s 270.7 idillion, thejute and textile industries largely in East Pakiztan shared the largerpart (,is 100.9 million) followed by chemicals (Rs 30.7 million),food products (as 16.7 million) and service industries including

ANNEX 16Page 3

hotels, road, river and sea transport (Rs 15.9 million). EPSIC/WPSICsmall loan operations with Rs 15.2 million overdue in regard to 293 projects,while relatively small in total amount outstanding, took by far the largestshare in the number of loans overdue (47%).

7. The high incident of IDBP loans in arrears is due to a number offactors bearing on its operations of which,several are outside its control.Its borrowers in the recent past have been exposed to severe stresses andstrains zesiting from the effects of war, shortages of imported raw materialas,politicai uncertainties and tensions and frequent changes in the Government seconomic and financial policies. In particular, the industries depending onimports of raw materials and intermediate products have been badly affectedby the Government's tightened foreign exchange licensing regulations. Therequirements of bonus payments for the import of raw materials and the lessthan adequate allocations of foreign exchange to meet their input require-ments have adversely affected the operations of these industries and haveresulted in considerable cost increases,frequently leading to a depletion oftheir slim working capital funds.

8. These general factors, apart from their depressing effect on theindustries' operations as a whole, have tended to compound some of thespecific problems encountered by the grovikgr. medium and small size projectsarising from lack of technical experience and managerial capabilities. Dueto the frequent delays in construction and poor technical plaxuning, manyprojects have been seriously delayed resulting in large cost overruns andshortages of working capital. To meet additional financing requirementsthese companies have frequently taken recourse to excessive short-term borrow-ings, causing a distortion of their capital structure and leading to seriousliquidity problems. In these conditions many of IDBP's borrowers found them-selves unable to meet the servicing requirements of the loans extended tothem under various foreign credit lines, some of which provide for graceperiods which turned out to be inadequate due to the delays in construction.

9. Many of these problems are of a nature common to other developingcountries, and it should have been possible for IDBP to identify them by athorough appraisal and follow-up of the project.

Recoveries of Bad Debt

10. As of June 30, 1969 IDBP recorded a total of Rs 25.3 million in bador doubtful loans represented by 204 cases of which 91. were under litiga-tion. Against this, IDBP has made provisions in the amount of Rs 13.6million. Except for a small amount (Rs 36,000) written off in respect toone single project which had gone into liquidation, IDBP has not made any

write.-offs of bad debt so far.

11. In making its annual provisions for bad debt, IDBF has beenfollowing standard procedures by assessing bad and doubtful loans <within auniform classification according to risk as follows (a) complete 1.ossas, (b)doubtful, and (c) sub-marginal, with provisions up to 100% taking intoaccount the security available to the Bank in each case. In these assess-ments account is taken of 30% of the appraised or book value of the fixedassets, whichever is low¢er, and of the collateral security.

ANNEX 16Page 4

Special Studies Department

12. WJith a growing number of loans in arrears IDBPts management hasbecome increasingly aware of the existing inadequacies of its project ap-praisal and loan follow-up. In 1968 it established a Special StudiesDepartment which in conjunction with similar units in the Regional officeswas entrusted with the identification and evaluation of sick and problemprojects. A first comprehensive review of all sick and difficult casesin the loan portfolio was completed on December 31, 1968. It formed thebasis for a continual follow-up on the overall position through regularsix monthly reports by the regional branches. Based on these submissions,the Department prepares reassessments of individual ailing projects which,together with recommendations on remedial measures are submitted for finalreview to a special Coordination Committee prior to management action.

13. CO June 30, 1969, the group reported a total of 233 sick ordifficult cases. The aggregate amount of Rs 61 million of loans overduerepresented about 31%o of the number and 19% of the total amount of loansin arrears for more than six months, classified as follows:

Amount AmountNo. of Sancttd OverdueCases Mil Rs. Mi1. Rs.

1. Projects behind schedule 50 58.2 3.22. Sick and difficult projects 92 233.5 42.73. Projects under litigation 91 25.0 15.1

233 316.7 61.0

14. To date the Special Studies Department has evaluated 130 casesinvolving loans overdue in the aggregate amount of Rs 58.8 million. Remedialmeasures so far have been taken in regard to 33 projects involving overduesin the amount of Rs 18.1 million and nine more projects with overduesRs 1.5 million were pending with the Coordination Committee.

