NPL Market Assessment Pakistan

Non-Performing Loan
Market Assessment in
Pakistan
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Acknowledgements
This report was prepared by a World Bank Group (WBG) team led by Faryal Nazir (Private Sector Specialist)
and comprising Miguel Maria Otamendi Rodriguez (Consultant), Marta Muller (Consultant), Sergio Ariel
Muro (Consultant), Karlis Bauze (Senior Financial Sector Specialist), EY Ford Rhodes and Haidermota & Co.
The team benefitted from comments from Farhan Fasihuddin (Principal Investment Officer), Tania Khan
Jamal (Senior Investment Officer), Jahangir Sohrabzadeh (Senior Investment Officer), Amjad Bashir (Senior
Economist), Vanessa Vizcarra (Senior Operations Officer) and Patricia Ann Shadforth (Editor). The analysis
and conclusions were informed by consultations with private sector, industry associations, corporate
restructuring entities, financial institutions, and public sector supervisors and regulators. In particular, the
report builds on survey and feedback from the State Bank of Pakistan (SBP), the Securities and Exchange
Commission of Pakistan (SECP), Pakistan Corporate Restructuring Company Limited (PCRCL), Pakistan
Banks’ Association (PBA) and its member financial institutions.
The work was prepared under the supervision of Dahlia Khalifa (Senior Manager), K. Aftab Ahmed (Regional
Director), Deena Mai Burjorjee (Principal Operations Officer), Christina Ongoma (Principal Investment
Officer), Adel Meer (Manager), Mehmet Mumcuoglu (Manager), Natalia Bogomolova (Manager), Shabana
Khawar (Principal Operations Officer), and Zeeshan A. Sheikh (Country Manager).
Table of Contents
1. PREFACE ............................................................................................................................................... 7
2. LIST OF ABBREVIATIONS.................................................................................................................. 8
3. EXECUTIVE SUMMARY ................................................................................................................... 11
4. PAKISTAN NPL MARKET OVERVIEW ........................................................................................... 29
4.1. The Structure of the NPL Market in Pakistan & NPL Market Players ......................................... 29
4.2. NPL Trends, Sectoral Composition and Other Financial Data ..................................................... 32
5. PRUDENTIAL REQUIREMENTS FOR MANAGING & REPORTING NPLS ................................. 55
5.1. Analysis of Macro prudential regulations..................................................................................... 55
5.2. NPL Reporting Framework for Banks in Pakistan ....................................................................... 57
5.3. Prudential Treatment of Restructured Loans ................................................................................ 61
5.4. NPL Reporting Framework for Banks in Europe ......................................................................... 62
5.5. A Comparison of SBP’s NPL Reporting Requirements with European NPL Reporting
Requirements ............................................................................................................................................. 62
5.6. A Comparison of SBP’s NPL Framework with BCBS Guidelines on Problem Assets................ 64
5.7. Write Off Policy and Practice for Banks in Pakistan.................................................................... 73
5.8. A Comparison of Write off Requirements under IFRS 9, SBP Instructions and Bank Polices .... 74
5.9. Collateral Framework for Banks in Pakistan ................................................................................ 76
5.10. Collateral Valuation - External Valuators .................................................................................... 76
5.11. Potential for Differences in the Market Value and Book Value of Collateral .............................. 77
5.12. Collateral Valuation Practices Contributing to Price Gap ............................................................ 79
5.13. Credit Risk Management Frameworks and Practices in Banks in Pakistan .................................. 80
5.14. Summary of Key Impediments and Recommendations................................................................ 84
6. SECURITY ARRANGEMENTS, INFORMATION FRAMEWORK AND RISK MANAGEMENT 87
6.1. Overview of Secured Transactions Regime and Related Impediments ........................................ 87
6.2. Registries and Information Framework ........................................................................................ 92
6.3. Recommendations ........................................................................................................................ 93
7. TAXATION LAW AND PRACTICE FOR NPLS IN PAKISTAN...................................................... 95
7.1. Overview of NPL Taxation in Pakistan ........................................................................................ 95
7.2. Taxation of Loan Provisions, Deductibility and Reversals........................................................... 95
7.3. Taxation of Loan Write offs ......................................................................................................... 96
7.4. Tax Treatment – Fair Value Considerations in Sale of NPL ........................................................ 96
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PAKISTAN NPL MARKET ASSESSMENT DIAGNOSTIC
7.5. Shortcomings in the Taxation Framework Contributing to a Price Gap ....................................... 97
7.6. A summary of key impediments and recommendations ............................................................... 98
8. NPL RESOLUTION – A REVIEW OF LEGAL REQUIREMENTS AND PRACTICES IN
PAKISTAN .................................................................................................................................................. 101
8.1. Recovery by Banks or DFIs ....................................................................................................... 101
8.1.1 Enforcement of Security Interest through Court Intervention ........................................................ 101
8.1.2 Enforcing Security Interests without Court Intervention ..................................................................... 102
8.2. Winding-up................................................................................................................................. 103
8.2.1 Limitations and obligations surrounding insolvency ........................................................................... 103
8.2.2 Legal and regulatory framework for the liquidation of an insolvent borrower .................................... 104
8.2.3 Rights of secured creditors in relation to insolvency proceedings ....................................................... 105
8.3. Debt Rescheduling ..................................................................................................................... 106
8.4. Debtor Rehabilitation and Restructuring .................................................................................... 106
8.4.1 Corporate Rehabilitation Act ............................................................................................................... 107
8.4.2 Creditors’ Scheme of Arrangement ..................................................................................................... 107
8.4.3 Rehabilitation of Sick Public Sector Companies ........................................................................... 108
8.5. Write off ..................................................................................................................................... 108
8.6. Sale or Transfer of NPL ............................................................................................................. 108
8.6.1 Securitization ....................................................................................................................................... 108
8.6.2 Pakistan Corporate Restructuring Company Limited (PCRCL) .......................................................... 110
8.6.3 Good bank/bad bank structure ............................................................................................................. 112
8.7. NPL Servicing Infrastructure...................................................................................................... 113
8.7.1 Licensing requirements and the role of collection, recovery and/or repossession agents ................... 113
8.7.2 Enlistment with PBA ........................................................................................................................... 113
8.7.3 Operating model of servicers ............................................................................................................... 114
8.7.4 Servicing Challenges ........................................................................................................................... 114
8.8. Recommendations ...................................................................................................................... 114
9. NPL INVESTORS AND NPL INVESTMENT STRUCTURES FOR PAKISTAN ........................... 123
9.1. Key Investors in NPLs Markets Globally ................................................................................... 123
9.2. Common NPL Resolution Models and Potential NPL Transaction Structures........................... 125
9.3. Summary of Possible NPL Models and Transaction Structures ................................................. 128
9.4. Possible NPL Transaction Structures to Start an NPL Market in Pakistan ................................. 135
9.5. Options for preferred NPL investment model ............................................................................ 152
10. ANNEXES .......................................................................................................................................... 153
10.1. Annex A - List of laws, regulations and circulars reviewed ....................................................... 153
10.2. Annex B - List of Banks in Pakistan .......................................................................................... 155
10.3. Annex C - Conditions for Rescheduling/Restructuring in PRs................................................... 157
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10.4. Annex D - Detailed documents required under multiple loan scenarios..................................... 159
10.5. Annex E – NPL Market – A case study of Spain ....................................................................... 162
10.6. Annex F – NPL Market – A case study of Italy ......................................................................... 164
10.7. Annex G – NPL Market – A case study of India ........................................................................ 167
10.8. Annex H – NPL Market – A case study of Malaysia ................................................................. 170
10.9. Annex I – EBA NPL Templates ................................................................................................. 173
10.10. Annex J – Credit Approval Cycle Phases ................................................................................... 174
10.11. Annex K - Salient Features of the Recovery Ordinance ............................................................. 175
10.12. Annex L – Foreclosure Process .................................................................................................. 177
10.13. Annex M – Examples of Creditors’ Schemes of Arrangement .................................................. 180
10.14. Annex N – CIRC ........................................................................................................................ 181
10.15. Annex O – List of Debt Collection Companies .......................................................................... 184
10.16. Annex P - Project Scope & Methodology .................................................................................. 185
10.17. Annex Q – COVID Relief measures adopted by SBP ................................................................ 188
10.18. Annex R – EBA disclosure on NPLs and Forborne Exposures .................................................. 189
10.19. Annex S – Key common features of restructuring policy and practices in banks in Pakistan .... 191
10.20. Annex T – Provisions Against NPLs According to the PRs ....................................................... 193
10.21. Annex U – Debt Collection Agencies: Eligibility/Other Criteria for Approved Agencies ........ 195
10.22. Annex V – Mechanism for Collection of Periodic Cash Flows .................................................. 197
11. REFERENCES .................................................................................................................................... 198
6
1. PREFACE
The objective of this Non-Performing Loan (NPL) Market Assessment Diagnostic Report is to examine and
assess the NPL market in Pakistan, and identify bottlenecks and practical areas that could be addressed in the
short and medium term to make the NPL market in Pakistan more investor friendly. The report analyzes the
laws and practices governing NPL resolution in Pakistan, reviews the prudential, accounting, and taxation
frameworks and practices applicable to managing, valuing and reporting of NPLs, and evaluates global NPL
resolution strategies and models that banks in Pakistan can use.
This report has drawn widely from research and literature, and from primary information collection and face
to face interviews with stakeholders including the State Bank of Pakistan (SBP), Securities and Exchange
Commission of Pakistan (SECP), valuator companies, legal experts in recovery & insolvency laws, banks,
and other financial institutions (FIs).
The report analyzes and sizes the NPL market in Pakistan and identifies key financial trends, NPL
concentrations, major participants, sectors, and segments. It presents the current state of Pakistan’s NPL
market, identifying the legal, prudential, taxation, and other regulatory and practical impediments for financial
institutions and potential NPL investors to create and operate a viable secondary market for NPLs. The report
also assesses the feasibility of potential secondary market transaction models for NPLs within the context of
the current laws and regulations in Pakistan.
7
2. LIST OF ABBREVIATIONS
ABL Allied Bank Limited
ABS Asset Backed Securities
AMC Asset Management Company
AUM Assets Under Management
BSD Banking Supervision Department
BOD Board of Directors
BPRD Banking Policy and Regulation Department
CAD Credit Administration Department
CEO Chief Executive Officer
CIRC Corporate and Industrial Restructuring Corporation
CPC Civil Procedure Code
CRC Corporate Restructuring Companies
CRSIU Committee for Revival of Sick Industrial Units
DARP Distressed Assets Recover Program
DFI Development Financial Institution
DPD Days Past Due
DPS Debt Property Swap
EBA European Banking Authority
ECB European Central Bank
eCIB Electronic Credit Information Bureau
FATF Financial Action Task Force
FBEs Foreign Bank Exposures
FDD Foreign Demand Draft
FIA Federal Investigation Agency Act, 1974
8
FIFO First in first out
FSV Forced Sale Value
FMC Fund Management Companies
IFC International Finance Corporation
IFRS International Financial Reporting Standard
IFAS International Financial Accounting Standards
IVSC International Valuation Standards Council
ITO Income Tax Ordinance
HBL Habib Bank Limited
IA Internal Auditor
JSTs Joint Supervisory Teams
KKR Kohlberg Kravis Roberts & Co.
LGD Loss Given Default
MCB Muslim Commercial Bank
MENA Middle East & North Africa
MUFAP Mutual Funds Association of Pakistan
NAB National Accountability Bureau
NAV Net Asset Value
NBP National Bank of Pakistan
NBFC Non-Bank Finance Companies
NIT National Investment Trust
NPL Non-Performing Loan
NPFs Non-Performing Finances
OAEM Other Assets Especially Mentioned
OECD Organisation for Economic Co-operation and Development
ORBO Offences in respect of Banks (special courts) Ordinance, 1984
9
OSED Offsite Supervision and Enforcement Department
PBA Pakistan Banks’ Association
PCATP Pakistan Council of Architects and Town Planners
PCRCL Pakistan Corporate Restructuring Company Limited
PD Probability of Default
PEC Pakistan Engineering Council
PPC Pakistan Penal Code, 1860
RBI Reserve Bank of India
RICS Royal Institution of Chartered Surveyors
RM Relation Management
PRs Prudential Regulations
SAM/SAMG Special Asset Management Department/Group
SBP State Bank of Pakistan
SECP Security & Exchange Commission of Pakistan
SME Small & Medium Enterprise
SPV Special Purpose Vehicle
TERF Temporary Economic Reforms Facility
TEGOVA The European Group of Valuers' Associations
UBL United Bank Limited
UNCITRAL United Nations Commission on International Trade Law
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3. EXECUTIVE SUMMARY
1. The NPL market in Pakistan compared with regional peers such as India or China is nascent, and
the secondary market is nearly non-existent. In 2020, Pakistan ranked 58th on the resolving insolvency
indicator of the World Bank’s Ease of Doing Business Index, with a recovery rate of 41 cents/dollar,
slightly above the average recovery rate of 38 cents/dollar for the South Asian region. For OECD High
Income countries this metric is 70 cents/dollar. The stock of NPLs in Pakistan stood (at 31 Dec 2020) at
PKR 828 billion (approximately $5 billion) with 97 percent provision coverage, and the infection ratio
was approximately 9 percent (including an average of 17 percent for SME loans). Further, about 10
percent of the total outstanding gross advances as of 31 March 2021 had been restructured or allowed a
principal deferment under the State Bank of Pakistan’s (SBP) Debt Relief Scheme. Annual trends show
a steady rise in commercial banking NPLs since 2017. In 2020, NPLs from the power, cement and
agriculture segments were the top three contributors to NPL stock. Loans to the corporate sector comprise
roughly 70 percent of NPL stock in Pakistan.
2. In 2020, the after-tax profits of the banking industry (listed commercial banks) increased to 34
percent compared with 21 percent in 2019. This was partly on account of general economic relief
measures taken by the government and the SBP in response to COVID-19. For the banking sector, these
included, a 625 basis points cut in the policy rate, a temporary economic refinance facility (TERF),
providing long-term concessionary refinancing at 5 percent for manufacturers and exporters, a Debt
Relief Scheme offering principal deferment and restructuring of PKR 911 billion worth of loans (about
10 percent of outstanding gross advances as of 31 March 2021). The net interest income of banks
increased by 25 percent, while non-mark-up income jumped by 16 percent mainly due to strong capital
gains in Treasuries, marking an annual increase of roughly 11 times. Compared with strong growth in
bottom lines in 2020, the growth of loans and advances was lack-luster at only 2 percent.
3. In Q1 of 2021, NPLs increased by PKR 22 billion to PKR 850 billion. Based on the financial results
for the nine -month period ending 30 September 2021, there has been a better-than-expected recovery of
loans, evidenced by some of the banks contributing large gross advances booking 75 percent higher
provision reversals in this period when compared with the same period last year.
4. The NPL reporting framework (comprising SBP circulars and Prudential Regulations (PRs)) lacks
provisions necessary to enhance the quality, transparency, and standardization of the NPL data
reported by banks. Enhanced NPL reporting improves banks supervision, increases investor confidence
and reduces pricing gaps caused by information asymmetries or uncertainties. Comparisons with the
European Banking Authority’s (EBA) guidelines on NPLs and reporting templates reveal areas of focus
for Pakistan.
i. SBP’s NPL reporting framework does not require reporting of any operational, qualitative
or non-financial information, such as a bank’s NPL governance model, the operating model of
its special asset management function, or its NPL strategy. This information is necessary, especially
in the case of high NPL banks, for better bank supervision and for external parties to gauge the
robustness of a bank’s NPL remediation infrastructure.
ii. The SBP’s NPL regulatory reporting requirements are standardized for all commercial
banks in Pakistan and there is no concept of proportionality which is commonly seen in the
Europe (EBA and ECB guidelines enforce enhanced regulatory requirements for banks with
infection ratios greater than 5 percent). Proportionality in supervisory standards of NPL reporting
is used to set enhanced NPL reporting and disclosure requirements for high-risk banks (for example
with NPL stocks above a certain threshold) while keeping the burden of compliance to a minimum.
11
iii. In the SBP’s NPL reporting framework there are no voluntary NPL reporting requirements
like the EBA’s NPL transaction or screening templates. These templates provide a framework
for granular and portfolio level reporting of NPLs which can be used for due diligence by potential
NPLs investors. The standardization helps transparency and comparability of reported information
and enables more transactions in the secondary NPL market. Greater detail in the disclosed
information lessens information asymmetries and helps banks selling NPLs to achieve higher
prices.
iv. The SBP’s NPL reporting framework requires little information on forborne exposures (loans
whether performing or non-performing which have been restructured, rescheduled or have been
provided any other form of concession). An all-encompassing definition, classification, treatment,
and reporting measures for forborne exposures does not exist. There are no requirements to report
or disclose detailed information on credit quality of forbearance, the quality and effectiveness of
forbearance, ageing profile of forbearance, and classification of performing and non-performing
forborne exposures. In Europe, these requirements are part of the supervisory standards.
v. The SBP’s NPLs reporting templates do not require information on fair value or market
value of NPLs or collaterals. Reporting and disclosing this information is important to facilitate a
secondary market for NPLs.
vi. Further shortcomings in relation to Basel guidelines on the treatment of problem assets exist:
a. No clear guidance on exposure-basis (debtor approach) classification in the case of multiple

loans to a borrower or a borrower in a group.
b. Terms such as ‘Concession’, ‘Unlikeliness to pay’, and ‘Financial difficulty’ are undefined.
c. Reporting and treatment measures for loans or exposures with multiple restructurings
(forbearance measures) are not defined.
5. There is a need for consistency in the SBP’s write off guidelines with those in International
Financial Reporting Standard 9 (IFRS 9). As per SBP requirements and internal risk management
policies, banks only consider write offs when all other forms of recovery and resolution have been
exhausted. An unsolicited write off does not affect a bank’s legal right to recover. The SBP requires banks
to comply with time based and other administrative criteria before a write off can be approved. By
comparison, the write off requirements under IFRS 9 (applicable from 1 January 2022) are simpler and
trigger when an entity has no reasonable expectations of recovering either all or a portion of a financial
asset. A comparison of the two guidelines suggests that under the SBP requirements, banks may write off
loans that are still subject to enforcement activity. Banks can recover amounts they are legally owed in
full, but which have been partially or wholly written off due to no reasonable expectation of recovery.
However, under IFRS 9, without clear supervisory guidance, it is difficult for banks to demonstrate a lack
of reasonable expectation to recover assets in cases of ongoing enforcement activity, which may create
impediments for banks in booking write offs.
6. In contrast to private commercial banks, writing off loans is extremely difficult for public sector
banks. For public sector banks there is negative public opinion about writing off loans. This has branded
written off loans as loans not granted in good faith and which are therefore a waste of public money or a
result of corruption.
7. When compared with similar practices and frameworks in Europe, Pakistan’s collateral valuation
framework is deficient. These factors affect the quality and accuracy of collateral valuations used
or performed by banks and could be presumed to create gaps between market values (realized)
and bank values of collateral. They may also result in sub-optimal recoveries against NPLs and affect
investor confidence in the transparency and integrity of the NPL transactions. For banks in Pakistan,
guidance related to collateral valuation and the conditions and use of external valuators is provided in the
12
Prudential Regulations (PRs) issued by the SBP. Further, the criteria for the qualification, performance
management, enlistment or de-enlistment, categorization and reporting of external valuators for banks is
provided by the Pakistan Banks’ Association (PBA). The mandate to govern valuators lies with the
Securities and Exchange Commission of Pakistan (SECP) under the Companies Act, 2017, however, for
all practical purposes the PBA has continued to discharge these responsibilities to the extent they relate
to banks and other SBP regulated entities since the Act was legislated.
i. The current PBA guidance or PRs on valuation only applies to situations where banks are
required to use external valuators.1 In situations where banks can perform valuations internally
or as per their discretion, there are no minimum standards for the independence, qualification, and
experience of banks’ internal appraisers (staff) or the methodologies to be used by banks in
carrying out such valuations.
ii. Neither the PRs and the PBA guidance provide much guidance on the selection and use of
generally accepted valuation methods or international valuation standards, such as those
published by International Valuation Standards Council (IVSC), and their fitness for asset types
or collateral valuation. By comparison, the collateral valuation practices observed in Europe
indicate that banks use a variety of market, income, and cost-based approaches. The ECB guidance
on NPLs is clear on the supervisory expectations for the use and suitability of valuation methods
and other aspects of collateral valuation for banks.
iii. The PBA guidance for valuators does not mandatorily require valuators to be members or
be registered with any international valuation standard setting body, such as IVSC or the
Royal Institution of Chartered Surveyors (RICS), or to acquire such status within any number of
years of registration.
8. There are shortcomings in the existing taxation framework which can create tax disincentives in
NPL transactions for investors and banks by increasing the price gap between NPL buyers and
sellers. The increase in the price gap may be caused by the taxation framework which delays and limits
provisioning expense benefits or write offs available to NPL buyers and sellers.
i. The income and profits of a banking company in Pakistan are taxed under the provisions of the 7th
Schedule of the Income Tax Ordinance, 2001 (ITO). The primary provision (subject to some
exceptions) requires banking profits to be taxed as per the annual financial statements that banks
publish and file with the SBP. The rules of allowance or deductibility of provisions are:
a. Provisions for advances and off-balance sheet credits for consumer and SME portfolios (gross
of any reversals) classified as ‘Loss’ are allowed at a maximum of 5 percent of the total advances
for a bank as per PRs subject to an external auditor’s certificate.
b. Provisions for advances for all categories of advances and off-balance sheet credits classified
as ‘Loss’ except for consumer and SME financing, gross of any reversals, are allowed at a
maximum of 1 percent of the total advances for a bank subject to an external auditor’s
certificate.
c. Provisions exceeding 1 percent or 5 percent for specific portfolios may be carried forward by
banks.
ii. Current tax law does not allow for a deduction of provision until the loan has reached a stage where
it is classified as ‘loss’ which would be at least one year from when it was first classified as an NPL.
For example, if additions to the ‘loss’ categorized NPLs of a bank for a year stand at 3 percent of its
gross advances, only one-third of it (by application of the 1 percent limit) may be claimed in that
year as a tax allowed expense despite that in accounting books and as per the prudential regulatory
framework, the entire 3 percent is fully provided for (with some exceptions). It is common for banks
in Pakistan to have these carried-forward pools of disallowed provisions. Despite this common
practice, the tax or the accounting framework does not prevent a sale of NPLs below book value. In
1
State Bank of Pakistan, (2015) Prudential Regulations for Corporate/Commercial Banking (Risk Management, Corporate
Governance and Operations) https://www.sbp.org.pk/publications/prudential/PRs-Jan-2015.pdf
13
this case, if the tax authorities interpret the sale of NPLs as a full and final settlement against a
particular loan, that may qualify as a loss realization event and result in an accelerated allowance of
actual gains or losses which would otherwise have remained part of the carried forward pool.
iii. The SBP has issued specific PRs for Corporate and Commercial Banking, Agriculture Finance,
Housing Financing, Infrastructure Finance, Consumer Finance, Microfinance and SME Finance,
however, the ITO only provides specific deductibility criteria for SME Finance and Consumer
Finance, leaving all other classes of advances to be treated in the blanket of 1 percent deductibility
limit or to be adjusted to fit the definition of consumer or SME.
iv. Reversal of provisions, to the extent they relate to loans which are ‘loss’ categorized, are treated as
income in the fiscal year in which the reversal occurs on the basis that these were tax deductible.
Practically, it is common for tax authorities in Pakistan to pick up provision reversal transactions for
previously disallowed provisions, designate them as income and re-determine a bank’s tax liability,
causing double taxation. These are often successfully challenged by banks in Income Tax Tribunals
but not without considerable time and effort.
v. Under section 29 of the ITO, advances written off by a financial institution are allowed as a deduction
with the condition that ‘there are reasonable grounds for believing that the debt is irrecoverable’.
Tax authorities demand extensive evidence and documents to allow write offs (even direct write
offs), disregarding the multiple regulatory, policy and third-party checks that banks must conduct
before booking a loan write off. Tax law should be updated to rely on the regulatory and third-party
checks and introduce loan write off provisions which are less cumbersome for banks.
vi. The ITO (including the 7th Schedule) does not specifically cover the tax implications of an NPL
portfolio sale, transfer, securitization, fair valuation, and deductibility or otherwise of gains or losses
arising due to such transaction. When NPL portfolios are sold or transferred to Special Purpose
Vehicles (SPVs), these transactions might not meet the criteria of a true sale or an outright sale and
can be disregarded by tax authorities as tax liabilities. The ITO empowers a commissioner to
recharacterize a transaction or an element of a transaction that is considered part of a tax avoidance
scheme.
9. In Pakistan, NPL resolution including the use of various NPL resolution strategies (except for sale
or securitization) is usually via internal bank-led model. All commercial banks have in-house special
asset management or remedial asset management units which are mandated to resolve NPLs. Large scale
professional debt servicing companies for corporate loan portfolios do not exist in Pakistan. In the
secondary market, Pakistan Corporate Restructuring Company Limited (PCRCL) was established in
2019. PCRCL is licensed by the SECP and is empowered to acquire, restructure, reschedule and dispose
of NPLs and enter into agency and trust arrangements. Its shareholders include 10 commercial banks.
The two main challenges it faces include the requirement for additional capital, and the enactment of
legal amendments in its empowering statute, which are pending before Parliament and are expected to be
promulgated soon. The SECP has indicated it is being approached by different groups of investors with
interests in setting up additional CRCs.
10. The primary strategies deployed in Pakistan for the resolution of NPLs are recovery through court
proceedings and debt restructuring. Key legal developments for the secondary NPL market have been
enacting the CRC Act and Corporate Rehabilitation Act, 2018, to facilitate corporate restructuring and
rehabilitation, and establishing PCRCL, the first corporate restructuring company in Pakistan.
11. There have been few securitization transactions in Pakistan even though the legal framework for
securitization (including the Companies (Asset Backed Securitization) Rules, 1999 and the
circulars issued by the SBP) has been in place for almost two decades. Developing a secondary market
through securitization has not received traction recently. The legal framework for securitization enables
a secondary market, however it is impeded by, underlying issues relating to the quality of NPLs, NPL
recovery, tax allowance of provisions or losses in an NPL sale transaction. Legal requirements which
may also have commercial implications for securitization transactions include the stamp duty or
registration requirements, capitalization requirements for the SPV under the capital markets framework,
and aligning ‘true sale’ requirements under the SBP circulars with accounting true sale standards.
14
12. The chronic issues in Pakistan’s recovery system including court and litigation processes are the
primary impediments to NPL resolution. Recovery laws in Pakistan are evolving and despite a series
of laws enacted to address delays and offer fast track recovery avenues to banks and DFIs, disposal of
recovery cases remains a time-consuming process. Capacity building and procedural reforms remain a
key concern for timely NPL resolution.
13. Enforcing security interests out of court is challenging in Pakistan. For twenty years, Section 15 of
the Financial Institutions (Recovery of Finances) Ordinance, 2001 (which was intended to allow
banks and DFIs to foreclose on mortgages without Court intervention) has faced constitutional
challenges. The provision became effective after legislative amendments in 2016 were upheld by the
court. The Financial Institutions (Secured Transaction) Act, 2016 permits out of court enforcement for
security interests over movable property only for possessory security interests, such as pledge, title
retention arrangements and lien over deposit accounts. Unlike mortgages over immovable properties, the
modalities and procedures for enforcing possessory movable security interests out of court is not
prescribed.
14. The Corporate Rehabilitation Act, 2018 remains untested. The law is perceived as creditor friendly
which may have disincentivized debtors from invoking rehabilitation protection. The legislation
lacks an automatic stay on all proceedings against a debtor, its shareholders, or guarantors at the time a
debtor invokes protection under the Act.
15. Legal and regulatory frameworks related to security arrangements can be an important factor in
making the NPL market an attractive sector for investment. In Pakistan, reforms to develop a regime
to govern collateral arrangements and to align with international best practices have been introduced. The
framework for security interests over movable property and registry for non-corporate entities was
recently introduced through the Financial Institutions (Secured Transactions) Act, 2016 and amendments
further align the Act with the United Nations Commission on International Trade Law (UNCITRAL)
principles on secured transactions. Other areas of the legislation still require consideration.
i. The registry for immovable assets under land laws has been in place in Pakistan for a
considerable time, and it continues to be a system of manual registration and verification. The
land titling system is largely based on the traditional deeds registration system, where a sale deed
serves as the document of title, and it must be registered manually with registrar of the locality where
the immovable property is situated. Issues with the land titling system and ensuing disputes may
hamper and delay the enforcement of security interests over immovable property (either through or
outside of court proceedings). A centralization and digitization process for land records has begun
in some provinces. For security interests over immovable property of corporate entities, a centralized
and digitized registry of security interests is maintained by the SECP.
ii. As part of ensuring compliance with Financial Action Task Force (FATF) requirements, trust
laws have recently been overhauled which mean syndicated security arrangements under trust
structures (which are common in Pakistan) must be registered annually with the relevant
government agency. This could make syndicated security structures administratively cumbersome
and inefficient and, may have implications for the servicing of NPLs acquired by buyers and for
pricing NPLs in the primary and secondary markets.
16. Banks in Pakistan are generally open to considering secondary market NPL resolution options.
Based on discussions with the Heads of Special Asset Management commercial banks of varying sizes
and NPL portfolios, it is understood that banks are generally satisfied with the capacity and expertise of
their in-house remediation units. They consider legal impediments as the main challenge for recovery
and are open to exploring secondary market transaction options such as with PCRCL, particularly for
loans involving multiple creditors. It may be difficult for Islamic Banks to transact with any potential
NPL buyer (including PCRCL at this stage) that does not offer a shariah compliant (Islamic) transaction
structure.
15
17. Assuming significant improvements are made in the legal, taxation, prudential and related, there
are two possible NPL transaction models. These include company restructuring-based models such as
ARCs (India), government supported securitizations like the GACS (Italy) or bad banks such as
Danaharta (Malaysia) and Sareb (Spain). IFC’s investment preferences, including having a risk-reward
based proposition, requiring a servicing or distressed asset partner, avoiding asset comingling risk, having
a clear exit strategy, separating ownership & servicing of portfolios, and having some reserved powers
such as the right to veto portfolio purchases, were also considered.2
i. The first possible investment option is for PCRCL to operate as an asset management company 3 by
setting up funds (trusts). These funds can acquire NPL portfolios from banks. IFC and other private
investors can fund these acquisitions by purchasing units issued by PCRCL funds. In this model
NPLs can be serviced by PCRCL against a servicing fee. For implementation, this model requires
pending amendments to the CRC law to be enacted which will allow PCRCL to set up funds.
ii. The alternate option is for IFC to invest in the equity of PCRCL in its current form. PCRCL can
purchase NPLs and keep them on its own balance sheet. These NPLs can be serviced by PCRCL
itself or by a third-party servicer. Since third-party servicing companies for corporate loans do not
exist, a new servicing company would be set up by PCRCL and could operate as servicing platform
or a captive servicing company. In this case, IFC will be paid through dividends instead of collecting
shares from direct portfolio recoveries. This model does not require a legal amendment to implement.
18. An action matrix summarizing the key challenges, recommendations, and their relevant stakeholders
listed by priority and difficulty is presented below. It catalogs key actionable items and recommendations
from the report.
2
It is important to note that these options are presented as possible NPL resolution models and any investment
decisions by IFC will be based on its sole discretion and subject to IFC’s internal policies, management and
board approvals.
3
The asset management company (AMC) is used in the general sense to describe a category of NPL investor
companies. It does not refer to an AMC as may be defined in the NBFC regulatory framework of the SECP.
16
Action Matrix –Constraints and recommendations to improve NPL management and create a secondary NPL market in Pakistan
S. Constraints / Impediment Recommended Action Difficulty Priority / Outcome Responsibility

No. Time4
PRUDENTIAL/ REGULATORY REPORTING

1 Shortcomings in the NPL reporting Enhance the NPL reporting framework for Low Medium Better regulatory SBP
framework that prevent reporting of banks in Pakistan in line with EBA’s supervision; pre-empting
qualitative, other granular and FINREP framework particularly with (18-36 rising infection ratios,
portfolio level information by banks respect to reporting qualitative information months) facilitating NPL
for benefit of the regulator and and new reporting templates similar or transactions
potential NPL investors. comparable to EBA’s (voluntary)
transaction templates.
2 Reputational risk and exposures for Introduce legislation that ensures steps High High Public sector banks can Relevant banks,
public sector banks preventing them should be taken through advocacy and free up liquidity and Ministry of
writing off loans even when they meet guidelines that prevent write off abuse by (within 24 regulatory capital for new Finance, key
regulatory and internal policy criteria. public sector banks. months) loans, realize tax benefits, political
and improve their financial leadership
positions.
4
Time is only provided for those recommendations where a reasonable estimate could be arrived.

No. Time4
3 No requirements and guidance on Define accepted valuation methods by type Low High Accurate valuations help SBP, SECP and
acceptable valuation methods for of asset in the PBA guidelines for reduce price gaps PBA
collaterals, potentially affecting the valuators (within 18 (premiums) and help
quality of valuations and resulting in a months) secondary market
possible price gap. transactions.
4 No requirement for external valuators Include minimum standards as well as Medium Medium (24- Accurate valuations SBP, SECP,
to be members of international incentives for valuators to acquire 36 months) improve balance sheet PBA and
valuation bodies, potentially affecting memberships of known international transparency through Valuation firms
the quality of valuations and a price bodies in the PBA guidelines for valuators correct classification and
gap. provisioning of loans,
reducing price gaps
encouraging secondary
market transactions.
5 No guidance for banks on Add guidance on independence, Low Low Accurate valuations SBP, Banks
independence, qualification, and qualification, experience, and improve balance sheet
experience of banks’ internal methodologies of internal valuating bank transparency through
appraisers or the methodologies to be staff to SBP’s prudential regulations. correct classification and
used when performing valuations Initially, this may be introduced for provisioning of loans,
internally. voluntary adoption. reducing price gaps, and
encouraging secondary
market transactions.
6 No specialized private servicing Introduce regulatory and tax incentives to High Medium Improves the ecosystem SECP
companies for corporate loans. develop the private servicing market and and infrastructure of the
introduce minimum operating standards (24-36 secondary market,
for private servicers to encourage banks to months) improves recoveries on
avail their services. portfolios, incentivizes new
investors, improves risk
management for NPL

No. Time4
investors.
7 Administrative and time-based criteria Simplify write off criteria to remove time Low High Benefits to banks in freeing SBP
in SBP’s write off guidelines, which limitations and certain procedural up liquidity and regulatory
can create mild challenges when requirements, approvals, or certifications. (24-36 capital for new loans,
identifying write offs. months) realizing tax benefits,
Under IFRS 9, a loan may be written off improving their financial
No guidance for recognizing write only when there is no reasonable position.
offs in line with IFRS 9. expectation of recovery. Issue explanatory
guidance to clarify that ongoing
enforcement activity by a bank would not
be deemed as ‘reasonable expectation to
recover’, so that both prudential and
accounting requirements are aligned.
8 No proportionality principle in SBP's To actively monitor and pre-empt rising Medium Medium Better regulatory SBP
prudential framework to enforce infection ratios for each bank, introduce supervision and pre-
enhanced regulatory requirements on enhanced regulatory requirements for (24-36 empting rising infection
high NPL banks. banks with infection ratios above a certain months) ratios.
threshold.

No. Time4
9 No definition and framework in Update prudential regulations with clear Medium Medium Better regulatory SBP
prudential regulations to cover definitions of these terms and as supervision; and pre-
forborne exposures, unlikeliness to appropriate, the regulatory and external (24-36 empting rising infection
pay, concessions and financial reporting templates for banks including months) ratios
difficulty as described in the Basel their financial statement disclosures.
guidelines on the treatment of
problem assets.
10 Absence of 'debtor-based' approach in Update the classification and provisioning High Medium Improved disclosures and SBP
the prudential framework as described requirements for all categories of loans third-party confidence
in Basel guidelines on problem assets. covered in various PRs to follow a debtor- (24-36 (investors), improved credit
This potentially results in a lack of based approach so that exposures are months) risk management.
classification for performing classified at borrower level and not facility
exposures of non-performing level.
borrowers.
11 The banks participating in a Revise e-CIB reporting Low High Strengthens NPL resolution SBP
securitization transaction should not mechanisms and furthers
hold any share capital in the SPV development of primary
(except in certain cases involving and secondary NPL market.
residential and commercial mortgage-
based securities). Third parties are
reluctant to act as shareholders of the
SPV, primarily because of the
exposure to negative e-CIB reporting
at a group level on account of any
default by the SPV.
TAXATION

No. Time4
12 Restrictive deduction limits for loan 1. Realizing the original objective of the High High Encourages timely Ministry of
loss provisions taken in respect of introduction of the 7th Schedule in the ITO recognition of provisions, Finance, FBR
regulatory requirements in the 2001, recognizing and allowing loan (within 24 seen as strong enabler for
taxation framework which delay provisions in the 7th Schedule should be months) banks as well as NPL
and/or limit the taxation benefits that harmonized with Prudential Regulations buyers (investors), reduces
should be available to banks when and the accounting framework. potential price gaps.
recognizing NPL provisions.
2. The revision of limits and allowable
provision categories in the tax framework
should allow timely deduction of
provisions taken as per regulatory
requirements given the likely un-
collectible cash flows in each of the
categories.
13 The requirement of having 'reasonable To simplify the taxation of write offs for Medium High Encourages timely Ministry of
grounds for believing that the debt is banks, it should be brought in the ambit of recognition of write offs, Finance, FBR
irrecoverable’ to be able to deduct 7th Schedule of the ITO by reducing the (within 24 seen as a strong enabler for
written off loans under the taxation scope of section 29. As part of a broader months) banks as well as NPL
framework creates an administrative harmonization effort, the 7th schedule be buyers (investors), reduces
hindrance for smooth allowance of aligned with the prudential and accounting potential price gaps.
expenses (write offs) already booked, frameworks applicable to banks. This will
approved and audited by banks. allow both provisions and write offs to be
recognized in the same manner and
satisfying the same standards as required
by the prudential and accounting
frameworks, respectively.

No. Time4
14 No specialized tax framework for Introduce specialized provisions to the High High Adds certainty and Ministry of
NPL sale, transfer or securitization ITO that address the tax impacts of simplicity to structuring Finance, FBR
transactions including the absence of portfolio sale, transfer, agency or (within 24 NPL transactions and in
generally accepted fair valuation securitization transactions especially with months) turn enables a secondary
methods for NPL transactions and the respect to recognition of specialized legal market to be created and
discretionary powers of tax authorities structures and the use of generally attracts new NPL investors.
to re-characterize associated corporate accepted fair valuation models. These
structures on the premise of tax specialized provisions should allow timely
avoidance. deductions of any losses from the sale of
NPLs with simple rules closely aligned
with the accounting framework.
A more principle-based and less restrictive
tax framework will be more conducive to
developing a secondary NPL market.
LEGAL/JUDICIAL
15 Absence of provisions in the CRC Act Enact the pending legislative amendments High High Allows the creation of a SECP, Federal
necessary to enable PCRCL to set up that will allow PCRCL to set up funds and secondary market based on Government
funds such as an asset management operate as an asset management company. (within 24 best practice models,
company. months) improves risk management
for investors, improves
scalability and the
investment potential of
investment vehicles.

No. Time4
16 No Islamic financial instrument to NPL resolution models should consider High Medium Opens a new segment of SBP, PCRCL
allow for NPL transactions with developing and offering shariah compliant investors, improves (and any other
Islamic banks. variants of instruments for NPL (24-36 secondary market depth. future institute)
transactions to engage Islamic banks and months)
financial institutions.
17 Certain provisions of the Companies Enact fresh legislation (pending before the Low High Ensures consistency and Ministry of
Act are not aligned with the Secured Parliament) to effect the changes proposed brings certainty in rights of Finance/
Transactions Act. under the Secured Transactions buyers/investors of NPL. Legislature
Amendment.
18 Contrary to the UNCITRAL Model Enact fresh legislation to effect the changes Low High Alignment of legal regime Ministry of
Law on Secured Transactions, the proposed under the Secured Transactions with international best Finance/
Secured Transactions Act does not Amendment. practices and protection of Legislature
override contractual anti-assignment rights of NPL buyers and
clauses. investors.
19 The land title system in Pakistan is Complete the process of centralization and High High Risk mitigation and Ministry of
largely based on manually registered digitization of land title system across Protection of rights of NPL Finance/concern
sale deeds which is a time consuming Pakistan. investors and buyers. ed boards of
and unreliable process and does not revenue
Facilitates due diligence
facilitate public access to reliable land
records. during a pricing.
20 With the recent revamping of trust To facilitate creation and registration of Medium High Facilitates effecting NPL Federal
laws in Pakistan, creating and trusts for holding of security interests for transfers and servicing Government/SB
registering syndicated security financings and to align them with P
arrangements has become complex financing raised through the issuance of
and may ultimately have implications debt securities, the security trusts created
for servicing of NPLs acquired by as part of syndicate financings should be
buyers, and pricing of NPLs in the brought within the scope of “specialized
trusts” for which the registration

No. Time4
primary and secondary markets. requirements under trust laws have been
relaxed.
21 Capacity and administrative Increase the number of Banking Courts to High High Helps develop an effective Executive/Mini
constraints have caused a backlog of address the large number of cases. Dedicate recovery system and stry of Law,
pending cases and delays in some High Court benches to banking facilitates efficient NPL Justice &
conclusion of recovery proceedings. matters. Design a course to train judicial resolution. Parliamentary
officers and Banking Courts for capacity Affairs/PBA
building purposes. Prepare a list of qualified
eminent professionals to act as amicus
curiae.
22 No uniform guidelines for court Develop guidelines and manuals to make Low High Helps develop an effective Judiciary
procedures leads to delays in recovery proceedings efficient and which delineate recovery system and
proceedings. the life of a banking suit and procedures to expedites NPL resolution.
follow when dealing with an application for
leave to defend and other interlocutory
applications.
23 Applying CPC provisions to recovery Remove all references to CPC and recovery High High Helps develop an effective Ministry of
proceedings causes delays. proceedings should only be governed by the recovery system and Finance/
Recovery Ordinance. facilitates efficient NPL Legislature
resolution.
24 There is ambiguity on whether foreign Provide clarity through Section 2(a) of the High High Helps remove uncertainty Ministry of
FIs without a place of business in Recovery Ordinance where a foreign and facilitates NPL Finance/
Pakistan are permitted to invoke financial institution (regardless of whether it resolution involving foreign Legislature
jurisdiction of the Banking Courts. has a place of business in Pakistan) falls investors.
within the scope of the Recovery

No. Time4
Ordinance.5
25 In terms of Section 19(1) of the If the borrower fails to deposit the decretal Low High Helps develop an effective Ministry of
Recovery Ordinance, in practice, in amount within seven days, the attachment recovery system and Finance/
Sindh, automatic conversion to and sale of the assets [the list of which facilitates efficient NPL Legislature/Jud
would be submitted with the application for iciary
execution proceedings is not accepted, resolution.
leave to defend] should automatically
and a bank or DFI is required to apply follow. The same may be addressed through
for execution proceedings and is the judicial handbook.
subject to the time limitations.
26 There are considerable delays in Create specific guidelines relating to the Low High Helps develop an effective Federal
recovery proceedings on account of sufficiency of service of notice, recovery system and Government/Ju
borrowers challenging the decree on timeframes for decision on and facilitates efficient NPL diciary
the basis of improper or lack of proceedings in connection with leave to resolution.
service, delays in decisions on leave defend, disposal of suit, limitations on ex-
to defend, recording of evidence, parte ad-interim orders in appeal without
procedural formalities at execution adequate notice.
stage, as well as improper notice by
borrowers for the filing of appeals.
27 Despite the restrictive grounds spelt Include guidelines in connection with Low High Helps develop an effective Judiciary
out for granting injunctions against injunctive relief under Section 15(13) in recovery system and
out of court sale of mortgaged the judicial handbook and make them part facilitates efficient NPL
property under Section 15(13) of the of the judicial training program. resolution.
Recovery Ordinance, injunctive
orders are frequent.
5
In view of recent case law (Syed Itrat Hussain Rizvi v. Tameer Micro Finance Bank Limited through Attorney and another (2018 CLD 116 [Sindh] and judgment of the Lahore High Court in Writ Petition No.5591 /2018
(Muhammad Tuseef and 4 others vs. The State Bank of Pakistan and 30 others), microfinance banks do not fall within the definition of ‘financial institution’ for the purposes of the Recovery Ordinance. Albeit outside the scope
of this Report, an amendment to this effect may also be considered.

No. Time4
28 A specific process for out of Court It may be clarified that Section 16(3) of the Medium High Facilitates out of Court Federal
enforcement of security interests over Recovery Ordinance permits recovery/sale NPL resolution and Government
movable property has not been of movable property at any stage and contributes towards
prescribed and for all practical without the need for any order of the developing an NPL market.
purposes, enforcement is only availed Banking Court and procedure and
under an order of the Banking Court. modalities may be prescribed for out of
Court recovery/sale of movable property
subject to/in conjunction with the Secured
Transactions Act.
29 A consolidated framework for Capture all laws, procedures, and modalities High High Improves certainty and Legislature/Fed
company insolvency and non- in connection with corporate insolvency and effectiveness in the NPL eral
corporate entities does not exist. Even rights of secured/unsecured creditors under resolution mechanisms and Government/S
a consolidated regime, establishing a
for companies, the insolvency regime furthers development of ECP
corporate insolvency recovery mechanism
is spread across multiple laws. involving decisions to either restructure or primary and secondary NPL
else liquidate the company. markets.
Further, all companies, partnership firms,

proprietorship firms may be brought within
the fold of this single insolvency
framework.
30 The official liquidator is required to be Create training programs and handbooks Medium High Improves certainty and Judiciary/SECP
appointed from the list of provisional concerning liquidation procedures and effectiveness in the NPL
managers and liquidators maintained modalities to build capacity. resolution mechanisms and
by the SECP. However, based on furthers development of
stakeholder feedback, liquidation primary and secondary
proceedings are prone to delays, and NPL markets.
there appears to be a need for capacity
building and training for liquidators.

