KARACHI: The State Bank of Pakistan (SBP) has allowed the banks to charge off the fully provisioned corporate, commercial and Small & Medium Enterprises (SMEs) Non-Performing Loans (NPLs); however, banks’ right to recover will remain intact.
According to SBP, non-performing loans/ finances (NPLs) of the banking industry presently include a considerable portion of fully provisioned legacy loans.
“To address the issues concerning these legacy NPLs, banks are allowed to charge-off the fully provisioned corporate/commercial and Small & Medium Enterprises (SMEs) NPLs”, a circular issued by SBP said.
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However, SBP has made it clear 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 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 there-against.
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.
The Board of Directors (BoD) and senior management of banks will monitor the progress of charged-off loans and recovery thereof as per the BoD’s approved policy for dealing with NPLs/charged-off loans. Further, the senior management of the banks will ensure that efforts for recovery of the charged-off NPLs are not compromised in any case.
For reporting and disclosure of charged-off NPLs, banks will maintain proper record of such charged-off NPLs, continue to report such charged-off NPLs to e-CIB/private credit bureaus as overdue and give a disclosure of charged-off loans under a separate note in their financial statements.
NPLs, if any, in the names of related parties, sponsor shareholders, directors, Chief Executive Officers, and key executives of the banks or their family members and politically exposed persons will not be eligible for charge-off.
In addition, NPLs under litigation involving any criminal proceedings will not be eligible for charge-off allowed by the SBP.
Banks will be required to follow their BoD’s approved policies for charging-off NPLs against consumer loans.
For writing-off of charged-off NPLs, banks will ensure compliance with the write-off instructions issued by SBP and the requirements of Section 33A of the BCO, 1962.
Copyright Business Recorder, 2024
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