15. The work of the Special Studies Department has greatly enhancedthe IDBP's loan follow-up and, in conjunction with the comprehensive auditof the loan portfolio now under way, it should provide the necessary basisfor effective and productive future end-use supervision.

Conclusions of A.F. Ferguson and Co.'s Examination of IDBP's Portfolio

16. A.F. Ferguson & Co. has made a comprehensive study of IDBP'sprojects in arrears which covered (i) all projects which were classifiedby IDBP as doubtful or under litigation, (ii) a substantial part ofprojects in arrears for more than one year, (iii) all projects witharrears of less than one year and total disbursements exceeded Rs 1 mil-lion, and (iv) a minor part of projects in arrears for less than one yearwith total disbursement below Rs 1 million. The conclusions are:

AMNE 16Page5

a. IDBP's provision of Rs 13.6 million against debtwhich it considers doubtful is adequate to coverany losses which may arise in respect with suchdebt.

b. IDBPts contingency reserve of Rs 2.6 million whichis not shown in its published accounts is adequateto cover any other irrevocable debts relating toloans.

IBRD/DFCJanuary 26, 1970

ANNEX 16TABLE A

INDUTTRIAL DEMELOPMAT BANK OF PAKISTAN

Statement of Loans Overdue on J3ne 30 1969

(Amounts in million Rcupees)

Arrears ofNo. of Loan Amount Princ:ipalProje ts Outstanding % & erest 4

Total loans overdue 1,439 818.53Rescheduled in F.Y.

1968/69 (54) (120.12)Loans overdue, 6/30/69 1,3M5

Loans overdule not morethan 6 months 630 367-451/ 52.6 18.70 14.9a. EPIDC interests 8 73.21- 13.27b. Administered projects 2 80.76/ 29.32c. Small Industries Corp.:

WPSIC 139 16.85 4.21EPSIC 165 304 2.59 19.44 1.19 5.40

d. IDBP 237 132.32 38.47

551 305.73 43.8 86.46 68,5

Loans under litigationand/or for which provisionshave been made:a. SIC - WAPSIC 18 0.45 0.26

EPSIC 48 66 0.72 1.17 0.58 0.84

b. IDBP 138 24.06 20.17204 25.232/ 3.6 21.01 J6.6

TOTAL 1,385 698.41 100.0 126.17 100.0

1/ These loans are secured by EPIDC guarantee which will be released afterall arrears have been cleared and mortgages on the fixed assets havebeen created in IDBP's favor.

2/ Repayment guaranteed by Government of Pakistan.

3/ IDBP shares 25;' of risk which has priority over TiJPSIC's claim and,in the case of EPSIC, is shared between IDBP and EPSIC in proportion25/75-.

4/ Provisions for possible losses on these accounts as of June 30, 1969totalled Rs 13.65 million.

IBR?D/DFCNovember 6, 1969

INDUSTRIAL DEVELOPMENT BANK OF PAKISTAN

GeogaphcalDis"lmlm f LansOverdus for More Than One Year at June 30, 1969

Loan Amounts Overdue Arre.s of Principal & InterestREGION IflBP sic TO!IL IDBP sIC TOTAL

No. *f Rs. No. of Rs. No. of Rs. Rs*. rK. Rs.Projects Million Projects Million Projects Million Million Nillion Nillion

East Pakistan 156 137.99 173 2.33 329 14o.32 4o.09 1.58 41.67

West Pakistan:

Karachi 64 49.07 19 0.34 24.63 0.19

Lahore laL 68 - 10 la a2A 2978 3A.Z

Total - West Pakistan 169 117.48 120 12.91 289 130.39 54.41 3.74 58.15

TOTAL 325 255.47 293 15.24 618 270.71 94-50 5.32 99.82

*Including arrears in principal and interest.

