The non-performing loans (NPLs) have remained a
teasing trouble for financial institutions around the world. The
regulators in this aspect are enforcing manifold rules & bindings on
lenders to provide shelter to the depositors / investors.
In Pakistan the State Bank Of Pakistan being the
regulatory authority in this respect is playing its part and issues
various instructions in this regard. Presently the prudential
regulations (PRs) are the most significant component in this respect
apart from the selective credit control operative simultaneously to
The selective credit control (SCC) was based on
desired economic policy and relies on the security offered by the
borrower whereas the prudential regulations (PRs) were time based &
relying on Financials of the borrower.
The SCC was result oriented until introduction of new
mechanism called interest free banking and also afterwards. But the
internal situation in Pakistan, delaying the proper formation of
recovery institution, increasing political pressure on the banks and
adopting non-commercial policies, injured the health of these commercial
Feeling it necessary to take corrective measures for
the health of these institutions PRs were introduced.
But the increasing portfolio of NPLs is evidence that
there are many flaws in regulatory measures including policy & deeds.
There are two schools of thought in respect of
lending policy, the one modern or liberal that depend on the financials
of the borrowers and are time based, popular in developed countries, the
other is called the conservatives that rely on the security and based on
the economic requirements. The later being old had been successfully
adopted by all the nations even by the developed countries during the
era of their early ages until they have achieved and adopted the total
infrastructure for new policy.
Now the issue is that which method is appropriate for
Due to low literacy rate the frame work of Accounting
standard does not meet with the requirement of modern approach not only
that but the judiciary is also not equipped to meet the requirement in
this respect. The world famous ENRON scandal is an example to get the
lesson from modern policy. Being a developing nation having low literacy
rate and loopholes in the system we have no alternate but to adopt the
rule for relying on security. One can say that it does not meet the
requirements of modern age but it is the only feasible option based on
the ground realities of Pakistan.
But the PRs issued in first trench were time &
financial based totally neglecting the ground realities and available
infrastructure in this respect.
The major rules like:
PER PARITY EXPOSURE
The total outstanding financing facilities by a
banking company to any single person shall not at any point of time
exceed 30 per cent of the bank's unimpaired capital and reserves subject
to the condition that the maximum outstanding against fund based
financing facilities do not exceed 20% of the unimpaired capital and
reserves. In the case of branches of foreign banks operating in
Pakistan, the maximum exposure limit of 30% shall be calculated on the
basis of their assigned capital maintained under Section 13(3) of the
Banking Companies Ordinance, 1962 free of all losses and provisions,
provided that maximum exposure on the basis of fund-based facilities
shall be 20% of the capital maintained under Section 13(3) of the
Banking Companies Ordinance, 1962, or Rs. 12 million which ever is
LINKAGE BETWEEN EQUITY & DEBT
While granting any accommodation, banks shall ensure
that the total accommodation availed by any borrower from
banks/financial institutions does not exceed 10 times of the capital and
reserves (free of losses) of the borrower as disclosed in its Audited
Accounts. Every bank shall, as a matter of rule, obtain copy of accounts
relating to the business of each of its borrower for analysis and record
in the following manner (for the purpose of this regulation,
accommodation shall have the same meanings as in Regulation-l above) :
bank's exposure does not exceed Rs. 2 million.
Accounts duly signed by the
exposure exceeds Rs. 2 million but does not exceed Rs. 10 million.
Accounts duly signed by the
borrower and countersigned by the Internal Auditor of the
bank or a Chartered Accountant.
the exposure exceeds Rs. 10 million.
Accounts duly audited
by the practicing Chartered Accountants.
regulation shall not apply to loans not exceeding Rs. 500, 000/-
Banks shall ensure that:
Current asset to current liability ratio of the borrower does not fall
below the minimum indicated hereunder:
Current maturities of long term debt not yet due for
payment may be excluded from the current liabilities for the purpose of
calculating these ratios. Lease rental receivable within the next twelve
months as disclosed in the notes to the annual audited accounts shall be
treated as current assets for the purpose of calculating these ratios.
REGULATION - VIII
CLASSIFICATIONS OF ADVANCES ON TIME BASE DEFAULT.
CLASSIFICATION AND PROVISIONING FOR LOANS AND OTHER ASSETS
Every bank shall observe prudential guidelines given
hereunder in the matter of classification of its assets and provisioning
there against. (see table)
After introduction of prudential regulation the
framework provided a base for relying and classifying advances according
to age of the default irrespective of the security held.
The Islamic Mode of financing prohibited for charging
of return before the expiry period or charging Mark-up on mark-up. Not
only that but the loan documents were likewise designed confirmatory to
these rules and the legal framework is yet correspondent to the same
code, and any violation of this rule will attract the penalty by SBP.
But the PRs compels to recover mark-up within 90 days from the borrower,
failing which the classification process will be started and the
respective loan account will be treated as NPL. These conditions are
being contradictory to each other and applicable.
Simultaneously leaving behind no room to lenders for
keeping their portfolio in confirmatory to the both rules at the same
This time-based table of PRs brought a major portion
of advances in the net of NPLs and thus the phrase of engineered default
These Regulations are not being implemented in letter
& spirit resultantly banks accommodate their customers violating these
rules, and the others are compel to adopt the orbit to secure the
business in the competitive atmosphere.
