State Bank of Pakistan Issues New Guidelines for NPA Transfers to Corporate Restructuring Companies
Islamabad, July 25, 2024 — The State Bank of Pakistan (SBP) has issued comprehensive guidelines to regulate the transfer and assignment of Non-Performing Assets (NPAs) from Financial Institutions (FIs), including banks and Development Financial Institutions, to Corporate Restructuring Companies (CRCs). This move aims to ensure that such transactions are conducted in a fair, transparent, and prudent manner, adhering to relevant laws, rules, regulatory instructions, and the internal policies of the FIs.
Under these new guidelines, FIs must record financial instruments received from CRCs as consideration for the transfer of NPAs at a fair value, as determined and agreed upon between the parties, following the FI’s policy on the transfer and assignment of NPAs. Initially, these instruments will be reported at their agreed fair value for the first three years. After this period, they must be re-measured or revalued in accordance with the relevant International Financial Reporting Standards (IFRS), with any gains or losses being recorded in Other Comprehensive Income (OCI). Importantly, any gains recorded will not be available for dividends until full or partial redemption.
The SBP guidelines also allow FIs the discretion to recognize any losses or provision expenses during the initial three years. Additionally, upon the transfer of NPAs to CRCs, FIs can reverse up to 10% of the provision against the value of the financial instruments received into the Profit & Loss (P&L) statement. However, such provision reversals cannot be used for cash or stock dividend payments. Furthermore, FIs will not recognize cash payments received against the financial instruments in the P&L statement until these payments exceed 10% of the initially agreed fair value. Any cash recovery over this threshold will be recognized as income in the P&L statement for the period in which the payment is received.
The remaining 90% provision against the financial instruments received from CRCs will be maintained and recorded in the P&L statement in the year when the actual amount, either as upfront full or partial cash consideration, is received or when the financial instrument is fully or partially redeemed. Any losses not charged to the P&L will be placed into OCI, and the equivalent amount will not be available for dividend payments. FIs are required to provide proper disclosures on these losses in the notes to their periodic financial statements.
Each FI is also mandated to develop an internal policy for the transfer and assignment of NPAs to CRCs or for appointing CRCs as agents under an agency agreement for the recovery of NPAs. This policy can be a standalone document or part of other relevant policies, such as the Credit Risk Management Policy. It should provide guidelines on the types and categories of NPAs eligible for transfer, including consortium or syndicated NPAs.
The SBP’s new guidelines are expected to enhance the regulatory framework for managing NPAs and provide a structured approach to their resolution through CRCs, supporting financial stability and transparency in the banking sector.