IBRD/DFCNovember 6, 1969

ANNEX '10Table C

INDUSTRIAL DEVELOPMENT BANK OF PA1USTAN

Sectoral Anal sgis of~ Loans Overdue For I*ilor T-han One.Year

(in million Rupees)

Loan Arrears ofSi. No. of Amount PrincipalNo. Industrial Sector Projects Overdue* & Interest

1. Cotton Ginning 76 3.51 2.172. Jute Baling 1 0.15 0.153. Chemicals 8 83.03 30.674. Electricals 1 0.52 0.265. Food Products 38 16.73 9.816. Engineering 29 7.12 3.897. Milling 4 0.90 0.318. Non-lietallic Mineral Products 10 3.44 2.069. IMining 1 0.12 0.1210. Natural Gas and Motive Power nil nil nil11. Paper and Stationery 6 2.10 1.2012. Jute and Textile (Jute) 10 75.00 15.00

(Textiles) 14 24 25.86 100.86 85.46 23.e4613. Rubber Products 2 0.41 0.4114. Leather and Leather Products 4 1.09 0.7215. Road Transport 42 2.65 2.6416. River Transport 15 2.92 1.8317. Sea Transport 1 0.31 0.3118. IWood Products 9 3.22 1.8219. Oil Storage & Distribution nil nil nil20. Film Studios and Production 4 2.77 1.7321. Hotels 5 10.05 4.632'2. Surgical Goods 2 0.56 0.1523. Printing and Publishing 23 7.41 3.0924. Small Scale Industries

(EPSIc/tPSIC) 293 15.23 5.3325. Miscellaneous 20 5.60 3.07

TOTAL 618 270.70 99.83

*Includes principal and interest.

IBRD/DFCNovember 6, 1969

ANNE 17

INDUSTRIAL DENELOPMENT BANI' OF PAKISTAN

Projections of Loan Operations: 1969/70 - 1973/74

(in million Rupees)Actual Projected

Total Total1968/69 1964/69 1269/70 1970/71 1971/72 1972/73 19X73/7 1969L7I9

Net Sanctions

Lccal currency 35 212 54 63 72 81 90 360Fowr*gn Currency 1h0 836 162 180 216 234 2~52 12!g

175 1048 216 2h3 283 315 3b2 1h40- -__

Commitments

Local currency 1/ 18 151 54 63 72 81 90 360Foreign Currency 2/ 88 688 169 179 185 210 235 978

Total commitments 106 839 233 2h2 257 291 325 1338

L/C opened 3/ - - 141 185 179 190 212 907

Disbursements

Local Currency 4/ 44 233 52 57 67 75 85 336Foreign Currency 5/ 86 853 104 152 178 186 197 81Total Disbursementsl30 lO0- 26 12U 27- 282 1153

NOTES: 1/ Local currency commitments are 100%, of the year's net sanctions,

2/ Foreign commitments: 30% of current yearts sanctions.40% of previous year's sanctions.30% of sanctions of two years ago.

3/ L/C opened: 30% of current commitments.50% of previous year's commitments.20% of commitments of two years ago.

4/ Local currency disbursements: 40% of current year's commitments.60% of previous year's commitmxents.

5/ Foreign currency disbursements: 45% of current year's L/C's opened.45% of previous year's L/C's opened.1O, of L/C opened two years ago.

IBRD/DFCJanuary 26, 1970

ANNEX 18

TDlUSTRIAL DEVELOPITNT BANK OF PAISTAIT

Projected Cash Flow Statements: 1969/70 - 1973/74

(in million Rupees)1969/70 1970/71 1971/72 1972/73 197i3/14

Sources

Cash generation 12.28 14.01 15.07 15.83 16.93Increase in share capital 10.00 -- -- -- --

Increase in Government advances 32.90 _- -- 15.00 45.00KfW Counterpart Fund 3.72 8.06 10.90 11.74 12.92Increase in deposits and otheraccounts 32.99 20.00 20.00 20.00 20.00

Foreign currency borrowing 104.00 152.00 178.00 186.00 197.00Decrease in call loans -- 14.31 24.46 15.99 --Recoveries in local currency 28.45 26.46 25.14 26.34 29.76Recoveries in foreign currency 84.00 83.29 83.13 84.79 86.91

Total 308.34 318.13 356.70 375.69 408.52

Applications

Increase in fixed assets 0.10 0.10 0.10 0.10 0.10Disbursements in local currency 64.60 69.49 79.47 87.72 98.04Disbursements in foreign currency 104.00 152.00 178.00 186.00 197.00Increase in investments 1.00 8.68 10.01 11.07 11.83Repayments of foreign currencyborrowings 84.00 83.29 83.13 84.79 86.91

Repayments of SIC advances 0.12 0.25 0.25 0.25 0.25Increase in call loans 58.00 -- -- -- 10.14Dividend payments 2.80 3.60 4.00 4.00 4.00

Total 314.62 317.41 354.96 373.93 408.27

Adjustable items-/ + 0.13 - 0.28 + 0.74 + 0.76 - 0.75

Total 314.75 317.13 355.70 374.69 407.52

Cash surplus (shortage) (6.41) 1.00 1.00 1.00 1.00

Opening cash Balance 22.58 16.17 17.17 18.17 19.17

Closing balance 16.17 17.17 18.17 19.17 20.17

Note: 1/ Increase in accounts payable, and accrued interest and charges.