The Auditors of SBP usually conduct their audits in
the Head Offices and the authorities there, accommodate them for their
pleasure and thus all the exercise do not bring any improvement in the
Resultantly rising trend of NPLs harmed the balance
sheets and ratios of almost all financial institutions and this sector
was showing worst picture but this was not real reflection of the
financial matters and ratios. Most of the advances were very much
secured and recoverable and could be considered good on every scale but
they classified as NPLs on the scale of PRs and were provided the
provisions from the reserves causing heavy damages to the equity,
profitability, solvency and efficiency ratios of the banks subsequently.
At this stage the international donors came for the
rescue and restructural adjustments were made, causing serious &
manifold economic threats.
In 1997 the Remission package for defaulters was
announced without getting feed backs and examining the recovery process
in letter & spirit. Advances having adequate securities were paid off by
the defaulters in response to this policy and huge amount in millions
were allowed as remission wiping out the Reserves of Banking sector. The
actual termite of bad loans is still crippling the sector.
To show positive results a major change in the policy
of PRs were made and the instructions of classification according to the
available and reliable security were issued resultantly the advances
classified earlier on the basis of Time Frame were kept out of the orbit
of NPLs and artificial achievements of the consultants were on the
The regulation No: XIX under the heading of half
yearly data on financing facilities under automated performance
appraisal system (APAS):
Effective from 1st July, 1996,
particulars/information regarding financing facilities, both fund- based
as well as non-fund based, involving a sum of One million rupees or
above shall be recorded at the APAS Unit. Banking Policy & Regulations
Department, State Bank of Pakistan;
Accordingly, each bank and development finance
institution is directed: (i) that it shall report to the State Bank,
particulars of any financing facility that it has extended as per the
prescribed Returns, on half-yearly basis as at the close of 30th June,
and 31st December, each year }.
Now it requires identification of the persons
responsible for Bad Debts, but no preventing measures are taken to keep
the Banking System free from these apprentices even no arrangements are
made for their training and specialisation in the field of credits but
there are proofs that such persons are being honoured with awarding
still leading positions for their wrong doings resultantly frustration
among the able staff is witnessed and brain drain is harming the total
sector particularly NCBs.
The current ratio is made mandatory 1: 1 where as if
the working capital is allowed to the client for purchase of stocks the
marginal requirements, are 10 to 75% and the cushion must be available
in current ratio to meet the marginal requirement, but no such
instructions are conveyed leaving behind the loophole.
The Companies Act makes it mandatory for limited
companies to appoint their Auditor and the accounts of the company must
be audited by that Auditor only, the Income Tax Authorities do not abide
these rules particularly in case of Private Limited Companies, the banks
are left free to accept balance sheets signed or audited by any
chartered accountant. The CAs are not abiding the International
Accounting Standard, even the Balance Sheets of leading Banks are being
revised by New Management on their taking over to suit their own
In an atmosphere like that how can the lending be
secured on relying the Financials of the borrowers.
The banking sector in Pakistan has developed trend to
bring in the front line the Marketing Staff instead of the competent &
professional one. No doubt the marketing staff is the backbone of this
sector but lacks the managing ability & professional know how.
The PRs grip starts from Rs: 0.500M, the limit was
fixed in 1988 when the rupee dollar parity was around Rs: 26/- now the
parity is around Rs: 60/- but the limit is not revised, resultantly the
business on small scale has been curbed.
The firms are marked defaulters instead of the
Managers of these firms. Actually the Managers be made defaulters who
are actually responsible for their wrong doings not the entities.
Timely relaxations and corrective measures are not
announced for the uplift of the ill health sectors instead of wait until
fall policy is adopted.
Mushroom growth in any one sector is not timely
curbed to maintain the desirable level for better results but after the
excess than viable level, unprofessional curbing measures are adopted to
put the running units on ground.
For the better results, feed backs, seminars,
workshops, may held in addition to establishing an active strategic
economic division at SBP level and Credit Personnels be examined and
licensed from SBP as professionals for smooth working and desired
(i) Guidelines for Classification
of Short Term Facilities:-
Treatment of Income
Provisions to be made
OAEM (Other Assets
mark-up/ interest or Principal is overdue (Past due) by 90 days
from the due date.
mark-up / interest to be put in Suspense Account and not to be
credited to Income Account
of 2% of the difference resulting from the outstanding balance of
principal less the amount of liquid assets realizable
without recourse to a Court of Law.
mark-up / interest or principal is over due by 180 days or more
from the due date.
of 25% of the difference the outstanding balance of principal less
the amount of liquid assets realizable without recourse to a
Court of Law.
mark-up/ interest or principal is over-due by one year or
more from the due date
of 50% of the difference resulting from the outstanding balance of
principal less the amount of liquid assets realisable
without recourse to a Court of Law.
(a) Where mark-up/ interest or
principal is overdue beyond two years from the due date
1[Provision of 100% of the difference resulting from the
outstanding balance of principal less the amount of liquid assets
realizable without recourse to a Court of Law.]
(b) Where Trade
Bills (Import/export or inland bills) are not paid/adjusted within
180 days of the due date.