The Presidents / CEOs of

All Microfinance Banks

Dear Sirs / Madam,

AMEMDMENTS IN PRUDENTIAL REGULATION Nos. 12 AND 14

FOR MICROFINANCE BANKS (MFBs)

Please refer to BSD Circular No. 18 dated October 14, 2002 regarding Prudential Regulations for Micro Finance Banks (MFBs).

2. In order to bring the existing classification/provisioning/write-off criteria for Micro Loans in line with international best practices, while keeping in view the local conditions and the evolving phase of MFB industry in Pakistan, certain amendments have been made in the existing PR. Nos. 12 and 14 for MFBs to ensure soundness and stability of the Microfinance banking industry. This will result in the following changes in the existing criteria for classification, provisioning and write-off:
   1. Elimination of OAEM category.
   2. Revision of aging criteria whereby now the loans /advances overdue by 30 days or more (but less than 90 days) will be classified as Substandard, 90 days or more (but less than 180 days) as Doubtful and 180 days or more as Loss.
   3. Provisioning requirement for substandard category has been increased to 25 percent.
   4. MFBs shall maintain a Watch List of all accounts delinquent by 5 – 29 days.
   5. The MFB/MFI shall maintain a General Provision equivalent to 1.50% of the net outstanding advances (advances net of specific provisions).
   6. All Non-Performing Loans (NPLs) shall be written off, one month after the loan is classified as “Loss”, this shall, however, not extinguish the MFBs’ right of recovery of such written-off loans.
   7. Classification and provisioning shall be made at the end of every month.
   The revised criteria as per the attachment to this circular shall come into force with immediate effect.

4. All other instructions on the subject shall, however, remain unchanged.
5. Please acknowledge receipt.