No. Time4
31 Despite a heavy focus on creditor rights Decide whether the Corporate High High Improves certainty and Legislature/SE
and the Corporate Rehabilitation Act Rehabilitation Act should be reformed to effectiveness in the NPL CP
being in the field for over three years – encourage defaulters to exercise resolution mechanisms and
the framework has failed to gain protections available under the Act. A key furthers development of
traction. amendment to consider is to provide for an primary and secondary NPL
automatic stay on all proceedings against a markets.
debtor, its shareholders, or guarantors at
the time the defaulter invokes protection
under the Act.
32 There has been some legal The matter may be addressed through Medium High Makes the NPL resolution Provincial
controversy as to whether stamp duty appropriate provincial notifications, like strategy cost effective and Governments
is payable on the transfer of assets the ICT notification exempting payment of furthers development of
pursuant to schemes sanctioned by stamp duties. primary and secondary NPL
High Court/SECP following some markets.
judicial precedents.
33 The ‘true sale’ standard under the Some limited recourse should be permitted Low High Strengthens NPL resolution SBP/Federal
SBP Circular, applicable where banks such as where the originator breaches a mechanisms and furthers Government
and DFIs are originators, is more warranty that was relied upon by the SPV development of primary
stringent when compared with to purchase the NPLs. For example, if the and secondary NPL
international accounting standards, as originator warrants as to the accuracy of markets.
no recourse against the originator is past defaults and this turns out to be
permitted. materially incorrect, some recourse against
the originator should be permitted. The
extent of such recourse should fall within
the domain of the relevant accounting
standards to determine whether a particular
sale could be accorded an off-balance
sheet treatment in the hands of the

No. Time4
originator.
34 Under the SBP circular relating to Relax these requirements in relation to a Low High Strengthens NPL resolution SECP/SBP/PS
securitization, the ABS needs to have securitization involving NPLs. Clarify the mechanisms and furthers X
a minimum credit rating of ‘A’ and be ambiguity under the SECP Securitization development of primary
listed. Further, regulatory Rules, through amendments to confirm and secondary NPL
compliances are prescribed in PSX that listing is not a mandatory requirement. markets.
regulations which may be an
impediment in development of NPL
market.
35 High stamp duty and registration costs All provinces should issue notifications like Medium High Strengthens NPL resolution Provincial
may be an impediment in the the ICT notification to exempt or relax the mechanisms and furthers Governments
securitization of NPLs. payment of stamp and registration costs in development of primary
connection with securitizing NPLs.
and secondary NPL
markets.
36 Various subordinated legislation and Medium High Strengthens NPL resolution Legislature/SE
regulatory measures are pending Following passage of the CRC Act mechanisms and develops CP/Federal
issuance t which are necessary for amendment, the Federal Government will further investment Government
need to issue a notification to set up a
making the CRC Act an effective opportunities for NPL
Corporate Restructuring Board. To facilitate
NPL restructuring regime. and regulate the asset management structure investors/buyers.
proposed under the amendments, the SECP
will need to develop a framework within the
rules and regulations of the Corporate
Restructuring Companies Act, 2016.
A further amendment will be required to
determine whether a financial institution
should be permitted to control a CRC.

4. PAKISTAN NPL MARKET OVERVIEW
4.1. The Structure of the NPL Market in Pakistan & NPL Market Players
There are two types of financial institutions in Pakistan. The financial institutions which are regulated by the State
Bank of Pakistan (SBP), including commercial banks, microfinance banks, specialized banks, and DFIs. The other
type is financial institutions which are regulated by the Securities and Exchange Commission of Pakistan (SECP)
and are commonly called non-bank finance companies, including, leasing companies, mutual funds, and investment
finance companies (deposit taking and non-deposit taking).
Of all these FIs, SBP regulated commercial banks and other FIs are the main players in the NPL market. A detailed
analysis of the NPL portfolio trends, the proportions held across various banks and ranking of major NPL market
players in Pakistan is in Section 4.2 of this report.
NPL resolution takes place through in-house functions in banks. A secondary market is virtually non-existent
(except for PCRCL). All commercial banks have asset management or remedial asset management units which are
mandated to resolve NPLs transferred to them using restructuring, litigation, debt-asset swaps, out of court
settlements or other similar tools. When resolving these NPLs, it was understood that some banks contracted
individuals or third parties for asset identification or coordination with local land revenue offices, but they do not
use any debt servicing companies like those operating in European NPL markets.
PCRCL has been licensed by the SECP under the CRC Act. Its shareholding is held by ten financial institutions —
Allied Bank Limited, Bank Alfalah Limited, Bank Al Habib Limited, Faysal Bank Limited, Habib Bank Limited,
Habib Metropolitan Bank Limited, MCB Bank Limited, Meezan Bank Limited, National Bank of Pakistan, and
United Bank Limited.
The CRC Act empowers any licensed CRC for the acquisition, restructuring, rescheduling and disposition of NPLs
and various related matters, and equips them for dealing with corporate NPLs.
For general services related to tax, legal or transaction advisory and with respect to NPL transactions or other
structured finance deals, the market is concentrated with only a few accounting and legal firms participating. Table
1 contains a list of players and stakeholders in the corporate NPL market.
TABLE 1: STAKEHOLDERS FOR CORPORATE NPLS
S.
Stakeholder Category for Corporate NPLs Description
No.
1 Private Commercial Banks These are various categories of commercial banks
2 Public Commercial Banks which are potential NPL sellers. Commercial
Banks, among others, are regulated by the SBP. A
3 Islamic Banks (private commercial)
list of banks in each of these categories is in Annex
4 Specialized Banks B.
5 Foreign Banks
These are non-deposit taking financial institutions
regulated by the SBP and have corporate loans in
their banking book. As of 31 December 2020, total
6 Development Finance Institutions (DFIs)
NPLs of DFIs stood at PKR 15.9 billion. (State
Bank of Pakistan, 2020).
29
S.
No.
Among other NBFCs, there are non-deposit taking
leasing companies and investment finance
companies which deal in asset leasing, credit
guarantees and wholesale financing. The most
notable include Pakistan Microfinance Investment
Company (PMIC), IfraZamin (infrastructure
7 Non-bank finance companies (NBFCs)
guarantee company), Pakistan Credit Guarantee
Company and Orix Leasing. NBFCs’ volume of
lending to the economy is limited, and their
holdings of non-performing assets are also
minimal.
SECP regulates companies and the capital market

in Pakistan. Banks and DFIs are additionally
governed by the SBP. The Federal Board of
8 Regulators Revenue is the tax authority for federal income and
sales taxes while provincial sales taxes are
governed by provincial revenue boards.
The primary credit bureau in Pakistan is the SBP

owned e-CIB. Two other licensed private credit
bureaus also operate in Pakistan – Datacheck and
Tasdeeq – and there are two credit rating agencies
9 Credit Bureaus/Registry/Credit Rating Agencies
are functioning in Pakistan – Pakistan Credit
Rating Agency and JCR-VIS Credit Rating
Company.
These are companies offering collection, recovery,

asset tracking and repossession services mainly for
10 Debt Collection Companies (Servicers) consumer loans. A non-exhaustive list of these
companies based on web-searches is in Annex O.
In the agriculture sector and specific to electronic

warehouse receipts, Nayamat Collateral
Management Company offers financing, repository,
11 Collateral Management Companies
accreditation, and other similar services for
collateral management.
These firms offer financial valuation, due diligence,

capital raising, transaction structuring services, and
12 Transaction Advisory Firms other services generally associated with transaction
advisory.
30
S.
No.
The High Courts and Banking Courts at the district
level are key stakeholders in resolving NPLs, as all
cases related to default, liquidation, insolvency,
winding up, and restructuring are managed by these
courts.
13 Judiciary
The Pakistan Bar Council also plays a role in

resolving NPLs, and delays are generally caused by
frequent strikes in litigation proceedings.
All commercial banks and the top 10 commercials

banks and DFIs offer investment banking advisory
services especially with respect to capital market
transactions. Other stock brokerage houses such as
14 Investment Banking Advisory
Taurus Securities, Arif Habib Securities, BMA
Capital, IGI Finex, JS Global, KASB Securities and
Elixer Securities also offer these services.
Pakistan Stock Exchange is the exchange for

tradable debt and equity securities. It also provides
15 Capital Market listing regulations (in addition to SBP or SECP
regulations).
Insurance companies and asset management

companies are among the potential financial
services companies in Pakistan that could invest in
marketable securities.
As of June 2021, the insurance industry has total

assets of PKR 2 trillion (12 percent non-life & 88
percent life). The top five insurance companies in
Pakistan hold a combined market share of 85
percent of total industry assets.
As of June 2021, the mutual funds industry has

16 General Investors (Potential) total assets under management of PKR 1 trillion.
The top five asset management companies in
Pakistan hold a combined market share of 25
percent of the total assets under management. The
asset classes are divided into equity, debt, money
market and other assets in the percentages of 24
percent, 24 percent, 42 percent and 10 percent
respectively.
Banks (although less preferred due to their loan

origination role) are also potential minority
investors.
31
S.
No.
Pakistan Corporate Restructuring Company
(PCRCL) is the only known buyer and servicer for
17 NPL Investors
corporate NPLs in Pakistan.
Pakistan Banks’ Association plays a role in

coordinating banking industry efforts for NPL
resolution. A list of approved valuator companies
18 Pakistan Banks’ Association and Valuators by type of asset specialization is available from the
Pakistan Banks' Association
(www.pakistanbanks.org.pk).
4.2. NPL Trends, Sectoral Composition and Other Financial Data

Based on available data, NPL sectoral distributions, volumes, and trends, across various financial institutions and
sectors of conventional and Islamic banking have been analyzed. This analysis is critical to ascertain the opportunity
size and investor potential of the NPL market in Pakistan, to determine suitable interventions, including new NPL
transaction models and the creation of a secondary NPL market.
Overview of Pakistan’s Banking Industry
Pakistan’s banking industry comprises of a total of 32 banks, including five public-sector commercial banks, four
foreign banks, 15 conventional banks, five Islamic banks in the local private sector, and three specialized banks.
The Islamic banking industry in Pakistan also includes Islamic banking windows operated by 17 conventional
banks (including public sector and specialized banks). A list of these banks is in Annex B.
Local private commercial banks account for approximately 77 percent of total banking assets, of which 67 percent
belong to private sector conventional banks and 10 percent to Islamic Banks. Private commercial banks are the
largest providers of credit, with an estimated total loan value of more than PKR 6.53 trillion in December 2020
(with conventional banks’ lending PKR 5.5 trillion and Islamic banking institutions lending PKR 1.02 trillion).
Based on total banking assets, the five public sector banks have a market share of 19 percent (lending approximately
PKR 1.6 trillion in advances), while foreign banks (licensed branches of foreign banks) and specialized banks have
a total share of 3 percent and 1 percent respectively. These specialized banks only have a credit portfolio of PKR
185 billion out of the total of PKR 8.2 trillion.
Table 2 details the share of credit market between different types of banks and Table 3 shows the credit portfolio
of Islamic Banking Branches of Public Sector and Private Sector Conventional banks.
TABLE 2: CREDIT MARKET SHARE OF DIFFERENT TYPES OF BANKS
Total Credit Market Market Market

Assets Portfolio Total share share (% share (%
Type Deposits Equity
(PKR (PKR Banks (% of of credit of
million) million) assets) portfolio) deposits)
Public Sector
4,761,786 1,575,708 3,664,602 362,070 5 19% 19% 20%
Banks
32
Private
Sector
16,884,264 5,506,264 12,485,446 1,228,392 15 67% 66% 67%
Conventional
Banks
Islamic
2,499,410 1,023,616 2,032,632 129,488 5 10% 12% 11%
Banks
Foreign
733,826 72,368 274,380 76,541 4 3% 1% 1%
Banks
Specialized
244,569 113,617 61,466 65,942 3 1% 1% 0.3%
Banks
Industry
25,123,854 8,291,572 18,518,525 1,862,433 32 100% 100% 100%
Totals
Source: Quarterly Compendium: Statistics of the Banking System, Financial Stability Department SBP, 2020
The difference in the total assets of the industry and the sum of equity and deposits represents other liabilities
such as borrowings from SBP and other banks, bill payables and general accruals.
TABLE 3: CREDIT MARKET SHARE OF ISLAMIC BANKING BRANCHES
Total Credit Market Market Market

Assets Portfolio Total share share (% share (%
Type Deposits Equity
(PKR (PKR Banks (% of of credit of
million) million) assets) portfolio) deposits)
Islamic
Banking
Branches of 1,770,037 857,424 1,356,329 117,571 17 7% 10% 7%
Conventional
Banks
Pakistan’s Economy and the Banking Industry
While the impacts of the Global Financial Crisis of 2008-2009, were felt around the world in varying degrees, its
effects on Pakistan’s economy were less adverse. Figure 1 shows that as average global GDP growth declined from
4.32 percent in 2007 to 1.86 percent in 2008 and then fell further to 1.67 percent in 2009, however, Pakistan’s GDP
grew by 1.70 percent in 2008 and 2.83 percent in 2009. One of the reasons for this growth is that Pakistan’s
economy is largely driven by domestic demand and its participation in global value chains is relatively limited
when compared with countries like India, Bangladesh, China, Malaysia, or Thailand. Table 4 illustrates an
observable decline in the export of goods and services to GDP ratio of these countries from 2008 to 2010 while
Pakistan’s ratio increased over the same time period.
FIGURE 1: GLOBAL GDP GROWTH VS GDP GROWTH OF PAKISTAN
33
100000 8%
90000
6%
80000
70000 4%
60000
2%
50000
0%
40000
30000 -2%
20000
-4%
10000
0 -6%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Pakistan's GDP (USD) 152.4 170.1 168.2 177.2 213.6 224.4 231.2 244.4 270.6 278.7 304.6 314.6 278.2 263.7
Global GDP (USD) 58059 63709 60437 66163 73480 75173 77332 79469 75234 76417 81327 86344 87608 84705
Global GDP Growth 4.32% 1.86% -1.67 4.31% 3.13% 2.52% 2.67% 2.87% 2.92% 2.61% 3.28% 3.03% 2.34% -3.59
Pakistan's GDP Growth 4.83% 1.70% 2.83% 1.61% 2.75% 3.51% 4.40% 4.68% 4.73% 5.53% 5.55% 5.84% 0.99% 0.53%
Global GDP (USD) Pakistan's GDP (USD) Global GDP Growth Pakistan's GDP Growth
Source: The World Bank, 2020
TABLE 4: EXPORT OF GOODS AND SERVICES AS A PERCENTAGE OF GDP
Pakistan India Malaysia Bangladesh Thailand China

2008 12% 24% 100% 18% 71% 33%
2009 12% 20% 91% 17% 64% 25%
2010 14% 22% 87% 16% 66% 27%
The banking industry in Pakistan has been stable and has grown steadily since 2008. As shown in Figure 2, deposits
have increased at an average annual rate of approximately 13 percent and capital adequacy ratios have consistently
improved from 12 percent to an average of 19 percent. Both these measures show that banks have had sufficient
liquidity and stability to grow. The infection ratios shown in Figure 3 have also been declining since 2011, showing
a relative improvement in asset quality.
FIGURE 2: DEPOSIT GROWTH & CAR
34
20
18
16
14
12
10
8
6
4
2
0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Deposit Growth % 18 9 13 14 15 17 14 11 13 14 10 10 12 16
Capital Adequacy Ratio % 12 12 14 14 15 16 15 17 17 16 16 16 17 19
Deposit Growth % Capital Adequacy Ratio %
FIGURE 3: ADR & INFECTION RATIO
80
70
60
50
40
30
20
10
0
200 200 200 201 201 201 201 201 201 201 201 201 201 202
7 8 9 0 1 2 3 4 5 6 7 8 9 0
Advances to Deposits Ratio % 70 75 68 62 54 52 49 48 46 47 50 56 52 45
Infection Ratio % 7 9 12 15 16 14 13 12 11 10 8 8 9 9
Advances to Deposits Ratio % Infection Ratio %
Despite the growth, the good performance and stability of the banking sector have not proportionately contributed
to the economy. As shown in Figures 4 and 5, not only has Pakistan’s Private Sector (domestic) Credit to GDP
ratio been consistently declining (from 28.6 percent in 2008 to 17 percent in 2020) its relative standing among other
regional economies is also among the lowest. In addition, Figure 3 shows the banking industry’s Advances to
Deposits Ratio has also decreased from 75 percent in2008 to 45 percent in 2020. Assessing these combined trends
shows the banking industry has continued channeling its liquidity away from private sector borrowers. Heavy
borrowing by the government is one of the primary reasons of private sector borrowers have been crowded out.
Further, in private sector lending, the pie is overwhelmingly dominated by corporate and commercial loans. Loans
to micro, small and medium enterprises account for very little of total banking advances in Pakistan. As a result,
micro, small and medium enterprises, resort to internal finance for working capital and capex needs (as these
enterprises are often collateral-deficient and lack documented financial records). The banking sector’s aversion to
lend to relatively riskier segments of the economy is caused by weak title, contract, and recovery laws, uncertainties
around loan write offs, unchecked government borrowing thresholds and stringent capital requirements (which
35
make it particularly difficult to lend to informal or semi-formal segments of the economy).
FIGURE 4: DOMESTIC CREDIT TO PRIVATE SECTOR BY BANKS (% OF GDP)
Domestic credit to private sector by banks (% of GDP) - Pakistan

35 28.6
27.7
30
22.6 21.2
25 18.7
18 16.8 16.4 17 18 17
20 16 15.4 15.3
15
10
5
0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Domestic credit to private sector by banks (% of GDP) - Pakistan

Linear (Domestic credit to private sector by banks (% of GDP) - Pakistan)
FIGURE 5: PAKISTAN’S RELATIVE STANDING IN CREDIT-TO-GDP RATIO
1981-90 1991-2000 2001-10 2011-18

Malaysia 80 Thailand 126 China 115 China 144
China 75 Malaysia 124 Malaysia 111 Malaysia 118
Thailand 59 China 94 Thailand 92 Thailand 111
Chile 51 S.Africa 60 S.Africa 69 Chile 77
S.Africa 50 Brazil 54 Chile 66 Nepal 67
Brazil 49 Chile 50 Egypt 48 S.Africa 67
Qatar 32 Indonesia 46 India 41 Brazil 63
Colombia 31 Qatar 39 Oman 37 Turkey 59
Egypt 27 Egypt 36 Qatar 37 Qatar 58
Pakistan 25 Philippi… 36 Brazil 37 Oman 58
India 24 Oman 31 Nepal 37 India 51
Argentina 24 Colombia 30 S.Arabia 35 S.Arabia 46
Indonesia 24 India 24 Philippines 31 Banglad… 44
Philippi… 23 Pakistan 24 Sri Lanka 3 Colombia 44
Sri Lanka 20 S.Arabia 22 Banglade… 31 Philippin… 41
Oman 20 Sri Lanka 22 Colombia 26 Sri Lanka 40
Turkey 18 Nepal 21 Pakistan 25 Peru 40
S.Arabia 16 Mexico 21 Turkey 2 Indonesia 32
Mexico 14 Argentina 20 Peru 24 Egypt 28
Banglad… 12 Turkey 19 Indonesia 23 Mexico 23
Nepal 10 Peru 19 Mexico 15 Pakistan 17
Peru 10 Banglad… 18 Argentina 13 Argentina 14
0 50 100 0 50 100 0 50 100 0 50 100150
36
Despite having one of the lowest GDPs in 2020 compared with peer countries (as shown in Figure 6), Pakistan
continues to benefit from growing Chinese investments, and Iran's return to international markets is projected to
enhance mutual commerce. The China-Pakistan Economic Corridor (CPEC), a 3,000-kilometer network of roads,
railroads, and oil and gas pipelines connecting Pakistan and China, is projected to boost Pakistan's economy until
2030. The 2019 bailout package from the International Monetary Fund targeting stability and structural reform
appears to be on track to address macroeconomic concerns.
FIGURE 6: COMPARISON OF PAKISTAN’S GDP TO PEER COUNTRIES
Comparison of Pakistan’s GDP to peer countries (USD Billions)

China
India
Brazil
Mexico
Indonesia
Turkey
S.Arabia
Thailand
Argentina
Egypt
Philippines
Malaysia
Bangladesh
S.Africa
Colombia
Pakistan
Chile
Peru
Qatar
Sri Lanka
Oman
Nepal
0 2000 4000 6000 8000 10000 12000 14000 16000
Five-year Performance of the Banking Industry
The banking industry has performed strongly over the past five years (from December 2016 to December 2020).
 Total banking assets increased from PKR 15.8 trillion to PKR 25.1 trillion (cumulative growth of 59 percent)
 Deposits rose from PKR 11.7 trillion to PKR 18.5 trillion, growing by 57 percent
 Net advances increased from PKR 5.5 trillion to PKR 8.3 trillion, a growth of 51 percent
 Investments jumped from PKR 7.5 trillion to PKR 11.9 trillion, growing by 59 percent
 Equity rose from PKR 1.4 trillion to PKR 1.8 trillion, growth of 38 percent
 Profit after Tax increased from PKR 0.19 trillion to PKR 0.24 trillion, growth of 29 percent
 Non-Performing Loans rose from PKR 0.6 trillion to PKR 0.83 trillion, an increase of 37 percent
Despite the COVID-19 pandemic, Pakistan’s banking sector achieved growth of 7.8 percent in 2020. Figure 7
provides a snapshot of the size of assets base and the net advances provided by the banking sector. After-tax profits
of the banking industry (listed commercial banks) increased by 34 percent (in 2019 they increased by 21 percent).
37
The increased profitability was primarily the result of various relief measures taken by the government and the
SBP. These included a 625 basis point cut in the policy rate, a temporary economic refinance facility (TERF)
providing long-term concessionary refinance at 5 percent for manufacturers and exporters, a Debt Relief Scheme
offering principal deferment and restructuring of PKR 911 billion worth of loans, approving PKR 18 billion of
financing facility enabling hospitals and medical centers to enhance their capacities, Rozgar Scheme to prevent
layoffs by financing wages and salaries of employees, increase in borrowing and lending limits for consumer and
SME financing, and some relaxations in regulatory capital limits. A detailed account of COVID relief measures for
corporate, commercial and consumer financing facilities is in Annex Q. On the back of these measures, net interest
income rose by 25 percent while non-mark-up income jumped by 16 percent due to strong capital gains in
Treasuries (an annual increase of roughly 11 times).
Under the Debt Relief Scheme,6 borrowers had an option to either defer their principal amount for up to twelve
months while continuing to service mark-up amounts or restructure their loans for more than twelve months
including adjustments (if any) to the mark-up amount. The principal deferment option was available for six months
up until 30 September 2020 and resulted in deferment of PKR 657 billion. The restructuring option lasted for one
year up until 31 March 2021 and resulted in restructuring worth PKR 254 billion of loans. According to the SBP,
the scheme preserved the solvency of more than 1.8 million borrowers and combatted temporary economic
disruptions by providing a combined relief worth PKR 911 billion. Corporate borrowers benefit the most from this
scheme closely followed by the borrowers of MFBs, contributing to 79 percent and 13 percent of the total relief
amount respectively. These forbearance measures constitute about 10 percent of the value of total outstanding gross
advances of PKR 9.1 trillion as of 31 March 2021.
In terms of health of the loans which were subject to the relief measures granted by the SBP (or where the borrowers
availed the benefits under the above schemes), quarterly results published by banks shows that the loans that were
subject to relief measures have showed a better-than-expected recovery. Some of the larger contributing banks in
terms of gross advances have consistently booked higher reversals in their provisions in the 9-month period ending
30 September 2021 when compared with the same period in 2020. Table 5 provides a snapshot of this with related
information on the state of recoveries published in banks’ financial statements.
TABLE 5: REVERSAL IN PROVISIONS AND ASSET QUALITY OF LOANS
Reversals in Reversals in
provisions against provisions against
Comments on asset quality published in the
Banks advances for 9 months advances for 9 months
financial statements
(1 Jan 2021 – 30 Sep (1 Jan 2020 – 30 Sep
2021) in PKR millions 2020) in PKR millions
The total provisions (on advances,

investments, other assets, off balance sheet
items) reduced by nearly 50 percent over nine
months in 2020, which included PKR 5.2
billion of COVID-19 related general
HBL 4,617 2,547 provision. The infection ratio fell from 6.3
percent in Dec 2020 to 5.8 percent in Sept
2021 and the specific coverage improved
from 88.9 percent to 91.6 percent over the
same period. Total coverage is maintained at
over 100 percent.
6
Only loans which were performing as on 31 Dec 2019 were eligible under the scheme
38
(1 Jan 2021 – 30 Sep (1 Jan 2020 – 30 Sep
Reflecting the economic environment

triggered by the COVID-19 pandemic and
previous portfolio weaknesses, the asset
NBP 2,449 4,035 quality of the bank came under considerable
pressure. As of 30 Sept 2021 NPLs were PKR
201.66 billion, being 17.7 percent higher than
2020.
The bank’s business in Pakistan recorded a

net provision reversal (net reversal arises
when provision reversal exceeds the provision
charge) of PKR 1.4 billion for nine months of
2021 versus a net provision charge (net
charge arise when provision charge exceeds
UBL 3,210 947
the provision reversal) of PKR 1.7 billion in
nine months of 2020. Asset quality was 5.7
percent in Sept 2021, improving from 6.3
percent in Dec 2020, while specific coverage
improved from 85.7 percent in Dec 2020 to
87.1 percent in Sept 2021.
Proactive monitoring and recovery efforts led

to a net provision reversal of PKR 294 million
in provision maintained against NPLs. While
the general loss reserve created by the
MCB 5,246 1,426
uncertainty surrounding COVID-19 was
reversed, by PKR 3 billion, the systematic
risks surrounding the economic recovery
receded and domestic activity resurged.
The bank continued its momentum towards a

low infection ratio and high overall coverage
ratio which stood at 2.6 percent and 93.9
ABL 869 405
percent respectively. Private sector credit
offtake stimulated as economic recovery
gained momentum.
The analysis of reversals in provision against

advances for 2020 and 2021 and related
qualitative information on asset quality shows
an overall improvement in the asset quality of
Total 16,391 9,360
loans and an increase of 75 percent in
provision reversals in the nine months period
ending 30 Sept 2021 compared with the same
period last year. Provision reversals are
generally booked based on loan recoveries
39
(1 Jan 2021 – 30 Sep (1 Jan 2020 – 30 Sep
(with some exceptions), so the overall

increase in provision reversals may be
attributed to above expectation recoveries for
banks.
FIGURE 7: TOTAL ASSETS AND NET ADVANCES OF THE BANKING SECTOR
30,000 25.00%
25,124
25,000
21,991 20.00%
19,682
Amount in PKR Billion
20,000 18,342
15,831 15.00%
15,000
10.00%
10,000
5.00%
5,000
5,499 6,512 7,955 8,249 8,292

- 0.00%
2016 2017 2018 2019 2020
Total Assets 15,831 18,342 19,682 21,991 25,124
Advances (Net) 5,499 6,512 7,955 8,249 8,292
Change in total assets 11.93% 15.86% 7.31% 11.73% 14.24%
Change in Advances 14.18% 18.43% 22.15% 3.69% 0.52%
Total Assets Advances (Net) Change in total assets Change in Advances
As shown in Figure 7, the total assets of the banking industry have been rising since 2017, growing from 7.3
percent in 2018 to almost 12 percent in 2019, and grew by more than 14 percent in 2020. Credit portfolios have
increased but have not grown as much as assets. In 2018 advances grew by 22.15 percent, this reduced to 3.7
percent in 2019 and then a mere 0.5 percent in 2020.
Trend Analysis of Conventional Banks of Pakistan
Over the past five years, the total asset base of conventional banks (including all the commercial and specialized
banks other than the Islamic Banks) has steady increased steadily, which can be attributed to the growth of Islamic
40
Banking Branches of conventional banks as shown in Figure 8.
FIGURE 8: TOTAL ASSETS AND NET ADVANCES OF THE CONVENTIONAL BANKS
25,000,000 25.00%
22,624,445
20,064,272 20.00%
20,000,000 18,089,879
Amount in PKR Millions
16,989,800
14,683,734 15.00%
15,000,000
10.00%
10,000,000
5.00%
5,000,000
0.00%
4,932,389 5,751,073 7,032,001 7,316,627 7,267,956

- -5.00%
2016 2017 2018 2019 2020
Total Assets 14,683,734 16,989,800 18,089,879 20,064,272 22,624,445
Advances (Net) 4,932,389 5,751,073 7,032,001 7,316,627 7,267,956
Change in Advances 12.94% 16.60% 22.27% 4.05% -0.67%
Advances, slightly decreased during 2020, mainly due to the slowdowns caused by countrywide lockdowns and
social distancing restrictions. The reduction in private sector advances was broad; though financing to the textiles,
cement, and sugar sectors increased during the first half of 2020.
41
Trend Analysis of Islamic Banking Industry of Pakistan
Figure 9 shows the total assets and finances of both Islamic Banks and Islamic Banking Institutions in Pakistan for
the last five years.
FIGURE 9: TOTAL ASSETS AND NET ADVANCES OF ISLAMIC BANKING INSTITUTIONS
4,500,000 4,269,446 35.00%

4,000,000 30.00%
3,283,737
3,500,000
25.00%
3,000,000 2,658,485
2,500,000 2,271,753 20.00%
1,852,916
2,000,000 15.00%
1,500,000
10.00%
1,000,000
500,000 5.00%
820,879 1,206,741 1,510,811 1,622,528 1,881,040
- 0.00%
2016 2017 2018 2019 2020
Total Assets 1,852,916 2,271,753 2,658,485 3,283,737 4,269,446
Advances (Net) 820,879 1,206,741 1,510,811 1,622,528 1,881,040
Change in Advances 21.39% 31.98% 20.13% 6.89% 13.74%
The growth in total assets shown in Figure 9 is primarily because of investments made by Islamic banking
institutions that registered a considerable increase of 17.9 percent (PKR 191 billion) in 2020 and were recorded at
PKR 1.2 trillion compared with a rise of 0.3 percent in corresponding period of 2019. This increase is mainly
attributed to investments made by Islamic banking institutions in government sukuk between 2016 and 2020. The
government issued domestic sovereign sukuk of PKR 201.2 billion during that period.
42
Trend Analysis of Non-Performing Loans in Pakistan’s Banking Industry
Annual trend analysis of the industry shows that between 2016 and 2020, NPLs of the commercial banks in Pakistan
have shown a steady increase from 2017 to 2020. However, in 2020, when compared with gross NPLs, net NPLs
reduced considerably, by 32 percent, from PKR 141,347 million in 2019 to PKR 96,736 million in 2020, without
a decrease the gross NPL. This can be explained by the increase in loan provisioning (18 percent) from the previous
year.
Moreover, after a decline in 2017, NPLs as a percentage of assets increased in 2018 and 2019 but fell from 3.46
percent to 3.3 percent in 2020. This is because although the banking industry grew its asset base in 2020, it has
been under increasing pressure caused by reduced offtake of advances, cautious customer outlook, and increases
in credit losses and delinquencies. Figure 10 presents the breakdown of gross NPLs into provisions, net NPLs, and
gross NPLs as a percentage of total assets.
FIGURE 10: NET NPLS AND INFECTION RATIO OF BANKING SECTOR
900,000 60.00%
800,000
50.00%
Axis Amount in PKR Million
700,000
600,000 40.00%
500,000
30.00%
400,000
300,000 20.00%
200,000
10.00%
100,000
- 0.00%
2016 2017 2018 2019 2020
NPLs (Net) 90,399 75,582 110,131 141,347 96,736
Provisions against NPLs 514,267 516,965 569,613 619,771 732,166
NPLs as a % of total assets 3.82% 3.23% 3.45% 3.46% 3.30%
NPLs as a % of Equity 45.00% 43.00% 48.00% 46.00% 45.00%
Infection Ratio 11.00% 9.10% 8.54% 9.23% 10.00%
Provisions against NPLs NPLs (Net) NPLs as a % of total assets

NPLs as a % of Equity Infection Ratio
Public sector banks and specialized banks (also public sector) have the highest ratio of NPLs to assets (5.62 percent
and 27.48 percent respectively) and the highest NPLs to credit portfolio infection ratio (16.99 percent and 22
percent respectively).
Among private sector banks, Table 6 shows Islamic banks have performed better than conventional banks, with the
lowest ratio of NPLs to both the asset base and credit portfolios. Foreign banks have the lowest ratios, however the
total advances to foreign banks in 2020, reduced significantly, from PKR 91 billion to PKR 72 billion (a decrease
43
of 21 percent), which could be a reason for their low NPL ratios.
TABLE 6: NPLS AGAINST ASSET BASE AND CREDIT PORTFOLIO OF BANKS
Type NPLs (PKR Million) NPLs/Assets % NPLs/Credit Portfolio %
Public Sector Banks 267,740 5.62% 16.99%
Private Sector Conventional Banks 485,515 2.88% 8.8%
Islamic Banks (Excluding IBBs) 5,961 0.58% 3.20%
Foreign Banks 2,478 0.34% 3.42%
Specialized Banks 67,208 27.48% 59.15%
 The group-wise division of NPLs as shown in Figure 11 indicates that local private commercial banks
(including conventional as well as Islamic banks) hold the highest NPLs in their credit portfolio, amounting
to over 59 percent of NPLs in the industry.
 Since 2017, NPLs of public sector commercial banks have increased by 25 percent, and NPLs of private
commercial banks have grown by 20 percent, from PKR 291 billion to PKR 407 billion in 2020.
 Foreign banks, which hold a 0.3 percent share of total NPLs in the market, have dropped from PKR 2.84
billion in 2017 to PKR 2.48 billion in 2020.
 The NPL to equity ratio of the banking industry declined from 45 percent in 2016 to 43 percent in 2017, rose
to 48 percent in 2018, and then dropped over the next two years to 46 percent in 2019 and 45percent in 2020.
FIGURE 11: BANKS’ GROUP-WISE NPLS
600,000
491,476
500,000
Amount in PKR Million
400,000 267,740
300,000
200,000
100,000 67,208
2,478
-
Public Sector Local Private
Foreign Banks Specialized Banks
Commercial Banks Commercial Banks
2020 267,740 491,476 2,478 67,208
Table 7 provides details of the split between secured and unsecured loan portfolios within the banking industry.
TABLE 7: COLLATERALIZED ADVANCES FOR SCHEDULED BANKS
44
Collateralized Advances Unsecured Advances Percentage of
Type
(PKR Million) (PKR Million) Collateralized Advances
Public Sector Banks 1,686,621 9,037 99.47%
Private Sector
6,196,716 132,567 97.91%
Conventional Banks
Foreign Banks 70,794 4 99.99%
Specialized Banks 146,478 1,298 99.12%
Source: Classification of Scheduled Banks’ Advances, State Bank of Pakistan, 2020
Collateral accepted as securities by banks includes gold bullion, gold, silver ornaments, precious metals, securities,
shares and other financial instruments, merchandise (food items, raw materials finished or manufactured goods),
fixed assets, real estate and fixed deposits and insurance policies. The “others” category includes advances secured
by guarantees and other secured advances. The composition of collateral accepted by banks in 2020 is illustrated
in Figure 12.
FIGURE 12: COMPOSITION OF ADVANCES BY TYPE OF COLLATERAL
Gold Bullion, Gold, Silver ornaments, precious metals

Securities, shares and other financial instruments
Fixed deposits and insurance policies 1%
Unsecured Advances
Merchandise 1%
Fixed Assets 1%
Real Estate 1%
Others
26%
40%
16%
15%
Non-Performing Loans of Conventional Banks and Islamic Banks
The net NPLs of conventional banks in Pakistan reduced from PKR 90.4 billion in 2016 to PKR 75.6 billion in
2017 but increased to PKR 110 billion in 2018 and PKR 141.3 billion in 2019. In 2020, net NPLs decreased to
PKR 96.7 billion, after loan deferral facilities were implemented by the central bank, which has resulted in delayed
NPL recognition. This also explains the sharp increase in provisions in 2020, as shown in Figure 13.
45
FIGURE 13: PROVISIONS, NET NPLS, AND INFECTION RATIO
800,000 12.00%
700,000 10.00%
600,000
500,000 8.00%
400,000 6.00%
300,000 4.00%
200,000
100,000 2.00%
- 0.00%
2016 2017 2018 2019 2020
Provisions 514,267 516,965 569,613 619,771 732,166
NPLs (Net) 90,399 75,582 110,131 141,347 96,736
Infection Ratio 10.06% 8.43% 7.97% 8.58% 9.19%
Provisions NPLs (Net) Infection Ratio
For Islamic Banks in Pakistan, the infection ratio decreased from 4.13 percent in 2016 to 3 percent in 2017 as
illustrated in Figure 14. It then increased in 2018 and 2019 before dropping again by the end of 2020 to 3.2 percent.
Similarly, the ratio of net NPLs to net financing also decreased from 2 percent in 2019, when it was the highest in
a decade, to 0.58 percent in 2020.
FIGURE 14: NET NPLS AND INFECTION RATIO OF ISLAMIC BANKS
20000.00 5.00%
18000.00 4.50%
4.13% 4.30%
16000.00 4.00%
14000.00 3.50%
12000.00 3.00% 3.20% 3.00%
10000.00 2.40% 2.50%
8000.00 2.00%
6000.00 1.50%
4000.00 1.00%
2000.00 0.50%
0.00 0.00%
2016 2017 2018 2019 2020
NPLs (Net) 3712.02 4047.42 3807.55 18695.86 5960.80
Infection Ratio 4.13% 3.00% 2.40% 4.30% 3.20%
Net NPLs to Net Financing 0.66% 0.53% 0.41% 2.01% 0.58%
NPLs (Net) Infection Ratio Net NPLs to Net Financing
46
Top 10 banks in terms of NPLs and Infection Ratio
The top ten banks ranked according to highest NPLs in December 2020, are highlighted in Table 8. The NPL to
credit portfolio ratio shows that Sindh Bank Limited, which ranks as sixth in terms of NPL portfolio, has the highest
infection ratio (46 percent) in the banking industry. It also has the highest NPL to equity ratio of 185 percent.
National Bank of Pakistan (NBP) and Bank of Punjab have the second highest infection ratios, each with 15 percent.
It is important to note that the rise of NPLs for NBP to 15 percent, was larger than the usual growth rate of about 6
percent per annum (CAGR). NBP’s annual report shows this larger than usual increase was mainly on account of
general downturn in the economy in 2020 and effects on profitability caused by COVID-19 lockdowns.
TABLE 8: TOP 10 BANKS IN TERMS OF NPLS, 2020
Gross
Non- NPLs to Gross
Advances Equity NPLs Market
Sr. Performing Advances
Bank Name Portfolio (PKR to Share of
No. Loans (PKR Ratio
(PKR million) Equity NPLs
million) (Infection)
million)
National Bank
1 171,294 1,159,873 274,402 15% 62% 21%
of Pakistan
United Bank
2 83,623 691,202 184,073 12% 45% 10%
Limited
Habib Bank
3 82,104 1,305,409 265,495 6% 31% 10%
Limited
Bank of
4 57,251 391,890 52,383 15% 109% 7%
Punjab
MCB Bank
5 51,189 598,365 192,991 9% 27% 6%
Limited
Sindh Bank
6 35,334 76,356 19,077 46% 185% 4%
Limited
Askari Bank
7 28,411 421,819 54,681 7% 52% 3%
Limited
Faysal Bank
8 26,160 339,745 60,218 8% 43% 3%
Limited
Bank AlFalah
9 25,860 600,899 91,017 4% 28% 3%
Limited
Standard
Chartered
10 22,695 199,753 81,677 11% 28% 3%
Bank Pakistan
Limited
11 Others 244,981 3,238,427 586,419 7.6% 42% 30%
Industry Totals 828,902 9,023,738 1,862,433 9.2 45% 100%
47
FIGURE 15: NON-PERFORMING LOANS BY CLASSIFICATIONS
180
160
140
120
PKR Billions
100
80
60
40
20
0
National United Habib MCB Sindh Askari Faysal Bank Standard
Bank of
Bank of Bank Bank Bank Bank Bank Bank AlFalah Chartere
Punjab
Pakistan Limited Limited Limited Limited Limited Limited Limited d
Loss 148.5 66.0 73.6 42.7 50.6 33.7 24.6 22.4 14.3 16.9
Doubtful 15.8 8.4 1.4 8.1 0.3 1.6 2.0 0.9 7.9 4.0
Substandard 5.4 7.9 5.8 6.3 0.2 0.0 0.5 2.7 3.6 1.7
OAEM 1.6 1.3 1.3 0.2 0.1 0.0 1.4 0.2 0.1 0.2
Source: Annual Reports 2020 for Top 10 Banks
In absolute terms, the NBP is the second largest bank in terms of total assets, but it has the largest portfolio of
NPLs, accounting for 21 percent of all NPLs in the country, as shown in Figure 16. This is primarily because it is
a public sector commercial bank, which tend to have a higher risk of loan defaults than private commercial banks
or foreign banks. Similarly, the Bank of Punjab, also a public sector commercial bank, ranks fourth bank for the
highest percentage of NPLs. It owns about 7 percent of the total share of NPLs in the market although it holds only
to 4 percent of the industry’s total assets.
48
FIGURE 16: TOP 10 BANKS IN TERMS OF NPLs
180,000 46% 50%

160,000 45%
140,000 40%
120,000 35%
30%
100,000
25%
80,000 15% 21% 15% 20%
60,000 12% 11%
9% 8% 15%
7%
40,000 10% 6% 10% 4% 10%
20,000 7% 6% 5%
4% 3% 3% 3% 3%
0 0%
NPLs NPLs to Credit Portfolio Market Share of NPLs
Source: Financial Report 2020, Pakistan Stock Exchange, 2020
There are several reasons for higher infection ratios for Pakistan’s public sector banks. First, their increased
participation in government-led schemes or initiations as part of their developmental role in the economy. Over the
past two decades, it has been common for the national and provincial governments to assign public sector banks a
responsibility to fund or execute projects either fully or partially or as a first mover. Funding and services include
sector-specific concessional loans, interest free loans, and collection services. These developmental initiatives or
government schemes are not evaluated by public sector banks for their commercial viability. Together with the
desire to meet targets (such as loan disbursements) over short periods, they result in sub-optimal underwriting
practices and poor enforcement of credit quality standards. These lax practices, politically motivated loans and
malpractices caused by weak governance and control mechanisms contribute to a higher stock of NPLs in public
sector banks.
Writing-off loans to clean up balance sheets is heavily stigmatized and carries poor public opinion in Pakistan,
mainly a result of previous court decisions or political campaigns. This has branded written-off loans as loans not
granted or availed in good faith and a waste of public money or source of corruption. Public sector banks are the
worst affected by this anti-write off culture, since they are in practice directly governed and controlled by the
government despite the presence of an independent Boards of Directors. The increased scrutiny and activism by
law enforcement and national accountability agencies and greater questioning of bank officials about the particulars
of write-offs in the past few years has also contributed to this problem. This practice and an aversion to writing off
uncollectible loans results in accumulation of NPL stocks and rising infection ratios.
Sector-wise distribution of Advances and NPLs
Analyzing the sector-wise distribution of advances helps to identify the main recipients of banking sector credit.
Figure 17 shows the sector-wise distribution of advances and NPLs for the top 10 industry sectors, accounting for
61 percent of NPLs. The production and transmission of energy accounted for 15 percent of advances, with a credit
volume of PKR 1.39 trillion and a further 15 percent was loaned to the textile sector, with a credit volume of 1.34
49
trillion. These two sectors are followed by individuals, including retail and personal loans, which borrowed around
9 percent and agribusiness borrowed 8 percent of all advances.
FIGURE 17: DISTRIBUTION OF ADVANCES AND NPLS OF TOP 10 SECTORS
1,600 30.0
1,400 23.9
25.0
1,200 20.1
20.0
1,000
800 12.3 12.6 15.0

11.4
600 7.9 10.0
400 5.1 4.9 4.2
3.0 5.0
200
0 0.0
Produ
Autom Chemi
ction/
Agri- obile/ cal &
Ceme Electr Financ Individ Trans
busine Transp Pharm Sugar textile
nt onics ial uals missio
ss ortatio aceuti
n of
n cals
Energy
Advances 702 143 204 327 111 230 815 1,394 238 1,343
NPLs 90 18 6 17 23 10 70 52 54 180
Infection Ratio 11.4 12.3 3.0 5.1 20.1 4.9 7.9 4.2 23.9 12.6
Although the energy sector had the most advances, the sugar, electronics, textile, agribusiness, and automobile
sectors had the highest rates of NPLs in 2020. During second half of 2020, COVID-19 and locust plagues reduced
Pakistan’s agricultural sector’s growth prospects and put millions of farmers under distress. Over the past three
years, the electronics sector’s infection ratio has risen from 15.7 percent to 20.7 percent, while the textile sector
ratio has improved to 14.7 percent from 22 percent.
The change in NPLs within the different sectors (Figure 18) shows that NPLs of textile and shoes and leather
garments sectors have declined by 6 percent and 5 percent respectively. The cement, agri-business,
power/transmission of energy and sugar sectors, had the most banking sector NPLs in 2020. Most of the increases
in NPLs came from the cement sector (49 percent) followed by agribusiness (27 percent) and the production and
transmission of energy (25 percent). The rise in NPLs could have been higher if the SBP had not allowed banks to
consider deferring, restructuring and rescheduling of loans on borrowers’ request. NPLs for the banking sector
increased to an average of 9.2 percent of loans during 2020, from an average of 8.6 percent in 2019, although banks
were expected to manage infections with the government’s support.
50
FIGURE 18: SECTOR-WISE CHANGES IN NPLS
Textile -6%
Sugar 13%
Shoes and Leather garments -5%
Production/Transmission of Energy 25%
Others 12%
Individuals 7%
Financial 2%
Electronics 9%
Chemical & Pharmaceuticals 10%
Cement 49%
Automobile/Transportation 0%
Agri-business 27%
-10% 0% 10% 20% 30% 40% 50% 60%
Analysis of Segment-wise division of Advances and NPLs for 2020
Analysis shows that 71 percent of bank advances go to the corporate sector, which has an infection ratio of 9.4
percent. The commodity financing sector, which has the second highest share of advances has the lowest
infection rate – just 0.9 percent. Agribusiness has the highest infection ratio, 22.8 percent, followed by the SME
sector which has an infection ratio of 17.1 percent. Details of all segments are in Figure 19.
51
FIGURE 19: SEGMENT-WISE DIVISION OF ADVANCES AND NPLS
7,000 22.8 25.0
6,000
20.0
17.1
Amounts in PKR Billion
5,000 15.5
15.0
4,000
3,000 9.4
10.0
2,000 4.9
5.0
1,000 1.3
0.9
- -
Commod
Corporat SMEs Agricultu Consum Staff
ity Others
e Sector Sector re Sector er sector Loans
financing
Advances 6,422 461 338 635 833 164 171
NPLs 605 79 77 31 8 2 26
Infection
9.4 17.1 22.8 4.9 0.9 1.3 15.5
Ratio
Trend Analysis of Categories of NPLs
For this analysis, NPLs have been characterized as pre-doubtful (including OAEM and substandard NPLs),
doubtful, and loss. Figure 20 shows that more than 80 percent of the NPLs in the last five years were losses. In
2020, loss NPLs increased from PKR 606 billion to PKR 677 billion; doubtful NPLs increased from PKR 56 billion
in 2019 to PKR 82 billion in 2020; and pre-doubtful NPLs fell from PKR 99 billion to PKR 70 billion.
52
FIGURE 20: CATEGORY-WISE BREAKUP OF NPLS
800,000 90%
700,000 676,978 80%

