The State Bank of Pakistan has advised all Banks and DFIs to meticulously follow the SBP's guidelines in letter and spirit regarding "writing off irrecoverable loans and advances". Non-compliance and circumvention of directions shall invoke penal provisions under Banking Companies Ordinance, 1962.
According to SBP sources, in the backdrop of financial sector reforms, rapid changes in banking sector during the last decade and representations received from different stakeholders, the instructions on write off of irrecoverable/bad loans/advances have been revised and amended accordingly on the feedback received.
The irrecoverable/bad loans shall continue to be written off by the banks/DFIs, with the approval of respective Board of Directors (BOD) under a well-defined and transparent write off policy. The write off policy, if not already in place, may be made or revised accordingly by the BOD.
The BOD at their discretion may delegate adequate and appropriate powers down the line to the President/Chief Executive Officer and other senior officers of the bank/DFI, as they deem fit. To ensure proper management and supervision of write off of bad/irrecoverable loans/advances under delegated powers, an effective internal control and supervisory mechanism may be put in place.
Before considering/processing a write off proposal, the banks/DFIs shall adhere to following minimum guidelines:
i) All liquid securities/assets, as defined in Prudential Regulations for Corporate and Commercial Banking, held by bank/DFI under lien, pledge etc have been realised and sale proceeds thereof have been appropriated towards adjustment of outstanding amount of principal.
ii) Confirmation by the concerned official of the branch/office duly countersigned by the authorised official(s) of the office higher than the originating branch/office that borrower or his guarantor has no known means of repayment.
iii) The borrower(s) has not created other business interests and assets out of the non-performing loans proposed to be written off.
iv) The borrower(s) is not involved in any criminal misappropriation of stocks, movable and immovable assets or security (ies).
v) The write off of loans/advances, if any, in the names of Directors or their relative/dependent(s)/concern(s) in which they have any interest of 5% or more and in the name of Chief Executive of the bank/DFI shall require prior approval of State Bank of Pakistan (SBP).
vi) No write off will be allowed where forced sale value of securities held is more than the recoverable outstanding amount. However, the said condition shall not be applicable on the cases recommended/settled under any general incentive scheme of SBP or such other Committee(s) as notified by SBP or present Committee for Revival of Sick Industrial Units (CRSIU).
vii) The write off proposal is duly audited by the internal auditor (IA) of the bank/DFI. The IA shall clearly indicate the deviation/irregularity, if any, from the approved credit policy during the process of sanction, disbursement, documentation, monitoring/supervision of loan/advance and its underlying security(ies). The name(s) of official(s) responsible for irregularities/lapses, which has turned the loan/advance partially or fully bad/irrecoverable, may clearly be spelled out along with action taken against such official(s). It is clarified that IA would only verify the facts and figures as put forth by the concerned Department(s)/office(s) and need not give recommendation or otherwise.
viii) The latest valuation of properties/stock/other assets held by banks/DFIs as security for the loan/advance shall be obtained, if not available on record, at the time of write off of loans, indicating clearly therein, amongst others, the present market value as well as forced sale value. The condition of valuation of properties/stocks/ other assets held as security for the loans/advances shall be restricted to cases involving outstanding principal amount of Rs 5 million and above and have to be conducted through an approved surveyor on the list of Pakistan Banks Association. The valuation of properties/ stocks/other assets for determining market and forced sale value having outstanding principal amount of less than Rs 5 million may be done by bank/DFI itself as it deem appropriate in a reasonable and transparent manner.
ix) For writing off of loans/advances, where outstanding amount of principal is below Rs 0.5 million, the clauses stipulated at para 4(vii) and (viii) shall not be applicable. The banks/DFIs while following clauses at 4(i) to (vi) in said cases shall also obtain a joint certificate from originating branch manager and an authorised officer of the said branch duly countersigned by the authorised official(s) of the office higher than the originating branch confirming that no irregularity/deviation of prescribed rules and regulations in the process of sanction, disbursement, documentation, monitoring/supervision of loans/advances and its underlying security(ies) has occurred which has turned the loan/advances partially or fully bad/irrecoverable. The name(s) of the official(s) responsible for the irregularity(ies)/lapses may be clearly spelled out along with action taken against such official(s).
According to SBP sources, the Banks/DFIs (a) with the approval of BODs may add any other condition(s) as they deem fit, (b) shall report full particulars of loans/advances written off to Credit Information Bureau of SBP and (c) submit to BODs a report on quarterly basis with necessary details in respect of write off of loans, by President/Chief Executive and other senior officials of bank/DFI under delegated powers, for information.
In exceptional case(s) where banks/DFIs, on commercial considerations or for the purpose of cleaning the balance sheet, are unable to comply with one or more of the above guidelines, may put up the case to BODs for consideration. BODs may then decide the case on merit and by recording reasons in writing for approval or otherwise of the case(s). These cases shall be reported immediately to Director, Banking Inspection Department for information.
Banks/DFIs are also allowed to consider cases for rescheduling and restructuring in respect of sick industrial units and non-performing loans/advances under a well-defined and transparent policy to be decided and approved by their BOD.
It may however, be noted that rescheduling and restructuring done simply to break time frame or allow un-warranted improvement in classified category of loans/advances is not permissible. Re-scheduling and restructuring shall always be done under a proper and appropriate agreement in writing by following the due course of law.
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