SBP Directs Banks to File Recovery Suits for High-Value NPLs Before Charge-Offs
The State Bank of Pakistan (SBP) has issued new directives requiring banks to file recovery suits in court for non-performing loans (NPLs) with an outstanding principal amount exceeding Rs. 10 million at least two years before considering them for charge-off. This move aims to ensure that recovery efforts for such NPLs are not compromised.
In a recent circular, the SBP highlighted that the banking industry’s NPLs currently include a significant portion of fully provisioned legacy loans. To address these, banks are now permitted to charge off fully provisioned corporate, commercial, and Small & Medium Enterprises (SMEs) NPLs. However, it was clarified that such charge-offs do not constitute financial relief for borrowers, and the banks’ rights to recover these amounts remain intact.
Importantly, the charged-off NPLs will not appear on the banks’ financial statements but will instead be kept in memorandum accounts. The Board of Directors (BoD) and senior management of banks are mandated to closely monitor the progress and recovery of these charged-off loans, in line with the BoD-approved policy for managing NPLs and charged-off loans.
Banks are also required to maintain proper records of these charged-off NPLs and continue reporting them to the electronic Credit Information Bureau (e-CIB) and private credit bureaus as overdue. Additionally, banks must disclose charged-off loans in a separate note within their financial statements.
Certain cases, however, are not eligible for charge-off under the new guidelines. These include NPLs associated with related parties, sponsor shareholders, directors, Chief Executive Officers, key executives of the banks or their family members, and politically exposed persons. Furthermore, NPLs under litigation involving criminal proceedings are also excluded.
The SBP’s directives emphasize that banks must adhere to their BoD-approved policies when charging off NPLs related to consumer loans.
