Once a borrower faces difficulty in repaying loans or paying interest, the bank should initially address the problem by trying to verify whether the financed company is viable in the long run. If the company/ project is viable, then rehabilitation is possible by restructuring the credit facilities. In a restructuring exercise, the bank can change the repayment or interest payment schedule to improve the chances of recovery or even make some sacrifices in terms of waiving interest etc.
SBP has separate guidelines for restructured loans. A fully secured standard/ sub-standard/ doubtful loan can be restructured by rescheduling of principal repayments and/or the interest element. The amount of sacrifice, if any, in the element of interest, is either written off or provision is made to the extent of the sacrifice involved. The sub-standard accounts/doubtful accounts which have been subjected to restructuring, whether in respect of principal installment or interest amount are eligible to be upgraded to the standard category only after a specified period.
Similarities and Differences between restructuring and rescheduling of loan
Points of Similarities of Rescheduled and Restructured Loans
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Amount of Loan: Principal balance plus sum outstanding.
Points of Distinction B/W Rescheduled and Restructured Loans
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Nature: Rescheduling is extension of tenure of facility for payment of Sale Price but Restructuring is redemption of existing facility.
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Arrears/Charges: Rescheduled Amount shall not contain additional charges above the old Sale Price whereas Restructured amount may incorporate arrears, capitalization of penalty, profit charges, i.e. resulting in the amount exceeding the Old Sale Price.
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Contract Applied: In rescheduling, contract is applied as supplementary agreement. On other hand restructuring requires new set of documents.
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Effect on Existing Contract: 1st security documents not terminated and obligation is continuing, security is not discharged in rescheduling but in restructuring 1st security documents terminated and security discharged.
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Application: In rescheduling customer wish to extend tenure of facility at lower monthly installment rate and in restructuring Customer wish to start on a clean slate by terminating 1st security agreements and entering into new security agreements.
BSD Circular No. 02 of 2009
| BSD Circular No. 02 of 2009 | January 27, 2009 |
The Presidents/Chief Executives
All Banks/DFls Dear Sirs / Madam,
AMENDMENTS IN PRUDENTIAL REGULATIONS –
PROVISIONING FOR LOANS AND ADVANCES Please refer to BSD Circular No. 7 dated October 12, 2007 on the above subject in terms of which the benefit of Forced Sale Value (FSV) of collateral was withdrawn against all NPLs (except for housing finance) for calculating provisioning requirement. 2. It has been decided to allow the benefit of 30 percent of FSV of pledged stocks and mortgaged commercial and residential properties held as collateral against all NPLs for three years from the date of classification for calculating provisioning requirement w.e.f. 31-12-2008. Accordingly, the following Prudential Regulations (PRs) stand amended and are attached herewith:- i) Annexure-IV and V of Regulation R-8 of PRs for Corporate/Commercial Banking.
ii) Annexure-III and IV of Regulation R-11 of PRs for Small and Medium Enterprises Financing.
iii) Regulation R-22 of the PRs for Consumer Financing (Housing Finance). 3. Banks/DFIs may avail the above benefit of FSV subject to compliance with the following conditions: i) The additional impact on profitability arising from availing the benefit of FSV against pledged stocks and mortgaged commercial and residential properties shall not be available for payment of cash or stock dividend.
ii) Heads of Credit of respective banks/DFIs shall ensure that FSV used for taking benefit of provisioning is determined accurately as per guidelines contained in PRs and is reflective of market conditions under forced sale situations.
iii) Party-wise details of all such cases where banks/DFIs have availed the benefit of FSV shall be maintained for verification by State Bank’s inspection teams during regular /special inspection. 4. Para 4 of R-8 of PRs for Corporate / Commercial Banking and Para 4 of R-11 of PRs for Small & Medium Enterprises Financing stand deleted. For the purpose of determination of FSV, revised Annexure-V (Regulation R-8) of PR for Corporate/Commercial Banking and revised Annexure-IV (Regulation R-11) of PR for SME Finance shall be followed. 5. Any misuse of FSV benefit detected during regular /special inspection of SBP shall attract strict punitive action under the relevant provisions of the Banking Companies Ordinance, 1962. Furthermore, SBP may also withdraw the benefit of FSV from banks/DFIs found involved in its misuse.
6. All other instructions on the subject shall however, remain unchanged. Please acknowledge receipt.
(Encl: Attachments A, B, C, D, & E)
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Yours sincerely,
(Lubna Farooq Malik)
Director
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BSD Circular No.10 of 2009 - State Bank of Pakistan
| BSD Circular No. 10 of 2009 | October 20, 2009 |
Please refer to BSD Circular No. 2 of 2009 and Prudential Regulation R-8 for Corporate and Commercial Banking, Prudential Regulation R-11 for Small and Medium Enterprises Financing and Prudential Regulation R-22 for Consumer Financing.
2. In this regard, it has been decided as under:
I. Forced Sale Value:
Allow benefit of 40% of FSV of pledged stock and mortgaged residential, commercial & industrial properties (land and building only) held as collateral against NPLs for three years from the date of classification for calculating provisioning requirement w.e.f. 30-09-2009. Accordingly, the following Prudential Regulations stand amended and are attached herewith:
a. R-8 (para 4) and Annexure IV and V of Prudential Regulations for Corporate and Commercial Banking;
b. R-11 (para 4) and Annexure III and IV of the Prudential Regulations for SME Financing; and
c. Regulation R-22 of the PRs for Consumer Financing (Housing Finance).
II. Instruction on Rescheduling/Restructuring of Classified Loans and Advances:
i) Introduce interim instructions on classification/provisioning requirements in respect of rescheduling/restructuring of such classified loans and advances that are overdue by less than one year at the time of rescheduling/restructuring. These instructions will be applicable till June 30, 2010, and afterwards prevailing instructions on the subject will be applicable. The interim instructions are attached herewith.
ii) Banks/DFIs shall continue to follow the instructions contained in para 3 of the Prudential Regulations R-8 for Corporate and Commercial Banking and Prudential Regulations R-11 for SME Financing in respect of such loans and advances which are not covered in these interim instructions or which subsequently fail to meet the provisions of these instructions. 3. Banks/DFIs may apply the interim instructions on classification/provisioning requirements only on such of their existing classified loans and advances, which were rescheduled/restructured on or after 1st January 2009 and were overdue by less than one year at the time of rescheduling/restructuring.
4. Banks/DFIs may avail the benefit of provisioning, arising from above instructions, subject to the condition that it shall not be available for the payment of cash or stock dividend. Further, the details and impact of the benefit in provisioning shall be adequately disclosed in the notes to the financial statements.
5. Banks/DFIs shall provide details of loans and advances rescheduled/restructured under the interim instructions on monthly basis within 10 days of the end of each month, starting from the month of October 2009, to Banking Surveillance Department as per the attached format.
6. All other instructions on the subject shall however, remain unchanged.
Please acknowledge receipt. (Enclosures: As above)
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Yours faithfully,
-sd-
(Irfan Ismail)
Senior Joint Director
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