In view of the different profile of consumer loans, requirements for write off of irrecoverable loans and advances have been revisited for consumer financing. In this regard, following instructions are being issued:
2. Write off includes any form of financial relief allowed to the customer in terms of dues outstanding towards the bank/DFI, including principal, markup/profit and other charges.
3. The irrecoverable/bad loans shall continue to be written off by the banks/DFIs with the approval of respective Board of Directors (BOD) under a well defined and transparent write off policy. 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 the bank/DFI as they deem fit. 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.
4. Before considering/processing of a write off proposal, the banks/DFIs shall adhere to following minimum guidelines:
i) Every reasonable effort shall 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 realized 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 the 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 valuer 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.
5. The banks/DFIs shall submit to BOD a report on quarterly basis with necessary details in respect of loans written off.
6. The banks/DFIs shall report loans/advances written off to Credit Information Bureau of the State Bank of Pakistan (SBP). For this purpose, to reflect actual position of write off and recovery, netted balance of write off (principal, markup/profit and other charges) shall be updated as and when any recovery is made.
7. The write off of loans/advances, if any, in the names of Directors, Chief Executives, sponsor shareholders of the bank/DFI or their relatives/dependents shall require prior approval of SBP.
8. The write offs allowed shall be reviewed by the internal auditor (IA) of the bank/DFI with special emphasis on the cases where written off principal is Rs. 0.2 million or more.
9. The banks/DFIs shall comply with the above instructions in letter and spirit; any violation will attract punitive action under the Banking Companies Ordinance, 1962.
10. The BPRD Circular No. 06 of 2007 dated 05-Jun-07 will no longer be applicable on 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.
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