SBP issues guidelines for non-performing loans

KARACHI: The State Bank of Pakistan has issued guidelines on non-performing loans (NPLs) management strategy to facilitate banks in reducing the stock of their bad loans and infection ratio.

NPLs refer to those loans that are classified in accordance with the applicable instruction and prudential regulations.“In order to facilitate banks to deal with the existing stock of non-performing loans (NPLs) and minimize further buildup of NPLs, it has been decided that the banks shall develop a comprehensive NPLs management strategy, duly approved by their Board of Directors, the SBP said in the latest circular.

“While developing the said strategy, banks shall appropriately follow the guidelines on NPLs management strategy,” it said.“Banks are advised to ensure the development and implementation of the strategy within six months from the issuance of this circular,” it added.

In another circular, the SBP permitted the banks to charge-off the fully provisioned corporate, commercial and small and medium enterprises (SMEs) (NPLs), however, banks’ right to recover will remain intact.“To address the issues concerning these legacy NPLs, banks are allowed to charge-off the fully provisioned corporate/commercial and small and medium enterprises (SMEs) NPLs,” it said.

However, the SBP said that such charge-offs will not constitute any financial relief and banks’ rights to recover from their borrowers shall remain intact. In addition, charged-off NPLs will not appear on the banks’ financial statements and will instead be kept in the memorandum accounts.

As per the SBP’s directives, while charging-off NPLs, banks will ensure that NPLs are classified in the ‘loss’ category on an objective basis for at least five consecutive years, and banks have maintained full provisioning thereagainst.

In addition, for NPLs with an outstanding principal amount exceeding Rs 10 million, banks should have filed recovery suits in the court of law at least two years prior to considering the charge-off.