Circulars/Notifications - Banking Supervision Department  
 BSD Circular No. 9
November 12, 2003  

The Presidents/ Chief Executives
All Banks/DFIs

Dear Sirs/Madam,

REPORTING OF LOANS / ADVANCES, ACCRUED MARK-UP AND
NON-PERFORMING LOANS (NPLs)

It has been observed that Banks/DFIs are currently using different approaches for recording their loans / advances, accrued mark-up and non-performing loans (NPLs) in their books of accounts.

2) In order to bring uniformity and consistency in the accounting / reporting pattern of banks/DFIs and also to adopt best international practices in this area, it has been decided that banks/DFIs shall observe the following guidelines for recording/ reporting of loans / advances, accrued mark-up and NPLs in their books of accounts and various returns.

i) Accrued mark-up should only be shown under the head of “Other Assets” and not made part of loans / advances. Moreover, no mark-up should be capitalized except in cases covered under BID Circular Letter No. BID(Gen)2470/601-04-90 dated 17th June 1990. Further, as non-performing loans (NPLs) are sub-set of loans / advances, so no unrealized mark-up should be included in NPLs.

ii) Once a loan / advance is classified as NPL under the Prudential Regulations, it should be placed on non-accrual status and the unrealized mark-up already taken to income account should be reversed and kept in Memorandum Account. The subsequent mark-up should also be kept in Memorandum Account. The total amount of mark-up kept in Memorandum Account should be reported to SBP as a footnote only for monitoring and information purposes.

iii) A non-performing loan / advance should only be up-graded to regular status when bank receives payment of the loan’s overdue principal and mark-up and remaining payments are expected as scheduled in the loan agreement. However, the funds for repayment of overdue amounts should not be obtained through creation of a new loan/advance from the same bank. The up-gradation through rescheduling/ restructuring should be done in lines with the instructions contained in Prudential Regulations.

3) The banks/ DFIs shall observe the above guidelines with effect from the date of this circular and not with retrospective effect.

4) Moreover, to reduce the number of returns and to streamline the data reporting in accordance with the new guidelines, the Quarterly Statement of NPLs being submitted under Letter No. BPD (RU-51)/56/5187/2002 dated 8th April, 2002 has been abandoned. Banks/ DFIs shall henceforth be required to submit the position of NPLs as Part-B of Quarterly Report of Condition on the format attached, within 30 days of the end of each calendar quarter, with effect from the quarter ending December 31, 2003.

Please acknowledge receipt.

Encl: Part-B

Yours faithfully,
(JAMEEL AHMAD)
Director
       
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