September 08, 2007	Saturday	Sha'aban 25, 1428

KARACHI, Sept 7: The State Bank issued a draft circular on Friday completely withdrawing the benefit of Forced Sale Value (FSV) against all non performing loans (NPLs) for calculating provisioning requirement, which will directly hamper the profits of entire banking sector.

According to the draft, banks will have to go for 100 per cent provisioning against the NPLs or loss. However, liquid assets would be subtracted to calculate provisioning against NPLs.

The draft created waves of concerns among the bankers as the 100 per cent provisioning would hit their profitability.

The draft says where the interest or principal is overdue by one year or more from the due date, provision of 100 per cent of the difference resulting from the outstanding balance of principal less the amount of liquid assets, would take place. The amount of liquid assets would be realizable without recourse to a court of law.

Earlier, the banks’ non-liquid assets as collateral were used to be subtracted for calculating provisioning against NPLs. It provided banks an option to shelter the actual required provisioning by showing the collateral prices higher than the actual value.

The draft will be effective from December 31, 2007. Bankers said that the real impact of the draft will be felt in 2008 and banks would show fewer profits due to higher provisioning against their NPLs.

However, another major impact would result in higher recovery of NPLs. Bankers said that all banks would have to accelerate their recovery process and improve the recovery system.

According to the draft the provisioning requirements are lower for substandard (25%) and doubtful (50%) categories while highest for loss (100pc) category. The draft further said the time period for classifying ‘personal loans’ as “loss” has been reduced from one year to 180 days.

Where mark-up or interest or the principal is overdue by 180 days or more from the due date, the provision of 100% of the difference resulting from the outstanding balance of principal less the amount of liquid assets would take place.

The SBP further elaborated that the classified loans or advances that have been guaranteed by the government would not require provisioning, however, mark up or interest on such accounts to be taken to Memorandum Account instead of Income Account.

Analysts said that the reverse provisioning would be faster next year as banks would like to show better profits.

The impact of 100 per cent provisioning on various banks were calculated by a brokerage house, which showed that the Habib Bank would be the most affected private bank.

The impact of provisioning per share for HBL will be Rs12.36, which is the highest. The impact per share for National Bank is Rs6.9, United Bank Rs4, MCB Bank Rs2.87, Allied Bank Rs3.78, Askari Bank Rs5.4, Faysal Bank Rs2.92, Bank of Punjab Rs2.02 and Bank Al Falah Rs1.81 per share.

Mohammad Imran, head of research at First Capital said that private commercial banks faced the biggest impact of the new SBP provisioning policy while the foreign banks would face the least impact.

He said the coverage against the NPLs for local private banks was just 63 per cent. The 100 per cent provision would significantly slash the profitability of these banks.