SBP unveils guidelines on transfer, assignment of NPAs to CRCs

The State Bank of Pakistan (SBP) has issued guidelines on "Transfer and Assignment of Non-Performing Assets to Corporate Restructuring Companies (CRCs)."
The Corporate Restructuring Companies Act, 2016, provides legal framework for the establishment and regulation of Corporate Restructuring Companies (CRCs) in Pakistan and the first CRC in Pakistan has been licensed by the Securities and Exchange Commission of Pakistan (SECP) under the Act.
The CRCs can, inter alia, acquire, buy, hold, manage, restructure and resolve Non-Performing Assets (NPAs) of Financial Institutions and restructure, reorganize, revive and liquidate the commercially or financially distressed companies and their businesses.
In order to regulate the transfer and assignment of NPAs from Financial Institutions (Banks/DFIs) to the CRCs, the SBP has decided to provide minimum guidelines to the regulated entities for transfer and assignment of their NPAs to the CRCs.
Accordingly, all Banks and DFIs that agree to transfer and assign their NPAs to the CRCs will be required to ensure compliance of the guidelines on "Transfer and Assignment of Non-Performing Assets to Corporate Restructuring Companies."
As per guidelines, the Financial Institutions (FIs), whilst engaging with the CRCs, are required to ensure that transfer and assignment of NPAs is conducted in a fair, transparent, prudent manner and on an arm's length basis in accordance with the Act, relevant laws, rules, regulatory instructions, as amended from time to time, and FIs' internal policies and procedure manual.
The FIs will develop a policy for transfer and assignment of NPAs to CRCs. Such Policy can either be an independent document or a part of the Credit Risk Management Policy or any other relevant policy of the FI.
The Policy should, inter alia, prescribe guidance on the types of NPAs eligible for transfer and assignment to CRCs, process and technique for determining the value of NPAs, general terms and conditions for transfer and assignment of NPAs, classification, provisioning and accounting treatment of financial instruments received from CRCs as consideration.
The technique, specified for the valuation of NPAs, should be transparent, consistent and provide reasonable estimate of realizable fair value of the NPAs.
The transfer and assignment of NPAs from FIs to the CRCs should be a true-sale, on non-recourse basis, with all the risks & rewards of the NPAs transferred and assigned to the CRCs and such NPAs shall stand derecognized from the books of the FIs.
The FIs will record the financial instrument, received from the CRCs as consideration, on account of, transfer and assignment of NPAs, at the fair value.
The FIs will, however, in cases where the transfer and assignment of NPAs is at a value higher than Net Book Value (NBV), reverse the excess provision to Profit and Loss Statement of the year in which actual amount, in the form of upfront full/partial cash consideration, is received from the CRCs or to the extent the financial instrument received as consideration is fully/partially redeemed.
The losses, if any, arising from transfer and assignment of NPAs at lower than NBV should be recognized in Profit & Loss Statement of such period. The FIs are, however, permitted, until such time specified otherwise by State Bank of Pakistan, to recognize such losses in phased manner, in a period not exceeding the five years.
The FIs may accept the consideration, for transfer and assignment of NPAs to CRCs, in the form of cash and/or financial instruments, eg, Security Receipt, Deferred Payment Notes, Bond, etc, and such instruments will be classified as "Investment" in the books of the FIs.