606,339 70%
600,000
513,631 541,049
504,831 60%
500,000
50%
400,000
40%
300,000
30%
200,000 56,859 52,608 86,278 99,116 70,063
20%
52,417 55,663 81,861
100,000 34,175 35,108 10%
- 0%
2016 2017 2018 2019 2020
Predoubtful Doubtful Loss
Predoubtful as a % of Total NPL Doubtful as a % of Total NPL Loss as a % of Total NPL
Key take-aways from this Analysis
 The banking sector grew by 7.8 percent in 2020 and after-tax profits (including listed commercial banks)
increased by 34 percent (compared with 21 percent in 2019).
The increased profitability was primarily the result of various relief measures taken by the government and
the SBP. These included, a 625 basis points cut in the policy rate, principal deferment scheme (which resulted
in PKR 657 billion worth of loans being deferred), temporary economic reforms facility (TERF), relaxations
in the regulatory criteria for restructuring of loans, increased borrowing and lending limits for consumer and
SME financing, and some relaxations in regulatory capital limits. On the back of these measures, net interest
income rose by 25 percent while non-mark-up income jumped by 16 percent, mainly due to strong capital
gains in treasuries which increased by roughly 11 times year on year.
 Long-term trends in asset and deposit growth and the rising capital adequacy ratios, reflect the steady growth
of Pakistan’s banking industry. However, this growth has had a decreasing contribution to the wider economy
as evidenced by a consistently declining private sector credit to GDP ratio and a falling advances to deposit
ratio. One of the reasons for this is the crowding out of private sector borrowers due to excessive government
borrowing.
 In 2020, net NPLs reduced considerably, by 32 percent, but gross NPLs have grown, due to the increases in
loan provisioning (18 percent). The infection ratio for the industry was 9 percent.
 More than 80 percent of NPLs in the last five years fell into the loss category. The pre-doubtful NPLs in 2020
reduced by 29 percent, while the numbers of NPLs categorized as doubtful and loss rose.
 Private sector banks own the largest share of NPLs, but the infection ratio of public sector banks and
specialized banks (owned by the state) are the highest.
 The top 10 banks in terms of NPLs include National Bank of Pakistan, with an infection ratio of 15 percent
and a market share of 21 percent, United Bank Limited with an infection ratio of 12 percent, and a market
53
share of 10 percent, and Habib Bank Limited, with an infection ratio of 6 percent and a market share of 10
percent.
 The energy sector (production and transmission) receives the most advances in the industry. However, the
highest NPLs are from the sugar, electronics, textile, agribusiness, and automobile sectors. The change in
NPLs in 2020 within the different sectors shows that for the textile and shoes and leather garments sectors,
they have declined by 6 percent and 5 percent respectively and, highest growth in NPLs was in the cement,
agribusiness and production and transmission of energy sectors.
54
5. PRUDENTIAL REQUIREMENTS FOR MANAGING & REPORTING NPLS
A review of prudential requirements (PRs) for managing and reporting NPLs is critical in the context of this study
as they provide minimum regulatory standards and expectations for recognizing, accounting, reporting, managing,
restructuring, and writing off NPLs. These requirements have direct and indirect impacts on the profitability, risk
premiums, interest margins and balance-sheet liquidity of banks. They also affect (favorably or unfavorably) the
potential for developing an NPL market depending on whether the requirements are enabling or restrictive. Lastly,
these requirements help to maintain a sound financial sector through their reporting and disclosure requirements.
The PRs provide guidance for classifying and provisioning of loans. Banks in Pakistan categorize loans in the
following broad categories:
i. Satisfactory/performing accounts where there is no evidence of weakness, and all obligations are met on
time.
ii. Watch list accounts where the account starts showing early signs of a borrower’s inability to meet
commitments and require close monitoring. There is generally no provisioning in this category as the
account only shows early signs of credit deterioration, but occasionally subjective provisions are made
against these exposures.
iii. Depending on the days past due (DPD), NPLs are classified according to the SBP’s requirements.
Classifications include (the percentages can vary for some asset classes):
a) Other Assets Especially Mentioned (OAEM) having the requirement of 10 percent provision of
the outstanding loan amount, these are advances in arrears for 89 days or less.
b) Substandard having the requirement of 25 percent provision of the outstanding loan amount,
these are advances in arrears for 90 days or more but fewer than 180 days.
c) Doubtful having the requirement of 50 percent provision of the outstanding loan amount, these
are advances in arrears for 180 days or more but fewer than 365 days.
d) Loss having the requirement of 100 percent provision of the outstanding loan amount, these are
advances in arrears for 365 days or more.
The SBP has issued specific PRs for specific asset classes such as agriculture financing, housing finance, and
consumer financing. Annex T provides a comprehensive list of all the PRs and the NPL classification categories
based on days past due.
The following sections discuss the relevant aspects of credit risk management frameworks and practices of banks
in Pakistan, the NPL reporting framework, write off framework, and collateral framework, and compare them with
practices and guidance issued by European regulators and by global standard setters.
5.1. Analysis of Macro prudential regulations
Macro prudential regulations primarily aim to ensure the stability of a financial system. SBP in Pakistan has
occasionally issued specific prudential regulations for different segments of borrowers, including a specific set of
PRs for corporate and commercial borrowers. Under these, SBP provides guidelines to banks on the risk
management and operations of credit cases. PRs for corporate and commercial borrowers set specific exposure
limits, allowed investments, detail collateral guidelines and minimum margin requirements, and provide regulatory
guidelines, including provisioning requirements, non-funded exposures, and window dressing.7
In addition to these prudential regulations, SBP has issued several other detailed guidelines and instructions to
banks on their credit risk management strategies, policies, tools, and processes. These include guidelines on overall
7
State Bank of Pakistan, (2015) Prudential Regulations for Corporate/Commercial Banking (Risk Management, Corporate
Governance and Operations) https://www.sbp.org.pk/publications/prudential/PRs-Jan-2015.pdf
55
credit risk management and on credit scoring models used to analyze borrowers’ credit risk.
SBP is also formulating and implementing a wider and comprehensive Macro Prudential Policy Framework
(MPPF) to ensure system-wide financial sector stability. To enhance its assessment of pro-cyclical systemic risk
capabilities, SBP has established a macro stress-testing regime to capture macro-financial interlinkages. Several
variables were identified as early warning indicators (EWIs) of systemic risk. SBP is coordinating with the
Securities & Exchange Commission of Pakistan (SECP) and Finance Division to create a National Financial
Stability Council (NFSC) and a well-structured institutional setup for MPPF.
A survey carried out by the International Monetary Fund (IMF) across 49 countries, identified the nine instruments
that have been most frequently applied to achieve macro prudential objectives.8 Table 9 shows the instruments for
Pakistan.
TABLE 9: MACRO-PRUDENTIAL INSTRUMENTS
Macro-Prudential Instrument Regulated by SBP Requirement

30% for Equity Instruments
Caps on Loan to Value (LTV) Yes 20% for eligible TFCs
Instruments
Caps on Debt to Income (DTI) No -
Ceilings on credit or credit growth No -
Foreign Exchange Exposure
Caps on Foreign Currency Lending / Limits on Limits (FEEL) up to 25% of the
Yes
net open currency / currency mismatch paid up capital of the bank are
defined
Limits on maturity mismatch No -
SLR: Conventional Banks:
Reserve Requirements Yes 19%; IBs/IBBs: 14%
CRR: 5%.
Countercyclical Capital Requirements No -
Time-varying dynamic provisioning No -
Banks are allowed to suspend
Restrictions on profit-distribution Yes
dividends for capital buffer.
Compared with other developing countries in the region, SBP’s prudential regulations are slightly more stringent
in terms of risk limits and regulations. Table 10 shows that risk exposure limits for corporate borrowers are lower
than the average of neighboring developing economies.
8
International Monetary Fund, (2011) Macroprudential Policy: What Instruments and How to Use Them?
https://www.imf.org/external/pubs/ft/wp/2011/wp11238.pdf
56
TABLE 10: EXPOSURE LIMITS FOR COUNTRIES
Pakistan Bangladesh Turkey India
Total Exposure: 25% of the Total Exposure: 35% of the

Exposure
capital capital Total Exposure: Total:
Limit for
Funded Exposure: 25% of the Funded Exposure: 15% of the 25% of the Capital 30%
Group
capital capital
Under SBP’s PRs, large exposures are defined as exposures exceeding 10 percent of a bank’s equity, which is in
line with other countries, including Bangladesh. Moreover, the overall Foreign Exchange Exposure Limit (FEEL)
is set at 25 percent of a bank’s capital, or Rs 5,000 million, whichever is higher.9
Similarly, reserve requirements are also different for banks in Pakistan compared with other countries.
TABLE 11: RESERVE REQUIREMENTS FOR COUNTRIES
Pakistan Bangladesh Malaysia India

FX:
1. 5% Cash Reserve Account
Conventional Banks
(US$)
SLR: 13%
2. 10% Special Cash Reserve 4% of
CRR: 4%
Reserve Account (US$) 2% of eligible NDTL
requirements liabilities SLR:
Islamic Banks:
PKR: 18%
SLR: 5.5%
SLR: Conventional Banks:
CRR: 4%
19%; IBs/IBBs: 14%
CRR: 5%.
5.2. NPL Reporting Framework for Banks in Pakistan

The NPL reporting of banks in Pakistan is three broad categories.
1. Internal Reporting (Management Reporting): Reports that are internally generated by banks for ongoing
monitoring and decision making on performing, watch-listed, and NPLs. Typically, a bank’s Credit Administration
Department (CAD) and a Finance Department regularly report key information to Business Heads, Chief Risk
Officer (Risk Management Department), Head of Special Asset Management (Special Asset Management
Department), Credit Risk Committee of the Management and Board Risk & Compliance Committee.
Reports and relevant analysis are prepared by risk management departments (or by credit administration) and are
submitted to Board Risk Management Committees quarterly, or sometimes more frequently. Similar reports and
analysis based are used by management risk committees and relevant business units. The business risk review
function of a bank’s internal audit department also uses NPL reports to review the quality and risk review a bank’s
9
State Bank of Pakistan (July 2020), Foreign Exchange Exposure Limit (FEEL), DMMD Circular No.16 of 2020
https://www.sbp.org.pk/dmmd/2020/C16.htm
57
loan book. Typical reports include:
 Days past due reports

 Single party exposure
 Group exposure
 Product exposure
 Sector wise exposure
 Risk rating wise exposure
 Classified exposure
 Region/ Business Division wise exposure
 Facility wise exposure, including unfunded exposures
 Detail of securities held by the bank
 External rating of credit exposure
 Property held under Debt Property Swap Arrangement
 Statements of discrepant documents, further bifurcated into various products and business divisions
Banks also reporting on the watch-listing of accounts and watch-listed accounts. Watch-listing is where accounts
with signs of deterioration and flagged for enhanced monitoring and management. Credit policies require business
functions, especially branches or relationship managers, to identify and report on deteriorating credits for watch-
listing. These are also identified by risk management departments, internal, or external auditors based on publicly
available information such as account behavior with other lending banks, borrower litigations, borrower financials
statements, or payment behavior.
2. External Reporting: Banks are required to report standard disclosures in their periodic or annual statutory
financial statements. Bank financial statements are produced in Pakistan according to the format of financial
statements specified by the SBP, the Companies Act, 2017, and the Banking Companies Ordinance, 1962.
In the financial statements, banks are required to report on performing and non-performing advances at a minimum
(for comparative periods):
i. Gross advances performing and non-performing by:

a. Loans / advances (conventional business)
b. Islamic financing and related assets
c. Bills discounted or purchased
ii. Specific provision against:
a. Loans / advances (conventional business)
b. Islamic financing and related assets
c. Bills discounted or purchased
iii. General provision against performing advances
iv. Maturity wise disclosure of finance leases
v. Gross advances in local currency and foreign currency
vi. Domestic NPLs and provisions against NPLs as defined in Annex T
vii. A movement of General and Specific Provisions comprising:
a. Opening balance
b. Provision charged during the year
c. Reversals
58
d. Amounts written off
e. Amounts written off against agriculture financing
f. Closing balance
viii. If the bank has taken the benefit of Forced Sale Value (FSV) in computing the provisions against NPLs
subject to the criteria and limits provided by the prudential regulations, banks are required to disclose this
and the benefit of FSV availed.
ix. For write offs, the following information needs to be specifically disclosed:
a. Loans written off against provisions
b. Loans directly charged to profit and loss account (direct write offs)
c. Domestic and overseas write offs above PKR 500,000 and below PKR 500,000
x. As per the Banking Companies Ordinance, 1962, banks are required to disclose written off loans or any
other financial relief of PKR 500,000 or more in an annexure to its annual financial statements, except
where such disclosure is restricted by overseas regulatory authorities. The disclosure should include:
a. Name and address of the borrower
b. Name of individuals, partners, or directors with their CNIC no.
c. Total outstanding principle, markup and other charges
d. Written off – principle and markup
e. Other financial relief (amount)
xi. A movement of advances and provisions for exposure to related parties
xii. Gross advances, NPLs and associated provisions by industry sectors such as textiles, agriculture, cement
and sugar.
xiii. Gross advances, NPLs and associated provisions by exposure to public sector and private sector
xiv. Banks are also required to disclose guarantees, commitments, and other off-balance sheet exposures in
financial statements.
xv. In addition to these requirements, banks must also make disclosures of debt property swap arrangements.
This includes of all terms and conditions of DPS and associated costs to be borne by each party, actual
gains or losses realized on the sale of each one of these properties, and provision reversal and NPL
reduction, resulting from settlement through DPS.10
3. Regulatory Reporting: Banks regularly report to the SBP for it to use during onsite inspections, in the data
bank of the Credit Information Bureau and when publishing various industry-wide reports or other aggregates.
TABLE 12: SBP REPORTING REQUIREMENTS
S. Name and Circular

Frequency Reporting Requirements
No. Reference
 Borrower Name/ Institution

Monthly statement of  Exposure category
loans classified by  Outstanding
1 Monthly  Disbursement
category of borrowers
 No. of Accounts
- A-07
 Non-performing assets and provision against such non-
performing assets
10
State Bank of Pakistan (2016), Regulations for Debt Property Swap https://www.sbp.org.pk/bprd/2016/C1-DPS-Regulations.pdf
59
No. Reference
 Loan Application Received, Accepted, in-progress,
Rejected (numbers and PKR)
 Gross Advances
Statements of position Weekly,  Provisions – General and Specific
2 - BSD Circular No. 4 Monthly and  Gross Advances by public and private sectors
 Schedule of exposures to public sector by category
of 2005 Quarterly
including federal, provincial, local governments, state
enterprises and autonomous bodies
 A quarterly movement of NPLs showing adjustments
for cash recovery, rescheduling, or restructuring. This
Conditions on Non- information is presented for domestic and overseas
performing Loans - NPLs further divided by public and private sector
3 Quarterly
BSD Circular 9 of NPLs.
2003  Category wise (OAEM, Sub-standard, Doubtful, Loss)
provision required and provision held against the above.
 Sectoral classification of NPLs presented in (a) above
 Financial and non-financial information
 Customer information
 Director information
 Details of guarantors
 Information of associated companies/ parent/ group
 Approved financing limits
 Total outstanding principal
 Total outstanding markup
 Total outstanding principal in days past due buckets
Reporting to  Total outstanding markup in days past due buckets
Electronic Credit  Amount restructured or rescheduled
4 Monthly  Amount under litigation
Information Bureau
 Amount written off or waiver provided
(eCIB)
 Amount of any cash recovery against loans past due 90
days
 Provision
 Aging (past due buckets)
 Customer rating information
 Collateral information
 In case only partial liability is settled through DPS, the
banks will report the outstanding amount in its
respective overdue/classification category of eCIB and
NPLs reporting.
 Borrower name
Reversals of provision  Amount classified
5 Quarterly  Category of classification
against cash recovery
 Provision held at the start of the quarter
 Provision reversed
Details of loans and
6 advances rescheduled/ Monthly  Outstanding markup, principal, and other charges at the
time of rescheduling / restructuring
restructured
60
No. Reference
 Category of classification at the time of rescheduling /
restructuring
 Date of rescheduling or restructuring
 Final repayment date as per rescheduling or
restructuring
 Grace period in months (if any)
 Amount written-off or waived:
a. Principal
b. Markup
c. Other Charges
d. Total amount/ written off waived
5.3. Prudential Treatment of Restructured Loans

The PRs for corporate and commercial banking (PRs for other loan asset types follow similar requirements), require
that loan restructuring takes place when borrowers facing financial difficulty are granted concessions by banks
which intend to improve performance of the loan. Restructuring relaxes the terms and conditions of the financing
facility, including repayment tenor, mark-up and profit rate and charges and fees. Rescheduling is a similar concept,
where a financing facility is modified by extending the loan period, without changing any other terms and
conditions.
 The prudential regulations state that banks may reschedule or restructure their loans as per their policy
(common features of banks’ policies on restructuring are covered in the next section) but changes should not
be aimed at avoiding classifying the loan as non-performing.
 At the time of rescheduling or restructuring, banks and DFIs must consider and examine the requests for
working capital strictly on merit, taking into consideration the viability of the project or business, and
appropriately securing their interest.
 All fresh loans granted by the banks to a borrower after rescheduling or restructuring a borrower’s existing
facilities are to be monitored separately and are subject to classification under the prudential regulations on
the strength of their own specific terms and conditions.
 Banks are further required to ensure that the classification status and provisioning, is unchanged in relevant
reports to the SBP merely because a loan has been rescheduled or restructured. However, while reporting to
the SBP’s Credit Information Bureau (CIB), such loans or advances may be shown as ‘rescheduled or
restructured’ instead of ‘overdue’.
 The SBP has instructed all FIs that in the case of recovery against overdue/write off/late payment, FIs
will clearly mention a debtor’s borrowing history including overdue/write off/late payments in debtor
clearance letters and their history will be reflected in the debtor’s credit report for one year.
 In amendments to the Prudential Regulations for SME Financing, the SBP allows banks and DFIs to use
credit information reports of private credit bureaus that are licensed by the SBP. These are aimed at
facilitating SME financing by providing an enabling regulatory environment.11 While considering any
credit proposal (including renewing, enhancing, rescheduling or restructuring), banks shall obtain an e-
CIB report on their prospective borrower(s) from Electronic Credit Information Bureau.
 When an NPL has been restructured or rescheduled by a bank, its classification category can only be changed
to performing or upgraded when the terms and conditions of the rescheduling or restructuring are fully met for
a period of at least one year (excluding any grace period) and at least 10 percent of the total restructured loan
11
State Bank of Pakistan (2021), Prudential Regulations - Small & Medium Enterprise Financing
https://www.sbp.org.pk/publications/prudential/SME-PRs-Updtd-Apr-2021.pdf
61
amount (principal and mark-up), is recovered in cash. If the borrower repays or adjusts in cash at least 35
percent of the total restructured loan amount, the one-year period for declassification will not apply.
 Regardless of the classification status of the restructured/rescheduled loan, the unrealized mark-up on loans
declassified after rescheduling or restructuring can only be considered income when at least 50 percent of the
amount is realized in cash.
 If a borrower defaults either on principal or mark-up after the rescheduled or restructured loan has been
declassified, the loan will again be reclassified to the same category it was in at the time of rescheduling or
restructuring, and the unrealized markup taken to income account will also be reversed. Banks may further
downgrade the classification, considering the subjective criteria, at their discretion.
5.4. NPL Reporting Framework for Banks in Europe

Supervisory (Regulatory) Reporting
In Europe, the EBA has developed a mandatory FINREP framework for providing guidance to the banks for
supervisory reporting of financial information, including NPLs. Within this there is a set of reporting templates and
two of which refer to NPLs and forborne loans. All investment firms and banks in the euro zone must report
according to this framework as it is a basis for EBA and ECB analysis and supervision.
In 2018, the European Banking Authority (EBA) published final guidelines on the disclosure of non-performing
and forborne exposures.12 They provided additional disclosure requirements for NPLs and forborne exposures that
are consistent with the Guidance for Banks on NPLs issued by the ECB.13 These requirements were intended to
provide market participants and stakeholders a better picture of the quality of banks' assets, the main features of
their non-performing and forborne exposures, and in the case of more troubled banks, the distribution of the
problematic assets and the value of the collateral backing those assets.
The disclosure requirements in these guidelines are based on the proportionality principle and the guidelines
included a set of common templates applicable to all banks, and a set of additional templates applicable only to
credit institutions with a gross NPL ratio of 5 percent or higher.
The EBA guidelines require disclosures from all banks on account of NPLs and forborne exposures, details of
which are covered in Annex R.
EBA NPL Templates
To reduce information asymmetries between potential buyers and sellers of NPLs and as a foundation for secondary
NPL market initiatives, the EBA also issued voluntary NPL templates in 2017.14 They allow banks to supply
comparable and standardized data on NPLs to investors and other stakeholders. The practical experience from their
use and feedback from banks resulted in a redesign to improve their effectiveness and usability. Despite these
changes, the NPL data templates are not widely used due to their voluntary nature and complexity.15 Annex I has
more details on EBA NPL Templates.
5.5. A Comparison of SBP’s NPL Reporting Requirements with European NPL Reporting Requirements
A comparison of the NPL regulatory reporting requirements of the SBP with those set by the EBA both under
12
European Banking Authority (October 2018), Guidelines on management of non-performing and forborne exposures
https://www.eba.europa.eu/sites/default/documents/files/documents/10180/2425705/371ff4ba-d7db-4fa9-a3c7-
231cb9c2a26a/Final%20Guidelines%20on%20management%20of%20non-performing%20and%20forborne%20exposures.pdf
13
European Central Bank (2017), Guidance to banks on non-performing loans
https://www.bankingsupervision.europa.eu/ecb/pub/pdf/guidance_on_npl.en.pdf
14
“NPLs,” European Banking Authority, accessed February 18, 2021, https://www.eba.europa.eu/risk-analysis-and-data/npls
15 Napoli, Caterina; Ruvolo, Alessio Gerhart, (May 6, 2021), “The EBA discussion paper for the review of the standardized NPL data
templates,” Diritobancario https://www.dirittobancario.it/art/eba-discussion-paper-review-standardized-npl-data-templates/
62
supervisory reporting and voluntary NPL reporting highlights several differences.
TABLE 13: SBP & EUROPEAN NPL REPORTING REQUIREMENTS
SBP NPL Reporting Requirements European NPL Reporting Requirements

SBP’s NPL regulatory reporting requirements are The EBA has standardized criteria for all banks in the
standardized for all the commercial banks in FINREP framework for standardized reporting (which
Pakistan and there is no concept of proportionality contains two specific worksheets devoted to NPLs). It
where additional disclosures are required, or also requires additional reports from the banks with a
additional information is required for banks meeting gross NPL ratio higher than 5 percent.16
certain risk criteria.
SBP’s NPL reporting requirements mainly comprise EBA’s NPL templates, were designed in a way that
binding reports, which are required to be regularly they could act as a market standard and be used by
submitted in a fixed format. There are no voluntary banks on a voluntary basis for NPL transactions.
disclosures or guidelines.
SBP’s NPL reporting requirements are based on In Europe, banks provide granular and comprehensive
reporting of aggregates or totals with respect to NPL reporting, for example, in EBA’s NPL
transactional aspects of NPLs except for e-CIB Transactions Template.17
reporting. Borrower information is not required to
be reported (the templates or forms are designed for
reporting of aggregate information on NPLs and
provisions and other similar information).
The SBP NPL reporting framework (comprising The EBA’s NPL reporting requirements and the
various circulars) requires little to no information on supervisory expectations set by ECB include detailed
forborne exposures (loans whether performing or information on credit quality of forbearance, the
non-performing which have been restructured, quality and effectiveness of forbearance, the ageing
rescheduled or provided any other form of profile of forbearance on a regulatory portfolio basis,
concession). Although banks are required to submit classification of performing and non-performing
monthly reports on restructured or rescheduled forborne exposures, nature and effectiveness of past
loans to the SBP, providing aggregates and
forbearance measures.18
movement of outstanding balances, pre and post
restructuring final repayment dates and any grace
period allowed. They are report such details for the
purpose of e-CIB reporting but detailed information
on forborne exposures is not reported.
The SBP NPL reporting framework (comprising EBA’s NPL reporting requirements and the
various circulars) requires little to no information on supervisory expectations set by the ECB, require
valuation of collaterals either in total or on a information on the type, market value of collateral,
disaggregated basis. Information on the type, and any impairment in the value of collaterals against
market value of collateral, or impairments in the loans. In addition, information on any asset swaps,
value of collaterals against loans is not required. possession of collateral, litigations, or the other work-
Further, information on any asset swaps, possession out measures for NPLs is also a reporting
of collateral, litigations, or the other work-out
measures for NPLs is also not a reporting
16
European Banking Authority (October 2018), Guidelines on management of non-performing and forborne exposures
https://www.eba.europa.eu/sites/default/documents/files/documents/10180/2425705/371ff4ba-d7db-4fa9-a3c7-
231cb9c2a26a/Final%20Guidelines%20on%20management%20of%20non-performing%20and%20forborne%20exposures.pdf
17
“NPLs,” European Banking Authority, accessed February 18, 2021, https://www.eba.europa.eu/risk-analysis-and-data/npls
18
European Central Bank (2017), Guidance to banks on non-performing loans
63
SBP NPL Reporting Requirements European NPL Reporting Requirements
requirement. requirement.
In all the templates for NPL or related reporting for EBA’s NPL reporting requirements and the
SBP, information on fair value, market value or supervisory expectations set by ECB require detailed
recoverable value of NPLs is not required. Banks information on fair value, market value or the
are only required to provide the carrying amount of recoverable value of NPLs.
the outstanding NPL principal and markup. The
reporting of fair values of NPLs and collateral will
be important for the creation of a secondary market
for NPLs in Pakistan.
SBP’s NPL reporting requirements do not require EBA’s NPL reporting requirements and the
any operational, qualitative or non-financial supervisory expectations set by ECB require banks to
information such as a bank’s NPL governance provide comprehensive non-financial information.
model, its special asset management function This includes the NPL governance model, the
operating model, its NPL strategy or any other operating model of its special asset management
similar information. These aspects of a bank’s NPL function, its NPL strategy and other information for
governance and management might come to be banks with the NPL ratio greater than 5 percent.
reviewed as part of other requirements issued by the
SBP such as those related to risk management,
internal controls or in SBP’s supervisory
inspections, but not as part of NPL reporting.
All the requirements in SBP’s NPL reporting In addition to mandatory reporting requirements, the
framework (which comprises various circulars) are EBA has made available to banks, voluntary NPL
for the purpose of supervision, e-CIB reporting, or transaction templates whose aim is to improve
to publish industry-wide statistics.19 (State Bank of granular and portfolio level reporting of NPLs to
Pakistan, 2003). There is no voluntary or best create a more efficient, transparent and enabling
practice NPL reporting framework to support the market for NPL transactions.
exchange of standardized information between NPL
buyers and sellers in a potential NPL transaction
scenario.
5.6. A Comparison of SBP’s NPL Framework with BCBS Guidelines on Problem Assets
The Basel Committee Guidelines for the Prudential Treatment of Problem Assets were issued to address the
inconsistencies among the terminologies and definitions used in the credit categorization process.20 These terms
and definitions varied widely across jurisdictions and banks because there was no international framework to guide
banks and supervisors when categorizing problem loans. The influence of local accounting, regulatory, legal and
tax standards lead to situations where a category with the same name in different jurisdictions or banks did not
actually refer to loans with the same creditworthiness.
A comparison of various requirements of these BCBS guidelines with the counterpart requirements in the PRs is
in Table 14. Understanding of these differences in the context of this study is critical as they identify situations
where SBP PRs deviate from the global best practices for reporting and managing NPLs.
19
State Bank of Pakistan (July 2020), Foreign Exchange Exposure Limit (FEEL), DMMD Circular No.9 of 2003
https://www.sbp.org.pk/bsd/2003/C9.htm
20
Bank for International Settlements (2016), Guidelines Prudential treatment of problem assets – definitions of non-performing
exposures and forbearance https://www.bis.org/bcbs/publ/d403.pdf
64
(Shades in the table represent: Green = Consistent, Amber = Partial difference, Pink = Considerable difference)
TABLE 14: COMPARISON OF BCBS GUIDELINES AND SBP PRS
S. No. Key Clauses from BCBS Guidelines21 Coverage in SBP Prudential Regulations22
Non-Performing Exposures
The following exposures are considered non- NPLs are generally defined as loans and advances
performing: whose markup/interest or principal is overdue by
90 days or more from the due date (with some
1. All exposures that are “defaulted” exceptions listed in Annex T).
under the Basel II framework (where
the bank considers that the obligor is In addition to the time-based criteria prescribed by
unlikely to pay its credit obligations,
the SBP, subjective evaluation of a performing and
or the obligor is past due more than 90
days on any material credit non-performing credit portfolio is required for risk
1. obligation). assessment and, where necessary, all accounts
2. All exposures that are “credit (including those performing) will be classified
impaired” according to the applicable using time-based criteria.
accounting framework (Stage 3 –
credit impaired under IFRS 9). Such evaluation shall be carried out according to
3. All other exposures that are not the credit worthiness of the borrower, its cash flow,
defaulted or credit impaired but are operation in the account, adequacy of the security,
material exposures that are more than
inclusive of its realizable value and documentation
90 DPD, or where there is evidence
that full repayment is unlikely without covering the advances.
the bank realizing collateral.
Non-performing exposures should always be The PRs do not explicitly mention categorizing an
categorized for the whole exposure, including NPL as a whole exposure. However, it is implied
2. when non-performance relates to only a part of that any unpaid amount on the loan (interest or
the exposure, for instance, unpaid interest. principal) would result in the entire loan to be
marked as non-performing.
Identifying an exposure as non-performing is The PRs are silent over the accounting treatment.
not intended to affect its categorization as One of the main reasons for this lack of guidance
impaired for accounting purposes or as could be that banks face difficulties implementing
defaulted. Under IFRS 9, the identification of IFRS 9. This resulted in SBP deferring its
3.
an exposure as non-performing does not implementation until December 31, 2021. IFRS 9
necessarily influence the impairment stage in is applicable for accounting periods beginning on
which the exposure is allocated for accounting or after 1 Jan 2022 in Pakistan.
purposes.
Collateralization or received guarantees should The PRs mention that banks and DFIs can avail the
4.
not influence whether an exposure is benefit of Forced Sale Value (FSV) of collateral
categorized as non-performing. However, the held against loans or advances, determined in
21
Clauses have been sourced from Bank for International Settlements (2016), Guidelines Prudential treatment of problem assets –
definitions of non-performing exposures and forbearance https://www.bis.org/bcbs/publ/d403.pdf
22
Coverage sourced from State Bank of Pakistan, (2015) Prudential Regulations for Corporate/Commercial Banking (Risk
Management, Corporate Governance and Operations) https://www.sbp.org.pk/publications/prudential/PRs-Jan-2015.pdf; (2016)
Prudential Regulations for Consumer Financing, https://www.sbp.org.pk/publications/prudential/PRs-Consumer.pdf; (2014) Prudential
Regulations for Microfinance Banks https://www.sbp.org.pk/acd/2014/C3-Annex.pdf; (2016) Housing Finance Prudential Regulations
SBP, (2014), Prudential Regulations for Agriculture Financing https://www.sbp.org.pk/smefd/2016/Housing-Finance-Prudential-
Regulations.pdf;
65
bank may consider the collateral when accordance with the guidelines, before making any
assessing a borrower’s economic incentive provision. This statement indicates that collaterals
(both positive and negative) to repay under the play a key role in the number of provisions made
unlikeliness to repay criteria. Any recourse by by financial institutions.
the bank shall not be considered in this
judgment. The collateralization or guarantee The level of collateral held should have no effect
status does not influence the past-due status, on whether banks classify a loan as performing or
including counting past-due days and non-performing, as this is based on timely
determining the exposure as non-performing payments from the borrower.
once the threshold for materiality and overdue
days are met.
A counterparty is a natural or legal person to Each PR has defined a borrower counterparty in its
which a bank has exposure. When an exposure own context. Collectively, according to the PR it
to a counterparty is categorized as non- can be defined as a person on whom a bank or DFI
performing, all exposures to that counterparty has taken any exposure.
should be categorized as non-performing (this
is the debtor approach). However, for retail The PRs for corporate have not instructed financial
exposures as defined in the Basel II standard, institutions to mark all the exposures of a borrower
5. exposures can be categorized as non- as non-performing based on a single non-
performing on a transaction-by-transaction performing exposure considered to be material by
basis. In these cases, banks should consider the the financial institutions.
categorization status of other exposures to the
Similarly, the PRs for consumer and SME finance
same counterparty, except when this
(covering the retail exposures) assess each
information is not available.
exposure on the individual merits and this
treatment is in line with Basel requirements.
When applied, the debtor approach applies at Group means persons, whether natural or juridical,
the level of a single counterparty. When a if one of them or their dependent family members
counterparty belongs to a group, designating an or its subsidiary, have control or hold substantial
exposure to one entity of a group as non- ownership interest over the other. The PRs have
performing does not mean designating all only defined the maximum exposure limits for a
exposures to the other entities from the same single borrower and borrower group (total
6.
group are also designated non performing. exposure as a percentage of FI’s equity). Specific
However, designating the exposure to one of guidance on the impact of NPLs of one or more
the group entities as non-performing should be entities in the group on the overall classification
a consideration when assessing the and treatment of exposures to the group or vice-
creditworthiness and performing status of versa is not provided.
exposures to other entities in the group.
Past due – an exposure where any amount due For restructured loans or classified loans , the PRs
under the contract (interest, principal, fee, or provide that classification categories will not be
other amount) has not been paid in full on the upgraded or changed to performing unless more
date it was due. An exposure should be than the prescribed threshold of the outstanding
7.
considered past due from the first day of missed loan has been paid in cash. However, for
payment, even when the amount is not performing loans (especially those which are
considered material. overdue but not 90-days overdue), the PRs do not
provide a clear statement or guidance.
66
Material – an exposure that hits the materiality The PRs define it as “Large Exposure”, which
threshold in force in a jurisdiction as defined by means an exposure of 10 percent or more of a bank
supervisors. A bank needs to have a or DFI’s equity to a single borrower or group.
categorization process in place for all
8. exposures. The materiality threshold should be
applied by reference to an aggregated exposure
or past-due amount determined by supervisors
connected with the counterparty’s debt and not
the bank.
“Unlikely full repayment” – an exposure where The PRs state that ongoing customer due diligence
the full repayment of the principal and/or is performed at reasonable periodic intervals (to
interest by the counterparty is unlikely without assess the likeliness of payments) or on significant
relying on the bank’s realizing collateral or risk occasions such as when the nature of product and
mitigants, even when it is not past due or has services requested by the customer changes, a
been past due for less than 90 days. For these significant transaction or series of transactions take
exposures, Basel II provides examples of place, and a significant change occurs in the way
possible indicators of unlikeliness to pay such customer operates their account.
as the bank putting the credit obligation on a
non-accrued status; the bank making a charge- A subjective evaluation of the performing and non-
off or account-specific provision resulting from performing credit portfolio is required to assess the
a significant perceived decline in credit quality risk. Where necessary, any account including the
9.
subsequent to the bank taking on the exposure; performing account will be classified, and the
the bank selling other credit obligations from classification category can be downgraded on time-
the same counterparty at a material credit- based criteria.
related economic loss.
The PR for consumer finance states that banks and
The likelihood of repayment could also be DFIs should have an efficient and computerized
assessed by analyzing the financial situation of MIS, which should be able to effectively cater to
the counterparty, using information such as (i) the needs of the consumer financing portfolio. It
patterns of payment behaviors in past should be flexible enough to generate the reports
circumstances; (ii) new facts that change the used to effectively monitor the bank or DFI’s
counterparty’s situation; and (iii) financial exposure in the area.
analysis.
Financial analysis of non-retail counterparties The PRs provide LTV in the form of minimum
may include, as appropriate, the following margin requirements for financing against certain
ratios: leverage ratio; debt/EBITDA ratio; assets, such as 30 percent in case of financing
interest coverage ratio; current liquidity ratio; against shares. In the case of consumer financing, a
or ratio of (operating cash flow + interest maximum debt burden ratio of 50 percent is also
10. expenses)/interest expenses; LTV ratio; and prescribed. Apart from these some counterparty
any other relevant indicators. For retail exposure limits are also provided but specific ratios
counterparties, this analysis may include on financial performance and position are not
consideration of debt service coverage ratio, provided, rather banks are required to define them
loan-to-value ratio, credit scores and any other as part of their credit policy.
relevant indicators.
When applying the criterion of unlikely full The PRs require FIs to frequently monitor their
11.
repayment to an exposure, the contractual exposures. This can be done while analyzing
features of the exposure (for example an delinquency reports, quarterly product wise profit,
67
interest-only mortgage loan, a loan in which the and loss account duly adjusted with the provisions
repossession of collateral for repayment is of classified accounts. Borrower repayment
contractually provided for, or a retained first- patterns are carefully analyzed before marking the
loss tranche in a securitization transaction) account as non-performing under subjective
should not automatically result in its criteria. Like the Basel guideline, the loan is
categorization as non-performing without marked as non-performing when it is 90 DPD
analyzing the payment behaviors or the (with some exceptions noted in Annex T).
financial situation of the counterparty.
Regardless of its contractual features, an
exposure is categorized as non-performing
when it is more than 90 days past due and
meets the materiality threshold.
Forbearance
Forbearance occurs when a counterparty The PRs frequently use the terms restructuring and
(natural or legal person) is experiencing rescheduling. Restructuring means where due to
financial difficulty in meeting its financial borrower’s financial difficulty, a bank or DFI
commitments and the bank grants a concession grants concession to the borrower that it would not
that it would not otherwise consider whether or otherwise consider. Restructuring would normally
not the concession is at the discretion of the involve relaxing the terms and conditions of the
bank and/or the counterparty. A concession is financing facility which can include repayment
at the discretion of the counterparty when the tenor, mark-up/profit rate and charges/fee.
initial contract allows it to change the terms of
the contract in its own favor due to financial Rescheduling is where banks and /DFIs, due grant
difficulty. The identification of an exposure as borrowers facing financial difficulty concessions in
forborne does not affect its categorization as the form of allowing or extending the grace period
impaired for accounting purposes (IFRS 9) or of the existing financing facility, without changing
as defaulted in accordance with the Basel II the other terms and conditions of the financing
Framework. facility.
12
Forbearance as defined by Basel and restructuring
and rescheduling as defined by the PRs are
conceptually aligned. However, the scope of
forbearance as defined by Basel is deemed to be
wider as it encompasses all possible types of
concessions and is more widely used
internationally, compared with the concept of
restructuring and rescheduling as defined by the
PRs. Further, the restructuring and rescheduling
provisions in the PRs do not differentiate between
transactions that are the initiative of the borrower
or the lender.
Specific guidance on the alignment of this

treatment with IFRS 9 is not provided in the PRs as
IFRS 9 is yet to be implemented in Pakistan.
13. Forbearance includes concessions that are Restructuring or rescheduling is granting

granted due to the counterparty’s financial concessions to a borrower facing financial
68
difficulty on any exposure in the form of a loan, difficulties. Like the Basel guideline, all fresh
a debt security, or an off-balance sheet item loans granted by the banks and DFIs to a borrower
(for example loan commitments or financial after rescheduling or restructuring their existing
guarantees), regardless of the accounting facilities may be monitored separately and will be
measurement method. Forbearance is identified subject to classification under the PRs on the
at the individual exposure level to which strength of their own terms and conditions.
concessions are granted because of the
counterparty’s financial difficulty.
Financial difficulty – to identify cases of The PRs have not explicitly defined the term
forbearance, banks should first determine if the financial difficulty. It is implied in the PRs that FIs
counterparty is experiencing financial are required to perform ongoing monitoring of
difficulty. Some indications include, if the loans. Some of the financial difficulty indicators in
counterparty is past due on any of its material the PRs include the nature of product and services
14.
exposures, if it is not currently past due but is requested by the borrower changes, a significant
likely to be in the foreseeable future, if its transaction or series of transactions take place in
outstanding securities have been delisted, and if the borrowers’ business, and a significant change
available cash flows will be insufficient to occurs in the way borrower operates their account.
service all its loans or debt.
Concession – concessions are special The PRs have used but not elaborated on the term
contractual terms and conditions provided by a concession.
lender to a counterparty facing financial
difficulty so that the counterparty can Concession is regarded as a means of performing
sufficiently service its debt. restructuring or rescheduling of loans. Like the BIS
guidelines, the restructuring definition within the
The main characteristic of these concessions is PRs states that concessions are granted to the
that a lender would not extend loans or grant borrower that the bank or DFI would not otherwise
commitments to the counterparty, or purchase consider. Concessions involve relaxing the terms
its debt securities, on these terms and and conditions of the financing facility which
conditions under normal market conditions. include repayment tenor, mark-up/profit rate and
Supervisors may set specific materiality charges or fees and extending the grace period of
15. thresholds for what constitutes a concession. the existing financing facility without changing the
Concessions include extending the loan term, other terms and conditions.
rescheduling the dates of principal or interest
payments, and capitalizing arrears. Concessions The PRs have also imposed conditions for
can be triggered by changes in the conditions of restructuring and rescheduling for consumer
the existing contract, giving considerably more finance and housing finance loans. Annex C has
favorable terms for the counterparty, a more details.
supplementary agreement, or a new contract to
refinance the current transaction. They can also
include the exercise of clauses embedded in a
contract that enable the counterparty to change
the terms and conditions of its contract or to
take on additional loans at its own discretion.
Refinancing an existing exposure with a new The PRs for agriculture financing provide guidance
16. contract because a counterparty is experiencing in this respect. They state that banks and DFIs are
financial difficulty could qualify as a prohibited from adjustment lending (adjusting the
concession, even if the terms of the new existing loan with a fresh loan) to avoid
69
contract are no more favorable for the classification or meet allocated targets for
counterparty than those of the existing financing.
transaction.
Interaction of forbearance with non-performing exposures

Forbearance can be granted on performing and Banks and DFIs may reschedule or restructure their
non-performing exposures. When applied to a loans as per their policies but not to avoid
non-performing exposure, it remains non- classification. The rescheduling or restructuring of
performing. When forbearance is applied to a non-performing loans shall not change the status of
performing exposure, banks must assess classification of a loan or advance unless the terms
whether the exposure meets the non-performing and conditions of rescheduling or restructuring are
criteria, even if the forbearance results in a new fully met for a period of at least one year
exposure. When the original exposure would (excluding any grace period) from the date of the
have been categorized as non-performing at the rescheduling or restructuring, and at least 10
time of granting forbearance, the new exposure percent of the total restructured loan amount is
should be categorized as non-performing. recovered in cash. However, this one year
condition does not apply when the borrower has
repaid or adjusted in cash at least 35 percent of the
17.
total restructured loan amount (principal and mark-
up), either at the time of restructuring agreement or
later, during any grace period. Further, the PRs do
not provide guidance for cases where a performing
loan is provided a concession that prevents it from
being classified as non-performing, when it
otherwise would have been classified as non-
performing.
The requirements described here pertain to

corporate and commercial loans. All other PRs
follow the same approach but have slight
differences in the period and percentages applied.
Banks should ensure they appropriately The PRs mention that where a borrower
categorize of exposures on which forbearance subsequently defaults after a rescheduled or
have been granted more than once. When a restructured loan has been declassified by the bank
forborne exposure under the probation period is or DFI, the loan will be classified in the same
granted new forbearance, this should re-start category as it was at the time of rescheduling/ or
18.
the probation period, and banks should consider restructuring and the unrealized markup on such
whether the exposure should be categorized as loans taken to income account shall also be
non-performing. reversed. However, banks and DFIs can
downgrade the classification, taking into account
the subjective criteria at their discretion.
The continuous repayment period for non- Banks and DFIs may reschedule or restructure their
performing exposures and the probation period loans as per their policies but not to avoid
19. for forbearance can run concurrently. All non- classification. The rescheduling or restructuring of
performing forborne exposures should remain non-performing loans shall not change the status of
non-performing until they meet the performing classification of a loan or advance unless the terms
criteria. After this, the remaining probation and conditions of rescheduling or restructuring are
70
period for forbearance should be identified as a fully met for a period of at least one year
performing forborne exposure. (excluding any grace period) from the date of the
rescheduling or restructuring, and at least 10
percent of the total restructured loan amount is
recovered in cash. However, this one-year
condition does not apply when the borrower has
repaid or adjusted in cash at least 35 percent of the
total restructured loan amount (principal and mark-
up), either at the time of restructuring agreement or
later, during any grace period. Further, the PRs do
not provide guidance for cases where a performing
loan is provided a concession that prevents it from
being classified as non-performing, when it
otherwise would have been classified as non-
performing.
The requirements described here pertain to

corporate and commercial loans. All other PRs
follow the same approach but have slight
differences in the period and percentages applied.
When a forborne exposure becomes non- The PRs do not state whether a restructured or
performing during the 12-month probation rescheduled loan classified as non-performing
20.
period, the probation period starts again. during the probation period would cause the
probation period to restart.
Criteria for exiting from forborne exposure category

