SBP directs banks to pursue legal action
against major loan defaulters
The State Bank of Pakistan (SBP) has
instructed banks to initiate legal proceedings for the recovery of
non-performing loans (NPLs) with an outstanding principal exceeding Rs. 10
million before considering them for charge-off. This directive aims to
strengthen efforts to recover substantial overdue amounts.
According to an SBP circular, banks'
senior management must ensure that recovery efforts for charged-off NPLs remain
robust and uncompromised. Currently, the banking sector's NPLs include a
significant number of fully provisioned legacy loans.
To manage these legacy NPLs, banks
are permitted to charge off fully provisioned corporate/commercial and Small
& Medium Enterprises (SMEs) loans. However, such charge-offs will not
provide financial relief, and banks will retain their rights to pursue recovery
from borrowers.
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Charged-off NPLs will not appear on
the bank's financial statements but will be recorded in memorandum accounts.
The Board of Directors (BoD) and senior management are responsible for
overseeing the progress of these charged-off loans and ensuring recovery in
accordance with the BoD’s approved NPL policy.
Banks are required to maintain
detailed records of charged-off NPLs, report them as overdue to e-CIB/private
credit bureaus, and disclose them under a separate note in their financial
statements.
Certain cases are ineligible for
charge-off, including:
- NPLs associated with related parties, including sponsor
shareholders, directors, Chief Executive Officers, key executives, their
family members, and politically exposed persons.
- NPLs involved in criminal litigation.
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Banks must adhere to their BoD’s
approved policies when charging off consumer loan NPLs.
Source: ProPakistani