The State Bank of Pakistan (SBP) has authorised banks to write off bad and irrecoverable loans themselves with the approval of the board of directors (BoD) under a well-defined and transparent write off policy.
Addressing a seminar on 'write-off of irrecoverable loans and advances', Syed Irfan Ali, director, Banking Policy & Regulations Department, said the SBP has issued new guidelines regarding irrecoverable loans and advances to contain non-performing loans (NPLs) and if the banks not have any write off policy may be made or revised accordingly by their respective boards.
He said that for the writ-off loans banks required to confirm by the concerned official of the branch countersigned by the authorised officials of the office higher than the originating branch that borrower or his guarantor has no known means of repayment.
According to new guidelines, now all writ-off loans are not required internal audit and only Rs 0.5 million and above principal outstanding having loan cases required internal audit to verify the facts and figures, he added.
Syed Irfan Ali informed that valuation of property by the Pakistan Banks Association (PBA) approved valuators required only for holding principal outstanding Rs 5 million and above cases, earlier latest valuation of properties in cases involving Rs 0.1 million and above required by a PBA approved valuator.
Earlier, banks required to immediately report to the BoD the details of write-off made by the chief executive officer and other senior officials under delegated powers, now such report required to be submitted at least on quarterly basis with necessary details, he added.
The SBP official said: "New guidelines indicate that restructuring and rescheduling of unrecoverable loans would be done under a well-defined and transparent policy decided and approved by the BoD."
He said that prudential regulations of the SBP now require all the banks to classify their non-performing loans (NPLs) under three categories sub-standard, doubtful, and loss to bring NPLs in line with the international standards.
Explaining the NPLs, he said the SBP NPLs are those in respect of which either principal or mark-up or both are not being received in accordance with the terms of agreement and criteria laid down in the SBP Prudential Regulations.
Syed Irfan Ali said through an amendment in BCO 1962, banks are now required to disclose the details of the parties and individuals who have been allowed write-off of above Rs 0.5 million in their annual audited accounts.
In addition, Section 33 (B) was added in the BCO 1962 in 1997 which empowered the SBP to issue guidelines to banking companies for facilitating recovery of stuck-up loans and to introduce incentive schemes for recovery of NPLs, he added.
He said that write-offs are in essence recognition of reality that the original asset has diminished in value and therefore, it needs to be carried on the balance sheet at its realistic value. The SBP official said that under the Financial Institution Ordinance, 2001, the government established banking courts (BC) and gave the right of foreclosure to banks to sell the mortgaged properties without the intervention of court.