A forborne exposure will be identified that way According to the PRs, banks and DFIs are directed
until it meets both of the exit criteria: to ensure that the classification status and
provisioning are not changed in relevant reports to
(i) When all payments, as per the revised terms, the SBP merely because a loan has been
have been made in a timely manner over a rescheduled or restructured. The PRs guide that a
continuous period of not less than one year non-performing loan which goes through
(probation period for reporting). The starting restructuring or rescheduling can be classed as
21. date of the probation period should be the performing again however, there is no official
scheduled start of payments under the revised category from which of restructured or rescheduled
terms, regardless of the performing or non- loans can exit.
performing status of the exposure at the time
that forbearance was granted.
(ii) The counterparty has resolved its financial

difficulty.
Criteria for exiting NPE

An exposure ceases to be non-performing and Unlike Basel, the PRs have no guidance on the
can be recategorized as performing when all the reclassification of NPLs to performing. However,
22.
following criteria are simultaneously met: it may be implied that if time-based criteria (90
DPD) and/or subjective criteria (FIs assess a
(i) The counterparty does not have any material borrower to be in financial difficulty) for
71
exposure more than 90 days past due. categorizing the loan as NPL is no longer met, then
the loan can be classed as performing. The period
(ii) Repayments have been made when due over which the borrower is expected to make
over a continuous repayment period as continuous payments before categorizing the loan
specified by the supervisor of at least three as performing is not provided.
months.
The Basel guidelines also account for materiality
(iii) The counterparty’s financial situation has of the NPL. If the material amount of NPL is
improved so that the full repayment of the repaid by the borrower, then the loan can be
exposure is likely, according to the original any marked as performing. However, the PRs have not
modified conditions. provided any materiality-based criteria.
(iv) The exposure is not defaulted according to

the Basel II framework or credit impaired
according to the applicable accounting
framework.
Some situations will not lead to the The PRs do not state whether partially writing off
recategorization of a non-performing exposure NPLs would allow the remaining outstanding loan
as performing. amount to be categorized as performing.
(i) The partial write off of an existing non- They also do not include guidance on whether the
performing exposure, (when a bank writes off collateral proceeds received from an NPL would
part of a non-performing exposure that it deems result in that NPL being categorized as performing.
to be uncollectible).
The PRs have clearly laid out criteria, where the
(ii) Repossession of collateral on a non- rescheduling or restructuring of non-performing
performing exposure, until the collateral is loans will not change the loan’s classification
disposed of and the bank realizes the proceeds status unless the terms and conditions of
(when the exposure is kept on balance sheet, it rescheduling or restructuring are fully met for a
23.
is deemed non-performing). period of at least one year (excluding any grace
period) from the date of such rescheduling or
(iii) Extension or granting of forbearance restructuring and at least 10 percent of the total
measures to an exposure that is already restructured loan amount is recovered in cash.
identified as non-performing subject to the However, the condition of the one-year retention
relevant exit criteria for non-performing period, prescribed for restructured or rescheduled
exposures. loans to remain in the classified category, will not
apply if the borrower has repaid or adjusted in cash
The recategorization of a non-performing
at least 35 percent of the total restructured loan
exposure as performing should be made on the
amount, either at the time of the restructuring
same level (debtor or transaction approach) as
agreement or later during any grace period.
when the exposure was originally categorized
as non-performing.
Changes to the PRs, including the introducing a ‘debtor approach’, a classification category for forborne exposures,
clear definition of situations which qualify as a concession, and specific additional minimum due diligence ratios,
could result in an increase in classified loans for banks. The impact of the three stages of classification under IFRS
9 cannot be determined because IFRS 9 has not yet been implemented in Pakistan and the impact assessments
performed by banks or the pro forma financial statements submitted to SBP are not publicly available.
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5.7. Write Off Policy and Practice for Banks in Pakistan
Banks in Pakistan have introduced loan write off policies and procedures either on a stand-alone basis or as part of
their overall credit risk management framework. These policies provide guidance on pre-conditions for loan write
offs, criteria for selecting loans for write off, contents of a write off proposal, and management and board level
authority matrices for the approval of write offs.
These write off policies and practices are based on the minimum requirements or standards for write off set by SBP
and BPRD.
Some key features of banks’ write off policies and practices are:
 As a matter of policy write offs are only considered by a bank when all other forms of recovery and resolution
have been exhausted. The write off does not affect bank’s legal right to recover.
 There are two main types of write off options available to banks. One is the direct write off method in which
a loan or part of it may be written off for commercial reasons without it having completed the time and other
minimum criteria. This is an exception and does not occur frequently. The second and the more common write
off is when loss categorized NPLs have been classified as such for more than three years, making them eligible
for write off subject to fulfilling some additional conditions.
 Banks also propose loans for write offs for example when a loan has been loss categorized and it is known
conclusively that the security documentation is defective.
 Banks’ minimum conditions of write offs, are the same as or are slightly more stringent than those stated by
SPB BPRD circulars.
SBP regulatory requirements of write off
The regulatory requirements for write offs are primarily contained in BPD Circular 29 of 2002 (this was a one-time
scheme which allowed banks to formulate their own policies based on the circular) and BPRD Circular 6 of 2007
issued by the SBP. The circulars contain several requirements.
 NPLs which have been classified as ‘loss’ for three years or more are eligible for write offs. Should a bank
receive repayments, after a loan is classified loss that do not change the classification category, the loan still
qualifies for write off under the remaining conditions.
 The authority to approve write offs resides with the Board of Directors (this is consistent with the requirement
of the Companies Act, 2017). The Board is empowered to delegate this authority to appropriate levels of the
management.
 Banks are required to obtain SBP prior approval if a write off pertains to the bank’s CEO or its Directors or
their dependents or any business concerns where they hold a financial interest of more than 5 percent.
 Before processing a write off, banks must realize all liquid collaterals (including FDRs, Government
Securities, and Share Certificates held under lien and pledged goods) available to the bank against the loan in
question.
 Banks are not allowed to write off loans where the forced sale value of securities held, is more than the
recoverable outstanding amount. This condition does not apply to cases recommended or /settled under any
general incentive scheme of SBP or such other Committee(s) as notified by SBP or Committee for Revival of
Sick Industrial Units (CRSIU).
 Banks must obtain a signed confirmation from the branch or unit originating the loan that the borrower or its
guarantor has no known means of payment.
 Banks must ensure that the borrower(s) has not created other business interests and assets out of the NPLs to
be written off.
 Banks must ensure that the borrower(s) is not involved in any criminal misappropriation of stocks, movable
and immovable assets, or security.
73
 The write off proposal must be audited by the bank’s internal auditor (IA) (except for where the outstanding
amount of principal is below Rs. 0.5 million). The IA is required to clearly indicate any deviations or
irregularities from the approved credit policy during the process of sanction, disbursement, documentation,
monitoring and supervision of the loan and its underlying securities.
 At the time of processing a write off, banks are required to have valuation of collateral completed by a PBA
approved valuator where the outstanding principal exceeds PKR 5 million and by the bank when the
outstanding principal is less than PKR 5 million. The valuation report must state the market value and forced
sale value of the collateral.
 Banks are required to submit reports of quarterly write offs to their Board of Directors.
 Banks are required to report information for write offs to SBP’s Credit Information Bureau.
 Where banks are unable to comply with one or more of these requirements, they may put up the case to their
Board of Directors for consideration. The Board may then decide the write off case on merit, recording reasons.
Such write offs must be reported to the SBP.
Implementation of IFRS 9 in Pakistan
For banks in Pakistan, IFRS 9 is yet to be implemented. The SBP communicated these key requirements about
implementing IFRS 9 for banks in Pakistan in 2019.
 The implementation of IFRS 9 has been deferred to accounting periods beginning 1 Jan 2021.
 Banks have been asked to submit pro forma financial statements prepared in accordance with the requirements
of IFRS 9 to the SBP.
 Banks are required to perform a parallel run of IFRS 9 implementation starting from 1 Jan 2020 to test the
IFRS 9 outcomes. Banks are also required to submit quarterly reports on the status of IFRS 9 implementation
to the SBP.
 Other requirements with respect to progress, oversight, and implementation of IFRS 9 and necessary internal
changes were also provided.
Write off requirements under IFRS 9
According to IFRS 9, an entity is required to directly reduce the gross carrying amount of a financial asset when
the entity has no reasonable expectations of recovering either all or part of a financial asset. A write off constitutes
a de-recognition event under IFRS 9. Write offs can relate to all or part of a financial asset.
In an example provided in IFRS 9, where an entity plans to enforce the collateral on a financial asset and expects
to recover no more than 30 percent of the financial asset, it should write off the remaining 70 percent, if the entity
has no reasonable prospects of recovering any further cash flows from the financial asset.
IFRS 7 provides further guidance on the indicators that there is no reasonable expectation of recovery. These
include stopping enforcement activity and where the bank’s recovery method is foreclosing on collateral and the
value of the collateral is such that there is no reasonable expectation of recovering in full. Banks may write off
financial assets that are still subject to enforcement activity. Banks can still seek to recover amounts they are legally
owed in full, but which have been partially or wholly written off due to no reasonable expectation of recovery.
More clarity is required to make it easier for banks to argue under IFRS 9 and IFRS 7 that there is no reasonable
expectation of recovering the contractual cash flows if the loan is still subject to enforcement activity.
5.8. A Comparison of Write off Requirements under IFRS 9, SBP Instructions and Bank Polices
A comparison of the IFRS 9 accounting requirements and the write off requirements under the SBP which could
create conflict, or which require clarification, is set out in Table 15. Conflicts between various frameworks which
prevent, delay or complicate timely and adequate recognition of provisions or write offs can hamper the
development of a viable NPL market and may be a disincentive by NPL investors.
TABLE 15: WRITE OFF REQUIREMENTS UNDER IFRS 9 AND SBP
74
Write off Requirements under IFRS 9 Write off Requirements under SBP
Under IFRS 9, the core principle for writing off Under SBP, pre-conditions exist in the write off
(derecognizing) a loan is when the entity has no requirements. For example, the need for a loan to have
reasonable expectations of recovering a financial been classified as ‘loss’ for a period of three years
asset in its entirety or a portion thereof. There are no before being considered for a write off. Some banks
other operational or procedural pre-conditions have more stringent requirements which can go up to
provided in IFRS 9 which may delay, prevent, or five years.
advance a write off.
Under IFRS 9, a bank may be able to demonstrate that
it has no reasonable expectation of recovering without
waiting for a loan to complete the three-year post ‘loss’
categorization tenor but it will be prevented from
booking a write off based on the SBP requirements –
unless an exception from the Board of Directors is
obtained. Further, additional tax specific criteria for
allowance of write-off expenses are in the tax
framework.
IFRS 9 does not have any guidance or allowance for Other SBP operational conditions which prevent a loan
operational or administrative criteria preventing a from being written off include, for example, when the
loan from being written off. The criteria in IFRS 9 counterparty is a related party (Directors or the CEO),
are purely based on risk, rewards, continuing when borrower has created assets from the defaulted
involvement of the accounting entity, and the loan which are identifiable, when the forced sale value
variability of cash flows pre and post transaction. exceeds the outstanding loan principal amount or when
there is a criminal misappropriation of collateral.
Detailed supervisory guidance will be necessary if
regulatory or operational pre-conditions for write offs
which prevent a bank from writing off a loan, that
would otherwise meet the criteria provided in IFRS 9.
IFRS 9 provides that a loan may be written off when SBP provides no guidance on the indicators. It will be
the entity has no reasonable expectations of important to provide specific indicators or conditions
recovering a financial asset. IFRS 9 also provides through which banks can demonstrate to regulators,
indicators for banks to assess the impairments of external auditors, or other external parties that there is
financial assets, including significant financial no reasonable expectation of recovery. This will be
difficulty of the borrower, a breach of contract, such especially required in situations where the bank intends
as a default or past due event, or the likelihood that to write off a loan but chooses to continue with
a borrower will enter bankruptcy. enforcement activity such as litigation.
Under IFRS 9, it would be difficult to demonstrate The SBP write off requirements provide that a loss
that there is no reasonable expectation of recovery if categorized loan which has qualified for a write off
there are ongoing cash recoveries. This means loans would continue to do so regardless of any subsequent
may meet the SBP’s current write off criteria but are cash recoveries if the payments do not improve the
effectively prevented from being written off by loan’s classification. This requirement would not be
IFRS 9 because a bank is unable to reasonably consistent with IFRS 9.
demonstrate an inability for the loan to be repaid.
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5.9. Collateral Framework for Banks in Pakistan
The SBP’s PRs provide guidance about collateral valuation and the conditions and use of external valuators for
banks in Pakistan.
 Banks must have a Collateral Management Policy which covers generally acceptable forms, quality, valuation
at the time of acceptance and the tenor of a loan, haircuts, price volatility, diversification, margin calls limits,
substitution of collateral, and managing collateral in the event of a counterparty default.
 The PRs provide criteria for determining the value of pledged stock, plant & machinery under charge and
mortgaged properties.
The PRs define two types of valuations — a ‘Full Scope Valuation’ and a ‘Desktop Valuation’. The PRs do not
describe a ‘full scope valuation’ but, a desktop valuation is described as an interim brief review of full-scope
valuation so that any significant changes in the factors on which the full-scope valuation was based, are accounted
for and highlighted to the lending bank. Banks must complete annual external valuations for property and plant and
machinery assets. The full-scope valuation is required every three years and in the interim, desktop valuations can
be carried out annually or more frequently.
Little other information about activities or procedures for full scope valuations and desktop valuations is provided.
For Desktop Valuations, evaluators are required to pay a short visit to the borrower’s site, and it is the bank’s
responsibility to ensure that the evaluator has all the necessary information for the interim review.
In practice the full-scope valuation includes the following steps depending upon the type of collateralized asset:
i. Valuation of Land and Building

These include real estate valuations such as built-up properties, open plots, commercial buildings, office
premises, industrial units, or warehouses. Most of these valuations are based on a market approach and
comparative method:
a. Visit the property to understand property dynamics, such as the condition of buildings and civil works.
b. Evidence gathered from property dealers, real estate agents, market enquiries, and properties listed for
sale on different online portals for comparable values.
c. Adjustment based on experience and judgment to account for the specific element of property under
evaluation.
ii. Plant and Machinery
Valuation of plant and machinery is based on a cost approach and comparative method:
a. Historical cost and technical specifications are derived from purchase documents and fixed asset registers.
For imported plant and machinery, documents such as a letter of credit, bank payment form, pro-forma
invoice, commercial invoice, goods declaration issued by customs department, or a packing list are
required.
b. Survey of the plant and machinery to assess the condition and discuss with the concerned technical team
to understand the plant and machinery’s practical condition.
c. Evaluating replacement cost with factors such as inflation, and foreign currency rates.
d. Evaluating the current value after application of suitable depreciation rates and obsolescence factor.
5.10. Collateral Valuation - External Valuators
External valuators are mandatory for mortgaged property and plant and machinery asset valuation. For pledged
stocks, external valuators are only required when determining the stock’s FSV. The FSV is required when a loan
has been classified as non-performing and a bank intends to claim a reduction against the computed provision. For
Liquid Assets (assets readily convertible into cash), banks determine the value which is then verified by the bank’s
76
external auditors. For pledged shares of listed companies, values are taken at market value from the Stock
Exchange(s) on the balance sheet date.
The PRs also require that:
 External valuators appointed by the banks are on the PBA’s panel of evaluators.
 While assigning any values to the pledged stock, plant and machinery under charge, and mortgaged property,
evaluators are required to consider all relevant factors affecting the salability of such assets including any
difficulty in obtaining their possession, their location and condition, and the prevailing economic conditions
in the relevant sector, business, or industry.
 Evaluators must provide a reasonably good estimate of the amount that could be obtained by selling such
assets in a forced or distressed sale condition when assigning values to pledged stock, plant and machinery
under charge, and mortgaged property.
 Evaluators must make their assumptions clear, explain their calculations, formulae, and basis used to determine
values. In practice, FSV is calculated by applying a haircut percentage to the market value assessed by the
valuator. The haircut percentage is applied depending on the condition, quality, material, useful life, and wear
and tear of land and buildings and plant and machinery. Land and buildings have a haircut between 10 percent
and to 20 percent, where the plant and machinery’s haircut can range from 15 percent to 30 percent. The PBA
provides these ranges to external valuators and while they could be considered arbitrary, they allow valuators
to apply their professional judgement and skepticism in reaching an appropriate FSV.
Further criteria for the qualification, performance management, enlistment/ de-enlistment, categorization and
reporting of external valuators for banks is provided and governed by the PBA. The PBA’s approved list of
valuators has three panels, each specializing in different types of assets.
i. Agriculture, Residential & Commercial land, and buildings

ii. Industrial plant and machinery
iii. Commodities
5.11. Potential for Differences in the Market Value and Book Value of Collateral
There are several deficiencies in Pakistan’s bank collateral and valuator frameworks when compared with similar
guidance from Europe. An understanding of these differences is important as they can affect the quality and
accuracy of the valuation reports used by banks and result in differences between bank collateral values and market
values.
i. The PBA requires that the key person (majority owner) for valuators has a minimum of five years’ experience
in carrying out valuations for the banking industry or as an enlisted valuator or as a part of a valuation team.
For property valuations, they must also be an architect or town planner registered with the Pakistan Council
of Architects and Town Planners, and for plant and machinery be an engineer registered with the Pakistan
Engineering Council. No minimum qualifications or experience is necessary for other staff or valuators used
by these professional valuation firms. In practice, however, valuators generally have a minimum of bachelor’s
degree in civil or mechanical engineering. Valuation firms also require the valuators to have a minimum of
three years’ work experience in their relevant fields. International or local professional qualifications or
certifications are not commonly pursued by valuators in Pakistan.
Neither the Pakistan Engineering Council (PEC), nor the Pakistan Council of Architects and Town Planners
(the two bodies that regulate each profession) provide any standards, exams or accreditation criteria specific
to valuation of assets or property.
In Europe, valuations used by banks to must comply with European or international standards. The
International Valuation Standards Council (IVSC) is an independent, not-for-profit organization that produces
and implements universally accepted standards for the valuation of assets. IVSC has more than 160 member
organizations operating in 137 countries including the Practicing Valuers Association of India, the Institution
77
of Valuers India and other similar bodies from Malaysia, Sri Lanka, Thailand, and Egypt. The ECB Guidance
mentions standards issued by TEGOVA and by the Royal Institute of Chartered Surveyors (RICS). These both
adhere to the standards outlined by the IVSC but provide more details, including on the licensing and training
of appraisers.
ii. The PBA guidance for valuators does not mandate that valuator firms have membership or be registered with
any international valuation standard setting body such as IVSC or RICS. In fact, in the enlistment criteria,
there is only a 5 percent weightage for having membership of any professional body. Among the list of
accepted professional bodies, RICS is the only international one.
iii. In Annex V of its Guidelines for Valuators, the PBA provides minimum valuation standards. These are mainly
about standardizing the content of the report.23
a) Valuation reports are to be signed by authorized signatories of the Valuator.
b) Means of identification of assets to be clearly stated in the report.
c) Means of assessment of market value, the approach and the methodology used to be clearly stated in the
report (but no approach or methodology or guidance in this regard is prescribed).
d) Visible factors impairing salability of the asset to be specified such as ownership, geographical, territorial
or political factors.
e) Valuation reports to state if ownership was verified and comment on the market demand of the asset.
f) Valuation reports to state any other assumptions made in arriving at the values.
These criteria offer little guidance on the selection and use of accepted valuation methods or international
valuation standards and their fitness for asset types. In practice, the PBA communicates preferred methods of
asset and collateral valuation to professional valuation firms.
a) For valuing land and buildings, the PBA prescribes using the market approach method where fair values
are established through local inquiries and property dealers comparing local properties in the area. For
buildings, the year of construction plays a major role as the depreciation of 3 percent per annum. is
charged for residential and 5 percent per annum for commercial properties. This method is like the
“market approach - comparative method” defined by TEGOVA, which is consistent with IVSC.
b) For valuing plant and machinery, PBA recommends the replacement cost method where fair values are
established through inquiring about the cost of replacing the asset in its present condition and for this
information about manufacturers and mechanics for plant and machinery is necessary. This method is like
the “cost approach – depreciated replacement cost method” as defined by TEGOVA, which is consistent
with IVSC.
iv. All approved firms must submit certain data on valuations every quarter and the PBA uses a sample of these
to assess the market values and FSV derived by valuators and question accuracy where required. Banks can
also file complaints with the PBA if they believe the valuator is under or overvaluing collateral, in which case
PBA can impose a penalty on the valuation firm or remove them from the list of approved valuators.
v. The collateral valuation practices in European countries indicate that banks use market, income, and cost-
based approaches. In each of these, the bank deploys different valuation methods such as comparative,
capitalization, discounting, or a combination of these to arrive at a collateral value.
The ECB guidance on NPLs is clear on the supervisory expectations with respect to the use and appropriateness
of valuation methods for banks. There are some key differences between the ECB’s guidance and the PBA’s.
a) The ECB provides that the requirements for collateral valuation are supervisory expectations and provide
best practices for the policies, procedures, and disclosures which banks should adopt when valuing
immovable property held as collateral for NPLs. Meanwhile, the collateral guidance in Pakistan is
23
Pakistan Banks’ Association (2013), Guidelines For Enlistment Of Valuers And Monitoring Of PBA Panels Of Professional Valuers,
https://pakistanbanks.org.pk/wp-content/uploads/2020/10/guidelines_for_2013_20121220.pdf
78
provided by PBA which is an association of banks which does not have a mandate to regulate or set
binding standards for banks.
b) The ECB requires all valuations to be performed by independent, qualified, internal, or external valuators
as per given specific criteria.
c) Banks regulated by the ECB should develop and implement robust internal quality assurance (QA)
policies and procedures for challenging valuations. Key aspects of such QA program are that:
 It is carried out by an independent unit, such as Risk Management function.
 Valuations must be back-tested to understand their accuracy.
 The independence of external valuators must be tested.
d) Unlike the PBA, the ECB requires banks to adopt a valuation methodology fit for asset type.
 Immovable property collateral is required to be valued, adhering to European and international
standards. National standards (local country standards) are also be accepted if they follow similar
principles.
 All immovable property collateral is required to be valued based on market value or mortgage lending
value. A definition of market value is provided.
 Valuations exclusively based on discounted replacement cost method are not allowed.
 For income generating properties, a discounted cash flow or market comparable approach is allowed.
Other criteria are also provided for the use of market discounts, computation of future cash flows, back-
testing valuations, valuation of foreclosed assets and public disclosure requirements related to collaterals.
vi. The PBA guidance on valuation only applies to situations where banks are required to use external valuators.
In cases where banks can perform their own valuations, (outstanding loans below a certain threshold, movable
assets, pledges of current assets, liquid collaterals and certain desktop valuations) there are no minimum
standards for independence, qualification, experience of banks’ internal appraisers or the methodology used.
vii. There is no credible or industry-adopted property price index in Pakistan, which can serve as a benchmark for
desktop valuations or be used by banks or independent reviewers to assess or challenge the valuators’ values.
Property indices for rentals and sale transactions in major areas of Karachi, Lahore and Islamabad are
published by Zameen.com (a private property dealer, not a valuator) but it will be difficult for banks or
valuators to use them without an industry standard. Further there is no central database or information
exchange in Pakistan for banks to acquire information on comparative last-transaction prices for an immovable
asset.
All these factors will affect the quality and accuracy of collateral valuations and could create gaps between the
market values and bank values of collateral. This could result in sub-optimal recoveries against NPLs and affect
investor confidence in the transparency and integrity of the NPL transactions. It is critical for the banking regulator
in Pakistan to consider these shortcomings in the collateral valuation process, if it is to provide credible information
to potential purchasers of NPLs from the banks.
5.12. Collateral Valuation Practices Contributing to Price Gap
Figure 21 summarizes the collateral valuation practices which contribute to a price gap for NPL transactions
between buyers (investors) and sellers (banks).
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FIGURE 21: COLLATERAL VALUATION PRACTICES CONTRIBUTING TO PRICE GAP
•The current PBA guidance on valuation only applies to situations where banks are
required to use external valuators. Where banks can perform their own valuations, there
are no minimum standards for the independence, qualification, or experience of banks’
Lack of guidance staff. Providing this guidance to banks would result in more accurate internal assessments,
for internal and would narrow the price gap.
valuations
•There is very little guidance on the selection and use of generally accepted valuation
methods or international valuation standards such as those published by IVSC, and their
fitness for assets types or purpose of the valuation. The use of asset-specific valuation
Limited methods can result in more accurate valuations, which in turn will help to reduce the price
Collateral gap.
Valuation
Methods
•The PBA guidance for valuators does not mandate that valuator firms to membership of or
are registered with any international valuation standard setting body, such as IVSC or
RICS, or to acquire such status. Such minimum requirements for memberships may helpto
No professional raise the standard of people and processes in valuator firms and improve the quality and
membership accuracy of valuations, ultimately reducing the price gap.
requirement
5.13. Credit Risk Management Frameworks and Practices in Banks in Pakistan
In Pakistan, Boards of Directors of FIs are responsible for ensuring there is an appropriate credit risk management
framework in place. The subject is comprehensively regulated, and banks must ensure there are appropriate
governance, internal controls, and risk management principles for credit risk management. SBP’s risk management
regulations require banks to ensure that the credit sales and initiation teams are independent from the credit review
and risk monitoring teams. SBP has also issued guidelines on the credit governance and approval, usage of credit
scoring models for various credit sectors, and other PRs listing transactional regulatory requirements and exposure
limits.24
i. Credit Risk Governance
A board-level risk management committee is established by the banks to assist Boards in their risk management
responsibilities. Board level risk committees are usually responsible for oversight of the bank’s credit risk, and for
ensuring that appropriate policies and resources are in place for prudent credit risk management.
At a senior management level, it is a general practice to create risk management or credit committees which are
responsible for day-to-day credit risk oversight. An independent risk management department reports directly to
the chief executive of the bank. The credit risk unit of the bank, part of the risk management department, is generally
responsible for portfolio and transactional level credit risk reviews, monitoring, and reporting.
It is essential that the organizational structure of banks in Pakistan separates business development and client
relationship teams from risk review and monitoring teams. The responsibilities and reward structures for both are
required by the SBP’s regulations to be different.
Independent internal audit functions are responsible for annual portfolio reviews, which involves thorough case-
24
State Bank of Pakistan (2014), Risk Management Guidelines for Commercial Banks and DFIs
http://www.dcag.com/images/riskmgm.pdf
80
by-case reviews of sample credit transactions. The objective is to provide independent opinion on the health of the
portfolio as well as the strength of the internal controls in the credit processes.
ii. Credit Approval Cycle
The typical practice for a new loan follows three phases: a pre-approval phase in which credit assessment and
appraisal to decide whether or not to extend the loan; approval phase, in which the loan is reviewed and approved
by the decision makers within the bank; and a post-approval phase comprising the disbursal of the loan and recovery
of loan upon maturity. Annex J contains more details on the three phases.
In most commercial banks in Pakistan, paper-based documents related to loans are scanned for electronic storage
before the originals are filed in a vault. Information necessary for the accounting and core banking system is
populated in the system during various stages of the approval process. Some banks are more digitized than others
with electronic transfer of documents, and document management systems for retrieval and record keeping.
Processes for mainstream consumer financing are more digitally oriented than the customized loans common in
corporate, commercial or SME financing. Pakistan’s, microfinance banks have focused extensively on digitizing
their loan processing procedures and journeys and some have reached the stage of a fully digital end-to-end loan
application to disbursement process. Regionally, IDBI bank from India, has also fully digitized its agriculture and
MSME lending system.
Reasons for commercial banks to lag on digitization include:
a) Legacy IT systems and associated costs to replace, upgrade, and launch.

b) An under-developed ecosystem which relies heavily on the manual exchange of data between banks and
outside parties. For example, banks generally do not get API access to credit bureau data, data from land or
other asset registries. Information received from borrowers is in unstructured formats and any form of
digitization would require extra time to extract, transform and load.
c) Legal proceedings and courts often require certified true copies with wet signatures.
d) The regulatory framework is based on physical controls of authentication and approvals for example, requiring
fingerprints, wet signatures and manually signed applications.
e) When compared with microfinance banks there is little appetite to reduce operational costs, acquisition costs
and minimize turnaround time in commercial banks as they have healthy spreads and low transaction costs.
f) Virtually no infrastructure for electronic contracts from execution to enforcement contributes to this lack of
digitization.
Creating digital loan journeys for corporate, commercial and SME loans, would greatly benefit due diligence
processes in NPL transactions by improving their accuracy, auditability, and speed.
iii. Independent Risk Monitoring
In addition to the case-by-case review pre and post approval of the loan, it is a common for Pakistani banks to form
independent credit risk monitoring teams. The role of these teams is to oversee portfolio and transactional level
credit risks and monitor against acceptable thresholds. The teams also produce periodic credit risk exposure
reporting to the management and board level risk committees.
Credit risk monitoring teams have limited experience and expertise in advanced risk quantification measures. Credit
risk scoring models are generally used, however more accurate measures like Probability of Default (PD) or Loss
Given Default (LGD) are not measured. Although SBP has provided extensive guidelines for stress testing, their
results are often used only for regulatory reporting purposes, instead of playing a role in credit decision making
and strategy formulation.
Portfolio level risk assessments normally comprise rating migration analyses, regulatory stress testing, and good-
bad analysis. On a transactional level, credit case reviews are performed on a sample of credit transactions
performed during a set period (commonly one year). The purpose of these reviews is to assess the credit
81
administration process, the accuracy of credit ratings and overall quality of the loan portfolio, independent of the
relationship with the borrower, using updated information on their financial and business conditions, and the
conduct of the account. Exceptions in the credit monitoring process should also be evaluated for their impact on
the a borrower’s creditworthiness.
iv. Provisioning and Classification
If the reviews conducted by the risk management department indicate impaired loans, then subjective provisions
are made against them as per the SBP’s PRs.
v. Recovery and Resolution
If a loan becomes classified (OAEM, substandard, doubtful or loss), remedial strategies such as restructuring the
loan facility, enhancing credit limits or reducing interest rates are sometimes used to help improve a borrower’s
capacity to repay.
Bad loans can be restructured or rescheduled to facilitate or improve a borrower’s financial health. Collateral
liquidation and court proceedings are a last resort as there is inefficient legal infrastructure around recovery laws
in Pakistan.
Banks commonly determine the recoverable loan amount by valuing available collateral. For this purpose, annual
desktop valuations are conducted, and field valuations are performed at least once every three years using an
external valuator.
Cases for recovery are forwarded to the Special Asset Management Department (SAM), which is a separate division
of a bank which looks after NPLs that require specialized recovery skills (SAMs are independent of business
functions and report either to the CRO, CEO or the COO; models vary from bank to bank). SAMs mainly look
after accounts classified as default and occasionally become involved with watch list, OAEM, substandard loans,
or for amounts less than the bank’s own threshold. SAMs generally work with legal teams to create an account
action plan or recovery strategy, negotiate with clients and relevant parties for recovery and early resolution,
recommend necessary restructuring, rescheduling write offs or waivers, review transferred accounts, and file
recovery suits, liquidation petitions, and liquidation of collateral.
SAMs’ policies for the recovery of NPLs and write offs are often based on:
a) Channeling non-performing or high-risk credits into performing and lesser risk credits
b) Taking coercive recovery measures; and as a last resort, recommending write off
The recovery method used by SAM depends on whether the borrower willfully defaulting or not.
vi. Willful Default
The Banking Recovery Law in Pakistan defines willful default as:
a) Deliberate or intentional failure to repay any finance, loan, advance or any financial assistance received by
any person from an FI after such payment has become due under the terms of any law or an agreement, rules
or regulations issued by the SBP.
b) Utilization of finance, loan, advance or financial assistance or a substantial part thereof, obtained by any person
from a financial institution for a purpose other than that for which such finance, loan, advance or financial
assistance had been obtained and payment in part or full not made to the financial institution.
c) Removal, transfer, misappropriation or sale of any assets collateralized to secure a finance, loan, advance or
82
financial assistance obtained from a financial institution without permission of such institution.25
In case of willful default exit strategies are almost always pursued (rather than rescheduling or restructuring the
loan). Exit strategies involve recalling outstanding loan amounts and initiating legal action if a borrower fails to:
a) Partially settle up-front

b) Agree on an acceptable repayment schedule and rectify the causes of problem
c) Locate absconding defaulters and / or trace hidden assets
Banks can initiate actions irrespective of the amount of default for cases of willful default. They can:
a) Issue 30-day demand notice to the sponsors / guarantor / chief executive or any other person who the bank
deems to have some control in the loan account.
b) In event of failure to repay as demanded in the notices, the bank would refer the case to Governor of the SBP
which would be processed by SAMG head.
c) The Governor will issue seven days’ notice to the defaulters.
d) Should the alleged defaulters fail to respond the matter would be referred to the NAB Chairman for filing
reference.
e) Should payments be received, the Governor office will consider the response in the context of the bank’s
contentions and either refer the case to the NAB or provide directives to the bank to restructure or reschedule
the loan.
vii. Circumstantial/Unwilful Default
Any default that is not willful is classified as circumstantial. In these cases, banks generally try to revive the account
by:
a) Recovery of overdue mark-up and / or principal

b) Strengthening security or collateral
c) Ensuring adequate cash flows to keep the account current by closely monitoring the account and if necessary,
consider rescheduling or restructuring
viii. Restructuring and Rescheduling
Restructuring and rescheduling are commonly used to help a borrower improve their financial health and repayment
capacity. Depending upon the situation, concessions may include:
a) Reduction in mark-up
b) Change of tenor
c) Grant of additional financing
d) Recovery through revenue authorities
When rescheduling a loan, the profit terms usually remain unchanged, but the principal repayment tenor is extended
because the borrower is unable to meet the original payment schedule. Key restructuring policies and practices
followed by banks in Pakistan are in Annex S.
ix. Management buy-outs
Management buy-outs include acquiring a controlling interest in a defaulting company. To implement any proposed
change, a bank may play the part of an investment bank by:
a) Persuading the existing management to exit, and
25
National Assembly of Pakistan (2001), Recovery of Finance Ordinance
http://www.na.gov.pk/uploads/documents/1458282736_494.pdf
83
b) Identifying and encouraging suitable entrepreneurs with financial and management capabilities to take over
the commercially viable business. The bank’s financial involvement continues until the final settlement of
bank’s assets.
5.14. Summary of Key Impediments and Recommendations
Table 16 summarizes the key impediments and recommendations for managing and reporting on NPLs.
The recommendations have been rated and colored according to their priority.
High
Medium
Low
TABLE 16: RECOMMENDATIONS
S No. Impediment Recommendation
NPL Reporting Framework
SBP’s NPL reporting requirements do not SBP should consider requesting non-financial
require banks to report any operational, information about NPLs from banks such as a bank’s
qualitative, or non-financial information. NPL governance model, the operating model of its
1 Qualitative information can provide market SAM function, its NPL strategy or any other similar
intelligence and future predictions which the information. This would align with international best
quantitative information may fail to practices (EBA; ECB guidelines).
communicate.
The SBP’s NPL regulatory reporting SBP should consider segregating the NPL reporting
requirements are standardized for all requirements between high-risk banks and standard
commercial banks in Pakistan and there is no risk banks. This is common in Europe.
concept of proportionality or different Proportionality in NPL reporting supervisory
2
reporting treatments for high-risk banks and standards is used to enhance NPL reporting and
standard risk banks. disclosure requirements for high-risk banks (those
with NPL stocks above a certain threshold) while
keeping the compliance burden to a minimum.
In the SBP’s NPL reporting framework, SBP can consider introducing voluntary NPL
there are no voluntary or best practice NPL reporting, allowing interested banks to share further
reporting requirements. This reduces the details on NPLs. This is in the EBA’s NPL
information SBP receives about NPLs and transaction or screening templates (voluntary) which
3
the transparency of NPL transactions. have been introduced to set market standards for
granular and portfolio level reporting of NPLs and
create a more efficient, transparent, and enabling
market for NPL transactions.
The SBP’s NPL reporting framework SBP should consider enhancing the scope of
requires little information on forborne information it requests from banks on forborne
exposures (loans whether performing or non- exposures and disclosures on the assessment of fair
4 performing which have been restructured, values of NPLs and collateral. Detailed information
rescheduled or have received any other form on credit quality of forbearance, quality and
of concession) and fair values or market effectiveness of forbearance, ageing profile of
values of NPLs and collaterals. forbearance and classification of performing and non-
84
performing forborne exposures should be reported by
the banks. The results of annual assessments (or more
frequently if required) of the fair value or market
value of NPLs and collateral should also be reported
to the SBP.
Ambiguity and lack of guidance on the Basel introduced guidelines on the treatment of
definition, classification, treatment and problem assets in 2016. With these in mind, the SBP
reporting of NPLs and forborne exposures could address the following shortcomings in
(rescheduled or restructured) loans. Pakistan’s NPL reporting framework:
a. No clear guidance on exposure-basis (debtor
approach) classification when multiple loans have
been granted to a borrower or to a borrower in a
group.
b. No all-encompassing definition, classification,
treatment and reporting measures for forborne
exposures.
5
c. The SBP PRs do not cover the definition,
classification, treatment, and reporting criteria for
forborne performing exposures which would have
been classified as NPLs if they were not allowed
concessions.
d. Terms such as ‘Concession’, ‘Forborne Exposure’,
‘Unlikeliness to pay’, and ‘Financial Difficulty’ are
not clearly defined.
e. Reporting and treatment measures for loans or
exposures with multiple restructurings (forbearance
measures) are not defined.
Write off Requirements of SBP vs IFRS 9
Under the SBP requirements banks may IFRS 9 writing off occurs when an entity has no
write off loans that are still subject to reasonable expectation of recovering all or part of a
enforcement activity as the banks can seek to financial asset although it is understandable to have
recover amounts they are legally owed in prudential standards which are more stringent than an
6
full, but which have been partially/wholly accounting standard.
written off. This allows the bank to write off
loans without assessing all the possibilities
and chances of recovery.
Collateral Valuation Framework
The PBA and PRs do not provide any SBP could consider developing a collateral valuation
guidance to banks for performing collateral framework for banks to perform valuations
valuations inhouse. The banks may have the internally.
resources and expertise available to perform
desktop valuations (which must be
7
conducted annually by either the bank or an
external valuator). The PBA guidance or
PRs on valuation only applies to situations
where banks are required to use external
valuators.
8 The PRs or the PBA guidance provide very SBP should provide guidance on collateral valuation
little guidance on the selection and use of methods and consider introducing multiple methods
85
accepted valuation methods. This raises for valuing the different asset types like the collateral
ambiguity as to which valuation method is valuation practices in Europe. European banks use a
appropriate for which asset class. variety of approaches such as market-, income-, and
cost-based. The ECB does not allow valuations to be
exclusively based on a discounted replacement cost
method, whereas in Pakistan this is widely used for
plant and machinery valuations. The ECB guidance
on NPLs has clear expectations around the use and
suitability of valuation methods and other aspects of
collateral valuation for banks. Further, international
valuation standards such as those published by IVSC
provide guidance on valuation methods and their
fitness for asset types and the purpose of the
valuation which can be prescribed by SBP.
External valuator firms are required to PBA could encourage professional valuator firms to
perform collateral valuation assessments become a member of a recognized valuation standard
according to the PBA guidance. However, setting body.
these firms and their staff are not the
9 members of any recognized international
valuation bodies such as IVSC or RICS. This
may cast a doubt over the accuracy of
collateral valuations being performed in
Pakistan.
86
6. SECURITY ARRANGEMENTS, INFORMATION FRAMEWORK AND RISK
MANAGEMENT
6.1. Overview of Secured Transactions Regime and Related Impediments

Removing the legal and regulatory impediments to secured transactions and enforcing security interests over
movable and immovable assets (from a cost and timing perspective) could have a positive impact on the pricing of
NPLs by buyers and enable a secondary NPL market to be developed in Pakistan.
6.1.1 Security Interest over Movable Property
The common forms of security interests for movable property in Pakistan include hypothecation (a charge created
by a borrower on movable property, without delivery of possession of the movable property), pledges, liens,
assignment of receivables by way of security and title retention arrangements, such as finance leases.
Movable property comprises a wide asset base including present and future assets, tangible or intangible property,
property attached to immovable property (such as plant, equipment, machinery, fixtures and fittings, cables and
pipelines embedded in the earth or otherwise).
The Financial Institutions (Secured Transactions) Act, 2016 and the Companies Act, 2017 govern security interests
over movable property and the registration of security interests over corporate assets.
Among other things, the Secured Transactions Act covers:
 Creating security interests over corporate and non-corporate assets. Security interest may be created over
movable property by entering into a security agreement to secure obligations of a borrower. Security interests
created over movable property can extend to commingled goods and the proceeds of collateral, except as
otherwise agreed in terms of the security agreement
 The effectiveness of security interest against borrowers. Security interest shall be effective when the borrower
and the bank or DFI have agreed to create a security interest (against value to the borrower) over collateral
which the borrower has the right to create security interest.
 The perfection (making the security interest effective against third parties) of security interest over corporate
and non-corporate assets. If the security interest is created by a company, it may be perfected by registering
with the companies’ registry under the Companies Act, and if the security interest is created by a non-corporate
entity, it may be perfected by registration with the secured transactions registry set up under the Secured
Transactions Act (except in the case of security interest in collateral covered by a title document, security
interest in negotiable instrument or a right of payment of funds credited in a deposit account - perfection may
be by way of possession/control alone (as applicable)). Both the companies registry and the secured
transactions registry are under the administrative control and operation of the SECP.
 Priority of security interests over corporate and non-corporate assets. The general priority is: (i) between
unperfected security interests, the first to create security interest; (ii) a perfected security interest has priority
over unperfected security interest; and (iii) between perfected security interests, the first to perfect the security
interest.26
 Enforcement of security interest. A security interest may be enforced through a recovery suit while some.
security interests can be enforced without the intervention of a banking court. Security interests that can be
26
Under Chapter 11 of the Secured Transactions Act, certain special priority rules have also been prescribed.
87
enforced without a banking court include pledges, assignment of receivables by way of security,27 perfected
security interest in negotiable interest,28 a right of payment of funds credited in a deposit account, and security
interests based on retention of title or title documents.
 Enforcement of pledges: Pledges may be enforced without court intervention after a notice has been issued to
a borrower after default. The notice may be waived if the collateral is in danger of being wasted,
misappropriated or is perishable, or the amount of finance exceeds 10 million rupees.
 The duty of borrowers over non-possessory security interests. Borrowers are obligated to exercise care in the
custody, preservation, maintenance or exploitation of the collateral.
 Rights of secured creditors in case of insolvency of borrower. Secured creditors have the right to stand outside
of insolvency proceedings and a secured creditor’s claim has priority over any preferential claim irrespective
of whether the claim was made before or after the security interest was created. There are several aspects of
legislation requiring clarification before establishing an NPL market in Pakistan. Since the Companies Act
and the Secured Transactions Act were enacted at different time, it is necessary to align some of their
provisions to ensure clarity. For example, the concept of perfection of a pledge through possession alone under
the Secured Transactions Act, is contrary to the pledge registration requirement under the Companies Act.
 Pakistan’s Secured Transactions Act does not override anti-assignment clauses which is contrary to the
UNCITRAL Model Law on Secured Transactions. This means where the underlying contract has an anti-
assignment clause, the rights under a contract cannot be assigned without the consent of the account debtor.
o An amendment ordinance to partially align the Secured Transactions Act with the UNCITRAL
Model Law on Secured Transactions solved some of the issues relating to contractual limitation on
absolute assignment or assignment by way of security but it has now lapsed and has ceased to have
any legal effect. Fresh legislation to make the necessary changes is currently before Parliament.
 Further amendments to clarify some legislation in the Secured Transactions Act or insolvency laws may be
considered.
 Judicial precedents have confirmed that secured creditors can stand outside of insolvency proceedings,
however that principle will cease to have statutory force once the Secured Transactions Amendment is
enacted.
 The question of priority of a secured creditor’s claim over preferential payments owed by the borrower
to government authorities (such as tax) that arose prior to creation of the security interest has been the
subject of some litigation. The courts have consistently held that a secured creditor takes precedence over
all government claims created or accrued after the security interest of the secured creditors with some
exceptions.29
 In the banking industry, pledges were mostly created by way of constructive possession held by the muqaddam
(third parties appointed by banks or DFIs for constructive possession of secured movable assets). The risk with
27
The right to enforce any assignment of receivables by way of security also includes the right to enforce security over movable or
immovable property that secures the payment of receivables,
28
A security interest in negotiable instrument includes security interest over asset securing amount payable under the negotiable
instrument.
29
In the case of floating charge, the matter of priority of secured creditors over Government claims created or accrued prior to the
security interest may be addressed and resolved through the noted amendments. Section 65-A (as had been inserted vide the Secured
Transactions Amendment) confirms the priority of secured claims over all claims (including Government claims), in view of the
aforementioned judgments, it may be clarified that secured claims (unless otherwise provided for) shall not be subject to any preferential
claim (whether arising before or after creation of security interest) by any person or authority. For example, see Habib Bank Ltd. v
Messrs Rudolf Donhill (1999 PTD 2940 (Karachi High Court)) and Kenhill Limited, Karachi v. I.T.O., CO.CIR.A-3 (2000 PTD 1193
(Karachi High Court)).
88
this practice is the muqaddam creates multiple pledges over the same goods in collusion with borrowers and
releases pledged goods without authorization. Although recent changes to legislation means pledges must be
registered, the practical risk of collusive behavior between the borrowers and muqaddam and improper release
by muqaddam remains.
 The Collateral Management Companies Regulations, 2019, issued by the SECP covers the registration,
management and reporting requirements for collateral management and warehousing activities. Naymat
Collateral Management Company Limited is the only collateral management company licensed with the
SECP. The scope of these regulations is limited to managing and warehousing agricultural produce. A separate
legislative framework may be required for collateral management activities for other types of movable assets.
6.1.2 Security Interest over Immovable Property
There are many ways that security interest may be created over immovable property in Pakistan., the most ones
commonly used are simple mortgage and mortgage by deposit of title deeds, with the lender as security against
default by the borrower.
Some of the issues relating to immovable property include land title system and disputes in Pakistan, mortgage by
deposit of title deeds, and feasibility of English mortgage.
Land Title System and Disputes
The legal framework governing the ownership, transfer, acquisition, taxation, registration, tenancy of immovable
property across Pakistan includes several Acts.30 The title system associated with purchasing immovable property
is both laboriously complex and very insecure. Apart from issues relating to court procedures and the difficulty in
enforcing mortgages, other issues with the land titling system and ensuing disputes impede and delay the
enforcement of security interests over immovable property (either through or outside of court proceedings).
 The title system still largely based on the traditional deeds registration system where a sale deed serves as the
document of title and must be manually registered with the registrar of the locality where the immovable
property is situated.
 The onus of investigating the ‘good and clean chain of title’ is on the prospective purchaser. The purchaser
must approach the local patwari or registrar of the immovable property’s locality and search through a vast
paper-based record to verify the validity of the sale deed to the present owner.
 Land disputes are prevalent in Pakistan, many of which may, as acknowledged by courts, government officials
and authorities, include frivolous claims.
The legal issues relating to land titles are especially relevant to mortgages and the recovery of NPLs secured through
mortgages on immovable property.
To streamline the land title system and iron out these legal irregularities, the Government of Pakistan has set an
agenda to reform the land title system by establishing a centralized and digitized system of land records. The
provinces of Sindh, Punjab and Khyber Pakhtunkhwa have provided complete land records of state-owned land to
begin the digitizing process of land records.
The United Nations HABITAT in Pakistan has also started a pilot program with the Board of Revenue for
improving land records service delivery and enhancing the land management system in Khyber Pakhtunkhwa. A
Digital Land Information System using a Management Information System (MIS) and a Geographic Information
30
Transfer of Property Act, 1882; Punjab Tenancy Act, 1887; Government Tenants Act, 1893; Registration Act, 1908; Land
Acquisition Act, 1894; Colonization of Government Lands Act, 1912; Sindh Tenancy Act, 1950; Khyber Pakhtunkhwa Tenancy Act,
1950; Provincial Land Revenue Act, 1967; Balochistan Tenancy Ordinance, 1978; Land Records Manual; Land Administration
Manual; and Settlement Manual.
89
System (GIS) has been provided to the Board of Revenue to replicate across other provinces. To date there has
been little progress in sharing the system across provinces.
Mortgage by Deposit of Title Deeds
The most common type of security interest over immovable property in Pakistan is a mortgage by deposit of title
deeds.
As a general rule, any document that creates an interest in immovable property must be registered with the sub-
registrar local to the property. If not registered, the document fails to create any right or interest in immovable
property.
A mortgage by deposit of title deeds, on the other hand, is an oral transaction and no document is legally required
to be executed or registered. Corporate borrowers are an exception – they must register mortgages and charges
over immovable property with the SECP. Although not a legal requirement, it is an established practice to obtain a
memorandum in writing from the mortgagor recording that the borrower has deposited the title deeds with a bank
or DFI with the intention to secure its obligations. These memorandums are a private document between the bank
or DFI and the borrower and are not registered.
To make these mortgages public and to protect against sale to third parties, it is common to create a mortgage by
deposit of title deeds and couple it with a token registered mortgage. A token mortgage is registered for a small
percentage of the loan, while to cover the remaining portion of the loan, a mortgage by deposit of title deeds is
created on the property as security. Legally, the token mortgage adds nothing to the security interest when a
mortgage by deposit of title deeds has been created, and they can only be enforced for the amount secured under
the token mortgage.31
It is important to note that for the purposes of recovery proceedings banking courts (and the High Court) must
accept any document that creates a security interest regardless of whether it requires registration by law. This
requirement is under the Banking Court or High Court Section 18(4) of the Recovery Ordinance. Similarly, if a
financing document or a security document that requires registration has not been registered, it can still be admitted
and recognized in evidence.
It remains to be determined whether the effect of Section 18(4) is to only admit unregistered instruments in the
Banking Court or High Court or, it goes beyond that, to treat unregistered documents as creating rights in property
even when they have not been registered. If the latter is adopted, it means that Section 18(4) renders the Registration
Act redundant as far as financing by banks or DFIs is concerned.32
English Mortgage
It needs to be determined whether a mortgagee bank or DFI can acquire the mortgage property in its own name at
the time of granting a mortgage, and where whether the property can further the interest of a mortgagee for
enforcement purposes.
While it may be legally feasible, it could be argued that it is not likely to further the interests of the mortgagee bank
or DFI.
31
As currently, there is no registration of mortgage by deposit of title deed, registration of token mortgage under the Registration Act
can technically serve to put the public to notice. Given, however, the flaws in our land titling system (as noted above) the practical utility
of such notice is unclear.
32
At least two decisions of the Karachi High Court support the latter interpretation on the basis that the Recovery Ordinance was
special law and hence it prevailed over the provisions of the Registration Act (a general law). 32 However, both decisions dealt with a
mortgage created by deposit of title deeds which, as a matter of law, is not required to be created through a registered instrument. See
Muhammad Sarwar Khan v Habib Bank Limited) (2004 CLD 881) as followed in Mubarak Ali vs. First Prudential Modaraba (2006
CLD 927 (Karachi)).
90
The Transfer of Property Act defines an “English Mortgage”.
“Where the mortgagor binds himself to repay the mortgage-money on a certain date, and transfers the
mortgaged property absolutely to the mortgage [mortgagee], but subject to proviso that he will re-transfer
it to the mortgagor upon payment of the mortgage-money as agreed, the transaction is called an English
mortgage.”
When taken literally, an English Mortgage is an absolute transfer. However, it can also be understood to be a
mortgage with the caveat of the mortgagor having the right to retransfer upon payment of the mortgage money.
While reported Pakistani judgments on the subject have not been found, there is a question of interpretation in
similar Indian legislation which have gone to court. There is one line of cases where the courts have treated an
English Mortgage as an absolute transfer,33 and others that have held that an English Mortgage cannot be
substantively considered an absolute transfer.34
While resolving the controversy by amending the TP Act is possible, on balance, it would be better not to do so.
 For example, if the English Mortgage is treated as an absolute transfer, there could be privity of contract
between the mortgagee bank or DFI and say, a tenant on the mortgage property This can effectively make the
mortgagee bank or DFI liable in relation to the mortgage property as its owner, a level of risk that most banks
would be unwilling to take.35
 If the English mortgage is not treated as an absolute transfer, then it would be a mortgage and its efficacy of
enforcement would face similar land titling system constraints that are prevalent in Pakistan as other
mortgages.
6.1.3 Syndicated Security Arrangements
Many financing or security arrangements in Pakistan are based on trust. For example, financing raised through debt
security instruments or trust arrangements for custody and the enforcement of security interests in the case of
syndicated financing. A recent overhaul of trust laws set out the detailed process registering trusts in Pakistan. This
market diagnostic, briefly highlights: (i) the requirements of the revamped trust laws; (ii) the impediments in
creation of syndicated security arrangements under trust structures that may ultimately have implications for
servicing of NPLs acquired by buyers as well as pricing of NPLs in the primary and secondary markets; and (iii)
makes related recommendations.
Security interests created through a trust instrument in favor of a trustee, for the benefit of banks or DFIs (Security
Trust Instruments) are commonly adopted for large-syndicated financing provided to corporate borrowers.
Security Trust Instruments must be registered with the Assistant Director in each District under the Industries and
Commerce Department of Sindh, within a period of time to be notified by the Sindh Government (to our knowledge
this timeframe has not yet been issued). Trusts not registered will stop functioning or operating.
Trusts’ registrations must be renewed annually, and trustees should apply for renewal 30 days before the registration
expiry date.
This registration under the Sindh Trust Laws is cumbersome and the requirement to renew annually is likely to
create concerns for secured creditors. Changes to legislation would help to alleviate this challenge.
 Under the Sindh Trust Laws, given that they are otherwise regulated, ‘specialized trusts’ (including trusts for
creating collective investment schemes and vehicles, debt securities, employee benefit funds, provident,
pension and gratuity funds) are treated differently. Security trust instruments in the context of syndicated
financing are not classed as ‘specialized trusts’.
33
Bengal National Bank v Janaki Nath Roy (AIR 1927 Cal 725).
34
Falakrishna Pal v Jagannath, (AIR 1932 Cal 775).
35
Ramkinkar v Satyacharan (AIR 1939 PC 14).
91
 A ‘no-objection certificate’ from the relevant regulator satisfies the registration requirements for specialized
trusts and it is not necessary to annually renew a specialized trust.
 –To be treated as a specialized trust where the security is held for and on behalf of banks or DFIs, the following
is required:
 Certain directives to be issued by the SBP to regulate the creation of security interests in favor of a security
trustee; and
 A notification (published in the official Gazette) from the Sindh Government.
6.1.4 Multiple borrowings

