ISLAMABAD, March 26: The Securities and Exchange Commission of Pakistan (SECP) has rejected the demand by chambers of commerce and industry and trade bodies for the settlement of non-performing loans (NPL) advanced by the leasing companies and modarabas in line with the procedure prescribed for loans of commercial banks.

They had requested the commission to issue guidelines similar to those issued by the State Bank for banks and development finance institutions (DFIs) in respect of modarabas and leasing companies, which are regulated by the SECP.

They had based their request on the premise that since the said guidelines apply only to banks and DFIs, assets that are financed by modarabas and leasing companies would remain outside the assessed forced sale value (FSV) of total assets — thereby posing certain practical problems in the sharing out of the FSV between various creditors.

The request “is neither relevant nor required at this point in time,” said the SECP spokesman in a statement here on Wednesday.

The SECP, after due consultation with the leasing and modaraba industry associations in the matter, has informed the chambers that the situation of NPLs in the leasing and modaraba sectors “is quite different and as such the need for such liberal settlements is not felt at this point in time”.

The said SBP directive, it argued, was more pertinent to the commercial banking sector as it referred, particularly to a significant amount of stuck-up portfolio, and particularly those NPLs that are classified in the loss category and where the probability of recovery was almost negligible.

Assets financed by banks that are in the loss category, the SECP pointed out, were usually backed by the security of fixed assets that are attached/foreclosed through a long-drawn litigation process and sold to settle the outstanding dues, to the extent possible.

The leased assets, on the other hand, are by and large movable assets where recovery actions are generally initiated within months of default and settlement through repossession is achieved in much less time as compared to mortgage foreclosure.

That the leased assets were posing a hindrance in settlement was a misconception, the SECP declared, arguing: “Since the ownership of leased assets rests in the leasing companies/modarabas (the lessors), it is their lawful right to call for separate bids for these assets in case of a settlement. The courts have also accepted this position of the lessors in settlements through court auctions. In case of modaraba/musharika financing, the modarabas may experience problems similar to the commercial banks, but this constitutes a relatively small and insignificant portion of their overall operations.”

The concern regarding modarabas and leasing companies posing a hindrance in settlements was also dispelled in view of the fact that professionally managed institutions have clear guidelines and procedures on credit evaluation and risk management, including management of special assets/non-performing loans.

The issues pertaining to problem loans, therefore, could be efficiently worked out in light of these internal policies and procedures, the SECP added.