LoI takes note of NPLs issue

09 Jan, 2010

The Letter of Intent (LoI), submitted by the government to the International Monetary Fund (IMF) as a prerequisite for the release of the fourth tranche under the standby arrangement, has taken note of the politically charged issue of non-performing loans (NPLs).
The LoI states that "regulatory provisions have been amended to allow banks to increase the benefit of forced sale value of collateral from 30 to 40 percent for calculating provisioning requirements." Critics may well argue that if the collateral is not worth the paper it is written on, this may not be adequate. The LoI also says that interim instructions have been introduced on classification/provisioning requirements with a view to facilitating the rescheduling and restructuring of NPLs.
This is related to failure to pay attributed to economic reasons instead of using one's influence to get loans and then have them written off. The LoI also said that the SBP had taken adequate measures to limit moral hazard from possible ever-greening of NPLs, which include (i) monthly reporting on rescheduled NPLs, (ii) limiting the benefit from a change in provisions only to increase general reserves and not for payment of cash or dividends to shareholders, and (iii) urging banks to co-ordinate their actions for recovery of proceedings against defaulting groups/companies that have substantial exposure from a number of banks.

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