KARACHI - The State Bank of Pakistan by amending the Prudential Regulations pertaining to provisioning of classified loans and advances has increased forced sale value (FSV) benefit banks/DFIs from 30 percent to 40 percent. According to a circular (BSD circular No 10) issued to all banks/DFIs on Tuesday, FSV benefit has now been extended to industrial property (excluding plant and machinery) in addition to already available benefit on pledged stock and mortgaged residential and commercial properties, held as collateral against Non Performing Loans (NPLs) that are classified during the last 3 years from the date of classification for calculating provisioning requirement. As per new instructions, banks/DFIs may avail the benefit of provisioning, subject to the condition that it shall not be available for the payment of cash or stock dividend. Further, the details and impact of the benefit in provisioning shall be adequately disclosed in the notes to the financial statements. The State Bank has also introduced interim instructions on restructuring/rescheduling of classified loans and advances that are overdue by less than one year. These instructions will be applicable till June 30, 2010 and banks/DFIs may also apply these instructions on their existing restructured loans, which were rescheduled/restructure on or after January 1st, 2009. According to these instructions: (a) Banks/DFIs may upgrade the category of classification by one category upon rescheduling/ restructuring of such loans and advances that are overdue by less than one year. Moreover, upon meeting the terms and conditions of the restructuring for one year and cash recovery of at least 5 per cent of the restructured amount, the classification category may be further upgraded by one step. (b) If classification category of a classified loan/advance is upgraded on restructuring/ rescheduling, the bank/DFI shall maintain: I. provisions required for the category of classification, the loan/advance is in, after up-gradation (as calculated under prudential guidelines contained in relevant prudential regulations), plus II. 50% of the difference between the amount of provision required for category of classification, the loan is in after up-gradation and the amount of provision required for former category of classification (as calculated under prudential guidelines contained in relevant prudential regulations). (c) However, the benefit in provisioning will be subject to the following conditions: i. Benefit arising from interim instruction shall be taken directly into equity as a capital reserve and shall not be available for payment of cash and stock dividends. ii. Banks/DFIs shall credit this provisioning benefit to P&L and declassify restructured loan only after meeting following conditions: * Successful compliance with the terms and conditions of rescheduling/restructuring for 2 years and cash recovery of 10pc of the rescheduled/restructured amount, or * Recovery of 25% of the restructured amount in cash or through acquisition of immovable properties i.e. land and building (excluding any plant and machinery installed thereon). However, banks/DFIs are required to ensure that after such acquisition of land and building, outstanding exposures of the borrower should remain fully secured. * Where the terms and conditions of rescheduling/restructuring are not met, such loan/advance shall not be eligible for the benefit under interim instruction for any subsequent restructuring. * Banks/DFIs shall continue to follow the prevailing instructions on classification/provisioning of classified restructured loan in respect of such loans and advances which are not covered under these interim instructions or which subsequently fail to meet the provisions of these instructions * Banks/DFIs shall provide details of loans and advances rescheduled/restructured under the interim instructions on monthly basis as per prescribed format. SBP circular further said any misuse of FSV benefit detected during regular/special inspection of State Bank shall attract strict punitive action under the relevant provisions of the Banking Companies Ordinance, 1962. Furthermore, State Bank may also withdraw the benefit of FSV from banks/DFIs found involved in its misuse. Banks / DFIs may reverse the provision held over and above the required provision. However, such reversal of provisioning shall be made directly into the equity as a capital reserve and shall not be credited to Profit and Loss Account (P&L). The amount of provisioning taken to capital reserves shall not be available for payment of cash and stock dividend, circular said. i. The upgrade in classification category and reversal of provisions to capital reserve can only be made after the terms and conditions of rescheduling/restructuring have been documented, duly agreed upon and signed by both the borrower and bank/DFI. ii. The amount of capital reserve created from the reversal of provisioning shall be credited to P&L and loans/advances declassified, subject to the following: The terms and conditions of the rescheduling/ restructuring have been fully met for a continuous period of 2 years from the date of rescheduling/ restructuring and at least 10pc of the restructured amount has been recovered in cash; or at least 25pc of the rescheduled/restructured amount has been recovered either in cash or through acquisition of immovable properties i.e. land and building (excluding any plant and machinery installed thereon). However, banks/DFIs shall ensure that after such acquisition of land and building, outstanding exposures of the borrower should remain fully secured. iii. The unrealised mark-up on classified rescheduled/restructured loans shall not be taken to income account unless at least 50% of the outstanding mark-up amount is realized in cash. However, any short recovery in this respect will not affect the de-classification of this account if all other criteria are met. iv. If the terms and conditions of rescheduled/ restructured loan/ advance are not met as per the agreement, it shall not be eligible for another rescheduling/ restructuring under these instructions. v. The decision to reschedule/ restructure a classified loan/advance shall be made by Bank/DFI keeping in view the realistic cash flow generation capacity and financial viability of the borrower/project. At the time of rescheduling/ restructuring, Bank/DFI shall consider and examine the requests for working capital strictly on merit and appropriately securing their interests. vi. Banks/DFIs are encouraged to formulate and put in place, as a part of their overall credit policy, adequate policy framework duly approved by their Board of Directors for the rescheduling/ restructuring of their distressed loans and advances. vii. Any attempt to misuse the above benefit, would attract action under the relevant provisions of the Banking Companies Ordinance, 1962, including complete withdrawal/reversal of benefit availed under these instructions.