The State Bank of Pakistan (SBP) Friday issued regulations for Debt-Property Swap (DPS) in order to minimise risks in the settlement of Non-Performing Loans (NPLs) by banks/DFIs through DPS. According to BPRD Circular No 01 of 2016, keeping in view the rising trend in debt-property swaps, it has been decided to introduce a separate set of regulations on debt property swap so as to better supervise the exposure of banking industry to real estate sector, ie, regulations for DPS.
Debt Property Swap is a transaction for the purpose of settlement in the event of default on debt, consummated by an agreement between and among the bank/DFI and the borrower(s), by virtue of which the bank/DFI acquires/holds property serving as collateral or otherwise against debt.
Banks/DFIs resort to settlement of NPLs through, inter alia, sale of property held as collateral or otherwise. However, it has been observed that the risk management system adopted by banks/DFIs to identify, assess, monitor and contain risks for the purpose of DPS varies widely in terms of prudence and effectiveness.
In the absence of clearly written policies and instructions, DPS transactions are likely to be handled in inconsistent manner. This may give rise to practices which are perilous to the soundness of the banking system. In this view, regulations for DPS are being issued which are meant to set minimum standards to be employed by banks/DFIs while carrying out DPS transactions, the SBP said.
The DPS regulations are effective with immediate effect and transactions in-process will also be concluded as per these regulations, where applicable. Banks/DFIs lacking appropriate systems and procedures to ensure full compliance with these regulations are being given a time period of three months, from the issuance of the instructions, to streamline and/or develop the required systems and procedures, the circular said.
Those banks/DFIs, which are within the prescribed limits, will follow the same, while others who have exposure higher than the limits will approach the State Bank of Pakistan within three months with a well-defined plan envisaging compliance of exposure benchmarks within a period of maximum two years.
The DPS regulations are in addition to all applicable laws including Financial Institutions (Recovery of Finances) Ordinance, 2001. The SBP said the regulations are being issued in exercise of powers conferred under Section 41 of the Banking Companies Ordinance, 1962. Any violation will attract punitive action as per law.
As per SBP directives, regulations for DPS are applicable on corporate/commercial loans, consumer loans and SME loans. Banks/DFIs have been asked to place the Board of Directors (BoD) approved policy in respect of DPS. The policy may be part of banks/DFIs overall credit policy or separate as deemed appropriate by bank/DFI. In case of Islamic banking, the policy and manual will also be approved by the bank''s Shariah Advisor.
According to regulations, DPS should be transacted only for the loans classified in the category of "Loss" and it will be ensured that the customer holds absolute title to the property and has absolute right and/or authority to sell such property. While, in case only partial liability is settled through DPS, banks/DFIs will report the outstanding amount in its respective overdue/classification category of eCIB and NPLs reporting.