Institute of Bankers Pakistan Examinees: SBP regulations concerning write off loans

BSD Circular No.2 dated the 16th July, 1999

SD Circular No.SD 2 / 99

July 16, 1999

The Presidents/Chief Executives
Of All Banks

Dear Sir,

WRITING OFF OF IRRECOVERABLE LOANS/ADVANCES

In order to curb the rising trend of writing off of loans, mark-up and other dues by banks, following guidelines are issued for meticulous compliance: _

Bad/irrecoverable loans may be continued to be written off by banks themselves with the approval of their respective Board of Directors.

Before considering write off proposals placed before it the competent authority will ensure:

i) That the write off proposal is duly audited by the Internal Auditor who would be required to early indicate whether any deviation from the credit policy approved by the Board tool irregularity or slackness that occurred during the disbursement, documentation or subsequent monitoring of security or operations should be distinctly spelt out. The names and designation of officers/staff responsible for various lapses in handling the advance, which has become bad leading to its write off in full or part, and action taken against them be also specified.

ii) That the latest valuation of properties, stocks held as security against advances indicating present market value as well as forced sale value duly assessed by an approved surveyor is produced. No write off be allowed if the forced sale value of the security held by the bank is more than the outstanding amount recoverable.

iii) That all liquid assets including FDRs, Government Securities, Share Certificates held under lien and pledged goods etc., have been realized and sale proceeds thereof appropriated towards adjustment of outstanding.

iv) That the borrower/guarantor has no know means or repayment.

v) That borrowers have not created other business interests and assets out of the non-performing loan proposed to be written off.

vi) That no criminal misappropriation of stock or other movable.immovable securities by the borrower was involved.

Instructions issued in detail regarding debt restructuring and rescheduling as contained in circular No.BID(Gen)/2470/601-04-90 dated 17-06-1990 be followed. Banks should note that while rescheduling or restructuring is permissible, it should not be done simply to break time frame and to allow unwarranted improvement in the classified category of loan.

The write off of loans, if any, in the names of Directors or their relatives/ dependents/concerns in which they have any interest and in the names of Chief Executives of the bank require prior approval of the State Bank.

Full particulars of loans written off should be reported to the Credit Information Bureau of the State Bank.

The above supersedes the instructions contained in BID Circular No.4 dated 5^th July, 1994.

Further, with a view to ensuring good credit administration and minimize the impact or writing off loans and advances banks are advised to meticulously follow the credit policies framed by their Board of Directors and approved by State Bank of Pakistan.

Please acknowledge receipt.

Yours faithfully,
(ZAFAR HASNAIN SIDDIQUI)
Director

Endt.No.BSD(Admn)/2432-2446/571-B-99. Of date

Copy forwarded for information to:-

The Director, Banking Policy and Regulations Department/ BSD-III / Agricultural Credit Department/Foreign Exchange Department/Credit Information Bureau, State Bank of Pakistan, Central Directorate, Karachi.

P.S to Governor, State Bank of Pakistan, Central Directorate, Karachi.

P.A. to Deputy Governor-I, State Bank of Pakistan, Central Directorate, Karachi.

P.A to Deputy Governor-II, State Bank of Pakistan, Central Directorate, Karachi.

P.A to Chief Economic Adviser, State Bank of Pakistan, Central Directorate, Karachi.

P.A to Chief Foreign Exchange Adviser, State Bank of Pakistan, Central Directorate, Karachi.

P.As to Executive Directors, State Bank of Pakistan, Central Directorate, Karachi.

Deputy Director

BPRD Circular No. 06 of 2007

BPRD Circular No. 06 of 2007

June 05, 2007

The Presidents/Chief Executives
All Banks/DFIs

Dear Sirs / Madam,

WRITING OFF OF IRRECOVERABLE LOANS AND ADVANCES

Please refer to BSD Circular No.2 dated the 16th July, 1999 and other instructions issued from time to time on the subject.

2. In the backdrop of financial sector reforms, rapid changes in banking sector during the last decade and representations received from different stakeholders, the instructions on write-off of irrecoverable/bad loans/advances have been revisited and amended accordingly on the feedback received.

3. The irrecoverable/bad loans shall continue to be written off by the banks/DFIs, with the approval of respective Board of Directors (BOD) under a well defined and transparent write off policy. The write off policy, if not already in place, may be made or revised accordingly by the BOD. The BOD at their discretion may delegate adequate and appropriate powers down the line to the President/Chief Executive Officer and other senior officers of the bank/DFI as they deem fit. To ensure proper management and supervision of write offs of bad/irrecoverable loans/advances under delegated powers, an effective internal control and supervisory mechanism may be put in place.

