LAHORE, July 5: Bankers are stated to be misinterpreting prudential regulations to restructure bad loans in order to avoid classifying them as loss, resulting in reduction of their profits and payment of higher taxes.

“We have come across several such cases/complaints in the past few months in which the loans were rescheduled by bankers just to avoid indicating losses in their books,” says a member of the SBP Committee formed to resolve disputes between banks and delinquent borrowers applying for an amnesty under the central bank’s scheme for write-off of irrecoverable loans/advances.

“Many issues have cropped up due mainly to what we can term as over indulgence in the usual window dressing by reading more into prudential regulations than is actually written. A good number of cases have come to light in which loans were rescheduled over and over again by banks to avoid classifying those accounts as loss,” the source said. He said the practice was prevalent in the 1990s, particularly in the second half of the decade.

“This act resulted in higher than actual profits of banks, and payment of more taxes than they should have paid,” he said.

The source said the losses which the major banks suffered were in fact compensated by the SBP. In spite of this, the bankers did not report these accounts in the loss category though they should have done so, he added.

Prudential regulations prescribe two methods for classifying a borrower’s account as a loss. “One is based on time and is called the time-based criterion. Under this criterion, an account has to be classified under loss category if the principal or interest on it are past due for more than 180 days for trade based funding — two years for short-term and three years for long-term loans. The banks have in the past, in order to overstate profit, rescheduled loans before this period is reached to avoid their classification as loss and to undertake the required provisioning,” he said.

The other criteria for classifying a loan as loss is stated to be subjective. It says: “In addition to the time-based criteria, subjective evaluation of performing and non-performing credit portfolio shall be made for risk assessment and where considered necessary category of classification determined on the basis of time based criteria shall be further downgraded. Such evaluation shall be carried out on the basis of adequacy of security inclusive of its realizable value, cash flow of borrower, his operation in the account, documentation covering advances and credit worthiness of the borrower, etc.”

The sources said this requirement uses the word “shall” as opposed to “may” which many banks conveniently misinterpret as when they do not wish to classify an account as a loss.

He said: “There are accounts where the factories have been closed down but loans not classified as losses. In a blatant case of utter disregard of this criteria a project, which was funded by the international banks but whose funding was stopped later on due to sanctions after the nuclear tests, was never classified as a loss. The local banks despite acknowledging that it was not possible for the project to go ahead did not classify the facilities that had already been extended as loss.”

The sources said the misinterpretation of prudential regulations was causing immense problems in the settlement of the loans and advances under the SBP amnesty scheme. “Almost all accounts that have had cash flow issues for the last many years or have downgraded the borrowers credit worthiness or have poor account operation or have little or no security are still being denied settlements under the SBP guidelines on the pretext that the account was not classified as loss and did not qualify,” he said.

“This is not the only case of misinterpretation which banks are using against their borrowers. The case of mechanical denial by banks of facilities to all borrowers being reported under the CIB list is an open secret. The SBP has issued clarifications in this regards and SBP Governor Dr Ishrat Hussain has recently in an article acknowledged it and asked the bankers to avoid such practices. Despite all of these directions by the SBP, most banks continue to deny facilities to customers despite the security for the new facility being adequate. The projects being settled under the guidelines are already suffering as banks are denying the facilities to such units which is contrary to the SBP’s stated policy,” the sources said.