KARACHI: The State Bank on Monday directed all banks and development finance institutions (DFIs) to continue with their policy of writing off loans, but gave some new instructions to make the process more transparent.

The State Bank issued two circulars regarding the write-offs, asking banks to consider scenarios where natural calamities impair prospects of recovery.

“Every reasonable effort will be made to recover the outstanding loan, advance or financing,” said the circular. However, in exceptional cases, such as widows and orphans, banks or DFIs may consider relaxation to this requirement under their policy, it added.

Write-off of loan, advance or financing or waiver, if any, in the names of directors, chief executives, sponsor shareholders of the bank or DFI or their family members will require prior approval of the SBP,” the central bank said.

The boards of directors of the banks or DFIs would ensure transparency in the process so that loan, advance or financing is written off only when there are no realistic prospects of recovery, said the circular.

The financial relief, however, does not include financial reversals, such as credit card fee, annual charges, bank’s commission etc., made by banks or DFIs as per their own policy or industry practices, on regular consumer loans and financing.

The latest valuation not older than one year of securities and collateral in possession of the bank or DFI and that of fixed assets held as security for the loan, advance or financing will be obtained at the time of writing off the loan, advance or financing.

The valuation will be conducted through an approved valuer on the list of Pakistan Banks Association. For outstanding principal amount of less than Rs2m, valuation may be done by the bank or DFI itself in a reasonable and transparent manner. The write-offs allowed will be reviewed by the internal auditor of the bank or DFI with special emphasis on the cases where written off principal is Rs0.2 million or more.

“The above instructions will be applicable on writing off loan, advances and financing falling under Prudential Regulations for Consumer Financing, including housing finance, except personal loans allowed for business purposes,” said the SBP circular.

Published in Dawn, November 25th , 2014