The State Bank of Pakistan on Thursday asked banks/DFIs to get a prior approval before writing off consumer financing loans of Directors, Chief Executives and sponsor shareholders of the bank/DFI or their relatives. The SBP has also urged banks/DFIs for effective internal controls and systems to ensure prudent management of write-offs of bad/irrecoverable loans/advances under the delegated powers to the head of the financial institution.
In view of the different profiles of consumer loans, the SBP has announced that it will revisit the requirements for write-off of irrecoverable loans and advances of consumer financing. According to SBP's BPRD Circular No 08, write-off includes any form of financial relief allowed to the customer in terms of dues outstanding towards the bank/DFI, including principal, mark-up/profit and other charges.
Banks/DFIs will continue to write off the irrecoverable/bad loans with the approval of respective Board of Directors under a well-defined and transparent write-off policy, it said. 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 bank/DFI as they deem fit.
In addition, to ensure prudent management of write-offs of bad/irrecoverable loans/ advances under delegated powers, effective internal controls and systems may be put in place. Banks/DFIs have been asked to submit a report on quarterly basis to BoD with necessary details in respect of loans written off. Banks/DFIs will also report loans/advances written off to Credit Information Bureau of the State Bank of Pakistan. For this purpose, to reflect actual position of write-off and recovery, netted balance of write-off (principal, markup/ profit and other charges) will be updated as and when any recovery is made, the circular said.
"The write-off of loans/advances, if any, in the names of Directors, Chief Executives, and sponsor shareholders of the bank/DFI or their relatives/dependents will require prior approval of the SBP," it added. The write-offs allowed shall be reviewed by the internal auditor (IA) of bank/DFI with special emphasis on the cases where written-off principal is Rs 0.2 million or more. According to the central bank before considering/processing of a write-off proposal, the banks/DFIs shall adhere to following minimum guidelines:
i) Every reasonable effort will be made to recover the outstanding loan.
ii) It shall be established by all available means that the borrower(s) has not created other business interests and assets out of the non-performing loans proposed to be written off and the loan is truly irrecoverable.
iii) It shall be ensured that all securities/collateral held/available with the bank/DFI have been realised and sale proceeds thereof appropriated towards adjustment of outstanding loan. However, in exceptional cases, such as widows and orphans, banks/DFIs may consider relaxation to this requirement under their policy.
iv) The latest valuation of properties/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. The valuation report shall clearly indicate therein, amongst others, the present market value as well as forced sale value. The valuation shall be conducted through an approved value on the list of Pakistan Banks Association. For outstanding principal amount of less than Rs 2 million, valuation may be done by the bank/DFI itself as deemed appropriate in a reasonable and transparent manner. Further, for writing off of loans/advances where outstanding amount of principal is below Rs 0.5 million, the requirement of obtaining latest valuation shall not be applicable.
The SBP has directed banks/DFIs to comply to these instructions in letter and spirit; any violation will attract punitive action under the Banking Companies Ordinance, 1962.
In addition, the BPRD Circular No 06 of 2007 dated 05-Jun-07 will no longer be applicable to write off of loans/advances falling under Prudential Regulations for Consumer Financing, except personal loans allowed for business purposes which shall continue to be governed by the said circular.