IBRD/AFCNovember 24, 1969

ANNEX 19

INDUSTRIAL DEVELOPMENT BANK OF PAKISTAN

Projected Balance Sheets:B19 6 9/70 - 1973/74(in million Rupees) Projected

Actual ______________________

196 ~3/69 1969/70 1970/71 1971/72 1972/73 19737LL

Assets

Cash and Bank balances 22.58 16.17 17.17 18.17 19.17 20.17Call and short-term interbankloans 76.77 134.77 120.46 96.00 80.01 90-15

Accrued interest and othercurrent assets 11.46 11.56 13.92 16.38 18.63 20.77

Investments 114.41 115.41 124.09 134.10 145.17 157.00

Local currency loans 304.85 341.00 384.03 438.36 499.74 568.02Foreign currency loans 675.47 695.47 764.18 859.05 96026 1,070.35

Fixed assets 1.36 1.46 1.56 1.66 1.76 186Contingent Rupee liabilities 32.37 32.37 3237 32.37 32.37 __32.37

TOTAL 1,239.27 1,348.21 1,457.78 1,596-09 1,757.11 1,960.69

Liabilities

Deposits and other accounts 16O.48 193.47 213.47 233.47 253.47 273e47Accounts payable 11.46 12.06 13.52 15.37 17.40 19.71Provision for bad debts 13.65 16.45 18.65 21.15 23.65 26.15Provision for taxation o.64 0.01 1.19 1.06 0.52 1.10Proposed dividend 2.80 3.60 4.oo 4.00 4.00 4.00

SIC advances 8.37 8.25 8.oo 7.75 7.50 7.25Lines of credit 135.03 138.75 146.81 157.71 169.45 182.37Foreign currency borrowing 675.47 695.47 764.18 859.05 960.26 1,070.35

haid-up share capital 40.00 50.00 50.00 50.00 50.00 50.00Reserves 36.90 43.08 50.59 59.16 68.49 78.92Special Development AssistanceFund 9.14 9.14 9.14 9.14 9.14 9.14

Government loans (subordinated) 112.96 145.86 145.86 145.86 160.86 205.86

Contingent liabilities _32.37 32.37 32.37 32.37 32.37

TOTAL 1,239.27 1,348.21 1,457.78 1,596.09 1,757.11 1,960.69

IBRD/DFCNovember 6, 1969

ANMEX 20

::TIJUSTRIAL DEVELORPENT BAIN OF PAXISTAN

Projected Income Statements. 1969/70 - 1973/74

(in million Rupees)Actual Pro&ected

1968/9 ]$Y/7O19,70/71 1971/72 19713 i7TIncome

Interest on investment anddeposits 10.03 12.99 i4.42 13.75 13.i4 14.50

Interest on loans industry 57.09 60.47 67.20 76.10 85.86 96.60Commission income 3.14 3.50 3.50 3.50 3_50 3.50

Total Gross Income 70.26 76.96 85.12 93.35 102.50 114.60

EKenditures

Administrative expenses 11.01 12.22 13.69 15.34 17.18 19.23Interest and other

financial expenses 41.78 45.81 49.58 54.39 60.42 68.62Provision for bad debts 1.07 2.50 2.50 2.50 2.50 2.50

Total Expenditure 53.86 60.53 65.77 72.23 80.10 90-.35

Income before taxes 16.40 16.43 19.35 21.12 22.40 224.25

Income tax 6.64 6.65 7r84 8.55 9.07 9.82

Net Income 9.76 9.78 11.51 12.57 13.33 14.43

Dividend allocation:

Amount 2.80 3.60 h.00 44.00 4.00 4.00

(% of par value) (8.0 ) (8.0 ) (8.0 ) (8.0 ) (8.0 ) (8.0 )

Pay-out ratio (%) 29 37 35 32 30 '~ 28

IBRD/bFCNovember 24,1969