KARACHI, March 12: Micro finance institutions sponsored by non-governmental organizations can transform themselves into micro finance banks but they will have to observe a set of rules laid down by the State Bank.

The SBP has issued guidelines that the auditors will have to meet while reviewing credit portfolio of the NGO-sponsored MFIs interested in becoming micro finance banks.

The MFIs licensing policy and criteria prescribed by the SBP allows NGOs to contribute up to 50 per cent of required capital in the form of credit/investment and other asset portfolios. But that is subject to review by a chartered accountancy firm from amongst the SBP panel of auditors.

The guidelines issued by the SBP warn the auditors that they shall review the entire process of MFIs credit policy making and its implementation at different stages.

The auditor shall also review MFIs accounting and information systems "and make an objective assessment about their capacity and reliability and effectiveness for generating portfolio related information and reports." The auditor shall also test whether the loan tracking MIS data reconciles with accounting system data.

According to SBP guidelines the auditor shall review whether the internal audit function is in place in the NGO-MFI and whether its size and capacity is compatible with the level of development and size of MFI. The auditor will assess "the scope, coverage and effectiveness of the audit particularly with respect to MFIs-loan portfolio, the quality of reports and enforcement thereof."

The auditor shall review the details of rescheduled cases and repayment patterns after the rescheduling. "The rescheduled loans against which even a single instalment is overdue shall attract 100 per cent provision whereas the rescheduled loans whose first instalment after the rescheduling is not due by the finalization of audit shall attract 50 per cent provision."

The guidelines say that the loan portfolio of NGO-MFI shall be grouped into five categories namely (i) current (ii) other assets especially mentioned i.e. OAEM (iii) substandard (iv) doubtful; and (v) loss.

Loans on which payment of principal or markup is not overdue will be treated current and the loans whose principal or markup is overdue by 30 days or more but less than 90 days will be treated as OAEM. Substandard loans would be the loans whose principal or markup is overdue by 90 days or more but less than 180 days and doubtful loans would be the ones the principal or markup on which is overdue by 180 days or more but less than 365 days. The loans whose principal or markup remains overdue for 365 days or more will be treated as loss loans. On current loans and OAEM no provisioning will be required. But 20 per cent provisioning would be required against substandard loans; 50 per cent against doubtful loans and 100 per cent against loss loans.