4. Before considering/processing of a write off proposal, the banks/DFIs shall adhere to following minimum guidelines:-

i) All liquid securities/assets, as defined in Prudential Regulations for Corporate and Commercial Banking, held by bank/DFI under lien, pledge etc have been realized and sale proceeds thereof have been appropriated towards adjustment of outstanding amount of principal.

ii) Confirmation by the concerned official of the branch/office duly countersigned by the authorized official(s) of the office higher than the originating branch/office that borrower or his guarantor has no known means of repayment..

iii) The borrower(s) has not created other business interests and assets out of the non performing loans proposed to be written off.

iv) The borrower(s) is not involved in any criminal misappropriation of stocks, movable and immovable assets or security (ies).

v) The write off of loans/advances, if any, in the names of Directors or their relative/dependent(s)/concern(s) in which they have any interest of 5% or more and in the name of Chief Executive of the bank/DFI shall require prior approval of State Bank of Pakistan (SBP).

vi) No write off will be allowed where forced sale value of securities held, is more than the recoverable outstanding amount. However, the said condition shall not be applicable on the cases recommended/settled under any general incentive scheme of SBP or such other Committee(s) as notified by SBP or present Committee for Revival of Sick Industrial Units (CRSIU).

vii) The write off proposal is duly audited by the internal auditor (IA) of the bank/DFI. The IA shall clearly indicate the deviation/irregularity, if any, from the approved credit policy during the process of sanction, disbursement, documentation, monitoring/supervision of loan/advance and its underlying security(ies). The name(s) of official(s) responsible for irregularities/lapses, which has turned the loan/advance partially or fully bad/irrecoverable, may clearly be spelled out along with action taken against such official(s). It is clarified that IA would only verify the facts and figures as put forth by the concerned Department(s)/office(s) and need not give recommendation or otherwise.

viii) The latest valuation of properties/stock/other assets held by banks/DFIs as security for the loan/advance shall be obtained, if not available on record, at the time of write-off of loans, indicating clearly therein, amongst others, the present market value as well as forced sale value. The condition of valuation of properties/stocks/other assets held as security for the loans/advances shall be restricted to cases involving outstanding principal amount of Rs 5 million and above and have to be conducted through an approved surveyor on the list of Pakistan Banks Association. The valuation of properties/stocks/other assets for determining market and forced sale value having outstanding principal amount of less than Rs 5 million may be done by bank/DFI itself as it deem appropriate in a reasonable and transparent manner.

ix) For writing off of loans/advances, where outstanding amount of principal is below Rs. 0.5 million, the clauses stipulated at para 4(vii) and (viii) shall not be applicable. The banks/DFIs while following clauses at 4(i) to (vi) in said cases shall also obtain a joint certificate from originating branch manager and an authorized officer of the said branch duly countersigned by the authorized official(s) of the office higher than the originating branch confirming that no irregularity/deviation of prescribed rules and regulations in the process of sanction, disbursement, documentation, monitoring/supervision of loans/advances and its underlying security(ies) has occurred which has turned the loan/advances partially or fully bad/irrecoverable. The name(s) of the official(s) responsible for the irregularity(ies)/lapses may be clearly spelled out along with action taken against such official(s).

5. The Banks/DFIs (a) with the approval of BODs may add any other condition(s) as they deem fit, (b) shall report full particulars of loans/advances written off to Credit Information Bureau of SBP and (c) submit to BODs a report on quarterly basis with necessary details in respect of write off of loans, by President/Chief Executive and other senior officials of bank/DFI under delegated powers, for information.

6. In exceptional case(s) where banks/DFIs, on commercial considerations or for the purpose of cleaning the balance sheet, are unable to comply with one or more of the above guidelines, may put up the case to BODs for consideration. BODs may then decide the case on merit and by recording reasons in writing for approval or otherwise of the case(s). These cases shall be reported immediately to Director, Banking Inspection Department for information.

7. Banks/DFIs are also allowed to consider cases for rescheduling and restructuring in respect of sick industrial units and non performing loans/advances under a well defined and transparent policy to be decided and approved by their BOD. It may however, be noted that rescheduling and restructuring done simply to break time frame or allow un-warranted improvement in classified category of loans/advances is not permissible. Re-scheduling and restructuring shall always be done under a proper and appropriate agreement in writing by following the due course of law.

8. Banks/DFIs are advised to meticulously follow the above guidelines in letter and spirit. Non- compliance and circumvention of same shall invoke penal provisions under Banking Companies Ordinance, 1962.

9. This supersedes instructions issued vide BSD Circular No.2 dated the 16th July, 1999, BSD Circular Letter No.1 dated the 9th February, 2000, BID Circular No.3 dated the 17th November, 2001 and BID Circular letter No. BID(Gen)/24-70/601-04-90 dated the 17th June, 1990 (regarding rescheduling and Restructuring).

10. Please acknowledge receipt.