It is common in Pakistan for multiple banks or DFIs to simultaneously lend to borrowers on the condition that a
bank or DFI procures a no-objection certificate (NOCs) from the bank or DFI that has already lent to the borrower.
The NOC is intended to ensure that both lenders hold the underlying security equally. In many of these cases lenders
do not enter security sharing agreements. This means there is often no understanding among the banks and DFIs of
how to enforce the security upon a default which can cause delays in enforcing or settling NPLs. Where the security
is held on a ranking basis the problem becomes more acute where the inferior charge holder wishes to enforce, and
the superior charge holder does not.
To alleviate this problem, banks and DFIs should draw up suitable agreements as guided by the PBA through
suggested drafts or example templates.
6.2. Registries and Information Framework
The credit information system in Pakistan is based on the eCIB, which is operated and maintained by the SBP, and
licensed private credit bureaus, which are regulated by the SBP.
6.2.1 Credit Information System - eCIB

The first credit information bureau was established by the SBP in 1992 and was made electronic in 2003 through
the eCIB.
 All banks, DFIs, non-bank financial companies and micro finance banks of Pakistan are members of the eCIB.
 The eCIB collects and collates credit data about borrowers (including corporate borrowers) which it uses to
create credit reports of borrowers
 Various PRs issued by the SBP require banks and DFIs to assign a weighting to the credit reports whilst
considering proposals for any exposure (including renewal, enhancement and rescheduling or restructuring).
A negative credit report does not prevent lending to a borrower, provided that a bank or DFI strictly follows
its own risk management policies and credit approval criteria and properly records the reasons for the
approving the financing.
 If borrowers are 90 days’ overdue on repayment, banks and DFIs are required to notify borrowers they have
15 days to reconcile or settle liabilities before reporting the name of the borrower to eCIB’s list of defaulters.
 Borrowers can approach their bank or DFI for complaint resolution. If the matter remains unresolved, they can
lodge a complaint with SBP and subsequently the banking mohtasib. After exhausting these options, borrowers
aggrieved by a Credit Report (or who distrust the genuineness and truthfulness of information supplied by any
bank or DFI) may challenge the report before High Court.36
36
The Lahore High Court36 (Messrs Yousaf Sugar Mills vs. Trust Leasing Corporation and others (2006 CLD 1191).)
whilst deliberating upon the issue of placement of a person on the defaulter list of the SBP held that such an action was unmerited prior
to determination of the genuineness of the information received. Subsequently, this reasoning has been applied in various cases where
the veracity of a Credit Report was challenged by a borrower and the High Court held that the SBP is required to ascertain the
genuineness and truthfulness of the information provided by a financial institution before making it available to other financial
institutions. Placing a person on eCIB’s list of defaulters can negatively impact a business’ ability to enter freely into a contract with
financial institutions and impedes the right to free trade (Tanveer Shakoor vs. FoP etc. (2020 CLD 728) and Messrs Yousaf Sugar
Mills vs. Trust Leasing Corporation and others (2006 CLD 1191)).36
92
 There are other laws that provide protection against the dissemination of false information, however, to date
no proceedings against a bank or DFI for dissemination of false information have been initiated under these
laws.
6.2.2 Credit Bureaus

The e-CIB is the only credit information bureau that provides a comprehensive report for borrowers as all banks
and DFIs are members. Apart from e-CIB, there are two other licensed private credit bureaus operating in Pakistan.
Based on discussions with the SBP, private credit bureaus have recently been authorized to collect credit
information from utility and telecommunication companies.
All Banks or DFIs are required to become members of and provide credit information to at least one private credit
bureau. This means private credit bureaus may not have complete credit information about borrowers as not all
banks and DFIs are their members.
 Private credit bureaus collect information from various sources including credit institutions, persons, entities
(non-financial companies and bodies, lenders and authorities), and include any court judgements related to a
borrower in their records.
 Banks or DFIs are required to send intimation letters to borrowers before reporting them as defaulters to private
credit bureaus and provide them with at least 15 days for reconciliation or settlement of overdue liabilities.
 Unlike the eCIB (where credit reports are only available to the members of the eCIB) any person may obtain
and pay for a credit report from a private credit bureau.
 Private CIBs are obliged to take reasonable steps to ensure the credit information they collect and disseminate
is accurate, complete, and not misleading and they have a duty to disclose the source of their information
should borrower request.
 A borrower may file a complaint with the SBP against a private credit bureau for disseminating false
information, and if aggrieved by the outcome of their complaint, may appeal to the High Court.
6.3. Recommendations
Table 17 presents a summarized list of key impediments and related recommendations relating to security
arrangements, information frameworks and risk management.
The recommendations have been colored according to their priority.
High
Medium
Low

Certain provisions of the Companies Act Enact of fresh legislation (currently pending before
are not aligned with the Secured Parliament) to effect the changes proposed under the
1 Transactions Act. Secured Transactions Amendment.
93
Contrary to the UNCITRAL Model Law Enact fresh legislation (currently pending before
on Secured Transactions, the Secured Parliament) to effect the changes proposed under the
2 Transactions Act does not override Secured Transactions Amendment.
contractual anti-assignment clauses.
While ever the practice of constructive A separate legislative framework may be required for
possession of pledged assets through collateral management activities for movable assets as
muqaddams continues, there is a practical the existing framework focuses primarily on
3 risk of collusive behavior as between agricultural produce.
borrowers and muqaddams and improper
release by muqaddams.
The land title system in Pakistan is still The process of centralization and digitization of land
largely based on manually title system across Pakistan needs to be completed in
registered sale deeds which is a time urban as well as rural areas.
4 consuming and unreliable process and
does not facilitate public access to
reliable land records.
With the recent revamping of trust laws To help create and register trusts for holding security
in Pakistan, creation and registration of interests for financings, and to bring them in line with
syndicated security arrangements has financing raised through the issuance of debt securities,
become complex and could have it is recommended that security trusts created as part of
5 implications for the servicing of NPLs syndicate financings should be classed as specialized
acquired by buyers and the pricing of trusts for which the registration requirements under
NPLs in the primary and secondary trust laws have been relaxed.
markets.
With respect to multiple borrowings, in Banks and DFIs should be encouraged to enter
many cases, there is no understanding intercreditor and security arrangements.
among the banks or DFIs as to how to
6 manage or enforce the security upon a
default – which contributes to delays in
enforcement or settlement of NPLs.
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7. TAXATION LAW AND PRACTICE FOR NPLS IN PAKISTAN
7.1. Overview of NPL Taxation in Pakistan

The income and profits of a banking company in Pakistan are taxed as per the provisions of the 7th Schedule of the
Income Tax Ordinance, 2001 (ITO). There are some sections in the Ordinance such as those relating to tangible
assets, and disposals which apply to the taxation of banks. It also states that all matters not specifically covered by
the 7th Schedule, will be dealt with according to the relevant section in the Ordinance.
The over-arching provision (with some exceptions) requires banking profits are taxed based on their annual
financial statements. In Pakistan, banks are incorporated as public and/or public listed companies and their financial
statements are prepared according to the format of financial statements prescribed by SBP through BPRD Circular
No. 02 of 2018 and in accordance with IFRS, IFAS as notified by the Companies Act, 2017 and the provisions of
the Banking Companies Ordinance, 1962.
The rules of allowance or deductibility of provisions are:
 Provisions for advances and off-balance sheet credits for consumer and SME portfolios (gross of any reversals)
classified as ‘loss’ are allowed at a maximum of 5 percent of the total advances for a bank, subject to an
external auditor’s certificate.
 Provisions for all categories of advances and off-balance sheet credits classified as ‘loss’ except for consumer
and SME financing, gross of any reversals, are allowed at a maximum of 1 percent of the total advances for a
bank, subject to an external auditor’s certificate.
 Provisions exceeding 1 percent or 5 percent for specific portfolios may be carried forward by banks.
The 7th Schedule was introduced to harmonize the taxation of banks with the rules of computation provided by the
PRs and the relevant accounting framework. However, subsequent amendments have introduced inconsistencies
between the tax computations, PRs, and the accounting computations. For example, the Schedule initially provided
thresholds based on classified advances, which was later changed to gross advances. Initially loan loss deduction
limits were applicable to the doubtful category, and this was removed to restrict the allowance to only loss
categorized advances.
Comparing the tax laws in Pakistan, with others globally, there are two methods to tax loan losses. The first is the
charge off or write off method where loan losses only become tax deductible when the debt is deemed fully
uncollectible, written off in the accounts, and legal or prudential criteria are satisfied. The second is a reserve or
provisioning method where a loan loss provision either in full or in part (subject to a limit) is allowed. These criteria
apply to specific provisions, as general provisions or floating provisions are not allowed in many countries.
The tax treatment of loan losses and provisions in Pakistan follows the reserve method. This practice is consistent
with the methods of tax treatment of loan losses globally. For example, in India, banks are allowed a tax deduction
for provisions for doubtful and bad debts to the extent of 8.5 percent of adjusted total bank income with an
additional 10 percent of the total average advances of the bank’s rural branches.
7.2. Taxation of Loan Provisions, Deductibility and Reversals
The thresholds for allowing a tax deduction for provisions should be reviewed to ensure that tax deductions cover
the loss accrued by a bank as result of a loan becoming non-performing without delay or advance. The tax law in
Pakistan does not allow for a provision to be deducted until the loan has reached a stage where it is classified as
‘loss’ – typically at least one year from when it was first classified as an NPL.
 Generally, as per the SBP’s PRs, a NPL is classified as ‘loss’ when it is 365 days or more overdue but it must
be classified as an NPL in the ‘sub-standard’ category soon as it is 90 days overdue. This means from the date
that an exposure is classified as non-performing, there is an approximate lag of 275 days before it can avail a
corresponding tax deduction. And, when available, such deduction is subject to maximum limits, causing the
spill-over to be carried forward.
 These provisions would make it desirable (not necessarily possible) for a bank (purely from a tax perspective)
to delay a provision until either the exposure becomes performing, or it qualifies as ‘loss’ or for write off.
 For deductibility the tax treatment of ‘loss’ NPLs and written off loans is similar because the tax benefit or
deduction becomes available as soon as a loan is loss classified or written off. The only difference between
95
the two is that the maximum limits of 1 percent or 5 percent do not apply to write offs, making them the only
scenario where the full benefit of tax deduction is available to a bank.
Thresholds need to cover all types of portfolios of a bank to stay relevant. The SBP has issued PRs for corporate
and commercial banking, agriculture finance, housing financing, infrastructure finance, consumer finance,
microfinance and SME finance. However, the ITO only provides specific deductibility criteria for SME finance
and consumer finance, leaving all other classes of advances with the 1 percent deductibility limit or to be adjusted
to fit the definition of a consumer or SME.
The tax provisions for deductibility thresholds need to evolve based on Pakistan’s economy and to make sure that
tax deduction is allowed timely and substantially covers losses accrued by a bank when loans become non-
performing.
The implementation of IFRS 9 is expected by January 2022. The existing tax framework provides limits that are
designed to ensure that loan losses are only fully allowed for tax purposes when a loan has become uncollectible
or bad. On the contrary, IFRS 9 requires early recognition of provisions based on the probability of default
determined at the time a loan is booked. and for the complete life of the loan. It is expected that post-
implementation, the stock of general provisions for banks will increase as banks recognize additional provisions
for the performing category of loans required under IFRS 9. General provisions are not tax allowable and are seen
as immaterial compared with the size of specific provisions. However, when general provisions increase on an
industry level and continue to be disallowed in the tax framework, there is a pressing need to revise, expand and
harmonize the tax deductibility limits with those in the prudential and accounting frameworks.
Reversal of provisions for loans which are loss categorized are treated as income in the tax year in which the
reversal occurs. In practical terms, it is common for tax authorities in Pakistan to pick up provision reversal
transactions for previously disallowed provisions, designate them as income and re-determine a bank’s tax liability,
causing double taxation. These are often successfully challenged by banks in Income Tax Tribunals which wastes
considerable time and effort.
For financial reporting and accounting, it makes sense for banks to book provisions in a given financial year, net
of provision reversals. Historically, banks have submitted provisions for tax deduction net of reversals as per their
accounting practice. This resulted in challenges for banks when provision reversals (which had already been netted)
were taxed as income. Amendments in 2019 to the Finance Act clarified that provisions would be allowed gross of
reversals (with the aim to tax provision reversals as income separately to when the reversal took place). The impact
of this is as yet unknown, but it is likely that the amendments which create another disparity between the tax law
and accounting practice, will add complexity to the tax assessment process when there are different tax periods
involved, and require banks to maintain excessive internal records and reconciliations to satisfy the needs of tax
authorities. These issues could be avoided if more harmonized and simplified tax rules were introduced.
7.3. Taxation of Loan Write offs
Advances written off by a FI are allowed as a deduction with the condition that ‘there are reasonable grounds for
believing that the debt is irrecoverable’. This provision seems excessive and has the potential to hamper genuine
deductions to banks whose write offs are approved by its Board of Directors and meet the minimum criteria
provided by the regulator. Write off proposals to the Board are certified by a bank’s internal audit department and
the write off transaction is later audited by external auditors. Tax authorities demand extensive evidence to allow
write offs, disregarding the fact that there are multiple regulatory, policy and third-party checks that a bank must
complete before it can book a loan write off. The tax law should be updated to rely on those checks and introduce
loan write off provisions which are less cumbersome for banks.
7.4. Tax Treatment – Fair Value Considerations in Sale of NPL

As discussed above, the income and profits of a banking company in Pakistan are taxed as per the provisions of the
7th Schedule of the Income Tax Ordinance, 2001. This includes profit and/ or losses arising from all the revenue
streams in a bank. As described earlier, these profits and/or losses are determined based on the annual audited
accounts of banks prepared in accordance with the applicable accounting framework in Pakistan (with some
exceptions or disallowances) and submitted with the State Bank of Pakistan. Further, the 7th Schedule disallows
recognition of any notional losses or gains by a bank unless the actual event of the gain or loss has occurred.
Therefore, any gains or losses recognized as a result of book entries (such as fair valuation or impairment) are
disallowed.
The ITO (including the 7th Schedule) does not cover the tax implications of an NPL portfolio sale, transfer,
securitization, fair valuation, and deductibility or gains or losses arising from an NPL transaction. In the absence
96
of specific tax provisions, transactions involving NPLs will be tax based on the existing tax framework and rules
in the applicable accounting framework. This may create interpretational issues between banks and tax authorities.
 Where NPL portfolios are sold or transferred to Special Purpose Vehicles (SPVs), the transactions might not
be counted as a tax liability as they do not meet the criteria of a true sale or an outright sale. The Commissioner
Inland Revenue Commissioner can re-characterize a transaction or an element of a transaction that was
conducted as part of a tax avoidance scheme. The Commissioner can also disregard an entity or a corporate
structure that does not have an economic or commercial substance or was created as part of a tax avoidance
scheme. It would be prudent for the taxation framework in Pakistan to recognize special transaction structures
as acceptable means of NPL market transactions.
 The book value of an NPL portfolio at the time of sale or transfer will be another point of confusion. The ITO
does not recognize book entries or provisions against NPLs except for those categorized as ‘loss’ and
deductions are subject to maximum ceilings of 1 percent or 5 percent of gross advances. The result is that the
NPL book value for taxation purposes is likely to be higher than the accounting book value. Currently, there
is no provision to immediately allow unused tax deductions for loan loss provisions in the case of the sale or
derecognition of the NPL portfolio. This inconsistency between tax and accounting gains or losses could be
managed with deferred taxation. However, it is likely that tax authorities will question the market value or
below book value market value of NPLs which could create permanent differences between accounting and
tax gains or losses. These would remain unused (for tax allowance purposes) indefinitely disadvantaging NPL
sellers. In other words, these permanent differences will arise and continue to exist if the un-used or disallowed
provisions in the excess pool are not allowed to be deducted at the time of sale or transfer. The impact of these
differences could be rising NPL price gaps which are known to be a detriment to the development of a
secondary market.
 Permanent differences of tax consequences may also arise where the NPL book value for a bank includes
principal receivables, mark-up receivables, any contractual penalties or surcharges, and any impairment or fair
valuation losses, while the tax law only recognizes the principal receivable as the tax book value of a loan.
 Where an NPL sale transaction is received other than in cash (for example against issuance debt or equity
interest, which is not publicly traded), it will be difficult to determine the fair value of the payment in the
existing taxation framework without guidance. The ITO should allow generally accepted fair valuation
methods to be used to determine the value received in an NPL sale. It currently says that if the price of an
asset, except immovable property, is not ordinarily ascertainable, then the price may be determined by the
Inland Revenue Commissioner. The Commissioner’s discretion in this case may create challenges for buyers
and sellers of NPL portfolios, where fair values are determined and negotiated based on internal cash-flow
models and not by reference or comparison to an active market.
7.5. Shortcomings in the Taxation Framework Contributing to a Price Gap
Figure 22 summarizes the shortcomings in the current taxation framework which may contribute to a price gap for
NPL transactions between buyers (investors) and sellers (banks).
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FIGURE 22: SHORTCOMINGS IN TAX FRAMEWORK CONTRIBUTING TO PRICE GAP
•There is no provision in the ITO for the immediate allowance of unused tax
deductions for loan loss provisions in case of sale or derecognition of the NPL
portfolio. This inconsistency between tax and accounting gains or losses could, be
managed with deferred taxation. However, if the tax authorities are likely to question
the market value or below book value market value of NPLs which may create
Unused Tax permanent differences between accounting and tax gains/ losses. These could remain
deductions on sale unused (for tax allowance purposes) indefinitely disadvantaging NPL sellers (banks)
or transfer of NPLs and adding to the price gap.
•To deduct written off loans under the taxation framework, there is a requirement of
'reasonable grounds for believing that the debt is irrecoverable’. This requirement
creates an administrative hindrance for expenses (write offs) already booked,
approved, and audited by banks. Removing this barrier would encourage timely
Administrative recognition of write offs and reduce potential price gaps.
hindrance for
written off loans
•Under the ITO, provisions for NPLs are not taxable until the loans become classified as
‘loss’; even then, the allowance limit is 5% of the gross advances for consumer and
SME loans and 1% of the gross advances for all other loan types. General provisions
are fully disallowed. The provisions are restrictive, delay the allowance of benefits to
Restrictive banks, and contribute to a price gap.
deduction limits for
loss provisions
7.6. A summary of key impediments and recommendations
Table 18 summarizes the key impediments of taxation law to creating a secondary NPL market and related
recommendations. The recommendations are colored according to their priority.
High
Medium
Low
98
S no. Impediment Recommendation
1 i. Loan provisions should be treated in the

Delay and limitation in the tax allowance of
loan provisions. same way as they are in the Prudential
Regulations and the accounting framework.
Provisions for NPLs are not tax allowable
until loans become classified as ‘loss’.
ii. Limits and allowable provision categories in
When loans are classed as a loss, the
provisions are tax allowed at 5% of gross the tax framework should be revised to
advances for consumer and SME loans and allow sufficient and timely deduction of
1% of gross advances for all other types of provisions given the likely uncollectible
loans. cash flows in each of the categories.
This delays and limits the tax deduction
benefits available to banks for loan loss
provisions. The need for an auditor’s
certificate to be able to claim a tax
deduction exacerbates this issue.
Implementing IFRS 9 in 2022, is likely to
add to the stock of general provisions for the
banking industry and increase the number of
disallowed deductions to banks.
2 i. In the short term, these ambiguities or
Ambiguities and interpretational issues in
the tax framework. interpretational issues may be resolved by
explanatory provisions or amendments in
One of the practical challenges in the tax law which are clear and back-tested.
determining tax allowable provisions is
when a reversal of a disallowed tax
provision (from a past tax year) is ii. In the long term, harmonizing the tax
erroneously assessed as income in the year framework with the accounting and
of reversal. This causes double taxation. prudential framework applicable to banks,
These instances are often corrected but not will eliminate any room for
without considerable time and effort. misinterpretation.
3
Administrative difficulties in the tax
allowance of write offs.
Simplify the taxation of write offs for banks by
Banks can write off loans only after harmonizing the ITO with the prudential and
complying with strict internal policy and accounting frameworks applicable to banks. This will
regulatory requirements. Despite these, the allow both provisions and write offs to be recognized
ITO, allows a deduction for written off the same way and satisfy the same standards as
loans when ‘there are reasonable grounds
required by the prudential and accounting
for believing that the debt is irrecoverable’
and tax authorities demand extensive frameworks.
evidence and documents to allow write offs
ignoring the multiple regulatory, policy and
third-party checks for a bank before it can
book a loan write off.
4
No specialized tax framework for NPL sale,
transfer or securitization transactions.
Introduce specialized provisions that address the tax
The ITO does not specifically cover the tax impacts of portfolio sale, transfer, agency or
implications of an NPL transactions. In securitization transactions especially with respect to
their absence, special legal structures such recognition of specialized legal structures and the use
as SPVs may be re-characterized to prevent
of generally accepted fair valuation models to the
tax avoidance. Below-book value NPL
99
S no. Impediment Recommendation
transactions, complex instrument ITO.

transactions or transactions through
instruments not publicly traded, may be dis- For the tax framework to be conducive to developing
allowed for not having a commercial a secondary NPL market, a more principle-based
purpose or being a true sale. This is a major approach should be followed in setting this
impediment to developing secondary NPL
framework, so it is not overly restrictive.
market.
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8. NPL RESOLUTION – A REVIEW OF LEGAL REQUIREMENTS AND
PRACTICES IN PAKISTAN
8.1. Recovery by Banks or DFIs

There are various options available to banks and DFIs for recovering NPLs. The various resolution strategies will
be important for primary or secondary investors looking to invest in Pakistan’s NPL Market with a view to
maximizing recovery or returns through NPL assets.
8.1.1 Enforcement of Security Interest through Court Intervention
Recovery Proceedings under the Recovery Ordinance
The recovery laws in Pakistan have been constantly evolving and despite a series of laws enacted to address delays
and offer fast track recovery avenues, disposal of recovery cases remains a time-consuming process.
The Recovery Ordinance primarily provides a summary procedure for recovery of bank or DFI loans and loan
defaults before the Banking Courts or High Court. Salient features of the Recovery Ordinance, are in Annex K
(Salient Features of the Recovery Ordinance).
Given the number of recovery proceedings under the Recovery Ordinance and the technical aspects surrounding
NPLs, resolving recovery cases is a lengthy and cumbersome process as shown in Table 19.
TABLE 19: PROCEEDINGS, COURT AND TIMELINE
Proceeding Court37 Timeline
Banking Court 2-3 years

Recovery Suit under Section 9 of
the Recovery Ordinance
High Court Over 7 years
Banking Court 1.5-3 years

Execution proceedings
High Court 3-5 years
Criminal proceedings against borrowers under various criminal laws

Various statutes provide for criminal proceedings against borrowers who default on loans obtained from banks or
DFIs. The most typically used are:
(a) A bank or DFI initiates criminal proceedings against an alleged willful defaulter as defined under the Recovery
Ordinance.38 The Federal Investigation Agency (FIA) is the designated agency to inquire and/or prosecute
these matters. To initiate criminal proceedings under the Recovery Ordinance, a 30 day notice is served to
defaulter, and after this, the bank or DFI can request to begin criminal proceedings through a complaint made
to FIA.
(b) Until recently, the National Accountability Bureau (NAB) (subject to approval of the Governor, SBP) may
have inquired into and investigated inter alia any willful default by a borrower to pay any amounts due to any
financial institution under Section 5(r) read with Section 31D of the National Accountability Bureau
Ordinance, 1999 (NAB Ordinance). Recently, with the promulgation of the National Accountability (Second
37
Based on the discussion with litigators, recovery and enforcement proceedings instituted in Islamabad and Punjab are relatively
speedier than in Sindh.
38
The offence of willful default has been defined under Section 2(g)(i) of the Recovery Ordinance, to include inter alia deliberate or
intentional failure to repay any loan received by any person from a financial institution after such payment has become due under terms
of an agreement or applicable laws, improper utilization of any finance and/or improper use, transfer or sale of collateralized assets
without consent of financial institution.
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Amendment) Ordinance, 2021 scope of the said law has been revised to exclude from its ambit any persons
not directly or indirectly connected with the holders of a public office (Section 4(2)(c)).39
(c) Certain criminal offences in connection with banking/financing matters tried before courts constituted under
the Offence in Respect of Banks (Special Courts) Ordinance, 1984 (ORBO).40
When initiating and pursuing criminal proceedings in connection with NPLs, the Recovery Ordinance overrides
the ORBO, the FIA Act and the PPC so any criminal proceedings against a defaulting borrower for ‘willful default’
cannot occur at the same time as those under the ORBO, FIA Act and PPC.41 The law relating to concurrent criminal
and civil proceedings has been the subject of some legal debate with conflicting case law on the subject.42
8.1.2 Enforcing Security Interests without Court Intervention
Enforcing security interests over immovable property
If a mortgagor fails to pay the amount demanded after the bank or DFI has issued the required notices, within the
prescribed period, the bank or DFI can sell the mortgaged property or a part of it by public auction and use the proceeds
as the repayment of the outstanding mortgage. They must send notices to all interested parties and publish these in
newspapers with wide circulation.
The Recovery Ordinance was intended to allow banks or DFIs to foreclose on mortgages without going to court.
Unfortunately, the relevant section of the Ordinance (Section 15) was declared unconstitutional by the Lahore High
Court and later the Supreme Court of Pakistan43 on the grounds that banks or DFIs were not entitled to sell
mortgaged property unless and until the amount in dispute had been finally determined by a court. The Supreme
Court also had concerns about the procedural safeguards available to a mortgagor in the case of an out-of-court
sale by bank or DFI. Banks and DFIs were left with no option but to file suits for the determination of disputes and
then proceed with the sale of property through execution proceedings (a process which can take years to complete).
Further amendments and constitutional challenges have been made to the Ordinance, the result of which are that a
detailed procedure for the foreclosure of mortgaged property (without court intervention) was introduced to cure
the defects in the old legislation. A brief on the procedure prescribed for foreclosure is in Annex L (Foreclosure
Process). In a separate judgment, the Lahore High Court44 struck down the rule allowing banks or DFIs to sell to a
single bidder, which is incongruous with the concept of a public auction. The Recovery Rules in the Recovery
Ordinance Amendment have used the term “public auctions”.
Observations with respect to sale of immovable property without court intervention are:
(a) One of the objectives of the Recovery Ordinance is to provide for the sale of mortgaged property by a bank or
DFI without intervention of the court. However, Section 15 of the Ordinance also vests the Banking Court
with the power to grant injunctive orders restraining the sale or proposed sale of mortgaged property and in
practical terms, it is easy to obtain injunctive relief from the courts in Pakistan. The result is that the
Ordinance’s objective cannot be achieved when the Banking Courts grant injunctive orders in favor of
mortgagors, rendering the auction or sale process fruitless.
(b) Whilst the revised auction process may be time consuming and cumbersome, the requirements have been
39
It may, however, be noted that the NAB Amendment Ordinance (unless approved by the Parliament or extended in accordance with
the requirements of the Constitution of the Islamic Republic of Pakistan, 1973), shall, upon expiry of one hundred and twenty days from
the date of promulgation thereof, lapse and cease to have any force and effect.
40
Examples of offences triable before special courts set up under ORBO include inter alia offences under Sections 403, 406, 408, 467,
468, 471, 472, 473, 475 and 477-A of the PPC (that inter alia relate to dishonest misappropriation of property, criminal breach of trust,
forgery and falsification of accounts).
41
Syed Mushahid Shah v Federal Investment Agency (2017 SCMR 1218); Mian Ayaz Anwer v. State Bank of Pakistan (2019 CLD
375).
42 (Abdul Shakoor Kaloodi v The State (2003 PcrLJ 626)). Some jurisprudence on the subject has upheld the position that civil and
criminal proceedings may be pursued concurrently (Seema Fareed v. The State and another (2008 SCMR 839); Muhammad Aslam v
The State (2017 SCMR 390); Muhammad Akbar v The State and others (PLD 1968 Supreme Court 281)). Having said that, in more
recent jurisprudence of Pakistan Courts, it has been clarified that Sections 5(r) and 31D the NAB Ordinance and any other related
proceedings cannot be invoked by NAB simultaneously with the Recovery Ordinance or prior to the determination of default of an
obligation to pay under the Recovery Ordinance. Similarly, any proceedings of ‘willful default’ under the Recovery Ordinance (where
dependent on any determination of default by the borrower to pay) may only be invoked after determination of borrower’s default of
its payment obligations under the Recovery Ordinance (Mian AYAZ ANWAR versus STATE BANK OF PAKISTAN (2019 CLD
375). We may note, however, that an appeal against the noted judgment has been filed and is pending adjudication).
43
Muhammad Umer Rathore v. Federation of Pakistan (2009 CLD 257) and in National Bank of Pakistan v. SAF Textile Mills (PLD
2014 SC 283).
44
Muhammad Shoaib Arshad v. Federation of Pakistan (2020 CLD 638).
102
prescribed to ensure the constitutionality of the legislation after lengthy court battle. Any deviation or
legislative changes to alleviate the prescribed requirements will run the risk of being struck down on
constitutional grounds and may open the subject again to a legal dispute.
(c) While Section 15 of the Recovery Ordinance provides a speedy alternative to recovery proceedings, defects
in the land ownership and transfer system in Pakistan create title disputes over mortgaged property, causing
delays to recovery.
Enforcing security interests over movable property
Parties may contractually agree to an out of court settlement for certain types of security interests over movable
property. Pledges, the assignment of receivables by way of security and perfected security interests can be enforced
outside of court. Section 2.1 of this report provides more detail on security interests.
Section 16(3) of the Recovery Ordinance, allows a secured creditor to directly recover or take over possession of
movable property where the security agreement permits. However, Section 19(3) of the Recovery Ordinance,
allows post-decree mortgaged, pledged or hypothecated property to be sold by a bank or DFI with or without the
intervention of a Banking Court either by public auction or by inviting sealed tenders.
Whilst Section 16(3) of the Recovery Ordinance, on a literal read, permits out of court enforcement for all types of
security interests, a specific process for his has not been prescribed for all practical purposes, Section 16(3) is only
used by order of the Banking Court.
8.2. Winding-up
8.2.1 Limitations and obligations surrounding insolvency

There are limitations and obligations related to insolvency, including surrounding the duty of directors towards the
creditors, and general restrictions on a company that is insolvent.
Directors’ duties
General duties of the directors of a company include the duty to act in accordance with the charter of the company,
duty to act in good faith to promote the objects of the company and to act in the best interests of the company, its
employees, the shareholders, the community and for the protection of environment. A director, in discharge of his
or her duties, must also exercise reasonable care, skill and diligence, exercise independent judgment and avoid
conflicts of interest (Section 204 of the Companies Act).
While it is not specified that directors owe a duty to creditors, in view of the general language in the statute it could
be argued that directors also have an obligation to consider the interests of creditors.
This is especially relevant when a company is insolvent. Under English and Commonwealth decisions (that may
hold persuasive value in Pakistani courts), directors are required to take creditor interests into consideration when
a company is insolvent.45
The Companies Act also contains statutory duties and liabilities of directors related to insolvency.46
General restrictions
Some circumstances allow transactions to be set aside upon the insolvency or liquidation of a borrower.
45
Decision of the Supreme Court of New South Wales in the case of Kinsela v. Russell Kinsela Pty Ltd, (1986) 4 NSWLR 722 and West
Mercia Safetywear Ltd. v. Dodd (1986) 4 ACLC 215.
46
A summary of the provisions relating to director duties relating to insolvency in the Companies Act.
a) Courts, on an application by the liquidator, creditor or contributory of the company in the course of a winding up, have the power
to compel directors to repay or restore the money or property with surcharge or contribute such sum to the assets of the company
by way of compensation where the director has “misapplied or retained or become liable or accountable for any money or
property of the company” or “has been guilty of any misfeasance or breach of trust in relation to the company.” Any director
who is knowingly a party to the carrying on of the business of the company in the manner aforesaid, shall be punishable with
imprisonment for a term which may extend to two years, or with fine which may extend to twenty thousand rupees, or with both
(Section 397 of the Companies Act).
b) The courts in the course of the winding up of a company, may order that directors are personally responsible, without any
limitation of liability, for all or any of the debts or other liabilities of the company where it is clear that the business of the
company was carried on with the “intent to defraud creditors of the company or any other persons or for any fraudulent
purpose” (Section 398 of the Companies Act).
103
a) Avoidance of transfer. Where a borrower is a company, a transfer of property made within a one year before
a petition for winding up or a resolution allowing voluntary winding up, shall be void against the liquidator if
it is not “in the ordinary course of its business or in favor of a purchaser or encumbrancer in good faith and for
valuable consideration” (Section 391 of the Companies Act).
b) Fraudulent preference. Any act relating to property by or against a borrower, that occurs where winding up or
insolvency proceedings are imminent, may fall foul of the law relating to “fraudulent preference”. The
combined effect of the relevant statutory provisions is that to be considered fraudulent preference, a property
must have been transferred within six months of the commencement of winding up for companies, and within
three months for individuals, and that the transfer was made with a view to giving a secured creditor preference
over other creditors.
8.2.2 Legal and regulatory framework for the liquidation of an insolvent borrower
With the approval of creditors, an insolvent company may be wound up voluntarily, or by order of the court (Section
293 of the Companies Act).
Creditors’ voluntary winding-up
An insolvent company may be wound up voluntarily, if in addition to the shareholders’ resolution, creditors also
grant approval for winding up after a voluntary winding up is proposed by a company’s members. A creditors’
voluntary winding up entails the following:
a) The creditors and the company may nominate a person to be liquidator (from a panel of liquidators maintained
by the SECP) to wind up the company. Liquidators nominated by the creditors have preference. Although the
liquidator is required to be appointed from the list maintained by the SECP, based on stakeholder feedback,
there is a need to build capacity and train liquidators.
b) Once a liquidator is appointed, they take the place of the company’s board and chief executive.
c) After statement of affairs regarding the company’s assets and liabilities, the liquidator determines the
company’s viability or the steps necessary for maximizing value of assets of the company. The liquidator’s
report detailing the company’s assets and liabilities is submitted to the SECP.
d) The property of the company will be applied firstly, to satisfy preferential payments, second satisfy the
company’s pari passu liabilities, and finally towards payment to members according to their rights and interests
in the company.
e) The liquidator holds an annual general meeting of the company within a period of 60 days from the end of
first year after winding up began.
f) As soon as the company’s affairs are fully wound up, the liquidator prepares final accounts which are then
audited and a report of the winding up is prepared, showing that the property and assets of the company have
been disposed of and its debts fully discharged.
g) A final general and creditors’ meeting is called to present and explain the final report.
h) If satisfied with the report and accounts, the SECP registers them. Three months after this, the company is
deemed to be dissolved.
Winding up on the order of the Company Court47
A company may also be wound up by the companies bench of a High Court in Pakistan (Company Court) if it is
unable to pay its debts and where despite a 30 days’ notice from the bank or DFI, refuses or neglects to make a
payment or to secure or compound to the reasonable satisfaction of the bank or DFI.
Albeit, on a literal read, the Companies Act does not require a company’s insolvency to be established to wind it
up on the ground of inability to pay debt, there are strict principles for winding up a company that is unable to pay
debts.
a) The amount claimed by the bank or DFI must be genuine and acknowledged by the company and should not
have been disputed or challenged by the company.
47
While there are various other grounds on which winding up through Court could be sought (such as mismanagement), given the
purpose of this report, we have limited our overview to winding up of company on ground of its inability to pay debts.
104
b) There is a distinction between companies that are “merely unwilling to pay its debts” from those that are
insolvent. If a company is unwilling to pay its debts, the courts order the bank or DFI to file a suit for recovery.
c) The courts use the financial statements of the company to determine whether the only way to recoup the
company is to sell off its assets if the company is no longer generating revenue.
d) The courts would not reject a bank or DFI’s petition merely on the grounds that the FI has an alternative
remedy available.
Any winding up petition by a bank or DFI on the ground of a company’s inability to pay its debts is subject to
proving the company’s insolvency and where it is, will not be prejudiced by the remedies available to the bank or
DFI.
Winding up of company unable to pay its debts involves:
a) Once a company is determined to be insolvent, the Company Court passes a winding up order and appoints an
official liquidator from the SECP’s panel48 of liquidators49 who is required to complete the process within 12
months from the date of the winding up order.
b) All company property is taken into the custody and controlled by the Company Court, all litigation against it
is automatically stayed and may be transferred to and disposed of by the Company Court.
c) A statement of affairs is submitted to the official liquidator, within 60 days of which the official liquidator
must submit a report to the Company Court, after this, the Company Court fixes a time period within which
liquidation proceedings must be completed and the company dissolved.
d) Within 30 days of receipt of funds from disposal of all assets, the funds will be applied first to satisfy
preferential payments, second, to satisfy the company’s liabilities, and finally, subject to constitutive
documents, towards payment to members according to their rights and interests in the company.
Winding up is a last resort and attempts to revive an insolvent company are entertained by the courts even after a
winding-up order has been passed. A few examples of where insolvency proceedings may be stayed by the courts
include where there is an improvement in a company’s commercial viability,50 a company acquires the funds to be
able to discharge its liabilities,51 or the company is able and willing to revive itself either by arrangement,
compromise, or settlement.
8.2.3 Rights of secured creditors in relation to insolvency proceedings
Preferential payments are made to certain persons in priority to other debts, but this does not include secured
creditors (except where secured creditors have a floating charge and the assets of the insolvent company are
insufficient to meet preferential claims, in which case, preferential claimants have priority over secured creditors).
This is because the interests of secured creditors are protected by legislation.52
Under the relevant laws, (and in view of the jurisprudence of superior courts),53 secured creditors have options
including to remain outside of the winding up and proceed based on their security.
The process for an out of court enforcement of a security interest over movable and immovable properties in Annex
L applies where the secured creditors choose to enforce their security interests outside of insolvency proceedings.
A secured creditor does not have claim on payments of liquidation proceeds in priority to preferential payments, if
the secured creditor had neither realized nor exercised its option to remain outside the winding up process, but
rather relinquished its security for general benefits of creditors by filing its total claim with official liquidator.54
Our key observation in relation to secured creditors’ rights regarding insolvency proceedings is that the official
48
The Companies Act prescribes that the panel should consist of individuals with at least ten years’ experience in the field of accounting,
finance or law and as may be specified by the SECP such other persons, having at least ten years professional experience.
49
A person cannot be appointed as an official liquidator for more than three (3) companies at one time.
50
Additional Registrar of Companies, Securities and Exchange Commission of Pakistan vs. Messrs Schon Textile Limited ([Sindh High
Court] 2008 CLD 475).
51
National Bank of Pakistan vs. the Punjab National Silk Mills Ltd. and 2 Others (1989 MLD 2963).
52 Section 47 of the Provincial Insolvency Act, 1920 (as applicable), Section 48 (read with item 9 of Schedule 2) of the Insolvency
(Karachi Division) Act 1909.

