The
Presidents / Chief Executives
All Banks / DFIs
Dear
Sirs/Madam,
AMENDMENTS
IN PRUDENTIAL REGULATIONS - CLASSIFICATION AND PROVISIONING
FOR LOANS AND ADVANCES
As
you know that the banking scene of Pakistan, in recent years,
has undergone a visible change. In a sharp contrast to 1990s
when public sector banks dominated the banking system, about
eighty percent of the banking assets are now controlled
by the private sector. While this has yielded significant
benefits in the form of increased competition, product innovation,
technological up-gradation and diversification of business
activities, a host of new risks have also surfaced. This
has necessitated the adoption of international best practices
by the banks/DFIs in classification and provisioning against
their loans and advances portfolio to further strengthen
the soundness and stability of our banking system.
2)
In this perspective, it has been decided to make following
amendments in the existing classification and provisioning
criteria prescribed under the Prudential Regulations:
i)
The existing Annexure-IV of Regulation R-8 of the Prudential
Regulations for Corporate/Commercial Banking, Annexure-III
of Regulation R-11 of the Prudential Regulations for Small
and Medium Enterprises Financing, Regulation R-14 (Auto
Loans), Regulation R-23 (Housing Finance) and Regulation
R-28 (Personal Loans) of the Prudential Regulations for
Consumer Financing have been replaced with the enclosed
Attachments A, B, C, D and E respectively. The revised criteria
as per Attachments to this circular shall come into force
with immediate effect. This will result in the following
changes in the existing criteria for classification and
provisioning:
a)
Elimination of OAEM category.
b) Revision of aging criteria whereby now the loans /advances
overdue by 90 days will be classified as Substandard, 180
days as Doubtful and one year or more as Loss.
c) Increase in provisioning requirement for substandard
category to 25 percent.
d) The revised criteria will be applicable to all types
of financing facilities i.e. short, medium and long-term
and to corporate, SME and consumer financing except Trade
Bills (Import/Export or Inland Bills) and credit cards which
will continue to be classified as loss if not paid/adjusted
within 180 days from due date.
ii)
The benefit of forced sale value (FSV) of collateral allowed
under Para 4 of Regulation R-8 of the Prudential Regulations
for Corporate/Commercial Banking, Para 4 of Regulation R-11
of the Prudential Regulations for Small and Medium Enterprises
Financing, and Regulation R-23 (Housing Finance) of the
Prudential Regulations for Consumer Financing shall be available
against the financing facilities of Rs 5 million and above
only with immediate effect. Furthermore, the benefit of
FSV of collateral under the aforesaid provisions of Prudential
Regulations shall be further restricted to financing facilities
of Rs 10 million and above only with effect from December
31, 2006. The State Bank shall review the position to withdraw
the benefit of FSV altogether after December 31, 2006 and
separate instructions in this regard shall be issued to
the banks/DFIs in due course.
3)
All other instructions on the subject shall, however, remain
unchanged.
Please acknowledge receipt.
Encl:
Attachments A, B, C, D & E