State Bank of Pakistan amends criteria on classification & provision of Loans
Pakistan Times Business & Commerce Desk

KARACHI: The State Bank of Pakistan had decided to make a number of amendments in the existing classification and provision criteria prescribed under the Prudential Regulations.

The amendments have been made after considering the current banking scenario of Pakistan as in recent years it has undergone a visible change. In a sharp contrast to 1990s when public sector banks dominated the banking system, about eighty percent of the banking assets are now controlled by the private sector.

While this has yielded significant benefits in the form of increased competition, product innovation, technological up-gradation and diversification of business activities, a host of new risks have also surfaced.

This has necessitated the adoption of international best practices by the banks and DFIs in classification and provisioning against their loans and advances portfolio to further strengthen the soundness and stability of our banking system.

According to a SBP Circular issued today the existing Annexure-IV of Regulation R-8 of the Prudential Regulations for Corporate and Commercial Banking, Annexure-III of Regulation R-11 of the Prudential Regulations for Small and Medium Enterprises Financing, Regulation R-14 (Auto Loans), Regulation R-23 (Housing Finance) and Regulation R-28 (Personal Loans) of the Prudential Regulations for Consumer Financing have been replaced.

The revised criteria as per Attachments to this circular shall come into force with immediate effect. This will result in the following changes in the existing criteria for classification and provisioning.

Elimination of OAEM category, revision of aging criteria whereby now the loans and advances overdue by 90 days will be classified as substandard, 180 days as doubtful and one year or more as loss, increase in provisioning requirement for substandard category to 25 percent, the revised criteria will be applicable to all types of financing facilities which is short, medium and long-term and to corporate, SME and consumer financing except Trade Bills (Import/Export or Inland Bills) and credit cards which will continue to be classified as loss if not paid or adjusted within 180 days from due date.

The benefit of forced sale value (FSV) of collateral allowed under Para 4 of Regulation R-8 of the Prudential Regulations for corporate and commercial Banking, Para 4 of Regulation R-11 of the Prudential Regulations for Small and Medium Enterprises Financing, and Regulation R-23 (Housing Finance) of the Prudential Regulations for consumer financing shall be available against the financing facilities of Rs 5 million and above only with immediate effect.

Furthermore, the benefit of FSV of collateral under the aforesaid provisions of Prudential Regulations shall be further restricted to financing facilities of Rs 10 million and above only with effect from December 31, 2006. The State Bank shall review the position to withdraw the benefit of FSV altogether after December 31, 2006 and separate instructions in this regard shall be issued to the banks and DFIs in due course.●