The State Bank of Pakistan (SBP) on Tuesday announced further relaxation in the provisioning of loans for banks and DFIs and has allowed 40 percent benefit of forced sale value (FSV) on pledged stocks and mortgaged commercial and residential properties held as collateral against all non-performing loans (NPLs). On October 12, 2007, the SBP had completely withdrawn the benefit of FSV against all NPLs for calculating provisioning requirement from December 31, 2007.
However, in January this year, on the request of Pakistan Banks Association (PBA) the central bank allowed banks/DFIs to avail the benefits of 30 percent FSV. Now the SBP has further increased the benefit of FSV for banks/DFIs by 10 percent to 40 percent and with current announcement banks and DFIs will continue the provisioning of loans as per SBP''s instructions, but they would take benefit of 40 percent on FSV. SBP by amending the Prudential Regulations pertaining to provisioning of classified loans and advances has increased forced sale value (FSV) benefit banks/DFIs from 30 percent to 40 percent.
According to BSD Circular No 10, issued to all banks/DFIs, FSV benefit has now been extended to industrial property (excluding plant & machinery) in addition to already available benefit on pledged stock and mortgaged residential & commercial properties, held as collateral against non-performing loans (NPLs) that are classified during the last 3 years from the date of classification for calculating provisioning requirement.
The State Bank has also introduced interim instructions on restructuring/rescheduling of classified loans and advances that are overdue by less than one year. These instructions will be applicable till June 30, 2010 and banks/DFIs may also apply these instructions on their existing restructured loans, which were rescheduled/restructure on or after January 1, 2009.
"Banks/DFIs may upgrade the category of classification by one category upon rescheduling/ restructuring of such loans & advances that are overdue by less than 1 year. Moreover, upon meeting the terms and conditions of the restructuring for one year and cash recovery of at least 5 percent of the restructured amount, the classification category may be further upgraded by one step," SBP said.
Howeverm if classification category of a classified loan/advance is upgraded on restructuring/rescheduling, the bank/DFI shall maintain provisions required for the category of classification, the loan/advance is in, after up-gradation (as calculated under prudential guidelines contained in relevant prudential regulations and 50 percent of the difference between the amount of provision required for category of classification, the loan is in after up-gradation and the amount of provision required for former category of classification (as calculated under prudential guidelines contained in relevant prudential regulations).
SBP said that the benefit in provisioning will be subject to some conditions like benefit arising from interim instruction shall be taken directly into equity as a capital reserve and shall not be available for payment of cash and stock dividends.
Banks/DFIs would credit this provisioning benefit to P&L and declassify restructured loan only after successful compliance with the terms and conditions of rescheduling/restructuring for 2 years and cash recovery of 10 percent of the rescheduled/restructured amount, or recovery of 25 percent of the restructured amount in cash or through acquisition of immovable properties ie land and building (excluding any plant and machinery installed thereon). However, banks/DFIs are required to ensure that after such acquisition of land and building, outstanding exposures of the borrower should remain fully secured.
Where the terms and conditions of rescheduling/restructuring are not met, such loan/advance would not be eligible for the benefit under interim instruction for any subsequent restructuring, the central bank instructed banks and DFIs.
Banks/DFIs would continue to follow the prevailing instructions on classification/provisioning of classified restructured loan in respect of such loans and advances which are not covered under these interim instructions or which subsequently fail to meet the provisions of these instructions Banks/DFIs would also provide details of loans and advances rescheduled/restructured under the interim instructions on monthly basis as per prescribed format, the circular said.
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