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Prudential Regulations Amended – Banks to Avail 30 Percent FSV Benefit of Collateral

KARACHI (January 28 2009): State Bank of Pakistan has allowed the banks to avail 30 percent benefit of Forced Sale Value (FSV) of collateral for calculating provisioning requirement. Banks, at present, had to take 100 percent cash provision.

However, the benefit of 30 percent FSV is permissible against pledged stocks and mortgaged commercial and residential properties only.

Industrial land and property are explicitly excluded. And, the benefit is only available for loans classified within last three years as banks are expected, by SBP, to recover the overdue loan within 36 months. Banks, however, are restricted from availing the above benefit of FSC while paying cash or stock dividend.

According to knowledgeable sources, banks have generally not undertaken valuation of collateral held in 2008 as its relaxation was disallowed and now they will need to rush to valuators for assessment before finalising in their accounts for 2008. Banks are requested to issue their financial statements for 2008 prior to March-end 2009. SBP on Tuesday issued the following circular:

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dated October 12, 2007 on the above subject in terms of which the benefit of Forced Sale Value (FSV) of collateral was withdrawn against all NPLs (except for housing finance) for calculating provisioning requirement.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.

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