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Please refer to BID Circular No. 3 dated the 20th February, 1989 and Prudential Regulation No. VIII (as modified from time to time) regarding classification of non-performing loans. In view of the enforcement of revised disclosure standards, vide BPRD Circular No. 31 dated August 13, 1997, it has been decided to review the classification standards as also requirements of provisions. To this end following amendments are made:--

i) Subjective evaluation of performing and non-performing credit portfolio for the accounting year ending December 1997 and onwards shall be made for risk assessment both for adjustment by way of down grading or upgrading the category of classification. the evaluation shall be carried out on the basis of adequacy of security inclusive of its realisable value, cash flow of borrower, his operation in the account, documentation covering advances and credit worthiness of the borrower etc. the assessment will be made by bank as follows:-

a) Where in a loan account which was lastly classified as loss, doubtful or sub-standard, the borrower had been making regular repayments during the following year and continues even upto the time of finalisation of annual accounts of bank, it may be put into upgraded category provided collaterals available with the bank are strong and or of sufficient value to cover the outstanding amount and cash flow position justifies.

b) In case a classified account is upgraded and no regular repayment was thereafter received for a consecutive period of six months or was irregular preceding next balance sheet date of the bank, the account be reclassified according to aging criteria.

c) Only the realisable value of the assets duly mortgaged/pledged against banks’ loans and advances shall be considered while evaluating the assets and determining the provision requirements. The auditors/inspectors shall determine the realisable value in accordance with the guidelines and criteria that may be laid down by the State Bank from time to time. The same will further be subject to check by State Bank Inspectors.

ii) In case of OAEM classification for the accounting year ending December 1997, and onwards, no provision need be created and in case of sub-standard classification, provision for the accounting year ending December, 1997 and onwards, will be created at 20% of the difference resulting form the outstanding balance of principal less the amount of liquid assets realisable without recourse to a court of law.

2. Other instructions on the subject shall, however, remain unchanged.

3. The above instructions will come in to force with immediate effect.

4. Please acknowledge receipt.

Yours faithfully,

(MANSUR-UR-REHMAN KHAN)
DIRECTOR

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