October 16, 2002	Wednesday	Sha’aban 9, 1423

KARACHI, Oct 15: The State Bank has allowed banks and non-bank financial institutions to write-off loss-making loans up to half a million rupees without moving courts. Loss-making loans are the loans whose principal or mark-up — or both remain unpaid for three years.

Under a new set of guidelines issued by the SBP on Tuesday the boards of directors of banks and NBFIs may allow the management to write-off loss-making loans up to Rs500,000 “without going for litigation.” The guidelines spelt out in a circular (BPD no. 29) say that they can write-off loss-making loans worth more than Rs500,000 to Rs2.5 million after making cash recovery of 75 per cent or more.

But this is specific to circumstances where forced sale value of the security is more than the outstanding amount. But where it is less than the outstanding amount the cash recovery should be equal to forced sale value. Forced sale value is the value of the security evaluated by the banks or NBFIs.

The guidelines say that in case of loss-making loans worth more than Rs2.5 million the write-off could be made after cash recovery of 75 per cent — if the forced value of the security is higher than the outstanding amount. But if the forced value is less than the outstanding amount the recovery should be equal to the forced sale value of the security.

The SBP circular says that the banks and NBFIs would use these guidelines for formulating their own schemes for write-off of loans. Such schemes would offer “a one-time opportunity” — and expire on April 14 2003. The circular also makes it clear that the SBP guidelines “do not affect in any way the legal right of financial institutions to recover the written-off loans if they still wish to pursue them legally.”

Senior bankers say the SBP decision would enable banks to give loans to those private sector borrowers who do not currently have access to bank loans because they are yet to clear loan defaults.

“This will help banks accommodate more borrowers particularly small and medium enterprises (SMEs),” said head of operations of state-run National Bank R. A. Kaleemi.

By end-June this year all commercial banks reported a combined stock of non-paying loans worth about Rs168 billion which was roughly one-fifth of their total advances. Non-paying or non- performing loans are the loans whose principal or mark-up or both remain unpaid for 90 days or more. Separate figures for the loss- making loans (included in non-paying loans) are not available.

Bankers say huge carryover stocks of non-paying loans not only block the way for fresh lending to certain borrowers but also makes it difficult for them to lower lending rates to the desired level. “The SBP decision will also help the interest rates take their natural course,” Kaleemi said when contacted by Dawn over telephone.

Treasurer of a foreign bank who declined to be named said that liberal write-off of loans would also give rise to a new class of borrowers that are the potential target of consumer financing by the banks.

Lately SBP allowed banks to give small loans to people to buy consumer durables like televisions; refrigerators; motorcycles and air-conditioners etc. Two state-run banks namely National Bank and Habib Bank have launched consumer financing schemes. The two are trying to use part of their surplus funds into profitable business amidst an overall economic slump that has lowered the demand for the private sector credit and given rise to over-investment in government securities.

Sources close to the SBP say if the demand for private sector credit remains sluggish even after October (when it normally picks up) it may have to revise its stance on monetary policy.

The SBP has been following a stable monetary policy since mid-February after making a five percentage points cut in its key discount rate between July 2001 and February 2002. In response to this huge cut in SBP discount rate the banks have made a net reduction of about one per cent in their weighted average lending rate. They have been citing over-staffing and huge carryover of non-paying loans as two main factors that keep their cost of raising funds high and make it difficult for them to cut lending rates more generously. At present the weighted average lending rate of all the banks combined is a little more than 12 per cent.