53
United Bank Limited vs. PICIC and others (1992 SCMR 1731); Siemens Pak Engineering vs, Japan Power Generation Limited, (2020
CLD 619); Union Leasing Limited v. Pakistan Industrial Credit and Investment Corporation Ltd. through Deputy Managing Director
and 8 others, (2005 CLD 958); Orix Leasing Pakistan Limited vs. Sunshine Cloth Limited, (2001 PTD 3146).
54
Securities Exchange Commission of Pakistan vs. Innovative Investment Bank Limited (2020 CLD 766).
105
liquidator is required to be appointed from the list of liquidators maintained by the SECP. However, there is a need
to improve the skills of liquidators to avoid delays and shorten timelines for liquidation proceedings.
8.3. Debt Rescheduling
Conventional financing is based on a “mark-up” or “buy back” system of lending with the intention to shift to an
Islamic and non-interest-based system of banking. Under the mark-up system, conventional financing is structured
by way of a mark-up agreement under which the bank or DFI advances a sum of money to the borrower as the sale
price of certain goods sold by the borrower to the bank or DFI. There is a simultaneous buy-back of the goods by
the borrower from the bank or DFI at a marked-up price which is payable on deferred basis. Finance agreements
are structured this way to address the restriction prohibiting local Banks to extend interest-based financing.
However, unlike Islamic murabaha financing documents, where the assets are identifiable and specifically stated,
the assets in conventional mark-up financing are fictional and there is no physical sale or purchase of assets.
Under the interest-based system, restructuring can be carried out using an amendment to the original finance
agreement to modify interest payments and tenor. In contrast, restructuring under the mark-up system cannot be
done by amending the original mark-up agreement or by enhancing the purchase price) under the original mark-up
agreement by charging additional mark-up upon default by the borrower. This is because the original mark-up
agreement represents a past and closed sale, repayment terms of which cannot be modified. To overcome this
hurdle, conventional banks under the mark-up system commonly restructure loans through a new finance facility
with a fresh mark-up agreement with a fresh repayment schedule, effectively extending the maturity of the loan.
Under the new mark-up agreement, the bank and the borrower execute another fictional sale and purchase of assets
on a deferred payment basis, and the original outstanding amount is carried forward as the principal amount under
the new mark-up agreement.
Various prescriptions of the SBP55 suggest that restructuring, rescheduling and renewing loans is permitted, court
jurisprudence varies. Judicial pronouncements testing the validity of a restructuring arrangement by way of a fresh
finance facility focus on two major aspects of the fresh mark-up agreement. The first is the actual disbursement or
lack thereof under the fresh mark-up agreement, and the second is the charging of additional mark-up on the
principal amount under the fresh mark-up agreement. Such pronouncements are contradictory, confusing and create
uncertainty around debt rescheduling.
Disbursement
In some cases, judgments respect the sanctity of the commercial agreement between the borrow and banks and
support the proposition that disbursement under the new mark-up agreement is not necessary. There is other case
law where banks are denied recovery for lack of actual disbursement of funds under the new mark-up agreement.
Even where banks make actual disbursements under the fresh mark-up agreement which are subsequently used to
settle earlier loans, recovery is not permitted.
Additional mark-up
Although charging additional mark-up (mark-up on mark-up) is illegal and viewed as un-Islamic by the SBP and
various courts in Pakistan, there are instances where courts have adopted a lenient and flexible approach when
enforcing the principle prohibiting additional mark-up.
8.4. Debtor Rehabilitation and Restructuring
Corporate laws have historically focused little on recovery through corporate rehabilitation. The options available
to creditors of distressed entities to recover an NPL through debtor rehabilitation are:
 a scheme for rehabilitation of distressed entities introduced under the Corporate Rehabilitation Act, 2018
 a creditors scheme of arrangement
 the rehabilitation, reconstruction and reorganization of a public sector company declared as a sick
company.
Each of these options have their own limitations.
55
BCD Circulars 13 and 32 of 1984, BCD Circular No. 27 dated 12.11.1984, BCD Circular No. 37 dated 10.12.1984, BCD Circular No.
23 dated 25.5.1985, BCD Circular No.4 dated 30.6.1988, BPD Circular No. 24, BPD Circular No. 37 BID Circular No. 3, dated
20.2.1989, Circular No. BID (Gen) 2470/601-Q4-90 of 17.6.1990, BPRD Circular Letter No. 27 of 22.6.1999, SD Circular No. SD 2/99
of 16.7.1999 (para 3), BPRD Circular Letter No. 02 of 29.1.2000, BPRD Circular Letter No.4 of 17.2.2000, BPRD Circular No. 9 of
27.4.2000, BPRD Circular Letter No. 16 of 5.6.2000, BPRD Circular Letter 34 of 13.12.2000, BPRD Circular No. 06 of 5.6.2007 and
the PRs for Corporate/Commercial Banking.
106
8.4.1 Corporate Rehabilitation Act
The Corporation Rehabilitation Act facilitates the rehabilitation and reorganization of distressed entities. It enables
a borrower or qualifying creditors (a bank or DFI holding unpaid and overdue claims for an aggregate amount of
not less than two third of the value of the assets of the borrower) to file a petition for an order of mediation to agree
on a rehabilitation plan. Salient features of the Corporate Rehabilitation Act include:
 The High Court can order insolvency experts56 to be appointed to mediate between the borrower and the
creditors to achieve an acceptable plan of rehabilitation.
 There is no automatic stay (unlike in India and the United States). Borrowers or interested parties must apply
to the High Court, and after issuing an initial notice to the opposing party and a hearing, a stay order may be
passed by the High Court. The Court may also grant relief to a qualifying creditor from this stay order.
 In situations involving mismanagement or actions that have had an impact on creditor rights or a borrower’s
financial condition, the High Court may appoint an administrator before a plan of rehabilitation has been
confirmed.
 A rehabilitation plan must be accepted by each class of creditors holding at least two thirds of value of interest
and each class of interests of the borrower, before the High Court. The High Court, after a notice and hearing
and being satisfied that the plan is in accordance with the requirements of the law, accept the plan making it
binding on the parties.
 The High Court could declare the plan void if any aggrieved party filed an application within 12 months of the
plan’s confirmation.
 Either borrowers, qualifying creditors, or an appointed administrator can apply to the High Court to convert
the case into winding up proceedings. They can do this if the rehabilitation plan is not accepted within 12
months of an administrator being appointed, or if a petition under the Corporate Rehabilitation Act was filed
by the borrower for fraudulent purposes.
Although the Corporate Rehabilitation Act was promulgated over three years ago, the framework remains largely
untested. A few observations about the Act include:
 There is no time frame for completing a corporate rehabilitation process
 A corporate rehabilitation plan is subject to approval by any class of persons holding any interests not impaired
by the plan. The concept of an ‘impaired class’ has not been defined.
 Unlike the Title 11 bankruptcy under the laws of the United States, the concept of an "automatic stay" upon
beginning a rehabilitation process is not included.
8.4.2 Creditors’ Scheme of Arrangement
A compromise or scheme of arrangement may be proposed between a company and its creditors. A Scheme must
be approved by at least three quarters of all creditors and the High Court. Once sanctioned by the High Court or
the SECP,57 the Scheme is binding. The commercial wisdom behind a Scheme is not questioned, however, a
Scheme may be refused where it is unreasonable or unfair, it is not in the best interests of the company, creditors
are not acting bona fide and in good faith and are adversely coercing the minority, and that the plan does not adhere
to the law and directions of the sanctioning authority.58
A few case examples where a Scheme may successfully be affected (along with questions of law raised and
principles developed by the High Court) are in Annex M (Examples of Creditors’ Scheme of Arrangement).
Issues regarding the legal framework for creditor schemes of arrangement have raised important questions and
some controversy as to whether stamp duty is payable on transfers following Schemes sanctioned by High Court
56
Pursuant to Section 5 of the Act, the SECP in consultation with the SBP are required to maintain a panel of insolvency experts in
accordance with the terms mentioned therein.
57
To facilitate the corporate sector as well as secure the interest of creditors, jurisdiction to approve reorganization and reconstruction
under Sections 279-283 of the Companies Act of small sized companies vests with the SECP. Jurisdiction for approving compromises
and arrangements for medium sized and large sized companies lies with the Company Bench of the High Court (S.R.0. 840(i)/2017 dated
17.8.2017 issued by the Finance Division, Government of Pakistan).
58
Presson-Descon International (Private) Limited etc. vs. Joint Registrar of Companies (2020 CLD 1128), Paramount Spinning Mills
Limited v. Bank of Punjab (2019 SHC 420), Gulshan Bibi and Others Vs Muhammad Sadiq and Others (PLJ 2016 SC 776), Caravan
East Fabrics Limited vs. Askari Commercial Bank Ltd., Al-Baraka Islamic Bank Ltd., (2006 PTCLR 992).
107
or SECP. Historically, stamp duty has never been paid on Scheme orders in Pakistan.
The matter was addressed by Companies Act exempts stamp duty on transfers of sanctioned schemes of
compromise or arrangements. However, this exemption is only applicable in the Islamabad Capital Territory and
notification or legislation by other Provincial Governments is required. Until such notifications are issued,
ambiguity of whether stamp duty is required will continue.
8.4.3 Rehabilitation of Sick Public Sector Companies
The Companies Act provides a process for rehabilitating a sick public sector company which involves drawing up
a plan to rehabilitate, reconstruct and reorganize the company.
A plan for rehabilitation can include reducing of capital, issuing further capital, acquiring shares, altering a debt
structure or rescheduling, and changing the board of directors, any existing contract or constitutive document. Once
approved by the relevant Minister-in-Charge of the Federal Government, who also supervises its implementation,
the Plan is valid, binding and enforceable, notwithstanding the Companies Act, any other law or constitutive
company documents, or any other company agreement.
The Corporate Rehabilitation Act does not override Section 292 of the Companies Act, rather it is in addition to
other laws regarding company rehabilitation. This makes it questionable as to whether rehabilitation of a public-
sector company could also be agitated under the Corporate Rehabilitation Act.
8.5. Write off
There is little doubt that when a debt is written-off from a bank or DFI’s accounts following an agreement,
compromise or other understanding with the borrower, the bank or DFI, forgoes its rights to recover the written-
off amount from the borrower. However, where there has been no agreement with the borrower, a “write off” is
solely an accounting procedure where the bank or DFI takes the asset off its books.
Writing off a loan is therefore an internal accounting matter to present an accurate picture of the bank or DFI’s
financial condition. It does not amount to a conscious voluntary act by a bank to give up its rights of recovery from
a borrower. As such, in the absence of an agreement with the borrower or any other voluntary, conscious act by the
bank or DFI amounting to a discharge or a release, writing off of loans should not affect a bank’s legal right to
recover from the borrower.59
Writing off NPLs has been the subject of judicial scrutiny and oversight. After one such case,60 the Supreme Court
constituted a commission to examine as to whether the writing off was valid and for bona fide business
considerations. Following this, banks and DFIs were instructed to submit the entire record of all written off,
remitted, reversed, and or waived off NPLs of Rs. 2.500 million and above, for the period from 1971 to 1991, and
Rs. 25 million and above from 1992 onwards. After the inquiry, the prerequisites for writing off NPLs were made
stricter by the SBP, the risk of legal challenges for public sector banks remains.
8.6. Sale or Transfer of NPL

Various options are available to a bank or DFI to offload its NPL assets although there are some impediments
which may have an impact on the development and success of NPL markets in Pakistan.
8.6.1 Securitization
In this section, transfer of NPLs by a Bank/DFI using a typical securitization structure is dealt with. The regulatory
framework for the securitization structure is governed by BPRD Circular No. 31 of 2002(“SBP Circular”), as
amended by BPRD Circular No. 3 of 2021 (“Amended SBP Circular”) and The Companies (Asset Backed
Securitization) Rules, 1999 (“SECP Securitization Rules”).
The SECP Securitization Rules defines a ‘securitization’ as:
““Securitization” means a process whereby any Special Purpose Vehicle raises funds by issue of Term
59
In view of ordinary meaning and definition of “wrote-off” under the “Write-off Circulars’ and Section 63 of the Contract Act, 1872
read with the Phoenix Mills Ltd. vs. M.H. Dinshaw & Co. AIR 1946 Bom 469, at page 476. BPD Circular No. 29 of 2002 dated
15.10.2002. Said views are reinforced by State Bank of Pakistan as well as the provisions of the Recovery Ordinance which permit banks
to sue for the recovery of written-off loans even after the limitation period has expired where the write-off was procured through political
pressure. It may be noted that the section does not apply to amounts written-off by banks without the agreement or consent of the
borrower. The implication is that amounts so written-off do not in any event affect the bank’s right to recover against the borrower
60
S.M.C._26_2007_02082018.pdf (supremecourt.gov.pk), BPRD Circular Letter No. 28 of 2011 dated 30.12. 2011.
108
Finance Certificates or any other instruments with the approval of the Commission, for such purpose and
uses such funds by making payment to the Originator and through such process acquires the title, property
or right in the receivables or other assets in the form of actionable claims;”
A typical securitization structure involving NPLs can be:
 A special purpose vehicle (SPV) incorporated as a public unlisted company will issue asset-backed securities
(ABS) in the form of redeemable capital (for example term finance certificates) under Section 66 of the
Companies Act. The ABS will be listed and will be subject to the Structuring of Debt Securities Regulations,
2020 and any provincial trust laws depending upon whether the security interest is held by a trust.
 The SPV will acquire the NPLs from a bank or DFI using the funds generated from the ABS and does not need
the borrower’s consent unless the NPL documentation between the bank or DFI does not allow NPL transfer
without the borrower’s consent.
 The SPV may appoint the originator as a servicing agent to coordinate the fund flows (including the collection
or recovery of NPLs) and advise on enforcement actions. An originator can be the servicing agent.
 Where the originator is a bank or DFI there will need to be a ‘true sale’ of the NPLs which will generally be
in the form of an absolute assignment of receivables.
 Banks or DFIs may securitize their assets relating to lease financing (with acknowledged assignment of lease
rental proceeds), mortgage financing, and toll financing (for infrastructure developmental projects). Other
assets, however, may be securitized by banks or DFIs with the prior approval of the SBP, on an individual
basis.
Certain concerns and observations relating to securitizations are:
 The SBP’s ‘true sale’ standard, which applies when financial institutions are originators, is more stringent than
the IFAS, as no recourse against the originator is permitted. Generally, some limited recourse should be
permitted where the originator breaches a warranty that the SPV was relying upon to purchase the NPLs. For
example, if the originator falsely or erroneously affirms the accuracy of past defaults, some recourse against
the originator should be permitted.
 To the extent of residential and commercial mortgage-backed securities, the SBP now permits banks or DFIs
with having capital adequacy ratio of at least 1.3 times of existing regulatory requirements to set up a 100
percent owned SPV. SECP Securitization Rules however provide that the “Originator shall not be a connected
person to the Special Purpose Vehicle”.
 The Islamabad Capital Territory (ICT) stamp duty and registration fee are each capped at PKR 100,000,
removing a major obstacle to securitization by allowing a transaction to be structured to avoid stamp duty and
registration fees in other provinces. There are several scenarios where this applies.61
a) Subject to second bullet point below, where the security interest securing the receivables being transferred
does not involve immovable property or involves immovable property located only in ICT, so long as all
relevant documentation is executed in ICT (and preferably the SPV is incorporated in ICT).
b) Where the security interest securing the receivables (whether moveable or immovable) is held by a trust
for the benefit of the present and future beneficiaries. In other words, upon a transfer of the receivables,
the transferee will automatically become a beneficiary under the trust. In Pakistan, for sophisticated
syndicated transactions, such a trust arrangement is common. (Provinces have recently trust laws and its
practical implications are not entirely clear at this stage, but the matter is expected to settle down.) While
the underlying legal principles that underpin the above are somewhat complicated, they stem from the
following principles (generally stated).
c) The transfer of an interest in an immovable property can only be affected in writing and attracts
registration under the Registration Act.
61
Under certain very limited circumstances, stamp duty can possibly be avoided by affecting a transfer orally. As this route may not be
otherwise advisable, the same has not been elaborated upon any further.
109
d) Upon a transfer of receivables that are secured, the secured properties travel with the receivables.62 Thus,
where the security interest includes immovable property, the transfer document would become
registerable (even where the underlying security over such property was not registerable as in the case of
creation of mortgage over immovable property by way of deposit of title deeds.63
e) Under Section 28 of the Registration Act where the document affects immovable property, the document
needs to be presented in the office of sub-registrar where whole or some portion of the property is located.
Thus, in such case so if the immovable property is in ICT, the ICT notification will apply. For documents
affecting properties other than immovable properties, under Section 29 of the Registration Act, the
document needs to be presented for registration in the office of the sub-registrar where the same is
executed. Thus, in such case, the ICT notification will apply so long as the relevant documentation is
executed in ICT.
 An ABS must have a minimum credit rating of ‘A’, be listed, and comply with other regulatory requirements
prescribed by the Pakistan Stock Exchange Limited (PSX) which may impede the development of NPL market.
For example, in terms of Regulation 5C.3(iv) of the PSX Rule Book, a company may only apply for OTC
listing of debt securities offered and issued through private placement if its paid up capital is at least Rs.
25,000,000. These may add an unnecessary compliance burden to securitizations.
8.6.2 Pakistan Corporate Restructuring Company Limited (PCRCL)

CRC Act is a law intended “to provide for the establishment and regulation of corporate restructuring companies”,
pursuant to which the SECP has notified the Corporate Restructuring Companies Rules, 2019 (CRC Rules) and in
respect of which the SBP has issued the ‘Guidelines – Transfer and Assignment of non-performing assets to
Corporate Restructuring Companies’ (SBP NPL Guidelines).
Currently, there is one restructuring company, the Pakistan Corporate Restructuring Company Limited (PCRCL)
that has been licensed by the Securities and Exchange Commission of Pakistan (SECP) under the CRC Act. Its
shares are held by ten financial institutions — Allied Bank Limited, Bank Alfalah Limited, Bank Al Habib Limited,
Faysal Bank Limited, Habib Bank Limited, Habib Metropolitan Bank Limited, MCB Bank Limited, Meezan Bank
Limited, National Bank of Pakistan and United Bank Limited.
PCRCL was preceded by a similar organization, the Corporate and Industrial Restructuring Corporation (CIRC)
which was established with the mandate to acquire, restructure, rehabilitate, manage, dispose and realize non-
performing loans and other assets of specified banks and financial institutions. For an overview of rights, powers
and functions of the CIRC, please see Annex N (CIRC).
The CRC Framework
The SECP regulates and licenses corporate restructuring companies (CRC). Functions and powers of the CRC
under the Act include acquiring, restructuring, rescheduling and disposing of NPLs.
The CRC Act provides for the transfer of NPLs by a bank or DFI to a corporate restructuring company, which shall
take effect “notwithstanding anything to the contrary contained in any law, decree, judgment, order, contract,
instrument or document”. This means while it is likely for the parties to enter into a contract for purchase of NPLs,
the transfer of these NPLs will be affected by the law and not of the parties’ contract.
One aspect of the CRC Act (Section 6(1)(a)) requires elaboration. This Section does not permit financial institutions
to transfer their NPLs to an entity that is “established, owned or controlled by such financial institution or its
affiliates”. There is some ambiguity about whether ‘established’ is to be read with ‘control’, or independently.
Reading the two words independently would have prevented the establishment of PCRCL. SECP facilitated the
incorporation of PCRCL by issuing a clarification in December 2019:
62
Where the assignment of receivables by way of security is pursuant to the Secured Transactions Act, please see Section 59(3) of the
Secured Transactions Act, and in the case of assignment of receivables by way of security pursuant to Section 134 of the TP Act, please
note that in terms of Section 8 of the TP Act, a transfer of property (such as debt) to the transferee, transfers all the interest of the
transferor and legal incidents thereof. Such incidents, in the case of a debt, includes securities therefor (except where such securities are
also securing other debts not being transferred). Accordingly, on a plain reading of Section 8, the assignment of receivables under Section
134 of the TP Act should result in the transfer of underlying security as well.
63
While there is no Pakistani decision on this point, plethora of Privy Council and Indian judicial pronouncements have confirmed this
position (Elumalai Chetty v. P. Balakrishna Mudaliar (AIR 1922 Mad 344); Benares Bank Ltd. vs. Bank of Bihar Ltd. and others (AIR
1947 All 117); Maheshwari Rros v. Indra Sugar Works Ltd (AIR 1938 (All) 574); Company Bank, Bangalore v. Lalitha H.Holla and
Others (AIR 1994 (Kant) 133) and Gopi Nath v. Mt. Bekali and Ors (AIR 1935 (All) 837).
110
“…we are of the view that restriction imposed under section 6(1)(a) of the Act only applies to such CRC
where a financial institution, directly or indirectly holds fifty percent or more shareholding.”
Section 7 of the CRC Act stipulates that all legal proceedings in connection with the NPLs initiated by or against
a transferor shall automatically stand transferred in the name of CRC and all new legal proceedings by or against
the CRC may be instituted and adjudicated upon and disposed of, which proceedings were authorized to be
instituted by or against the transferor, including the proceedings under the Recovery Ordinance, ORBO, CPC and
the CRPC.
The CRC Act empowers the SECP to procure information from CRCs and conduct special audits and inquiries.
In view of the SBP NPL Guidelines:
 Banks or DFIs should develop a policy for transferring and assigning NPLs to corporate restructuring
companies and provide guidance on the types of NPLs eligible for transfer, the process and technique for
determining the value of NPAs, general terms and conditions for transferring and assigning NPLs, and the
classifying, provisioning, and accounting treatment of financial instruments received from CRCs.
 Certain single borrower and group exposure limits prescribed under the PRs do not apply to the transfer and
assignment of NPLs to CRCs until specified by the SBP.
 The transfer and assignment of NPLs from banks or DFIs to CRCs should be a true sale, on nonrecourse basis,
with all the risks and rewards of the NPLs transferred and assigned to the CRCs. This means the NPLs are
derecognized from the books of the banks and DFIs.
 The banks and DFIs may accept cash and/or financial instruments, for the transfer and assignment of NPLs to
CRCs.
 The banks and DFIs will record the financial instrument received from the CRCs at the fair value.
 While negotiating terms and conditions of transfer and assignment of NPLs to CRCs, banks and DFIs should
ensure to protect their financial and legal interest.
 The banks and DFIs, that transfer and assign the NPLs to the CRCs should provide certain disclosures in the
annual audited financial statements.
Amendments to the CRC Act (CRC Amendment Act)
 The CRC Amendment Act was recently passed, improving certain aspects of the CRC Act including:
- clarifying that financial institutions may transfer their NPLs to any CRC in which it does not have a
controlling interest.
- fortifying that a transfer of NPLs is by operation of law. It is also designed to repel any argument that the
transfer attracts stamp duty, particularly considering case law64 relating to schemes of arrangement under
company laws.
- permitting the CRC to acquire NPLs from financial institutions through one or more trusts constituted
and managed by it. This will enable the CRC to act as an asset management company and acquire NPLs
which it would then manage. This would allow segregating NPLs based on their nature or characteristics.
For example, housing NPLs could be segregated from other NPLs.
- enabling the CRC to act as a recovery agent where financial institutions do not wish to sell the NPLs to
CRC. Currently PCRCL (the only CRC licensed) does not have the financial strength to buy the NPLs.
The agency relationship (which does not entail any sale of NPLs to CRCs) would enable CRCs to build
knowledge and capacity and eventually buy and manage NPLs. PCRCL has entering into agency
arrangements with various financial institutions where PCRCL will exercise powers (on behalf such
financial institution) and bind them accordingly. A regulatory framework to provide the broad parameters
for this agency relationship may be useful.
- introducing scheme to revive distressed entities. The intent is to make a scheme of rehabilitation/revival
of a distressed entity prepared by the CRC to be binding on all creditors (secured or unsecured) adding
the concept of a scheme to cater for situations where a distressed entity is revivable, but due to multiple
64
The judgement of the Lahore High Court in the case of Fatima Sugar Mills Limited etc. in C.O. No.10 of 2012 dated 16.03.2015, an
intra court appeal against which is presently pending before the Lahore High Court.
111
creditors being involved, a revival remains inconclusive or takes considerable time. The proposed reform
will enable prompt debt aggregation, allowing CRCs to negotiate bilaterally with the borrower and
hopefully reach a quicker conclusion.
- requiring the High Courts to constitute one or more special benches to adjudicate cases under the CRC
Act. It also specifies that the special benches shall decide cases within 90 days of the institution of the
case, however this time limit has not been considered mandatory.
Practical and other observations in relation to PCRCL
 Low levels of capitalization and other funding available to PCRCL appears to be a significant hindrance to an
outright assignment or sale by any bank or DFI to PCRCL. Structuring payments on a deferred basis and
making them contingent upon recoveries made by PCRCL prevents them being commercially viable for both
parties. Also, these types of structures create accounting concerns in relation to off-balance sheet treatment in
banks’ or DFIs’ books.
 Assuming the CRC Amendment Act (which is pending) is enacted, it will enable financial institutions to
appoint PCRCL as a recovery agent. The implications for NPLs are:
a) As an agent PCRCL would not be able to take advantage of the scheme to revive distressed entities
(above) as it would not be the owner of the NPLs.
b) PCRCL believes that as agent it requires high levels of power and authority to be delegated to it by
banks and DFIs to enable it to effectively negotiate and deal with defaulters. The banks or DFIs have
two broad concerns: (a) the level of delegation to PCRCL needs to be monitored to prevent running
afoul of banking and company laws; and (b) loss of power and authority to deal with NPLs that a
bank or DFI owns.
 Following passage of the CRC Amendment Act, the Federal Government will need to issue a notification
to set-up the Corporate Restructuring Board. The Board will consist of not more than five members and
will have experience and functions as stated in the CRC Act. It will be critical that the Board consists of
well qualified members. To facilitate and regulate the asset management structure proposed through the
CRC Amendments Act, the SECP will need to develop a framework according to the rules and regulations
under the CRC Act.65
 Once the CRC Amendment Act is enacted, the CRC Rules will be revised to cover liquidation of a trust
by the CRC, governance of the Corporate Restructuring Board, contents of the scheme to be presented by
CRC for review to the Corporate Restructuring Board, and information required by the CRC from
concerned financial institutions.
 Banks and DFIs are under an obligation not to divulge any information relating to the affairs of their
customers (except in limited circumstances).66 To enable corporate restructuring companies to perform
due diligence of NPLs, prior to the NPL’s transfer and assignment banks and DFI are permitted to
exchange information relating to borrowers on a confidential basis.
8.6.3 Good bank/bad bank structure
Even upon the passage of the CRC Amendment Act it will not be possible for a bank or DFI to establish a CRC
that it controls. A legal structure may be created under banking and NBFC laws where a bank or DFI establishes a
subsidiary (including a wholly owned subsidiary) into which it may transfer its NPLs. This subsidiary for all
practical purposes would operate for the bank or DFI. While this is feasible, no bank or DFI has implemented this
structure.
Broadly, the structure would entail:
 An unlisted public company incorporated and licensed by SECP to provide investment finance services.
 The company above would be a subsidiary of the bank or DFI, and would require the SBP’s approval.
 The NPLs would be transferred from the bank or DFI to the subsidiary by way of scheme of demerger
sanctioned by the High Court or an assignment or asset sale or novation. The appropriate mechanism for the
65
Recent changes in the trust laws, in Section 6A, make it advisable to replace relevant references to the “Trust Act, 1882” with “the
applicable trust laws”. However, the same is recommended only by way of clarity.
66
For common law duty of confidentiality, see Tournier v. National Provincial & Union Bank ([1924] 1 KB).
112
transfer would be determined after examining issues of contractual restrictions, stamp duty implications, nature
of security interest, and cooperation of the defaulter.
 The subsidiary would benefit from the provisions of the Recovery Ordinance, being a financial institution.
The transfer to a subsidiary in this way is significantly more complicated compared with the CRC Act. It is however
the only viable option where a bank or DFI wishes to create a subsidiary to which NPLs can be transferred.
Regulators may also be reluctant to permit a Subsidiary to be set up given that the CRC Act has been developed
for the purpose of carrying out the business of a CRC.
8.7. NPL Servicing Infrastructure
The use and prevalence of debt collection or recovery agencies is limited in Pakistan. Whenever appointed, debt
collection or recovery agencies are mainly engaged for recovery and repossession services for banks’ retail
portfolios such as auto financing, personal loans, or credit cards. Based on discussions with banks, it is understood
that when engaged for corporate or commercial portfolios, third-party individuals or entities are generally used for
asset tracing or coordinating with local law enforcement agencies and land revenue offices in a very limited role.
A broader account-oriented servicing infrastructure does not exist.
There are no regulatory requirements, frameworks, or licensing requirements when it comes to setting up a debt
collection company, however, there are some minimum compliance requirements for debt collection entities if they
are to provide debt collection, recovery or repossession services to banks that are regulated by the SBP.
8.7.1 Licensing requirements and the role of collection, recovery and/or repossession agents
As a result of borrower complaints and grievances on fair treatment, the SBP issued “Fair Debt Collection
Guidelines” in 2008. The guidelines apply to various types of consumer financing facilities including credit cards,
housing loans, auto and personal loans. The guidelines require banks to adhere to minimum standards when it
comes to debt collection or recoveries.
 All information relating to payments fallen due is to be provided to the borrower before proceeding for debt
recovery.
 A minimum of 14 days’ notice is to be served to the borrower via letter or SMS, advising them to make overdue
payments, before a visit to the borrower’s residence or business place.
 Borrowers are not to be contacted at an inconvenient time and the identity, name of the bank and purpose of
the call is to be provided.
 Only lawful and acceptable business language and professional attitudes are to be used when contacting
borrowers.
 Collection staff are not to harass a borrower’s family members. However, necessary information can be
obtained from family, friends or third-party contacts of the borrower, if they are not in contact for 30 days.
 At least 14 days’ written notice to be provided before repossessing a leased vehicle. Recovery staff must allow
the lessee to take their possessions out of the vehicle.
 the transfer or misuse of borrowers’ personal data without their prior approval is prohibited and any
information about borrowers that is provided to collecting staff is required to be properly documented.
 Banks must ensure that the collection/recovery agencies they employ are enrolled with and approved by the
PBA. The SBP has advised the PBA to develop criteria for such agencies.
The PBA has recently published its Guidelines for Collection, Recovery and/or Repossession Agencies67 stipulating
the induction and performance monitoring of collection, recovery and/or repossession agencies.
In the PBA Guidelines, however, the Fair Debt Collection Guidelines relate to collecting, recovering and
repossessing consumer financing. It is unclear whether the regulatory framework also applies to corporate financing
and whether there is a regulated regime recovering corporate debts.
8.7.2 Enlistment with PBA
Applicants wishing to enlist with the PBA can apply any time throughout the year and they are enlisted every
67
The PBA Guidelines have been accessed through an online search. As such, it remains to be confirmed whether PBA Guidelines (as
provided in the noted link) are in effect. https://pakistanbanks.org.pk/wp-content/uploads/2021/03/guidelines.pdf
113
quarter if they meet the SBP’s requirements under the PRs.68 The details of eligibility criteria, appraisals, fee
structure and renewals are in Annex U.
A list of Approved Agencies is not maintained by the PBA and the matter of PBA’s role in enlistment of debt
recovery and collection agencies is a subject of some discussion.
8.7.3 Operating model of servicers
Based on discussions with a debt collection company (based out of the United Arab Emirates but with experience
of working in Pakistan), there are some notes about their operating model.
 Recovery agencies generally hire fresh graduates with a minimum of a bachelor’s degree and no other specific
requirements. Skills and expertise are acquired on the job. For mid senior or senior roles, prior experience of
recovery, lending, or other credit related experience in a bank in a client facing role is preferred.
 Debt collection companies operate on a success-based recovery fee, (also known as “No Win No Fee”
compensation structure). It means that financial institutions do not incur any fees related to an NPL once it is
successfully resolved. Commission rates vary but are typically between 5 percent and 20 percent, depending
upon the type and health of loan to be recovered. For instance, a loan with a DPD of more than seven years is
more difficult and less likely to be recovered than a loan with a DPD of three years, so command a higher
service charge.
 The remuneration model for banks’ internal recovery units (in Special Asset Management Functions), varies
between success-based and performance-based bonuses. The success-based bonus is like the agency
compensation structure, where the bank’s recovery department (usually SAM) earns about 3 percent of the
total outstanding loans recovered in the year. This is then shared between the employees in the department
depending upon the seniority. Performance-based bonuses are also common in banks, and is based on the
standard KPI targets achieved in the year. This compensation structure is consistent with the remuneration of
other bank departments.
 For corporate and commercial loan portfolios, debt collection agencies are not popular among banks in
Pakistan as they have inhouse capability for debt recovery.
8.7.4 Servicing Challenges
The Special Asset Management functions of some banks and a debt collection company noted some challenges in
debt recovery.
 Legal impediments are the main hurdle to resolving NPLs and include time consuming, expensive, and arduous
court proceedings, the liberal use of stay orders, frivolous/ counter lawsuits by borrowers, faulty or defective
asset titles (verbal conveyance of titles), falsification of documents and delay tactics. These are covered in
detail in Section 8.1.1 of this report.
 Operationally, NPL resolution in Pakistan is mostly focused on liquidation and recovery. When it comes to
restructuring, rehabilitating and reviving businesses, there is need for more focus, strategy and expertise in
Special Asset Management functions in banks.
 For collection companies, a pure success fee-based model is thought to create financial and operational
difficulties for their survival.
8.8. Recommendations
A summarized list of key impediments and related recommendations discussed in this chapter is in Table 20. The
recommendations have been colored according to their priority.
High
Medium
68
Ibid.
114
Low
Institutional capacity and administrative High Court:

constraints causing delays and concerns in
Dedicate a bench to deal with and dispose of banking
recovery proceedings
matters. The benches dealing with banking matters in
the Sindh, Lahore and Islamabad High Courts also
preside over matters including commercial, civil,
award, succession and intellectual property.
A judge who has experience with banking matters
should be allocated to the Banking Court roster.
Develop procedural guidelines and manuals for
applying for leave to defend and other interlocutory
applications.
Impose heavy costs on frivolous litigation.
Banking Courts:
Increase the number of Banking Courts, widen the
pool of potential candidates, and fill all existing
vacancies.
1. Both Courts:
In collaboration with a judicial academy, SBP should
design a course to train judicial officers from the
superior and subordinate judiciary and the Banking
Courts for capacity building purposes.
Sections 5(8) and 5(9) of the Recovery Ordinance
(relating to amicus curiae) should be routinely fixed
into service and a list of eminent professionals who
will be qualified to act in this capacity should be
prepared.
High Court:
Judicial clerks should be assigned to judges dealing
with banking, commercial and tax matters to assist
with carrying out legal research.
When a suit is put up both parties should be required
to submit skeleton arguments and a list of the citations
they will rely on the first date of hearing.
Section 2(a) of Recovery Ordinance Add clarity to Section 2(a) of the Recovery Ordinance
(definition of financial institution). so that a foreign financial institution (regardless of
whether it has a place of business in Pakistan) falls
2. Doubt has been created by judicial
pronouncements as to whether foreign FIs
not having place of business in Pakistan are
permitted to invoke the jurisdiction of the
115
Banking Courts. within the scope of the Recovery Ordinance.69
Section 9(1) and 10(2) of the Recovery Borrowers should not be allowed to file a suit under
Ordinance (suit by borrowers). the Recovery Ordinance and may agitate available
civil remedies. This should not preclude a borrower
The Recovery Ordinance was promulgated
from filing a counter claim in respect of the suit if
to deal with the recovery process of NPLs
necessary.
in aid of the banks or DFIs. Allowing a
3. borrower to file a suit under the Recovery Another, but less desirable option would be to remove
Ordinance (rather than through civil suit the requirement of leave to defend by the bank or DFI,
under the CPC), is contrary to the intended or to alternatively prescribe a timeframe in which a
purpose and causes delays in recovery defaulting borrower has to file a reply. The matter, if
proceedings and adds to the workload of the considered appropriate, may be incorporated as part of
Banking Courts (which are faced with the judicial handbook.
capacity issues).
Sections 9(5), 10, 13(1), 19. 22, of Notice

Recovery Ordinance.
Service should be affected, both on the address given
Considerable delays in recovery in the financing documents and on the address given in
proceedings are caused by borrowers the CNIC of the directors or shareholders, through all
challenging the decree on the basis of the modes, on the first date of hearing.
improper or lack of service, delays in
For corporate borrowers, consider using electronic
decisions on leave to defend, the recording
communication when service through other means has
of evidence, procedural formalities at
been unsuccessful.
execution stage, and improper notice by
borrowers when filing an appeal. The matter may be made part of judicial handbook
designed as part of judicial capacity building program.
Based on experience, borrowers do not
serve notice on financial institutions and by Recording evidence:
placing incomplete facts before the Banking
Court are able to procure interim orders. Prescribe a strict timeline for evidence to be recorded.
Dedicate a panel of retired High Court Judges
exclusively to recording evidence.
4.
Consider prescribing the recommendations through
rules.
Provide timeframes for decisions on leave to defend
and disposing suits:
Give Banking Courts 45 days to decide the success of
leave to defend applications to expedite the recovery
process.
Confirm that the 90-day period prescribed for the
disposal of a suit from grant of leave to defend is
mandatory.
These amendments would help reduce the time
involved in deciding the application for leave to
defend and should be included in the judicial
handbook as part of the judicial training program.
69
In view of recent case law (Syed Itrat Hussain Rizvi v. Tameer Micro Finance Bank Limited through Attorney and another (2018 CLD
116 [Sindh] and judgment of the Lahore High Court in Writ Petition No.5591 /2018 (Muhammad Tuseef and 4 others vs. The State Bank
of Pakistan and 30 others), microfinance banks do not fall within the definition of ‘financial institution’ for the purposes of the Recovery
Ordinance. Albeit outside the scope of this Report, an amendment to this effect may also be considered.
116
Execution modalities:
The defaulting borrower and/or its directors,
guarantors, shareholders should be required to submit
a list of immoveable, moveable and benami assets
with the application for leave to defend rather than at
execution stage. If the matter cannot be addressed
through rules, it should be included in the judicial
handbook.
Notice of filing of appeal:
Borrowers should give notice of appeal through all
modes and unless the banks or DFIs enter an
appearance in the matter, the appeal should not be
taken up for hearing until all facts have been provided.
Even if no amendments are made in the statute,
recommendations may be prescribed through rules or
as guidelines in the judicial handbook.
Section 10 (decision on leave to defend) The Banking Court may (i) allow the leave to defend
application; (ii) partially allow the leave to defend and
pass an interim order in terms of section 11 of the
There are significant delays in recovery Recovery Ordinance; or (iii) dismiss the leave to
proceedings pending the decision on leave defend application.
to defend applied by the borrowers.
The leave to defend application should only be
accepted by the Banking Court once the defaulter has
provided the details of all family members/ legal heirs
and/or a family registration certificate, and a complete
5.
list of assets and bank accounts of the directors/
guarantors. This would help expedite the execution
proceedings for recovery cases and discourage
borrowers, directors and/or shareholders from
unnecessarily delaying proceedings.
If the matter cannot be notified through rules of the
Federal Government, include these guidelines in the
judicial handbook designed as part of a judicial
capacity building program.
Sections 9, 12, 14, 16, 19, 22 and 24 of the Remove all references to CPC except those necessary
Recovery Ordinance (references to CPC). to the extent of powers of the Banking Court. The
Recovery Ordinance should be a self-contained code
There are significant delays in recovery
6. to prevent defaulters from delaying the proceedings by
proceedings (specifically execution stage)
taking advantage of the general jurisprudence relating
when Banking Courts follow CPC,
to the execution of decrees.
procedural laws applicable to general civil
cases
Section 19(1) of the Recovery Ordinance For clarity, replace the words ‘without the need to file
(automatic conversion to execution a separate application and no fresh notice to be issued
proceedings). to the judgment-debtor in this regard’ in Section 19(1)
with: ‘without the need of any order of the Banking
7. In practice, in Sindh, automatic conversion
Court, filing of any application or issuance of fresh
to execution proceedings is not accepted, a
notice to the judgment-debtor in this regard’.
bank or DFI is required to apply for
execution proceedings and is subject to the If a borrower fails to deposit the decretal amount
time limitations noted in the Limitation Act, within seven days, the attachment and sale of the
117
1908. assets [the list of which is submitted with the
application for leave to defend] should automatically
follow.
Section 22(3) of the Recovery Ordinance Admitting an appeal under Section 22(3) should be
(admission of appeal) subject to the borrower furnishing a security. The
requirement to furnish a security should be made
mandatory at the time of filing an appeal. The cost to
There are significant delays in concluding file an appeal will help sift out frivolous litigation that
recovery proceedings (specifically adds to the workload of the courts.
8. execution stage).
The purpose of proposed amendment is to make
furnishing a security a mandatory requirement for
admission of appeal. This will deter multiple
proceedings specifically given that at this stage, a
specialized forum has already determined a borrower’s
liability.
Section 27 of the Recovery Ordinance Extend the finality of order (as noted in Section 27) to
(finality of order). consent decrees as well.
9. Delays are caused by defaulting borrowers

challenging consent decrees on the basis
that consent decrees do not fall within the
language noted under Section 27.
Section 20 of the Recovery Ordinance For the sake of clarity, make appropriate amendments
(willful default). to Section 20 of the Recovery Ordinance to codify the
principle that criminal proceedings for willful default
The Recovery Ordinance has overriding
10. cannot be initiated concurrently under multiple legal
effect over the ORBO, the FIA Act and the
regimes.
PPC. However, it is possible to pursue
criminal proceedings under various laws at
the same time.
Given the current state of NPLs, there is a Make amendments such that if ‘willful default is made
need to consider reforms to discourage out in any case (i) CNIC, bank account(s) of the
willful default. borrower and its directors/ sponsors remain blocked
till the decree is satisfied; (ii) place the names of
11. directors/ shareholders of the borrower on e-CIB;
and/or (iii) place directors/ guarantors on the Exit
Control List. The proposed amendments may deter
‘willful default’ by borrowers, their directors and/or
shareholders.
Section 15 of the Recovery Ordinance Include guidelines in connection with injunctive relief
provides for sale of mortgaged property by under Section 15(13) in the judicial handbook and the
a bank or DFI without court intervention. judicial training program.
Section 15 (13), however, vests the Banking
Court with the power to grant injunctive
12. orders restraining the sale or proposed sale
of mortgaged property. This means the
objective of the Section is defeated when
the Banking Courts grant injunctive orders
in favor of the mortgagor, rendering the
auction/sale process fruitless. This is more
of a practical consideration as despite the
118
restrictive grounds spelt out in the Recovery
Ordinance, based on experience, injunctive
orders are frequent.
While on a literal read of Section 16(3) of Clarify that Section 16(3) of the Recovery Ordinance
the Recovery Ordinance, permits out of permits the recovery or sale of movable property at
court enforcement for all types of security any stage and without the need for any order of the
interests, a specific process for this has not Banking Court. Procedure and modalities may be
13. been prescribed; and for all practical prescribed for out of court recovery and sale of
purposes, enforcement is only availed movable property.
following an order of the Banking Court.
If legislative amendments are not possible, the
clarification or modalities may be added through rules.
A consolidated framework for the All laws, procedures and modalities connected with
insolvency of companies and non-corporate corporate insolvency and the rights of secured and
entities does not exist. Even for companies, unsecured creditors may be captured under a
the insolvency regime is spread across consolidated regime where no creditor of a company
multiple laws. would be entitled to invoke the winding up of the
company. Invoke provisions for corporate insolvency
recovery mechanisms where defaulting debtors will be
14. assessed on whether it is capable of repaying its debt,
failing which the debtor is either restructured, or else
liquidated and finally dissolved.
Ensure all kinds of Companies, partnership firms,
proprietorship firms, or any other person incorporated
with limited liability under any law, who have
defaulted to pay their debt, are brought within the fold
of the same insolvency framework.
Specific duties owed by directors to Amend the Companies Act to encourage the directors
creditors (in the context of insolvency) have to initiate or disclose bankruptcy proceedings as soon
15. not been statutorily prescribed. as possible and take all necessary measure to mitigate
potential loss to the company and banks or DFIs. This
would align with international jurisprudence.70
The official liquidator is required to be Proper training programs handbooks concerning

appointed from the list of liquidators liquidation procedures and modalities may help build
maintained by the SECP. However, capacity.
16.
liquidation proceedings are prone to delays,
and there is a need for capacity building and
training for liquidators.
Uncertainty is created vis-à-vis the Fortify the bank or DFI’s position through an SBP
requirement of fresh disbursement and circular prescribing: (i) a fresh finance agreement
17. charging of mark-up in rescheduling as a executed between the financial institution and
result of inconsistent and confusing judicial borrower, containing terms and conditions for
pronouncements. rescheduling earlier finance facilities; (ii) that
disbursement under the fresh finance agreement is not
70
Certain directors’ duties specifically in the zone of insolvency have been codified under the laws of England pursuant to the Companies
Act, 2006 (as applicable in England) and the Insolvency Act, 1986 (as applicable in England). In terms of the said Act, any person
including a director would be held liable for wrongful trading if it can be concluded that s/he failed to take “…every step with a view to
minimizing the potential loss to the company’s creditors as (on the assumption that he had knowledge of the matter…) he ought to have
taken…”
119
71
required; and (iii) banks may charge mark-up on the
principal amount under the fresh finance agreement,
which will constitute the outstanding debt (principal
plus mark-up) under the original finance agreement.72
The Corporate Rehabilitation Act was A corporate rehabilitation plan is subject to approval
promulgated after circulation, debate, and by any class of persons holding any interests which is
several rounds of revisions based on not impaired by the plan. The concept of ‘impaired
comments from stakeholders and insolvency class’ has not been defined. For sake of clarity,
experts which took over a decade. Despite a incorporate an appropriate definition of ‘impaired
heavy focus on creditor rights and the class’.
Corporate Rehabilitation Act being in the
Unlike the Title 11 bankruptcy under the laws of the
field for over three years, the framework has
United States, the concept of a time bound "automatic
failed to find any traction.
stay" upon the commencement of rehabilitation
process is not contemplated. The ‘automatic stay’
trigger may be incorporated, which with certain
exceptions, will operate as an injunction against all
actions affecting the debtor, its property, shareholders,
directors or guarantors and will help facilitate the
corporate rehabilitation process. If a borrower is
unable to provide “adequate protection” (through cash
18. collateral, or compensation for depreciation), then a
secured bank or DFI will be entitled to obtain relief
from the automatic stay and enforce its collateral
rights.
Prescribe a time frame of 180 days (extendable for

another 90 days) to complete a corporate rehabilitation
process. This will ensure a speedy process and may
also help ensure that the banks and DFIs can explore
alternate recourses should the corporate rehabilitation
process fail.
Consider a fast-track corporate rehabilitation process
(to be completed within 90 days and extendable by
another 45 days) for corporate or SME borrowers with
assets and income below prescribed levels or a
corporate borrower with a prescribed class of
creditors.
Some legal controversy has been created Issue provincial notifications similar to the ICT
following judicial pronouncements as to notification exempting payment of stamp duties.
whether stamp duty is payable on transfer of
19. assets pursuant to Schemes sanctioned by
High Court/SECP. The Companies Act has
addressed this controversy by exempting
stamp duty on transfers where notifications
are issued by the respective provincial
71
The proposition has also been supported in: Bank of Punjab through Attorney v. Dewan Salman Fiber Limited 2017 CLD 451 [Sindh];
The Bank of Punjab vs. Arif Ali Shah Bukhari, 2016 CLD 1301 [Sindh]; Bank Al-Habib Limited vs. M/s. Khalid Javaid and Brothers
and 8 Others, 2016 CLD 1493 [Sindh]; Bank Alfalah Limited vs. Syed Zulfiqar Ali Rizvi, 2016 CLD 618 [Sindh]; The Bank of Punjab
vs. Flying Cement Company Limited, 2015 C L D 1567 [Lahore]; Syed Abbas Ali vs. Bank of Punjab, 2015 CLD 1409 [Lahore];
Ibrahim Oil Mills vs. Mcb Bank Limited, 2015 CLD 802 [Lahore] (Research conducted in July 2017).
72
The proposition has also been supported in: Bank Al-Habib Limited vs. M/s. Khalid Javaid and Brothers and 8 others, 2016 CLD 1493
[Sindh] (relied on M/s. Dadabhoy Cement Industries Ltd. and 6 others v. National Development Finance Corporation Karachi [PLD
2002 SC 500]; The Bank of Punjab vs. Dewan Farooque Motors Limited, 2015 C L D 1756 [Sindh] (Research conducted in July 2017).
120
governments under the stamp laws.
However, such notifications are yet to be
issued (except in the case of Islamabad).
The framework for creditor schemes of Set up separate tribunals for sanctioning Schemes for
arrangement has been in place for a long all types of enterprises. This will contribute towards
time, however, has not found traction for making creditor schemes of arrangement an attractive
NPL resolution. option for NPL resolution by:(i) building capacity for
20.
matters involving complex financing and security
arrangements and restructuring; (ii) reducing the
workload of the SECP and the High Court; and (iii)
expediting the overall process.
There is ambiguity as to whether the Seek clarity from the SECP/Federal Government as to
process delineated under Section 292 of the whether the process delineated under Section 292
Companies Act would necessarily have to would have to be adopted in case of rehabilitation of a
21. be adopted in the case of rehabilitation of a sick public sector entity.
sick public sector entity (as opposed to the
rehabilitation regime under the Corporate
Rehabilitation Act).
The ‘true sale’ standard under the SBP Include some limited recourse where the originator
Circular, applicable where banks or DFIs breaches a warranty that was relied upon by the SPV
are originators, are more stringent as to purchase the NPLs. For example, if the originator
compared with the applicable international warrants as to the accuracy of past defaults and this
accounting standards, as no recourse against turns out to be materially incorrect, some recourse
22.
the originator is permitted. against the originator should be permitted. The extent
of such recourse should fall within the domain of the
relevant accounting standards to determine whether a
particular sale could be accorded an off-balance sheet
treatment in the hands of the originator.
To the extent of residential and commercial The SECP Securitization Rules need to be amended as
mortgage-backed securities, the Amended appropriate.
SBP Circular now permits banks and DFIs
(having capital adequacy ratio of at least 1.3
23. times of existing regulatory requirements)
to set up a 100 percent owned SPV. SECP
Securitization Rules however provide that
the “Originator shall not be a connected
person to the Special Purpose Vehicle”.
The banks participating in a securitization Make appropriate revisions to e-CIB reporting to

transaction (pursuant to BPRD Circular No. alleviate the problem.
31 of 2002) cannot hold any share capital in
the SPV (except in certain cases involving
residential and commercial mortgage-based
24. securities). There is general reluctance by
independent third parties to act as
shareholders of the SPV. One major reason
for this is the exposure to negative e-CIB
reporting at a group level on account of any
default on the part of the SPV.
25. Under the SBP Circular, the ABS needs to Consider relaxing these requirements in relation to a
have a minimum credit rating of ‘A’ and be securitization involving NPLs. Further, on account of
121
listed. Regulatory compliances have been an ambiguity under the SECP Securitization Rules,
prescribed in the regulations issued by the amendments providing clarity are advisable to confirm
Pakistan Stock Exchange Limited in that listing in not a mandatory requirement under the
relation to listed or OTC listed ABS issued said Rules.
by an SPV.
High stamp duty and registration costs may This issue can be addressed if all Provinces also issue
26. be an impediment in securitization of NPLs. notifications exempting stamp duty like the ICT
notification.
Even after enactment of the CRC Even after the CRC Amendment Act is enacted, the
Amendment Act, subordinated following additional measures/recommendations may
legislation/regulatory measures will be be noted:
required to make the CRC Act an effective
If from a policy angle a financial institution should be
NPL restructuring regime.
permitted to control a CRC, a further amendment to
the CRC Act will be required.
Following passage of the amendment the Federal
27. Government will need to issue a notification to set up
the Corporate Restructuring Board. The Board should
have a maximum of five members and have relevant
experience.
To facilitate and regulate the asset management
structure proposed through insertion of Section 6A in
the CRC Act, the SECP will need to develop a
framework in harmony with the rules and regulations
under the CRC Act.73
There is ambiguity as to whether banks and Revise the PBA Guidelines to remove ambiguity in
DFIs may only engage with Approved relation to corporate financing. Alternatively, a
28. Agencies in in accordance with the PBA separate set of guidelines may be considered for
Guidelines for collecting, recovering and collection, recovery and/or repossession agents
repossessing NPLs. servicing corporate NPLs.
73
As a result of the recent changes in the trust laws, in Section 6A, replacement of relevant references to the “Trust Act, 1882” with “the
applicable trust laws” is also advisable. However, the same is recommended only by way of clarity.
122
9. NPL INVESTORS AND NPL INVESTMENT STRUCTURES FOR PAKISTAN
9.1. Key Investors in NPLs Markets Globally

