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FSV Benefit
10-27-2009, 02:23 AM
Post: #1
FSV Benefit
I have heard in different news and articles that SBP has relaxed FSV (Forced Sale Value) Benefit to 40%. What does it mean? How does FSV is regarded as <b>benefit</b> for banks?
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10-31-2009, 03:35 PM
Post: #2
 
Dear,

Its simple dear. Banks advance loans to their customers and keep anything from customer as collateral of loan. It may be property, machinery or listed shares etc.

When the customer defaults from the payment of interest or principal on the due date, its loan becomes Classified or Non-Performing Loan (NPL).

In this situation, provision against bad debts should be recognised in the books of accounts of bank. SBP has prescribed the methods of calculating provision for bad debts / against NPLs through prudential Regulations. It is prescribed that liquid securities should be deducted from outstanding principal while calculating provision for bad debts.

Most of the situations are there, where banks do not hold liquid securities as collateral and hold property or machinery of the client.

In this situation, banks have to account for provision on the full amount of principal in absence of FSV.

FSV is forced sale value of the property mortgaged with bank by the customer.

SBP requires that if a bank want to take the benefit of the FSV, mortgaged property should be valued by independent valuer on the panel of SBP and FSV is reported by valuer in its report.

This value of FSV may be deducted while calculing provison for bad debts from th outstanding principal.

<b>For example....</b>

Suppose a customer has taken a loan of 100 M from bank by mortgaging his property having market value determined by valuer of bank 150 M at the time of approval of loan. Further suppose, the customer has defaulted the principal and markup amount on due date. Now.....

Markup income would be reversed in the books of bank. Expense of provision for bad debts against principal amount would be recognised in PL account as loss as 100 M in absence of FSV benefit which dilute / negatively effect the EPS of the bank.


If FSV benefit is allowed to avail by SBP, then market value of property at the time of reporting date after default, say 80 million, would be deducted from 100 M and remainging 20 M would be recognised as loss in PL accont. This would improve the EPS of the bank.


Simply, if FSV benefit is allowed to bank then profits of the bank are highly reported in the financial statements and vice versa.

Regards,


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06-22-2010, 05:08 PM
Post: #3
 
aoa,

The example u have quoted above is quite helpful for the understanding fsv. but my question is how to calculate fsv value in following case.

Example
Borrower xyz has taken loan from Bank A , B and C against one of its industrial property. Now how can i calculate fsv value for bank A. either we hav to keep in mind charge on security / consider the proportionate of outstanding while calculating fsv value.

Regards,
Imran
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