State Bank of Pakistan

As you are aware the quantum of non-performing loans (NPLs) has persistently shown a rising trend. The stock of NPLs accumulated in the banking sector, has severely affected the financial health of these institutions. A multi-pronged strategy that consists of vigorous recovery by the banks themselves, restructuring under Committee for Revival of Sick Industrial Units(CRSIU), transfer and subsequent auction of loans by Corporate & Industrial Restructuring Corporation(CIRC) has produced some tangible results as far as the stock of NPLs is concerned. The best guarantee for the future is that the credit appraisal, approval, documentation and follow up by the banks themselves ensure that the flow of NPLs is averted. To facilitate the banks to deal with these loans in loss category, which have been outstanding on the books since long and for which the probability of recovery is almost negligible, the State Bank of Pakistan has developed a new set of guidelines in consultation with the banks and Federation of Pakistan Chambers of Commerce and Industry (FPCCI).

2. These revised guidelines/instructions are issued to facilitate the banks in clearing their stock of irrecoverable NPLs. However, these instructions/guidelines do not affect in any way the legal right of financial institutions to recover the written-off loans if they still wish to pursue them legally. The benefits of this approach are that the balance sheets of the banks will be strengthened and the drag of the NPLs in the lending rate to the borrowers will be eliminated.

3. The Boards of Directors of the banks are advised to set up a transparent process with properly delegated authority, internal controls and oversight to ensure that the process of write-off under these guidelines is managed and supervised properly.

4. Non Performing Loans that are classified as loss for 3 years or above have been divided into three categories viz. A, B & C:

Category A: Loans having outstanding amount upto Rs 0.5 million (Guidelines at para ‘9(i)’ below shall apply).

Category B: Loans having outstanding amount of more than Rs 0.5 million and upto Rs 2.5 million (All the guidelines except at para ‘7’ & ‘8’ will be applicable).

Category C: Loans having outstanding amount of more than Rs 2.5 million (All the guidelines will be applicable).

5. Bad / irrecoverable loans as defined under ‘4’ above, may be allowed to be written-off by the banks/NBFls themselves with the express approval of their respective Board of Directors or their nominated/designated authority/committee. The write-offs made by the designated authority/committee shall be invariably submitted to the Board of the concerned institution for information in the next Board meeting.

6. Before allowing write-off, all liquid assets including FDRs, Government Securities, Share Certificates etc. held under lien and pledged goods should be realized and sale proceeds thereof appropriated towards the reduction of outstanding liability of the borrower. This should be legally cleared by the bank /NBFI’s legal counsel.

7. The latest valuation of properties/stocks held as security having value of Rs 2.5 million and above indicating their present market value as well as their forced sale value duly assessed by a surveyor/ architect, on the approved panel of Pakistan Banks’ Association (PBA), should be produced before the approving authority.

8. Before approving a write-off proposal, the competent authority should ensure that, for cases having an outstanding amount of over Rs 2.5 million, the same have been audited by the internal/external auditors who would expressly indicate the deviations / shortcomings noticed by them in the write-off proposals.

9. While allowing write-off arising as a result of settlement/compromise of cases mentioned at para ‘4’ above, the following guidelines may be followed:-

i) Category A: Where the outstanding amount is upto Rs 500,000/-

ii) Category B: Where the outstanding amount is more than Rs 500,000/- but less than Rs 2,500,000/-

Criteria	Amount to be recovered
Forced Sale Value (evaluated by the bank /NBFI) of the security is more than the outstanding amount.	75% or more of the outstanding should be recovered in cash.
Forced Sale Value (evaluated by the bank / NBFI) of the security is less than the outstanding amount.	A sum equal to Forced Sale Value (evaluated by the bank / NBFI) should be recovered in cash.
Where no tangible security is available.	Efforts should be made to recover maximum possible amount.

Criteria	Amount to be recovered
Forced Sale Value of the security is more than the outstanding amount.	75% or more of the outstanding should be recovered in cash.
Forced Sale Value of the security is less than the outstanding amount.	A sum equal to Forced Sale Value should be recovered in cash.
Where no tangible security is available.	Efforts should be made to recover maximum possible amount
Forced Sale Value should be determined by an independent professional valuer who should be listed on the panel of valuers maintained by the Pakistan Banks’ Association (PBA)

10. In case the bank is not in a position to recover even 75% of Forced Sale Value of the security due to any reason, the Board of Directors/designated authority may allow relaxation by recording reasons/justifications thereof.

11. Outstanding Loans include the amount of principal and interest / mark-up and other perforced charges charged to the borrower’s account or mark-up receivable account. Further, outstanding amount should be arrived at after deduction of liquid assets as mentioned at para ‘6’ above. However, in case of decreed cases, the decretal amount and the mark-up allowed by the Court will be treated as outstanding amount for the purpose of this Scheme.

12. The settlement in above categories shall be made only on the basis of cash recovery. The borrower has to make at least 10% cash down payment of settled amount at the time of signing of agreement and remaining amount may be paid in installments at least on quarterly basis within a maximum period of 3 years from the date of signing of agreement. Under the above arrangements the borrower will only be eligible for write-off after repayment of entire agreed amount. In case of non-adherence of terms of agreement, the borrower will not be eligible for any concession.

13. The banks/NBFIs are further advised to vigorously pursue those delinquent borrowers who fail to avail of the Scheme within the stipulated time period by processing the cases under the provisions of law. To this end an effective in-house system for recovery of defaulted loans should be developed at Head Office level, which should be charged with the responsibilities of taking all the requisite legal measures/proceedings.

14. The banks / NBFIs shall not be eligible for any kind of payment / compensation whatsoever from State Bank of Pakistan on account of write-offs allowed by the banks/NBFIs.

15. The banks / NBFIs are advised to modify their internal policy guidelines / instructions on write-off of loans and advances accordingly.

16. Full particulars of loans written-off should be reported to the Credit Information Bureau, Banking Supervision Department, State Bank of Pakistan on quarterly basis.

17. In case of any dispute between the borrower and the bank/NBFI the matter will be resolved through SBP Committee.

18. The scheme issued by the banks/NBFIs on above guidelines shall be a one-time opportunity, which will expire on April 14, 2003. The banks/NBFIs shall, however, formulate and issue their policy based on above guidelines accordingly.

19. For write-off in all other categories, instructions/guidelines notified by the State Bank from time to time shall remain in force.