Potential NPL investors for the Pakistan market are listed according to their presence in the region (including
China, India, Middle East, and Southeast Asia), their assets under management, recent involvement in NPL deals,
and investments in emerging markets. IFC has also partnered with some of these investors.
i. Cerberus Capital Management
Cerberus is one of the world’s largest and most experienced investors in NPL portfolios. Since 1998, its global
NPL platform has invested approximately $21.3 billion in equity through almost 250 NPL transactions with total
transaction values of approximately $72 billion.
ii. Apollo Global Management

Apollo Global Management, Inc., is a global alternative investment manager firm. Apollo is headquartered in New
York City, with offices across North America, Europe, and Asia.
Apollo’s largest business segment by assets under management is credit, with more than $320 billion under
management for global investors as of December 31, 2020. Within this segment of the business, Apollo also invests
in NPLs.
Apollo has set up a business in India, in Mumbai and New Delhi which should provide a reasonable understanding
of the regional NPL dynamics and thus a good potential entity which may be approached.
iii. Blackstone
The Blackstone Group Inc. is an American alternative investment management company based in New York. As
of 2020, the company's total assets under management were approximately $619 billion.
Blackstone's private equity business has been one of the largest investors in leveraged buyouts in the last three
decades. and it is one of the world’s largest credit-oriented asset managers. The Assets under management for
Blackstone’s Credit business were $149 billion in March 2021.
In 2017, Blackstone bought NPLs worth $200 million from Huarong Asset Management, one of the four asset
management companies in China. Similarly, Blackstone has acquired NPLs from the European markets.
Given Blackstone’s size and its involvement in the global NPL market, it may be a potential investor to work with
IFC and other stakeholders in Pakistan.
iv. BlackRock
BlackRock is one of the world’s largest asset management firms with $8.68 trillion assets under management in
December 2020.
Blackrock has proven investment experience in NPLs. In 2014, Blackrock purchased a stake in the Chinese NPL
market and there is a speculation that with a couple of other asset management companies, it may tap into the Indian
NPL market.
v. KKR & Co
KKR & Co. Inc. is a New York-based global investment company that manages multiple alternative asset classes.
In December 2020, KKR’s assets under management were worth ~$78 billion across seven countries including
UAE, India, and Singapore.
KKR has invested in NPLs globally, developing strong relationships with banks and advisors across Europe and
growing its presence in Asia. This has allowed KKR to access acquisition opportunities bilaterally with the sellers
or through auction processes. They have ownership in debt servicing platforms across Europe and Asia and leverage
to source and then service these investments post-acquisition.
Since 2016, KKR has purchased four Spanish and one Portuguese NPL portfolios, totaling over €2.4 billion in
123
aggregate outstanding balance that is being managed by its captive servicer.
As KKR already operates in Asian NPL markets including Hong Kong, Singapore, Tokyo, and Beijing, it would
suit the Pakistan market.
vi. Brookfield Asset Management
Brookfield Asset Management is a global alternative asset manager with over $600 billion in assets under
management across real estate, infrastructure, private equity and credit (including through affiliate Oaktree Capital
Management).
Brookfield owns and operate long-life assets and businesses, offering investment products and services to public
and private pension plans, endowments and foundations, financial institutions, insurance companies and private
wealth.
Brookfield has global reach with assets under management in North America of $378 billion, in Europe and Middle
East of $106 billion, $43 billion in South America and $75 billion Asia Pacific.
Brookfield also invests in NPL markets to fight distressed debt. In 2016, Brookfield put $1 billion in India to
recapitalize and provide financial support to distressed corporate clients. Brookfield’s global network and
operational capacity make it a suitable potential investor for the Pakistan NPL market.
vii. Shoreline Capital Management
Shoreline Capital is a private fund manager established to find and create value in distressed assets and special
situation investments in China. Shoreline manages portfolios of NPLs, restructured single credits, special situation
financings, distressed private equity and real estate. Shoreline has over $500 million of capital under management,
of which several billion dollars is invested in distressed debt assets and equity. Shoreline’s investor base consists
of internationally renowned endowments, funds-of-funds, pensions and philanthropic foundations.
Shoreline Capital’s Shoreline Capital CNY Fund is one of the largest in Asia, seeking $1.5 billion in capital. The
fund invests in opportunities in China, with around 70 percent of capital invested in non-performing assets of banks,
loans to local government platforms and state-owned enterprise loans.
In 2015, Shoreline Capital Management and Oaktree Capital Group purchased a portfolio of NPLs in China for a
total of $168 million. The portfolio consists of loans issued to Chinese companies typically secured by the
companies' hard assets. Sellers include Chinese banks and one of the country's asset management companies that
buy bad loans at a discount from banks and other financial institutions.
viii. Oaktree Capital Group
Oaktree Capital Management is a global alternative investment management firm with expertise in credit strategies.
Oaktree focuses on rated and non-rated debt of sub-investment grade issuers, and its investments include high yield
bonds, convertible securities, leveraged loans, structured credit instruments, distressed debt, and private debt.
In 2020, Oaktree had $148 billion of assets under management out of which around $32.5 billion investment had
been made for acquiring distressed debt. The regional mix shows around 15 percent assets in Asia Pacific, 19
percent in Europe, Middle East & Africa (EMEA) region and the rest in Americas.
In 2018, Oaktree Capital Group LLC bought a portfolio of distressed loans in China with a face value of $476.70
million. This NPL portfolio, consisted of 178 loans in China´s Pearl River Delta, that were mostly property backed.
ix. Bain Capital
Bain Capital is a private multi-asset alternative investment firm with approximately $140 billion in assets under
management. It invests in global private and public equity, fixed income, credit, venture capital, and real estate
across multiple sectors, and industries.
Bain Capital bought a portfolio of non-performing loans worth $200 million from a Huarong asset management
company in China as part of its special situations strategy in Asia. The portfolio of NPLs was of real estate-related
loans, including loans linked to commercial retail assets, hotels, and industrial assets.
Bain Capital raised $1 billion through the India Resurgent Fund – a joint venture with Piramal Enterprises and its
first Asia-focused credit fund. IFC also contributed $100 million to the fund and was an anchor investor.
The India Resurgent Fund is expected to revitalize several distressed companies, and provide capital relief to banks,
helping to resolve NPLs in India. It will support a new regulatory framework and contribute to a more robust
124
distressed asset market, allowing banks to increase lending.
x. Sancta Capital Group
Sancta Capital is the only investment manager focused on distressed and deep value investing in the Middle East
and Africa.
It invests in publicly listed debt and equity securities, loans and claims of stressed and distressed borrowers, and
alternative financing solutions to companies outside the traditional bank market. It specializes in acquiring and
restructuring distressed and NPLs, bonds and trade claims.
Sancta Capital has $130 million of assets under management in mainly the United Arab Emirates, Kuwait, Egypt,
and Saudi Arabia.
xi. Aiqon Capital Group
Aiqon Capital Group Sdn Bhd is the largest NPL-acquiring firm in Malaysia, specializing in acquiring and
managing NPL assets from banks and FIs.
Since starting operations in 2010, Aiqon has acquired retail NPLs with a total face value of over $12 billion in
Malaysia. The last notable transaction was Aiqon’s purchase of retail banking NPLs from AMMB Holdings Bhd
in early 2019 for about $132.5 million.
Aiqon currently manages acquired NPL portfolios with a face value of $7 billion in Malaysia, Singapore, Thailand,
Philippines, Australia, Luxembourg, and Spain. The NPLs are from individuals and corporations who had made
industrial hire purchases and had taken out small-and medium-industry loans, auto financing, mortgage, personal
loans or financing under cooperatives, and credit cards.
xii. Collectius Group
Collectius Group is a credit management service and asset management company with operations in Indonesia,
Philippines, Singapore, Malaysia and Thailand. It is one of the largest NPL-acquiring companies in Southeast Asia,
having purchased 65 portfolios from banks and finance companies with a total face value of $3.5 billion. In
Malaysia, it has $173.6 million in retail NPLs. Collectius has partnered with IFC to launch a $60 million regional
investment platform dedicated to acquiring and resolving unsecured debt in Indonesia, the Philippines, Malaysia,
Thailand and Vietnam.
In 2018, Collectius acquired an NPL portfolio in Thailand from Thai Military Bank, the NPL portfolio consisted
of almost 7,000 credit cards and personal loans with a total principal value of $23 million. In the same year,
Collectius acquired its second NPL portfolio from a FI in the Philippines for $100 million and pioneered debt
purchase in Indonesia, signing its first NPL portfolio deal for $300 million.
9.2. Common NPL Resolution Models and Potential NPL Transaction Structures
9.2.1 Background and available options
In Pakistan, NPL resolution is an internal bank-led model. All commercial banks have in-house special asset
management or remedial asset management units which are mandated to resolve NPLs transferred to them using
restructuring, litigation, debt-asset swaps, out of court settlements, or other similar tools. To resolve these NPLs
some banks contracted individuals or third parties for asset identification services and coordination with local land
revenue offices, and asset repossession services for consumer finance debt collection (Annex O). Loan servicing
companies like those operating in European NPL markets do not exist (see Table 20 for examples). The NPL
problem in Pakistan is largely considered a legal one and until the impediments in the law and the court system are
resolved, banks’ preference for an in-house model over any options of sale or securitization will remain. However,
it is possible that the banks hold this view because an attractive alternative model for NPL resolution has not been
available to them.
As well as internal bank-led model, a few other models are common in Europe, Southeast Asia and India. These
models are essentially based on the transfer of NPLs from a bank to an NPL buyer through sale or a securitization-
like structure. Among these models of NPL buyers, public, and private and hybrid entities exist. Some examples
of these models include:
i. Integrated Bank Credit Trading Platform (Portugal) or Project Solar (Greece). In these models NPLs from
multiple banks are pooled into an SPV allowing banks to derecognize their NPLs. The SPV is privately
125
owned.
ii. ARCs (India). In this model an asset reconstruction company set up as a non-bank finance company under
SRFAESI Act, 2002 of India buys NPLs from banks. The purchase is funded by security receipts issued
by a trust (under an ARC) to qualified buyers. NPL purchases are through tender and auction.
iii. GACS (Italy) and Greece (HAPS) Securitization Models. In these models, NPLs are transferred to an SPV
for a cash payment by the SPV to the selling bank. The SPV issues asset-backed securities to investors.
With a layered funding structure, the senior securities issued are backed by a government guarantee against
a fixed fee. A servicer is appointed for NPL servicing against a management fee. The transferring banks
can also act as servicers.
iv. NAMA (Ireland), SAREB (Spain), KAMCO (Korea) and Danaharta (Malaysia). In these models distressed
assets are pooled into government sponsored or established (but not necessarily majority owned) SPVs
allowing participating banks to derecognize their NPLs receiving government-risk securities as payment.
The skills, specialization and robustness of the servicing entity can contribute to the success of an investment
structure depends. Common NPL servicing models (based on examples from European markets) are shown in Table
21.74
TABLE 21: SERVICE ENTITIES OPERATING IN EUROPE
S no. Category Examples
Captive servicers with exclusive relationships Hudson with Lone Star

1
with private equity NPL investors Lapithus with Apollo
Loan servicing platforms owned or CHL (UK and Ireland) and Haya (Spain) with
2 controlled by NPL private equity investors but Cerberus. Pepper, HipoGes, and Pillarstone with
open to third parties KKR
Debt purchasing and collection agencies

3 Lowell, Arrow, Hoist, Cabot
with growing secured servicing capabilities
Bank platforms or Asset Management FMS Wert management,

4
Companies (AMC) Euro bank Financial Planning Services (FPS)
Global Commercial Real Estate (CRE) loan

5 Situs, Mount Street, CBRE
servicers
6 Country-focused players LOANCOS (Germany)
Business Process Outsourcing (BPO) Link Asset Servicing, Computershare, Tech

7
integrated servicers Mahindra (Target)
Conventionally, the servicing industry is comprised of debt collection agencies which purchase NPLs for their own
account, and third-party servicing companies that administer portfolios and collect loans, but crossover models
such as captive servicers or loan servicing platforms are becoming popular as many loan servicers in Europe have
either have been bought by investors, have grown to become investors themselves, or have been created via joint
ventures between banks and loan servicers or investment funds (Metz, 2020).
In Pakistan, other than the Pakistan Corporate Restructuring Company (PCRCL), which is loosely comparable with
74
Deloitte (2019), Deleveraging Europe https://www2.deloitte.com/content/dam/Deloitte/uk/Documents/corporate-finance/deloitte-uk-
deleveraging-europe-2019.pdf
126
the ARC model in India, no structure or entity similar to the servicing entities operating in Europe exists. A review
of the legal impediments relating to PCRCL is in Section 8 of this report, however, there are three crucial points to
note following discussions with PCRCL.
i. Under the CRC Act, PCRCL cannot buy NPLs from banks involved in its establishment, ownership or
control. This ambiguity in the law regarding the use of words ownership and establishment has resulted
in some uncertainty as to whether the banks that own PCRCL can sell or transfer their NPLs to PCRCL.
ii. PCRCL has limited capital, preventing it from becoming a notable player in the secondary NPL market.
PCRCL was established with an equity of PKR 500 million and does not have sufficient capital to
purchase large corporate or commercial NPLs and keep a sufficient base of investment portfolio for
regular cash flows.
iii. PCRCL has entered some success fee-based agency contracts and NPL sale agreements with banks. This
agency model is neither expressly allowed in PCRCL’s mandate nor was it the reason it was established,
but this model has been adopted by the company as a temporary measure to stay in business until the
legislative amendments necessary to shore up its viability occur. The agency agreements that PCRCL
has agreed so far, will be effective upon the relevant legal amendments.
In this context, there are a few possible models for the sale or securitization of NPLs. In presenting these models,
IFC’s investment preferences75 such as having risk-reward based propositions, requirement of a servicing or
distressed asset partner, avoiding asset comingling risk, having a clear exit strategy, separating ownership and
servicing of portfolios, and having some reserved powers such as the right to veto portfolio/asset purchases have
been discussed. It is important to understand that the success of any of these models will depend on the extent to
which the shortcomings in provisioning and tax regulations, enforcement laws, recovery laws and the court system
in Pakistan are addressed, as they can improve recovery times, reduce transactional costs of recovery and improve
per rupee NPL recovery. Whether or not these legislative changes occur will have a direct impact on whether any
of the model options discussed below present themselves as attractive investment options for a private investor.
75
Any investment by the IFC will be subject to necessary improvements in the legal, regulatory and taxation regimes and be subject to
IFC management and board approvals.
127
9.3. Summary of Possible NPL Models and Transaction Structures
Table 22 contains a summary of the characteristics of each of the possible NPL models and the transaction structures contained in Section 9.4.
TABLE 22: SUMMARY OF POSSIBLE NPL MODELS & TRANSACTION STRUCTURES
Option 1: PCRCL Option 1A: New Option 2: PCRCL Option 4: Alternative Funds
S. Option 3: Securitization by
Characteristic (enhanced & company under CRC (Funds/ Trusts) as asset set up by Private Fund
No originating bank
expanded) law management company Management Companies
Legal changes None None Amendments in the CRC None None

required to law required to allow CRC
1
enable the to operate as asset
structure management company.
Legal basis for CRC Law CRC Law CRC Law By specific contractual terms By specific contractual terms
2 transfer of
assets
Ability to remit Yes, as dividend Yes, as dividend Yes, by redemption of units Yes, only if a profit participating Yes, as dividends when invested
the upside on payments in case of payments in case of (where set up as open-end investment instrument is used for in units of the trust/shares of the
the portfolio equity investment equity investment fund) and as dividends when example, participating term finance fund (where it is set up as a
3 (recoveries (subject to 9 below). invested in units of the trust certificates company) or through redemption
(subject to 9 below).
beyond the of units, where applicable
(subject to 9 below) [also (subject to 9 below).
initial purchase (subject to 9 below) [also refer to
refer to Annex V].
price)? Annex V].
Transfer of Automatic by operation Automatic by operation Automatic by operation of Movable collateral will transfer Movable collateral will transfer
collateral along of CRC law of CRC law CRC law along with NPL unless contractually along with NPL unless
with NPL agreed otherwise. Transfer of contractually agreed otherwise.
4 immovable collateral will require Transfer of immovable collateral
registration under registration laws. will require registration under
The registration duty applicable on registration law. The registration
transfer of immovable property duty applicable on transfer of
128 PAKISTAN NPL MARKET ASSESSMENT DIAGNOSTIC

No originating bank
varies from Province to Province. By immovable property varies from
way of example, in the Province of Province to Province. By way of
Punjab, the registration duty may be example, in the Province of
up to one per cent of the value of the Punjab, the registration duty may
immovable property whereas in the be up to one per cent of the value
Province of Sindh, registration duty of the immovable property
of PKR 1000 is payable. whereas in the Province of Sindh,
registration duty of PKR 1000 is
payable.
Borrower Yes, in case of anti- Yes, in case of anti- Yes, in case of anti- Yes, in case of anti-assignment Yes, in case of anti-assignment
5 approval assignment clause. assignment clause. assignment clause. clause. clause.
required?
Primary funding Equity Equity Equity or Units of fund Asset-backed securities Units of alternate fund (equity)
6
option76
Regulatory Procedural requirements Incorporation and No requirements at this Securitization of assets other than Incorporation and licensing
approvals for of SECP on issuance of licensing requirements to stage. Additional lease and mortgage finance require requirements to set up public
investment capital will apply. Pre- set up public limited requirements may be SBP approval. Investment in and limited company (non-bank
merger clearance from company under prescribed along with in- transfer of ABS also requires SBP finance company) under
7 Competition Companies Act and CRC process regulatory approval. Companies Act will apply.
Commission may also law will apply including amendments. NBFCs operate under a regulated
be required. No SBP requirement for framework and are subject to
approval required for managerial capacity of various regulatory requirements
investment in FX. sponsors/ board. including reporting to the SECP.
Investment must be Minimum capital, PKR Minimum capital, PKR 10
76
As an alternative IFC may lend to a CRC against a pledge of its portfolio. This option will be possible provided there are no restrictions in the regulatory framework to be prescribed for investment in trusts set up by CRC. As
noted in the table above, presently only an enabling provision in the CRC Act is proposed which would permit CRCs to acquire NPLs from financial institutions through one or more trusts constituted and managed by it and the
regulatory framework in connection there is yet to be prescribed. In the case of other funds of a similar nature operating in Pakistan (such as private funds or REIT funds) certain secured/unsecured borrowing thresholds/fund
investor disclosure requirements have been prescribed vis-à-vis borrowing by the trust funds. Further, prior approval of the SBP will be required for trusts to seek borrowing from abroad in view of Chapter 19 of the FE Manual.

No originating bank
registered with 500 million. No SBP million. No SBP approval
Authorized Dealer on approval required for required for investment in FX.
repatriable basis. investment in FX. Investment must be registered
Investment must be with Authorized Dealer on
registered with repatriable basis.
Authorized Dealer on
repatriable basis.
Regulatory No SBP approval No SBP approval No SBP approval required No prior approval of the SBP will be No SBP approval required for
approvals for required for investment required for investment for investment in FX. required for IFC to invest in ABS or investment in FX. Investment
profit in FX. Investment must in FX. Investment must Investment must be transfer the same to any must be registered with
8
repatriation be registered with be registered with registered with Authorized resident/non-resident. Authorized Dealer on repatriable
Authorized Dealer on Authorized Dealer on Dealer on repatriable basis. basis.
repatriable basis. repatriable basis.
Regulatory Feasible subject to Feasible subject to (Presumed for equity No prior approval of the SBP will be Sale to Pakistan resident:
approvals for requirements of CRC requirements of CRC investment) feasible subject required for IFC to transfer the same Repatriation subject to basic due
divestment (exit Act and relevant rules. Act and relevant rules. to requirements of CRC Act to any resident/non-resident. diligence by Authorized Dealer.
options) Sale to Pakistan Sale to Pakistan and relevant rules. Sale to If proceeds exceed $50 million in
resident: Repatriation resident: Repatriation Pakistan resident: six months, additional
subject to basic due subject to basic due Repatriation subject to basic requirements by Authorized
diligence by Authorized diligence by Authorized due diligence by Authorized Dealer. Sale to non-resident: No
9 Dealer. If proceeds Dealer. If proceeds Dealer. If proceeds exceed restrictions, if sale price paid
exceed $50 million in exceed $50 million in six $50 million in six months, outside Pakistan. Stamp duty on
six months, additional months, additional additional requirements by share transfer applies.
requirements by requirements by Authorized Dealer. Sale to
Authorized Dealer. Sale Authorized Dealer. Sale non-resident: No
to non-resident: No to non-resident: No restrictions, if sale price paid
restrictions, if sale price restrictions, if sale price outside Pakistan. Stamp duty
paid outside Pakistan. paid outside Pakistan. on share transfer applies.
Stamp duty on share Stamp duty on share

No originating bank
transfer applies. transfer applies.
Taxes on Income taxable at 29 Income taxable at 29 Under the current tax law, Income taxable at 29 percent as Under the current tax law, the
income percent as income from percent as income from the profit/surplus earned by income from business. Gain/loss on profit/surplus earned by the fund
business. Gain/loss on business. Gain/loss on the trust will be taxed as disposal of assets (collateral will be taxed as business income
disposal of assets disposal of assets business income at 29 acquired) taxable as capital/ gain at 29 percent and any gain/loss on
(collateral acquired) (collateral acquired) percent and any gain/loss on loss. Varying rates for capital disposal of assets (collateral
taxable as capital/ gain taxable as capital/ gain disposal of assets (collateral gain/loss based on holding period acquired) will be taxable as
loss. Varying rates for loss. Varying rates for acquired) will be taxable as and asset type. capital/ gain or loss for the fund.
capital gain/loss based capital gain/loss based capital/ gain or loss for the Varying rates for capital gain/loss
on holding period and on holding period and trust. Varying rates for based on holding period and asset
asset type. asset type. capital gain/loss based on type.
holding period and asset
10 Dividends paid by the fund will
type.
generally be taxed at 15 percent
Dividends paid by the trust for unitholders. On redemption of
will generally be taxed at 15 units, the difference between the
percent for unitholders. On initial investment value of units
redemption of units, the and the redemption value of units
difference between the will be taxed as capital gain for
initial investment value of the investors (on FIFO basis).
units and the redemption
value of units will be taxed
as capital gain for the
investors (on FIFO basis).

No originating bank
Transaction No stamp No stamp No stamp duty/registration Stamp duty varies from province to Stamp duty varies from province
specific taxes or duty/registration costs duty/registration costs costs province. In Islamabad, stamp duty to province. In Islamabad, stamp
duties on NPL is capped at PKR 100,000/- as per duty is capped at PKR 100,000/-
sale/purchase/tr the legal exemptions. In Punjab, as per the legal exemptions. In
ansfer stamp duty is 3 percent of the value Punjab, stamp duty is 3 percent
of property. In Sindh, there is some of value of property. In Sindh,
doubt as to applicability of stamp there is some doubt as to
duty on sale of movable property as, applicability of stamp duty on
whilst the enabling stamping sale of movable property as,
11
provision is wide enough to capture whilst the enabling stamping
sale of movable property, the provision is wide enough to
mechanism for computation of stamp capture sale of movable property,
duty does not cater for movable the mechanism for computation
properties. On a narrow read, stamp of stamp duty does not cater for
duty of 1 percent of the transaction movable assets. On a narrow
value will be attracted. read, stamp duty of 1 percent of
the transaction value will be
attracted.
Minimum None. PCRCL is Statutory licensing fee - None Fees for incorporating a public Statutory application fee for
statutory already established. PKR 50,000/-. Fees for limited company vary depending registration of Alternative Fund
establishment incorporating a public upon share capital of the company as a notified entity - PKR
costs77 limited company vary and may be calculated at. An SPV 1,000,000/-.
12 depending upon share may only apply for OTC listing of
capital of the company debt securities offered and issued
and may be calculated at through private placement if it’s paid
https://www.secp.gov.pk up, capital is at least Rs.
/company-formation/fee- 25,000,000/-, otherwise minimum
77
https://www.secp.gov.pk/company-formation/fee-calculator/company-incorporation-fee-calculator/

No originating bank
calculator/company- paid up capital requirement is PKR
incorporation-fee- 100,000.
calculator/). A CRC
under CRC Law is
required to have a
minimum share capital
of PKR 500 million.
Servicing PCRCL to be the The new CRC to be the PCRCL to be the default Private third-party servicers (limited PCRCL, private third-party
capacity and default servicing option. default servicing option. servicing option. Third-party options) or setting up a new servicers (limited options) or
infrastructure, Third-party servicing Third-party servicing servicing options are servicing company/ platform. setting up a new servicing
13 outsourcing of options are limited. options are limited. limited. Setting up a captive company/ platform.
operations Setting up a captive Setting up a captive servicing company may be
servicing company may servicing company may explored.
be explored. be explored.
Governance and Proportionate control, Full control possible Control in NPL portfolio Control in NPL portfolio and Control in NPL portfolio and
control by IFC shared with 10 existing and underlying assets based underlying assets based on underlying assets based on
14
shareholders on investment proportion. investment proportion. investment proportion.
(commercial banks)
Control of cash Proportionate share Full control on profit Control in NPL portfolio Control in NPL portfolio and Control in NPL portfolio and
flows through dividend distributions/ dividends and underlying assets based underlying assets based on underlying assets based on
distributions approved possible. on investment proportion. investment proportion. investment proportion.
15 by the Board (specific
exceptions can be made
through shareholder
agreement).
Asset ownership Assets owned by Assets owned by the Assets owned by the Assets owned by the SPV Assets owned by the alternate
16
PCRCL new CRC fund(s)/ trust(s) investment fund

No originating bank
Collateral No restrictions on the No restrictions on the No restrictions on the type No restrictions on the type of No restrictions on the type of
17 type of collateral. type of collateral. of collateral. collateral. collateral.
Debt No restricted options No restricted options No restricted options under All remedies as are typically All remedies as are typically
Enforcement under CRC law. Soft under CRC law. Soft CRC law. Soft collection, available for debt enforcement available for debt enforcement
collection, litigation, collection, litigation, litigation, asset swap, out-of- including litigation, rescheduling, including litigation, rescheduling,
18 asset swap, out-of-court asset swap, out-of-court court settlement, restructuring and rehabilitation. restructuring and rehabilitation.
settlement, restructuring settlement, restructuring restructuring and
and rehabilitation may and rehabilitation may rehabilitation may be used.
be used. be used.

9.4. Possible NPL Transaction Structures to Start an NPL Market in Pakistan
FIGURE 23: OPTION 1 DIAGRAM
TABLE 23: OPTION 1 DESCRIPTION
Option 1
Model Description
1. The scope and depth of PCRCL is increased by addition of new

private investors (for example, IFC) providing additional capital to
fund NPL purchases.
2. With enhanced capital, PCRCL can purchase NPLs from banks
against cash or issuance of debt securities or a combination of the two.
The transfer of NPLs by a Bank/DFI to PCRCL, shall take effect
“notwithstanding anything to the contrary contained in any law, decree,
judgment, order, contract, instrument or document”. As such, the
transfer is affected by operation of law and not by way of any contract.
3. All legal proceedings shall automatically stand transferred from the
PCRCL (enhanced and transferor to PCRCL upon the vesting of the transfer in terms of the
expanded) CRC Act. A variety of modes may be availed for recovery of NPLs,
such as debt rescheduling, debtor rehabilitation/restructuring, recovery
proceedings (with or without Court intervention), as detailed in chapter
8 of the report. Additionally, as detailed in Section 8.5, recovery of
NPLs may also be undertaken (where PCRCL holds two-thirds in value
of the principal amount payable to secured financial institutions of the
distressed entity) through sanction of a scheme of revival (without
Court involvement) through proposed amendments to the CRC Act,
that is binding on all creditors (Scheme of Revival).
4. The acquired NPLs are kept on the balance sheet of PCRCL which
can either service the portfolio itself or can outsource servicing to an
appropriate third-party servicing company. Based on available

Option 1
information, third-party servicing companies in Pakistan (recovery or
debt collection companies) only operate in consumer financing
portfolios and the existence of a servicing company for corporate loans
is not known. Where PCRCL both owns and services the NPL portfolio
itself, this model will be comparable to a crossover servicing structure
where an NPL purchaser also undertakes portfolio servicing. For
PCRCL, this is the current and default servicing model and may be
easier to implement or continue with. However, his structure combines
asset ownership and asset servicing which goes against IFC’s
investment preferences. To resolve this, there are some alternatives.
 Achieving internal segregation in portfolio servicing and ownership
through the governance structure, board and management
committees and internal portfolio specific service-level agreements.
 A captive servicing company (a separate legal entity) which
services PCRCL’s portfolio against a servicing fee. Its shareholders
can include IFC and other private investors.
 A (non-exclusive) servicing platform owned by IFC and other
private investors which services portfolios for a variety of NPL
investors with no exclusivity.
5. In this model, private co-investors will be equity holders and be paid
through dividends (profit distributions) by PCRCL.
Practically speaking, if private investors become shareholders
alongside commercial banks, a conflict of interest about the transfer
price of NPLs may exist. The shareholder commercial banks might not
be fully motivated to negotiate for the lowest purchase price given the
loss on sale of NPLs accruing to their primary business. In addition,
non-shareholder commercial banks might have concerns about sharing
information with a bank owned PCRCL as its shareholders could be
competitors. It will be useful to have strong, transparent, and effective
shareholder agreements and a clear segregation between policy-making
and everyday management of the company to overcome these
obstacles. This may be achieved by:
 Clearly articulating the mandate of NPL servicing and management
based on maximizing returns and recoveries for PCRCL.
 A clear statement of NPL valuation methods to be employed and
other minimum information and deal criteria.
 A clear matrix of authorities with proper governance committees
like those for Investment and Risk Management with equitable
representation of bank and non-bank private investors.
 Providing certain reserved powers to non-bank private investors by
virtue of shareholder agreement where they approve each asset
purchase.
 Providing clear guidance in the Board charter for disclosure and
decision making where there is a perceived conflict of interest, for
example when evaluating investment proposals for shareholder
bank.
Investment Options

Option 1
IFC or other similar private investors can take a direct equity stake in
the company, enhancing its capital base and helping to resolve its
capital constraints. IFC’s experience and expertise will facilitate
Direct equity investment in investment from the equity investors from other NPL markets. The
PCRCL investment can also be made by creating an offshore holding company
or SPV which invests in PCRCL. After operating for several years with
greater capital, the company could access capital markets to raise more
capital and further widen the investor base.
Legal/Regulatory Considerations
Licensing/Regulatory Requirements
This option does not require a new entity to be set up, licensed, and
operationalized. It capitalizes on the existing specialist legal framework
aimed at NPL resolution (with required changes assumed). There is a
clear need for PCRCL to gain additional capital to get its operations
underway.
Foreign Exchange Law Requirements
Equity investment
No prior SBP approval is required for private foreign co-investors
(such as IFC) to make an equity investment in PCRCL provided the
issue price is paid by foreign investor in foreign exchange, through
normal banking channel by remittance from abroad, or out of a foreign
currency account maintained by the investor in Pakistan. The
investment must be registered with the SBP through an Authorized
Dealer. Once registered, the foreign investment will be held on a
repatriable basis (all dividends and divestment proceeds will be
repatriable from Pakistan).
To divest from PCRCL, foreign co-investors will be able to transfer its
shares in PCRCL to any resident or non-resident purchaser that meets
Legal and Taxation the eligibility criteria under the CRC Act and the rules issued
Requirements/Considerations thereunder (as applicable). Following recent reforms in the foreign
exchange laws, the restrictions on repatriation of divestment proceeds
exceeding the break-up value or listed price, as applicable, of shares
have been relaxed.
 Where a foreign investor sells its registered investment to a
Pakistani resident, divestment proceeds may be repatriated without
the need for prior approval of the SBP provided the necessary
documentation is provided to the Authorized Dealer. For
disinvestment proceeds not exceeding the market value (in case of
listed securities)/ break-up value (in case of unlisted securities), the
Authorized Dealers can allow the divestment proceeds to be
remitted after conducting basic due diligence involving a review of
share purchase agreement, broker/auditor report regarding
market/break-up value of shares, buyer verification. Where
divestment proceeds exceed the market or break-up value
(depending on whether the securities are listed) , the Authorized
Dealer can allow the proceeds to be remitted only after it is satisfied
that the transaction is genuine by reviewing additional documents
such as detailed justifications/ rationale/ basis of setting the
transaction price per share, from the buyer, in original, attested copy
of transaction due diligence, independent third party valuation
report of the buyer (where proceeds exceed $50 million in a span of

Option 1
six months).
 Where a foreign investor sells its registered investment to a non-
resident, there will be no restrictions or requirements regarding the
sale price so long as payment is made outside Pakistan. Stamp duty
on the transfer of shares will be repatriated to Pakistan, and the
PCRCL will be required to register the share transfer with the
Authorized Dealer.
Other requirements
Depending on the quantum of investment and turnover of all parties,
pre-merger clearance of the Competition Commission of Pakistan may
be required.
Legal Reforms
Amendments to the CRC law should be made to remove certain
lacunas and deficiencies.
Tax Considerations
Income earned by a company (person) from profit on debt is taxable
under the head “Income from Business”. ‘Profit on debt’ (received or
paid) means any profit, yield, interest, discount, premium or other
amount owing under a debt, other than a return of capital. It also
includes any service fees relating to a debt, including any fees incurred
through a credit facility which has not been utilized. Based on these
definitions, it is understood that only surplus cash flows (those above
the purchase price) received on an NPL portfolio whether they be
periodic payments or received after a result of sale or transfer, will be
taxable. However, where portfolios are acquired by PCRCL (NPL
Buyer) other than in cash and the purchase price is based on valuation
of securities issued, then it may become a subject of debate with tax
authorities given a lack of clear framework on generally accepted ways
of portfolio sale/purchase transactions in the ITO (refer to Section 7).
Regardless of a company’s structure (a non-bank), the company’s
income during the year shall be taxed as income from business at the
standard corporate tax rate of 29 percent. Where collaterals are
acquired in satisfaction of debt, for tax purposes, the assets acquired
are likely to be classified as non-business assets (much like non-
banking assets) and therefore the gain or loss on disposal of these
assets may be treated as a capital gain or loss. In the income tax
ordinance, there are varying rates of taxation for capital assets
depending on the type of asset and their holding period. (Please note,
this interpretation is based on general understanding of the tax
provisions and is not tax advice).
For dividends or profit repatriations back to the holding company, a
standard rate of 15 percent will apply. Pakistan has tax treaties with
some other countries through which lower rates on dividends may be
achieved. If a foreign investor sets up a holding company in a country
that has a treaty with Pakistan, it may be possible to get the dividends
taxed at a lower rate than 15 percent. For example, in Switzerland
where the investor company holds not less than 20 percent in an
investee company in Pakistan, dividend is taxable at 10 percent.
Further considerations
Where movable or immovable property acquired to satisfy a debt is
disposed of by the NPL acquiring entity, the gain can be (by

Option 1
interpretation) classified as either income from business or a capital
gain. Where it is classified as capital gain, it may attract a lower rate of
taxation (between 12.5 percent and 15 percent instead of the standard
corporate tax rate of 29 percent).
In general, NPL acquisitions below book value or with unusual fair
valuations will be questionable and the use of trusts, SPVs or other
specialist corporate structures will run the risk of being re-
characterized. These potential problems are described in Section 9.4.
Tax Impacts on Different Transaction Stages in Option 1

Table 24 summarizes and explains the impact, application, and incidence of various taxes at different stages
of transaction(s) between the participants in Figure 23. The reference numbers in Table 24 correspond to the
steps shown in Figure 23.
TABLE 24: TAX IMPLICATIONS IN OPTION 1
Ref.
Steps Tax Impact
No
Investor provides
1 There is no tax impact.
equity investment
PCRCL buys NPL
portfolio
The gain or loss on sale of NPL portfolio will be treated as business
Originator (seller)
3 income or business loss of the bank (NPL Seller) and taxed at income
receives cash
tax rate of 35 percent.
4 PCRCL hires servicer There is no tax impact.
1. Servicing company will charge service fee inclusive of (Sindh) sales
tax on services at 13 percent to PCRCL. This is a provincial tax and
Servicing company
rates will vary depending on the concerned province.
5 collects cash from
borrowers.
2. The management or service fee income of the servicing company
will be taxed as business income at 29 percent.
1. Business income of PCRCL (the surplus recovered) will be taxed at
higher of the following:
a. 29 percent of taxable income
b. 1.25 percent of annual turnover (revenue)
c. 17 percent of accounting income
2. In addition to regular business income, if PCRCL acquires an asset

to satisfy a debt which is later sold at market value, then the gain or
PCRCL receives loss on the asset’s sale will be taxed at the capital gain rate of 29
6 collections from percent (standard corporate tax rates apply for assets other than
borrowers immovable property). If the holding period of such asset(s) is greater
than one-year then the amount of taxable capital gain will be reduced
by 25 percent. For immovable property, various rates of capital gain tax
of up to 15 percent apply.
For this tax treatment, it is understood that all receipts from the
borrower are treated as principal repayments since PCRCL would have
purchased the NPLs at a discount. In this case there is no at-source
withholding by the borrower (being a company).

Alternatively, if the repayments from the borrower (being a company)
are structured and split between principal payments and interest
payments then the borrower will be obligated to deduct 15 percent of
the interest portion of the payment at the time of payment. This will be
an at-source withholding of the income tax on business income of
PCRCL adjustable against the total income tax liability of PCRCL.
While making payments to the servicing company, PCRCL would

withhold income tax at 8 percent of gross amount of payment and 20
PCRCL pays servicing
7 percent of the amount of sales tax charged by the servicing company.
fee
These are not new or additional taxes but are an at-source deduction of
a portion of existing income taxes.
PCRCL pays dividends Dividends paid to investors will be taxable at 15 percent (by
8
to shareholders withholding) or a lower rate if there is an applicable tax treaty.
TABLE 25: OPTION 1A DESCRIPTION
Option 1A (Variation of Option 1)
Model Description
This option is a variation and a direct solution to address a conflict of

interest which may arise in a bank-private investor co-owned entity. In
this option a new corporate restructuring company exclusively owned
by private investors may be set up under the CRC law (CRC). It will
resolve the conflict of interest, and enable efficient management, in
comparison with PCRCL which has ten banks and DFIs (as its
shareholders and management). The downside of this option is the time
and cost of setting up and operationalizing a company.
In this model, the CRC will also purchase NPLs from banks against
cash or issuance of debt securities.
The acquired NPLs are kept on a CRC’s balance sheet which can either
service the portfolio itself or can outsource servicing to a third-party
servicing company. Third-party servicing companies in Pakistan
(recovery or debt collection companies) only operate in consumer
A new company under the financing portfolios, not corporate loan portfolios. Where the new CRC
CRC law both owns and services the NPL portfolio itself, this model will be
comparable to a crossover servicing structure (discussed above) where
an NPL purchaser also undertakes portfolio servicing. For PCRCL, this
is the current and default servicing model and may be easier to
implement or continue with. However, his structure combines asset
ownership and asset servicing which goes against IFC’s investment
preferences. To resolve this, there are some alternatives.
 Achieving internal segregation in portfolio servicing and ownership
through the governance structure, board and management
committees and internal portfolio specific service-level agreements.
 A captive servicing company (a separate legal entity) which
services the CRC’s portfolio against a servicing fee. Its
shareholders can include IFC and other private investors.
 A (non-exclusive) servicing platform owned by IFC and other
private investors which services portfolios for a variety of NPL

Option 1A (Variation of Option 1)
investors with no exclusivity.
Investment Options
Private investors can aim to establish a CRC and take on direct equity
stake in the company and provide it with capital and liquidity to invest
in NPLs. IFC’s expertise and experience will facilitate investment from
equity investors from other NPL markets. The investment can also be
made by creating an offshore holding company or SPV which invests
in the CRC.
After operating for several years with greater capital, the company
could access capital markets to raise more capital and further widen the
investor base.
Establishment of CRC by IFC
Variation: A literature review shows that when the government is
added as an investor in these structures, it increases the credit
worthiness of the entity and provides a positive signal, helping to
increase the appetite of private investors. One of the models could add
the government as a co-investor along with IFC. It is important to
understand that direct equity investment through budgetary allocation
may not be a preferred option for the government, so options involving
a guarantee capital or contingent capital (subject to Constitutional
borrowing/guarantee limits) may be considered.
A corporate restructuring company will have to be set up as a public
limited company and licensed by the SECP. Minimum paid up capital
prescribed for the incorporation of a CRC is PKR 500 million.
Legal and Taxation For licensing of the CRC, subscribers and board members are required
Requirements/Considerations to meet certain criteria including special knowledge and experience of
matters regarding the restructuring of companies in distress, financial
engineering techniques, and the skills and capacity to deal with out of
court work outs.
The remaining legal and taxation considerations for this variation are
the same as Option 1.

Option 2
Model Description
In this option, PCRCL operates as an asset management company

where various fund(s) (as separate legal entities) are created with non-
consolidating investment from PCRCL. Private investors such as IFC
can directly invest in NPL portfolios by investing in the securities
issued by the fund(s) while PCRCL acts as a servicer for NPL
portfolios in these fund(s).
1. PCRCL creates fund(s) in the form of trusts.
2. The trusts operate as unit trusts (like open ended funds). IFC or
other investors can invest in these trusts by buying the units or
securities issued by the trust which will represent the carrying value of
its NPLs. Where there is any surplus above the original carrying value
of the net assets it will result in an increased net asset value (NAV) of
the units. The NAV structure will allow investors to collect variable
cash flows (initial investment and surplus) through regular
PCRCL (Funds/ Trusts) as
redemptions (a model can be agreed in the offering documents of the
asset management company
trust such as systematic redemption option of units). Annex V
contains more details about the periodic cashflow collection. It is
important to note that amendments to the CRC law to enable CRCs to
create trusts only propose that CRCs can create trusts, the enabling
rules or modalities in which these trusts will operate or raise finances
are to be determined.
3. All legal proceedings shall automatically stand transferred from the
transferor to PCRCL upon vesting of transfer.
4. The acquired NPLs are kept on the balance sheet of fund(s) or
trust(s).
5. PCRCL offers servicing on fee basis or uses third party servicers.
6. Security holders of fund(s) or trust(s) are paid out of cash flows
arising from portfolio recoveries.

