SBP Issues Guidelines to Regulate Non-Performing Assets

The State Bank of Pakistan has issued a set of guidelines to regulate the transfer and assignment of Non-Performing Assets (NPAs) from Financial Institutions (banks and Development Financial Institutions) to Corporate Restructuring Companies (CRCs). The FIs, while engaging with the CRC(s), are required to ensure that the transfer and assignment of NPAs is conducted in a fair, transparent, and prudent manner, and on an arm’s length basis under provisions of the Act, relevant laws, rules, regulatory instructions (as amended from time to time), and FIs’ internal policies, procedures and manuals. The FIs will record the financial instruments received from the CRC(s) as consideration on account of transfer and assignment of NPAs at the fair value as determined and agreed upon between the two parties in line with FI’s policy for transfer and assignment of NPAs. The FIs may continue to report financial instruments received from CRC(s) at its initial agreed fair value for the first three (3) years of recognition. The financial instruments, at each subsequent reporting date after the initial three (3) years, shall be re-measured/revalued as per the relevant International Financial Reporting Standards (IFRS). The gains/losses, if any, arising due to such remeasurement/revaluation will be taken to Other Comprehensive Income (OCI). The gains, if any, will not be available for dividends until full/partial redemption. The FIs may, at their own discretion, recognize any losses/provision expenses during the initial three (3) years. Upon the transfer of NPAs to CRC(s), the FIs may reverse up to 10 percent of the provision against the value of the financial instrument received from CRC(s) into a Profit & Loss (P&L) statement. However, such reversal of provision shall not be available for payment of cash and stock dividends. After the recognition of 10 percent of the initially agreed fair value of the financial instrument in the P&L statement, the FI shall not recognize receipt of cash payments against the same financial instrument until the payments received are more than 10 percent of its initially agreed upon fair value. In case of cash recovery over 10 percent, only the differential shall be recognized in P&L in the period in which the cash payment has been received. The remaining 90 percent provision against the value of financial instruments received from CRC(s) will be maintained. It will be recorded in the P&L statement of the year in which the actual amount, in the form of upfront full/partial cash consideration, is received from the CRC(s) or to the extent the financial instrument received as consideration is fully/partially redeemed. The amount of losses not charged to P&L shall be placed into OCI and the amount equivalent to such deferred losses shall not be available for payment of dividends. The FIs shall provide proper disclosures on these losses in the notes to the periodic financial statements. Each FI should develop its internal Policy for the transfer and assignment of NPAs to the CRC(s) or appointment of the CRC(s) as an agent, under an agency agreement, for recovery of NPAs. This policy can be an independent document or part of either the Credit Risk Management Policy or any other relevant policy of the FI. The policy should, inter alia, prescribe guidance on the types/categories of NPAs (including the consortium/syndicated NPAs) eligible for the transfer and assignment to the CRC(s) or appointment of the CRC(s) as an agent of the FIs for the recovery of NPAs.