Circulars/Notifications - Banking Supervision Department  
 BPRD Circular No. 7
April 6, 1998   

All Banks

Dear Sirs,

PRUDENTIAL REGULATIONS FOR LOAN CLASSIFICATION.

 

Please refer to BID Circular No. 3 dated the 29th February,1986 and Prudential Regulation No-VIII (as modified from time to time) regarding classification of non-performing loans. In view of the enforcement of revised disclosure standards, vide BPRD Circular no.31 dated August 13, 1997, it has been decided to review the classification standards as also requirements of provisions. To this end following amendments ate made: -

i) Subjective evaluation of performing and non- performing credit portfolio for the accounting year ending December, 1997 and onwards shall be made for risk assessment both for adjustment by way of down grading or upgrading the category of classification. The evaluation shall be carried out on the basis of adequacy of security inclusive of its realizable value, cash flow of borrower, his operating in the account, documentation covering advances and credit worthiness of the borrower etc. The assessment will be made by bank as follows: -

a) Where on a loan account which was lastly classified as loss, doubtful or sub standard, the borrower had been making regular repayments during the following year and continues even upto the time of finalization of annual accounts of the bank it may be put into upgraded category provided collaterals available with the bank are strong and or of sufficient value to cover the outstanding amount and cash flow position justifies.

b) In case a classified account is upgraded and no regular repayment was thereafter received for a consecutive period of six months or was irregular preceding next balance sheet date of the bank, the account reclassified according to aging criteria.

c) Only the realizable value of the provision requirements. The auditors/ inspectors shall determine the realizable value in accordance with the guidelines and criteria that may be laid down by the State Bank from time to time. The same will further be subject to check by State Bank Inspectors.

ii) In case of OAEM classification for the accounting year ending December, 1997and onwards, no provisions need be created and in case of sub-standard classification, providing on the accounting year ending December, 1997and onwards, will be created at 20% of the difference resulting from the out standing balance of principal less the account of liquid as sets releasable with recourse to a court of law .

2. Other instructions on the subject shall, however, remained unchanged .

3. The above instructions will come into force with immediate effect.

Please acknowledge receipt.


Yours faithfully,
Sd/-
(Mansur-ur-Rehman Khan)
Director

       
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