Option 2
7. A variety of modes may be availed for recovery of NPLs, such as
debt rescheduling, debtor restructuring, recovery proceedings (with or
without Court intervention) as well as Schemes of Revival, as
described in Section 8.
Investment Options
Private investors can directly (or through an offshore alternative

investment fund) invest in the securities or units issued by the fund(s)
or trust(s) created by PCRCL. For a better credit rating, the underlying
assets for these securities can include non-performing, under-
performing, and performing assets, or they could be backed by
Investing in securities issued
government guarantee on a case-by-case basis.
by funds/ trust
As per the legislative amendments, the trust(s) or fund(s) can be
matured over the long term into a collective investment vehicle where
their securities or units are subscribed by a wider set of investors such
as insurance companies, mutual funds or even retail investors.
Legal Reforms (CRC Law)

Amendments to the CRC law should be made to remove certain
lacunas and deficiencies. One of the proposed amendments is to
permit CRC to acquire NPLs from banks or DFIs through one or more
trusts constituted and managed by it. This will enable the CRC to act
as an asset management company and acquire NPLs through the trusts
it would manage. This would allow for separate funds for different
types of portfolios segregated by asset class or resolution strategy, or
for separate funds for portfolios funded by the same investors.
To facilitate and regulate this asset management structure, SECP will
need to develop a framework under the CRC Act. The current
framework of SECP for asset management companies that fall within
the umbrella of non-banking finance companies cannot apply to
CRCs. This means that even if a trust or fund structure is created
under PCRCL in the CRC law, it will not have the features of a more
Legal and Taxation holistic fund structure as has been prescribed by the SECP for
Requirements/Considerations collective investment schemes.
Trust laws
Despite this legal limitation, by virtue of some recent amendments in
the trust laws in Sindh and KPK, a simplified process has been
introduced to register certain ‘specialized trusts’ that are subject to
regulatory oversight of the SECP. The process for ‘specialized trusts’
is simplified and is one-off unlike for registering other types of trusts.
While they arguably already fall within the ambit of ‘specialized
trusts’, to exercise abundant caution, unit trusts to be set up by
PCRCL or any other CRC, should also be notifiable as ‘specialized
trusts’ under relevant trust laws to expedite registration.
Foreign exchange laws
The SBP can permit non-residents to invest in units of any funds
quoted on the stock exchange, units of mutual funds registered as
open-end schemes under the management of asset management

Option 2
companies, and units of private funds managed by Private Fund
Management Companies, licensed by the SECP. The units may be
transferred to any non-resident or resident and divestment proceeds
may be remitted outside of Pakistan under the same conditions as
detailed in the context of units of Alternative Funds under Option 4.
There is currently no general permission of the SBP that would be
available for non-residents to invest in units of trusts set up by CRCs
for NPLs. Any non-resident investors need special permission from
the SBP. Alternatively, a general permission may be introduced in the
foreign exchange laws to allow non-residents to invest in units of any
trusts established by a CRC (like that available for units of mutual and
private funds). This could enable divestment of units in the same way
as for Private Funds or listed funds.
Tax Considerations
Income earned by a company from profit on debt is taxable under the
head “Income from Business”. ‘Profit on debt’ (received or paid)
means any profit, yield, interest, discount, premium or other amount
owing under a debt, other than a return of capital. It also includes any
service fees relating to a debt, including any fees incurred through a
credit facility which has not been utilized. Based on these definitions,
it is understood that only surplus cash flows (those over the purchase
price) received on an NPL portfolio whether they be periodic
payments or received after a result of sale or transfer, will be taxable.
However, where portfolios are acquired by PCRCL (NPL Buyer)
other than in cash and the purchase price is based on valuation of
securities issued, then it may become a subject of debate with tax
authorities given a lack of clear framework on generally accepted
ways of portfolio sale/purchase transactions in the ITO (refer to
Section 7).
Regardless of a company’s structure (a non-bank), the company’s
income during the year shall be taxed as income from business at the
standard corporate tax rate of 29 percent. Where collaterals are
acquired in satisfaction of debt, for tax purposes, the assets acquired
are likely to be classified as non-business assets (much like non-
banking assets) and therefore the gain or loss on disposal of these
assets may be treated as a capital gain or loss. In the income tax
ordinance, there are varying rates of taxation for capital assets
depending on the type of asset and their holding period. (Please note,
this interpretation is based on general understanding of the tax
provisions and is not tax advice).
Where the PCRCL Trust declares a dividend for its unitholders, a

standard rate of 15 percent will apply. Pakistan has tax treaties with
some other countries through which lower rates on dividends may be
achieved. If an investor sets up a holding company in a country that
has a treaty with Pakistan, it may be possible to get the dividends
taxed at a lower rate than 15 percent. For example, in Switzerland
where the investor company holds not less than 20 percent in an
investee company in Pakistan, dividend is taxable at 10 percent.
Further considerations
Exemptions in the ITO mean the income of a collective investment

Option 2
scheme (for instance, a mutual fund) as defined in the NBFC Rules
2003, does not pay tax where 90 percent of its profit is distributed to
its unit holders. If the NPL purchasing entity (such as a trust, SPV, or
alternate investment fund) can be classified through special provisions
or relaxations, or is structured as a collective investment scheme, then
it may also possibly benefit from this tax exemption.
Where movable or immovable property acquired to satisfy a debt is
disposed of by the NPL acquiring entity, the gain can be (by
interpretation) classified as either income from business or a capital
gain. Where it is classified as capital gain, it may attract a lower rate
of taxation (between 12.5 percent and 15 percent instead of the
standard corporate tax rate of 29 percent).
In general, NPL acquisitions below book value or with unusual fair
valuations will be questionable and the use of trusts, SPVs or other
specialist corporate structures will run the risk of being re-
characterized. These potential problems are described in Section 9.4.
Tax Impacts on Different Transaction Stages in Option 2

Table 27 summarizes and explains the impact, application, and incidence of various taxes at different stages
of transaction(s) between the participants shown in Figure 24. The reference numbers in Table 27 correspond
to the steps in Figure 24.
TABLE 27: TAX IMPLICATIONS IN OPTION 2
Ref.
Steps Tax Impact
No
IFC (investors) invest
in PCRCL fund(s)
PCRCL fund(s) buy(s)
NPL portfolio
The gain or loss on sale of NPL portfolio will be treated as business
Originator (seller)
3 income or loss of the bank (NPL Seller) and taxed at income tax rate
receives cash.
of 35 percent.
PCRCL appointed as
servicer
1. PCRCL will charge a service fee inclusive of (Sindh) sales tax on
services at 13 percent to PCRCL Fund(s). This is a provincial tax and
PCRCL (servicing
rates will vary depending on the province.
5 company) collects cash
from borrowers.
2. The management or service fee income of PCRCL will be taxed as
business income at 29 percent.
1. Business income of PCRCL Funds (the surplus recovered) will be
taxed at higher of the following:
a. 29 percent of taxable income
b. 1.25 percent of annual turnover (revenue)
PCRCL fund(s)
c. 17 percent of accounting income
6 receive(s) collections
In addition to regular business income, if PCRCL acquires an asset to
from borrowers.
satisfy a debt which is later sold at market value, then the gain or loss
on the asset’s sale will be taxed at the capital gain rate of 29 percent
(standard corporate tax rates apply for assets other than immovable
property). If the holding period of these asset(s) is greater than one

year, then the amount of taxable capital gain will be reduced by 25
percent. For immovable property, various rates of capital gain tax of
up to 15 percent apply.
For this tax treatment, it is understood that all receipts from the
borrower are treated as principal repayments since the PCRCL
Fund(s) would have purchased the NPLs at a discount. In this case
there is no at-source withholding by the borrower (being a company).
Alternatively, if the repayments from the borrower are structured and

split between principal payments and interest payments then the
borrower will be obligated to deduct 15 percent of the interest portion
of the payment at the time of payment. This will be an at-source
withholding of the income tax on business income of PCRCL Fund(s)
adjustable against the total income tax liability of PCRCL Fund(s).
While making payments to the management or servicing company
(PCRCL) PCRCL Fund(s) would withhold income tax at 8 percent of
PCRCL Fund(s) pay gross amount of payment and 20 percent of the amount of sales tax
7
servicing fee charged by the management or servicing company. These are not new
or additional taxes but are an at-source deduction of a portion of
existing income taxes.
Investors can derive two types of incomes from PCRCL Funds.
1) Dividends taxable at 15 percent (by withholding) or a lower rate if

there is an applicable tax treaty.
2) Capital gain or loss on disposal or redemption of PCRCL Fund(s)

units at standard corporate income tax rate of 29 percent (for listed
Investors distribute securities or units this tax rate is 15 percent taxed as separate block of
8 direct portfolio income).
collections
This treatment assumes that the capital gain from redeeming units is
taxable in Pakistan. If the investment company is registered in a
country with a double tax treaty with Pakistan, then it can apply for an
exemption on this tax in Pakistan and must obtain an exemption
certificate otherwise a 20 percent withholding tax on the gross amount
remitted by PCRCL fund(s) will apply. This withheld amount will, be
adjustable as a tax credit in the investor’s home country.

Option 3
Model Description
This is a decentralized model where private investors can invest in

NPL portfolios by subscribing to the debt securities of a SPV set up
by one or more originating banks. There are several options for
securitization structures involving NPLs.
(i) An SPV incorporated as a public unlisted company will issue asset-
backed securities (ABS) in the form of redeemable capital (such as
term finance certificates).
(ii) The SPV will acquire the NPLs from the originator (a bank or
DFI) using the funds generated from issuing ABS. Without a
contractual restriction in the NPL documentation, borrowers may not
consent to such an acquisition.
(iii) The SPV may, for a fee, engage PCRCL as a servicer or any other
third-party servicer.
(iv) Where the originator is a bank or DFI there will need to be a ‘true
sale’ of the NPLs, typically, an absolute assignment of receivables.
(v) Banks or DFIs may securitize their assets relating to lease
financing (with the acknowledged assignment of lease rental
proceeds), mortgage financing and to toll financing (for infrastructure
developmental projects). Other assets, may be securitized by banks
Securitization through SPV and DFIs with the approval of the SBP, on a case-by-case basis.
by originating banks/ a
combination of originating Variations
banks.
(i) Securities could be backed by the government under a scheme,
such as in GACS. This is to ensure asset-based securities have
favorable capital treatment on originating banks or investor balance
sheets. The bid-ask differences are at their minimum and can increase
investor confidence.
(ii) Alternatively, the securities may also be tranched as senior,
mezzanine and junior to suit the risk appetite and investment
objectives of a wider set of investors. To propose a tranche-based
structure, more information regarding the portfolios, certainty of the
cash flows, and other legal and enforcement related challenges will be
required. As Pakistan is a nascent NPL market, more time will be
required before complex transaction structures can be introduced.
While this private securitization model or decentralized bank-led
securitization model is theoretically possible in Pakistan, Option 3
may not be the best one to choose now.
 Without sophisticated structuring, a bank-led securitization might
not qualify for the non-consolidation and true sale criteria under
the applicable accounting framework in Pakistan. Under IFRS 9,
an entity (such as a bank or DFI) can de-recognize an asset when it
has transferred all the risks and rewards associated with it. The
transfer of risks and rewards is evaluated by comparing the entity’s
exposure before and after the transfer, with the variability in the

Option 3
amounts and timing of the net cash flows of the transferred asset.
An entity has retained substantially all the risks and rewards of
ownership of a financial asset if its exposure to the variability in
the present value of the future net cash flows from the financial
asset does not change significantly after the transfer. An entity has
transferred substantially all the risks and rewards of ownership of a
financial asset if its exposure to such variability is no longer
significant in relation to the total variability in the present value of
the future net cash flows associated with the financial asset.
 The general regulatory and reputational risks which affect the
banking sector may still affect this SPV, its investors and its
servicers. The structure may not be considered an ‘outside the
banking sector’ structure.
 It may be difficult to achieve economies in this model as it will
largely be bank-specific compared with an AMC with multiple
funds and the ability to pool assets from more than one bank.
 If created outside the CRC law, this SPV will not have the special
powers and privileges available to CRCs.
 The depth and participation in the private debt securities market in
Pakistan is limited.
Investment Options
Investing in asset backed

IFC and other private investors can invest in ABS issued by the SPV.
securities

Pakistan’s Foreign Exchange Manual enables private investors to
invest in ABS (such as term certificates) on a repatriable basis, and to
transfer the ABS if procedural requirements are met.
Legal Reforms
To facilitate Option 3, recommendations relating to true sale
Legal and Taxation requirements, limitations on establishing a wholly owned SPV,
Requirements/Considerations minimum capital requirements, ABS credit rating requirements, and
stamp laws are described in Sections 8.3 and 8.5.
Tax Considerations
The remaining taxation considerations for this option are the same as
Option 1.

Option 4
Model Description
Alternative funds in Pakistan can be structured as conventional trust

funds, where an author of a trust creates the trust in the name of
beneficiaries, while appointing a trustee and a trust manager. In the
alternative funds model, a non-banking finance company acts as the
trust manager to oversee a fund of investments that may comprise
NPLs (alternative fund). Only sophisticated investors (having net
assets of PKR 15 million (excluding the value of their personal
Alternative funds set up by residence) are permitted to invest in Alternative Funds.
Private Fund Management Unlike Options 1 and 2:
Companies (FMC)
(i) Alternative funds can acquire NPLs contractually rather than by
operation of law; and
(ii) FMCs will not be able to enforce any Scheme of Revival under the
CRC Act and so will need to rely on other avenues, such as out of
Court settlement, recovery, and schemes under the Companies Act
and Corporate Rehabilitation Act. All of these may be more time
consuming and cumbersome or have their own limitations as
described in 10.3.
However, an Alternative Fund model will allow greater risk
diversification, as up to 30 percent of its net assets may be invested in
assets other than NPLs.
Investment Options
IFC or other similar private investors can aim to set up an FMC to

establish alternative funds. IFC’s experience and expertise will
Direct equity investment in
facilitate investment from equity investors from other NPL markets.
Fund Management Company
The investment can also be made by creating an offshore holding
company or SPV which invests in an FMC.

Option 4
After operating for several years with greater capital, the company
could access capital markets to raise more capital and further widen
the investor base.
IFC and other private investors can directly (or through an offshore
alternative investment fund) invest in the securities or units issued by
an alternative fund. For gain a better credit rating, the underlying
assets for these securities can include non-performing, under-
performing, and performing assets, or they can be backed by
government guarantee (on a case-by-case basis or under an
Investing in units issued by the overarching scheme of guarantee and subject to constitutional
alternative fund borrowing/guarantee limits).
The trust can be matured into a collective investment vehicle where its
securities are subscribed by insurance companies, mutual funds or
retail investors.
This second investment option, is not possible in Pakistan today, as
there are no alternative funds for investments in NPLs.
A non-banking finance company will have to be set up which will then
obtain a license from the SECP to act as an FMC. All promotors,
directors, the chief executive officer, and the chairperson must meet the
criteria prescribed by the SECP, and the FMC must have minimum
capital of PKR 10 million.
Alternative funds established by the FMC must be approved by and
registered with the SECP.
Equity investment in FMC
No prior SBP approval is required for private investors to make an
equity investment into a FMC provided the issue price is paid in foreign
exchange, through normal banking channel by remittance from abroad,
or out of a foreign currency account maintained by the investor in
Legal and Taxation Pakistan. The investment must be registered with the SBP through an
Requirements/Considerations Authorized Dealer. Once registered, the investment will be held on a
repatriable basis (all dividends and divestment proceeds will be
repatriable from Pakistan).
To divest from FMC, investors will be able to transfer their shares to
any purchaser that meets the criteria of the. Following recent reforms
in the foreign exchange laws, the restrictions on repatriation of
divestment proceeds exceeding the break-up value or listed price, as
applicable, of shares have been relaxed.
(a) Where an investor sells its registered investment to a
Pakistani resident, divestment proceeds may be repatriated
without the need for prior approval of the SBP provided the
necessary documentation is provided to the Authorized
Dealer. For disinvestment proceeds not exceeding the
market value (in case of listed securities)/ break-up value (in
case of unlisted securities), the Authorized Dealers can allow
the divestment proceeds to be remitted after conducting
basic due diligence involving a review of the share purchase

Option 4
agreement, a broker or auditor report on the market or break-
up value of shares, buyer verification. Where, divestment
proceeds exceed the market or break-up value (depending on
whether the securities are listed), the Authorized Dealer can
allow the proceeds to be remitted only after it is satisfied that
the transaction is genuine by reviewing additional
documents such as detailed justifications/ rationale/ basis of
setting the transaction price per share, from the buyer, in
original, attested copy of transaction due diligence,
independent third party valuation report of the buyer (where
proceeds exceed $50 million in a span of six months).
(b) Where an investor sells its registered investment to a non-
resident, there will be no restrictions or requirements
regarding the sale price so long as payment is made outside
Pakistan. Stamp duty on the transfer of shares will be
repatriated to Pakistan, and the FMC will be required to
register the share transfer with the Authorized Dealer.
Units of Alternative Funds
No prior SBP approval is required for private investors to make an
equity investment in units of alternative funds provided the issue price
is paid in foreign exchange, through normal banking channel by
remittance from abroad, or out of a foreign currency account
maintained by the investor in Pakistan. The investment must be
registered with the SBP through an Authorized Dealer. Once registered,
the investment will be held on a repatriable basis (all dividends and
divestment proceeds will be repatriable from Pakistan).To divest from
the Alternative Fund, investors will be able to transfer their units to any
resident or non-resident purchaser. Following recent reforms in the
foreign exchange laws, the restrictions on repatriation of divestment
proceeds exceeding the net asset value of units have been relaxed.
(c) Where an investor sells its registered investment to a
Pakistani resident, divestment proceeds may be repatriated
without the need for prior approval of the SBP provided the
necessary documentation is provided to the Authorized
Dealer. For disinvestment proceeds not exceeding the
market value (in case of listed securities)/ break-up value (in
case of unlisted securities), the Authorized Dealers can allow
the divestment proceeds to be remitted after conducting
basic due diligence involving a review of the share purchase
agreement, a broker or auditor report on the market or break-
up value of shares, buyer verification. Where, divestment
proceeds exceed the market or break-up value (depending on
whether the securities are listed), the Authorized Dealer can
allow the proceeds to be remitted only after it is satisfied that
the transaction is genuine by reviewing additional
documents such as detailed justifications/ rationale/ basis of
setting the transaction price per share, from the buyer, in
original, attested copy of transaction due diligence,
independent third party valuation report of the buyer (where
proceeds exceed $50 million in a span of six months).
(d) Where an investor sells its registered investment to a non-
resident, there will be no restrictions or requirements
regarding the sale price so long as payment is made outside
Pakistan. Stamp duty on the transfer of shares will be

Option 4
repatriated to Pakistan, and the FMC will be required to
register the share transfer with the Authorized Dealer.
(e) For disinvestment proceeds from matured units of the
alternative fund, the Authorized Dealer will review the
winding-up report verified by external auditor and trustee of
fund, unitholders investment statement and distributions
statement (including principal repayment) before allowing a
remittance.
Other requirements
Depending on the quantum of investment and turnover of all parties,
pre-merger clearance of the Competition Commission of Pakistan
may also be required.
Tax Considerations
The remaining legal and taxation considerations for this option are the
same as Option 1.
9.5. Options for preferred NPL investment model

Of the four potential NPL transaction structures and their variations, Option 2 – PCRCL as an asset
management company – is the preferred for IFC.I It generally meets IFC’s investment preferences, particularly
by avoiding the risk of asset co-mingling, separating ownership and servicing structures, allowing for direct
investment in portfolios, building on an existing PCRCL company structure, and benefiting from the
specialized CRC law. However, in practical terms, it requires changes in the legal framework to allow PCRCL
to set up fund(s) and trust(s).
The next best alternative is Option 1 – direct equity investment in PCRCL. This option may not meet all
conditions of the preferred investment model for a foreign investor but would retain the key benefit of
operating under the CRC law, with an operationalized company structure and would require no legal
amendments.
Options 3 and 4 are the least preferred. Pakistan’s underdeveloped securitization and secondary markets makes
Option 3 – a decentralized bank-led securitization difficult to implement, and the large scale of the legal
amendments required for Option 4 – an alternate investment fund – make it unfeasible.

10. ANNEXES
10.1. Annex A - List of laws, regulations and circulars reviewed

 Sindh Trust Act, 2020
 Financial Institutions (Secured Transactions) Act, 2016
 Companies Act, 2017
 Sale of Goods Act, 1930
 Contract Act, 1872
 Financial Institutions (Recovery of Finances) Ordinance, 2001
 UNCITRAL Model Law on Secured Transactions
 Financial Institutions (Secured Transactions) (Amendment) Ordinance, 2020
 Collateral Management Companies Regulations, 2019
 Price Control and Prevention of Profiteering and Hoarding Act, 1977
 Transfer Property Act, 1882
 Punjab Tenancy Act, 1887
 Government Tenants Act, 1893
 Land Acquisition Act, 1894
 Colonization of Government Lands Act, 1912
 Sindh Tenancy Act, 1950
 Khyber Pakhtunkhwa Tenancy Act, 1950
 Provincial Land Revenue Act, 1967
 Balochistan Tenancy Ordinance, 1978
 Land Record Manual
 Land Administration Manual and Settlement Manual
 Land Registration Act, 1925 (UK)
 Indian Transfer of Property Act, 1882
 Sindh Trusts (Amendment) Act, 2021
 Credit Bureaus Act, 2015
 Credit Bureau Rules, 2016
 Credit Bureau Regulations, 2016
 Prudential Regulations for Corporate/ Commercial Banking
 Defamation Ordinance, 2002
 Pakistan Penal Code, 1860
 The Prevention of Electronic Crimes Act, 2016
 State Bank of Pakistan’s Framework for Risk Management in Outsourcing Arrangements
 Pakistan Banks Association’s Guidelines for Collection, Recovery and Repossession Agencies
 Civil Procedure Code, 1908
 Limitation Act, 1908
 National Accountability Bureau Ordinance, 1999
 FIA Act, 1974
 Offence in Respect of Banks (Special Courts) Ordinance, 1984
 Constitution of Pakistan, 1973
 Financial Institution (Recovery of Finances) (Amendment) Act, 2016
 The Financial Institutions (Recovery of Finances) Rules, 2018
 Provincial Insolvency Act, 1920
 Insolvency (Karachi Division) Act 1909
 Companies Act, 2006 (England)
 Insolvency Act, 1986 (England)
 Corporate Rehabilitation Act, 2018
 Stamp Act, 1899
 The Companies (Asset Backed Securitization) Rules, 1999
 Structuring of Debt Securities Regulations, 2020
 Registration Act, 1908
 Corporate Restructuring Act, 2016

 Corporate Industrial Restructuring Corporation Ordinance, 2000
 Financial Assets and Enforcement of Securities Interest Act, 2002
 Pakistan Stock Exchange Rule Book
 Trust Act, 1882
 Banking Companies Ordinance, 1962
 Non-Banking Finance Companies (Establishment and Regulation) Rules 2003
 Non-Banking Finance Companies and Notified Entities Regulations, 2008
 Fair Debt Collection Guidelines, 2008 issued through BPRD Circular No.13 of 2008
 BCD Circular No. 13 of 1984 dated 20.6.1984
 BCD Circular No. 32 of 1984 dated 26.11.1984
 BCD Circular No. 27 dated 12.11.1984
 Circular Letter No. BID (Gen) 2470/601-Q4-90 of 1990 dated 17.6.1990
 BPRD Circular No. 06 of 2007 dated 5.6.2007
 BPD Circular No. 24 dated 04.07.2003
 BPD Circular No. 37 dated 03.11.2003
 BPD Circular No. 29 of 2002 dated 15.10.2002
 BPRD Circular No. 08 of 2013
 BPRD Circular No. 12 of 2014
 BPRD Circular Letter No. 34 of 2014
 BPRD Circular Letter No. 28 of 2011 dated 30.12. 2011
 BPRD Circular No. 3 of 2021 dated 25.2. 2021
 BPD Circular No. 8 of 2003 dated 12.3,2003
 BPRD Circular Letter No. 40 of 2020 dated 27.8.2020
 Notification no. S.R.O. 362(I)/2008 dated April 4, 2008
 SECP letter No. CLD/CCD/602/24/2016-1614 dated December 2, 2019
 BPRD Circular Letter No. 01 of 2010
 BID Circular No. 3, dated 20.2.1989
 BPRD Circular Letter No. 27 of 22.6.1999
 SD Circular No. SD 2/99 of 16.7.1999
 BPRD Circular No. 9 of 27.4.2000
 BPRD Circular Letter 34 of 13.12.2000,
 BPRD Circular No. 06 of 5.6.2007
 BSD Circular No. 16 of 2004
 S.R.O No. 1(KE)/2018 dated July 6, 2018 issued by the Ministry of Finance
 S.R.0. 840(i)/2017 dated 17.8.2017 issued by the Finance Division Government of Pakistan
 Guide to the Companies Act (17th Edition 2010)

10.2. Annex B - List of Banks in Pakistan
The table below provides a list of banks operating in Pakistan.
TABLE 30: LIST OF BANKS IN PAKISTAN
Category of
Sr. No. Name of Bank Nature of Bank
Bank
1 First Women Bank Ltd. Conventional Bank
Conventional Bank with Islamic

2 National Bank of Pakistan
Banking Branches
Public Sector
Commercial
3 Banks (majority Sindh Bank Ltd.
Banking Branches
of ownership
with the
government) Conventional Bank with Islamic
4 The Bank of Khyber
Banking Branches

5 The Bank of Punjab
Banking Branches
6 AlBaraka Bank (Pakistan) Ltd. Islamic Bank

7 Allied Bank Ltd.
Banking Branches

8 Askari Bank Ltd.
Banking Branches

9 Bank AL Habib Ltd.
Banking Branches

10 Bank Alfalah Ltd.
Banking Branches
11 Private Sector BankIslami Pakistan Ltd. Islamic Bank

Commercial
Banks
12 Dubai Islamic Bank Pakistan Ltd. Islamic Bank

13 Faysal Bank Ltd.
Banking Branches

14 Habib Bank Ltd.
Banking Branches

15 Habib Metropolitan Bank Ltd.
Banking Branches
16 JS Bank Ltd. Conventional Bank
17 MCB Bank Ltd. Conventional Bank

Category of
Sr. No. Name of Bank Nature of Bank
Bank
18 MCB Islamic Bank Ltd. Islamic Bank
19 Meezan Bank Ltd. Islamic Bank
20 SAMBA Bank Ltd. Conventional Bank

21 Silk Bank Ltd
Banking Branches

22 Soneri Bank Ltd.
Banking Branches
Standard Chartered Bank (Pakistan) Conventional Bank with Islamic

23
Ltd. Banking Branches

24 Summit Bank Ltd
Banking Branches

25 United Bank Ltd.
Banking Branches
26 Citibank N.A. Conventional Bank
27 Deutsche Bank AG Conventional Bank

Foreign Banks
Industrial and Commercial Bank of
28 Conventional Bank
China Ltd.
29 Bank of China Limited Conventional Bank
Punjab Provincial Co-operative

30 Conventional Bank
Bank Ltd.
Specialized
31 SME Bank Ltd. Conventional Bank
Banks
32 Zarai Taraqiati Bank Ltd.
Banking Branches

10.3. Annex C - Conditions for Rescheduling/Restructuring in PRs
Rescheduling/Restructuring of Non-Performing Housing Finance

a) Banks/DFIs shall have policy for rescheduling/restructuring of non-performing housing finance, which
should be approved by the Board of Directors or by the Country Head/Executive/Management Committee in
case of branches of foreign banks.
b) Rescheduling/restructuring should not be done just to avoid classification of financing and provisioning
requirements. In this connection, banks/DFIs shall ensure that house financing facilities of any borrower
should not be rescheduled/restructured more than once within two years.
c) For the purpose of rescheduling/restructuring, banks/DFIs may change the tenure of the financing by
maximum two years beyond the original tenure agreed with the customer subject to maximum financing tenure
of 25 years.
d) While considering rescheduling/restructuring, banks/DFIs should, inter alia, take into account the
repayment capacity of the borrower. The condition of 50% of Debt Burden Requirement (DBR) shall not be
applicable to financing rescheduled/restructured. However, any new house financing facility extended to a
borrower who is availing any rescheduled/restructured facility shall be subject to observance of minimum
DBR.
e) The status of classification of the non-performing assets shall not be changed because of
rescheduling/restructuring unless borrower has paid at least 10% of the rescheduled/restructured amount
(including principal and mark-up both) or six instalments as per terms & conditions of the
rescheduling/restructuring whichever is high. However, for internal monitoring purpose, banks/DFIs may re-
set the dpd (days past due) counter of the newly created finance to “0” dpd.
f) Provisions already held against non-performing financing, to be rescheduled/restructured, will only be
reversed if condition of 10% recovery or six instalments is met.
g) If the borrower defaults (i.e. reaches 180 dpd) again within two years after declassification, the financing
shall be classified under the same category in which it was prior to rescheduling/restructuring. Banks/DFIs,
however, at their discretion may further downgrade the classification based on their own internal policies.
Rescheduling/Restructuring of Performing / Non-performing Consumer Financing Facilities
1. Banks/DFIs should frame policy for rescheduling/ restructuring of consumer financing facilities including
non-performing financing facilities. The Policy should inter-alia include definition and types of
rescheduling/restructuring, criteria to assess the financial distress or income impairment warranting the
rescheduling / restructuring, the reduced mark-up/profit rates applicable on restructured accounts and specify
the limits on the amount of rescheduled / restructured performing financing facilities as percentage of total
outstanding consumer financing. The policy should be approved by the Board of Directors or by the Country
Head/Executive/Management Committee in case of branches of foreign banks.
2. For the purpose of rescheduling/ restructuring, banks/DFIs may:
a) Club or consolidate outstanding amounts on account of personal loans/financing and credit cards and
create one financing facility. The new facility so created shall be placed in the lowest category of
classification amongst the classifications of the financing facilities clubbed.
b) Convert revolving facility into an instalment-based financing facility with maximum repayment tenor
of 5 years.
c) Change the tenure of the financing by maximum two years beyond any regulatory cap on maximum
tenure.
3. Rescheduling/ restructuring, or transfer of any financing facility from one category of consumer finance to
another, should not be done just to avoid classification of financing facilities and provisioning requirements.
In this regard, banks /DFIs shall ensure:
a) Consumer financing facilities of any borrower should not be rescheduled/ restructured more than once
within 12 months and three times during five-year period,
b) The loan account has existed for at least 9 months before rescheduling/restructuring as a performing

loan account,
c) Islamic banking institutions shall ensure shariah compliance in rescheduling/restructuring of consumer
finance facilities
4. While considering rescheduling/restructuring, banks/DFIs should, inter alia, take into account the repayment
capacity of the borrower. The condition of 50% of Debt Burden Requirement (DBR) mentioned at Regulation
R-3 of Prudential Regulations for Consumer Financing will not be applicable to loan rescheduled/ restructured.
However, new consumer financing facility extended to a borrower who is availing any rescheduled/
restructured facility shall be subject to observance of minimum DBR prescribed in the Regulation R-3 of
Prudential Regulations for Consumer Financing.
5. The status of classification of the non-performing financing facility shall not be changed because of
rescheduling/restructuring unless borrower has paid at least 10% of the total rescheduled/restructured amount
(i.e. principal and mark-up) or six instalments (comprising principal and mark-up) as per terms & conditions
of the rescheduling/restructuring. However, for internal monitoring purpose, banks/DFIs may re-set the DPDs
counter of the newly created loan to “0” DPD.
6. Provisions already held against a non-performing financing facility, to be rescheduled /restructured, will
only be reversed if above mentioned condition of 10% recovery or six instalments is met. 7. If the borrower
defaults (i.e. reaches 90 DPD) again within one year after declassification, the financing facility shall be
classified as under.
TABLE 31: TYPE OF CONSUMER FINANCING & CLASSIFICATION
Type of Consumer Financing Classification
Unsecured Loss
Same category in which it was prior to rescheduling or

Secured restructuring. At their discretion, banks and DFIs may further
downgrade the classification based on their own internal policies.

10.4. Annex D - Detailed documents required under multiple loan scenarios
Detailed documents required under multiple loan scenarios:
If Secured against Government Securities
 Demand Promissory Note (IB-12)
 Letter of guarantee (IB-29)
 Letter of Pledge, Lien and Authority for Shares, Stocks & Securities (IB-26A)
 Letter of lien, Set Off & First Charge (IB-28)
 Agreement for sale and buy back of marketable securities. (IB-31)
 Letter of Authority to mark lien and encashment
 Power of Attorney – attested and notarized
 Authority to appropriate profit on securities to recover mark-up
 Original Certificates duly discharged by owner, signature verified and marked lien on the face of
securities
 Letter by the Issuing Authorities confirming marking of bank’s lien on securities
 Registration of charge under STR arrangements
If secured against fixed deposits/cash collateral

 Original Deposit receipt /TDR endorsed /discharged by the holders, signatures verified and marked
lien on face
 Letter of lien, Set Off & First Charge (IB-28)
 Letter of Authority to mark lien and encashment
If secured against Inventory / movable property/Fixed Assets (Plant Machinery & Equipment)
 Letter of Hypothecation of stocks / movable assets (IB-25-A)
 Letter of Hypothecation of Fixed assets (IB-25-B)
 Letter of Pledge of goods (moveable assets) (IB-26)
 Board Resolution (limited Companies)
 CTC of Form-10 (for creation of charge over book debts / current assets/stocks/fixed assets) Limited
Companies
 Certificate of registration of charge issued by Registrar of Companies/SECP (Limited Companies)
 Post charge Search Report from SECP
 Insurance policy assigned to the Bank
 Valuation certificate for fixed assets such as Plant, machinery & equipment
 Collateral Inspection

If secured against equitable mortgage of property
 Declaration of Properties (Form-188)
 Borrower's Board Resolution for mortgage (limited Companies)
 Obtain title deeds, Chain Title documents and property plan - legally vetted
 Genuineness of Tile of property
 Memorandum of deposit of title deeds (IB-24)
 Letter of Hypothecation for Fixed Plant & Machinery (IB-25-B)
 CTC of Form-10 filed with Registrar / Receipt evidencing filing of charge with SECP (Limited
Companies)
 Certificate of registration of charges issued by SECP (Limited Companies)
 Post charge Search report from SECP
 Valuation Report
 Consent of third party, if the property not owned by the borrower himself
 Third Party Memorandum of deposit of title deeds (IB-24-A)
 NOC from relevant property authorities for creation of mortgage
 Notification of bank’s mortgage charge with Revenue Authorities/land owning authorities
 Agreement to mortgage
 Personal Guarantee from owner of property (IB- 29)
 Power of Attorney:
 Pre & Post mortgage Search Certificate
 Schedule of fixed assets
 Municipal Tax / Ground Rent / Lease Rent paid Receipts
 Mortgage deed, in case of legal mortgage (registered with Registrar of Assurances)
 Clearance from Bank's legal advisors
If secured against shares

 Transfer deed signed by borrower; stamps / signature verified (in case of Physical Share Certificates)
 List of shares (in case of Physical Share Certificates)
 CDC Statement evidencing Lien/ pledge of Shares with Bank (in case of electronic shares)
 Board Resolution (Limited Companies)
 Copy of Form-10 filed with Registrar / Receipt evidencing filing of charge with SECP (Limited
Companies)
 Power of Attorney - Attested and notarized

If secured by Personal Guarantee
 Personal Guarantee (IB- 29)
 List of Assets of Guarantors
If secured against Book Debts

 Letter of Hypothecation of book debts (IB-25-F)
 Form-L, for creation of charge
 Board Resolution (Limited Companies)
 Copy of Form-10 filed with Registrar / Receipt evidencing filing of charge with SECP (Limited
Companies)
 Power of Attorney - attested and notarized

10.5. Annex E – NPL Market – A case study of Spain
NPL Market Players & Companies
The Banco de España (BdE) is Spain's primary monetary authority, and it also acts as the country's national
bank supervisor under the Single Supervisory Mechanism (SSM) of the Eurozone. There are twelve banking
groups in Spain which include 52 commercial banks, two savings banks, and 61 cooperative banks. In addition,
in 2012, the Spanish government formed SAREB, a bad bank (Bank of Spain, 2020). The European Union
imposed Sareb as a condition in exchange for up to €100 billion in aid to the Spanish banking sector. In 2012,
Sareb acquired real estate and other toxic assets worth more than €50 billion from nine Spanish savings banks.
SAREB works as an Asset Management Company (AMC), which permits the isolation of problematic assets
from credit institutions that require government assistance to remove them from their balance sheets. In return
for the NPLs acquired from banks, the AMC offers bonds with a government guarantee. The assets must be
transferred to SAREB without the agreement of any third parties. The value of the assets will be determined
by the Bank of Spain based on assessment reports prior to the transfer.
SAREB is a group of Spanish and international private and public investors. Aside from rebuilding the Spanish
financial system in a maximum of 15 years (scheduled to be completed in 2027), the goal is to extract as much
profit as possible from the toxic assets. Nationalized financial institutions and bodies have remitted about
€55,000 million to SAREB. Two-thirds of this sum is made up of property-related loans and credits, the
remainder is property assets. SAREB is deemed the owner of the assets that were transferred (Bankia, 2021).
NPL Market in Spain
The rate of NPL reduction has slowed dramatically since the outbreak of the pandemic. In both the business
and residential categories, the total stock of nonperforming loans (NPLs) recorded by the Bank of Spain (BdE)
dropped by €5.2 billion (8.2 percent) to €57.8 billion by July 2020, compared with the previous year. Most of
this decrease occurred in the second half of 2019, although loan sales and other restructuring activities slowed
in March due to the COVID-19 pandemic, this market, however, has recently become more active.
Due to the government and banking industry’s support measures (payment moratoria and public guarantees) ,
the percentage of NPLs in total loans (NPL ratio) remained at 4.7 percent as of end-July 2020, just marginally
lower than the end-2019 figure of 4.8 percent. In the first half of 2020, state guarantees covered a large part of
new company loans, successfully ensuring that firms could meet their liquidity demands. While these interim
measures were highly effective in the near term, they will need to be supplemented with more structural
measures, such as effective debt resolution and corporate restructuring frameworks. The support programs can
only partially reduce credit risks, and the banking sector's asset quality is expected to deteriorate in as the
pandemic progresses, especially if more restraint measures are required.
In the first half of 2020, the stock of home NPLs grew, accounting for over half of the entire stock, with a net
inflow of €1.6 billion of NPLs. The NPL ratio for Spanish banks fell from 3.5 percent at the end of June 2019
to 3.0 percent at the end of June 2020, according to statistics from the European Banking Authority (EBA),
which is similar to the EU average of 2.9 percent. The EBA data also reveals that provisioning levels have
remained relatively steady, with total NPL impairments accounting for 43.3 percent of all NPLs at the end of
June 2020, up from 42.9 percent a year earlier and below the EU average of 45.3 percent (European
Commission, 2020).
SAREB – Recent Development & Outlook
SAREB has liquidated 36 percent of its assets and repaid 31 percent of its senior debt at the halfway point of
its projected life cycle. By 30 June 2020, SAREB's senior debt, which is backed by the government and held
by banks that received government assistance, would have been decreased from €50.8 billion to €35.1 billion.
Since 2019, SAREB has been executing a new strategy and has gradually converted its RED (real estate
development loans) into assets. In view of the significant discounts required on that market, the new approach
is to depend less on non-performing loan sales. As a result, SAREB plans to step up its efforts to convert loans
into underlying collateral that may subsequently be offered and sold in the retail real estate market. As a result,
2019 was the first year in which real estate surpassed financial assets as the primary source of revenue.
SAREB also introduced several cost-cutting measures in an effort to better oversee and monitor its assets and
reduce needless maintenance costs. As of June 2020, loans and advances made up 56 percent of SAREB's
overall balance sheet, with NPLs accounting for nearly all of them. The rest of SAREB's balance sheet was
made up of about €14 billion in real estate owned (REO). Nearly a quarter of these assets have been published
for retail sales, with the remainder either unpublished or destined for specialist sales (European Commission,

2020).
Structure of AMCs / Bad Banks
SAREB began as a majority-owned private corporation (55 percent private, 45 percent public). There were 14
domestic banks, two international banks, and ten insurance firms among the private equity investors. The Fund
for Orderly Bank Restructuring was used to inject public capital. Property development loans and properties
held as security are the two major types of assets transferred to SAREB. It was originally financed with €50.8
billion in government-backed senior debt, €3.6 billion in subordinated debt (15-year callable bonds convertible
into equity), and €1.2 billion in stock owned by 26 banks and insurance firms.
Sareb is set up as a centralized AMC from an operational standpoint. A centralized AMC consists of a single
workout company that is partially owned by the public. This centralized, "systemic" strategy entails pooling a
bigger part of the financial system's troubled assets under a single group that may benefit from economies of
scale in terms of resources and experience, as well as standardization of workout methods. Section 11.2 -
Common NPL Resolution Models contains further information on how to set up AMC.
SAREB has hired specialized trained personnel with prior private sector expertise, and it mostly outsources
asset servicing. SAREB utilized contributing banks as servicers when it was first established, but in 2015 it
shifted loan administration and management to four private firms.
Evaluating the Effectiveness of SAREB
SAREB has liquidated 36 percent of its assets and repaid 31 percent of its senior debt at the mid-point of its
anticipated lifespan, as previously stated. Its delayed recovery is partly because all its assets are in Spain,
where the property market is still recovering. As it received numerous small-value residential property loans
and collateral, SAREB has a considerably larger number of individual assets. Access to collateral and
foreclosure processes have not hampered Sareb's performance in Spain; in fact, they are widely viewed as
benefiting lenders. The retail channel provides the majority of SAREB's revenue.
SAREB has suffered significant and consistent losses in terms of financial performance. SAREB's capital base
has been eroding because of these ongoing losses. On the regulatory front, some relief has been implemented.
SAREB lost €947 million in 2019 and €396 million in the first half of 2020. Unrealized losses are also included
in the RED and REO portfolios. Several steps to alleviate the situation have been implemented. SAREB was
able to account for asset impairments against value adjustments because to Real Decreto-Ley 4/2006, which
enabled it to do so without reporting them in its profit and loss statements.
The revised guidelines for SAREB asset valuation were published by the Bank of Spain in October 2015. By
the end of 2016, the new standards demand an individual assessment of all assets to reflect market price
changes. This resulted in additional impairment provisions of €2.04 billion. The new valuation criteria also
had an impact on SAREB's asset disposal business, since they required the company to focus on activities
where the asset's sale price is higher than the valuation price to make profits and forcing a temporary halt in
asset disposal.
This surge in NPL sales has resulted in portfolio reductions of up to 70 percent, which SAREB could not agree
to. Instead of selling NPLs, the current goal is to prioritize and expedite the conversion of loans into “real
estate-owned” assets through foreclosures. As Spanish real estate values rise, this is projected to give liquidity
to the bank's holdings and facilitate property transactions.
The year 2012 when Sareb was created had an NPL ratio of 7.5 percent and in year ending 2020 the NPL ratio
is only 4.5 percent. Although Spain's NPL is now low, economists believe that it will climb soon. As a result,
banks and the Spanish Central Bank must ensure that NPL management is addressed seriously. Sareb is a
prominent player in NPL management, having purchased nearly 200,000 properties worth €50.8 billion. Only
36 percent of these assets had been sold as of 30 June 2020, and SAREB's portfolio has suffered significant
losses since its inception. Nonetheless, supporters of SAREB point out that, despite its difficulties, SAREB's
final performance is unknown. Furthermore, even if it never becomes profitable, SAREB's overall purpose of
assisting the financial sector may be accomplished. There was limited evidence about the effectiveness of
SAREB at the time of this research, not least because SAREB is an ongoing programme.

10.6. Annex F – NPL Market – A case study of Italy
NPL Market in Italy
The NPL market in Italy has been declining since 2015, peaking at €341 billion in 2015. It is expected to reach
€130 billion by 2020. The NPL ratio was 5.2 percent in December 2020 (6.7 percent in 2019), which is higher
above the EU average of 2.9 percent and the gross NPL ratio objective of 5 percent set by the European
Banking Authorities (EBA).
The lockdown measures imposed in response to the COVID-19 pandemic caused a slowing in the declining
trend compared to the same time in 2019. Looking at the composition of gross bad loans (the most serious
category), the “Corporate & SME” sector accounted for the largest percentage (74.4 percent) of gross bad
loans in Italy in July 2020, followed by Consumer loans (17.5 percent). In comparison with YE-2019, the
proportion of Secured Bad Loans (45 percent) stayed very steady (44 percent). Corporate and SME constituted
68 percent of secured bad loans, while Retail represented 23 percent (PwC, 2020).
In Italy, there are roughly 500 banks, including 136 public limited banks, 22 cooperative banks, 268 mutual
banks, and 79 foreign bank branches. The banking industry employs 280,000 people and has around 25,400
branches. The four largest Italian banks by assets are Unicredit, Intesa Sanpaolo, CDP, and Banco BPM. The
Banca d'Italia (or Bank of Italy) was founded in 1893 and is the country's central bank.
In 2016, the Italian government opted to implement Garanzia Cartolarizzazione Sofferenze, or GACS, which
allows NPLs to be transferred from a bank to an NPL investor via securitization rather than direct sale or
purchase. GACS refers to the Ministry of Economy and Finance's (MEF) unconditional, irrevocable, and
payable on first demand guarantee given on senior tranches issued in an NPL’s credits securitization deal. The
senior notes' subscribers will receive payment of the due amount from the MEF within 120 days of the
occurrence of a trigger event (such as non-payment of interest or repayment of principle by the SPV).
To execute and finalize the NPL transactions, various parties must work together (structure of GACS and how
these stakeholders interact is mentioned in the section below). The following are the parties engaged in this
process:
 Originator: These are the banks that are presently dealing with NPLs and are looking to remove
excess NPLs from their balance sheet to make room for new loans.
 Arrangers: The arranger oversees the transaction's preparation and marketing. It is also known as the
placement agent in this last position. Most arrangers will additionally underwrite the transaction's
possibly unsold notes. International investment banks that can operate in several countries dominate
the arrangers industry. JPMorgan Chase & Co. is the primary arranger of NPL securitizations. In its
reference market, Italy, Banca IMI and Mediobanca are major local businesses.
 Rating agencies: The rating agency assigns a credit default rating to the securitization's tranches.
Running a statistical model based on the data provided by the source is their core job. The algorithm
assigns a grade to each tranche based on a base case scenario, but it also analyses alternate situations.
Some of the world's largest rating agencies dominate the industry. The rating agencies Moody's,
Scope Ratings, and DBRS are all active.
 Servicers: Servicers play an important role in the transaction's preparation. The bank must hire an
independent servicer to handle the portfolio for primary GACS transactions. The servicer for
secondary transactions is usually the same person who is currently managing the portfolio. Prelios is
the leading servicer in terms of transactions due to its strong position in the Italian GACS. DoValue,
Credito Fondiario, and Cerved are the companies that come after it.
 Advisers: In the planning and promotion of deals, financial advisors are monitored. Advisors can
help with overall project management, data preparation, and serving as a sounding board for
servicers' business ideas. Financial advisers' markets are also characterized by the presence of foreign
players. With their experience preparing sell-side portfolio deals, Big Four advisers are typically
involved in transactions.
 Lawyers: Lawyers are involved in the operation's structure and the production of legal paperwork,
such as the prospectus and SLAs between the SPV and the servicers. They are a mix of multinational
firms like as Orrick and A&O, as well as local firms such as Chiomenti in Italy (Deloitte, 2020).

Transaction structure under GACS
Portfolios of nonperforming loans are transferred to a special purpose vehicle (SPV) that supports the
acquisition by issuing Asset Backed Securities (ABS) or notes, which can have a fixed or floating rate coupon
and are generally organized in various seniority tranches. The NPLs are the underlying collateral that backs
the ABS under this system. Securitizations help banks by providing capital relief and a smaller immediate
P&L effect than a direct sale.
In the form of a CDS contract between the State and the SPV, the government offers a guarantee to the senior
tranche. In the event of assurances offered by an EU member state, this must be authorized by the European
Commission. Government-backed schemes, in contrast to market transactions, usually provide better pricing
and therefore limit possible losses for originator institutions.
The stages for primary securitization deals under GACS are as follows:
i. SPV buys a portfolio of nonperforming loans and issues notes to pay for it;
ii. Senior, mezzanine, and junior tranches are the most common; 03. The senior tranche has the first
claim, followed by mezzanine, and finally junior;
iii. An independent servicer must be appointed by the originator;
iv. Interest payments are based on the notional value of outstanding notes and can be payable annually,
semiannually, or quarterly;
v. Liquidity lines are typically given to deal with discrepancies between possible collections deficits
and note interest payments.
vi. All collections are combined into a single pool and subjected to a single payout cascade;
vii. To comply with risk retention rules, the Bank must maintain a minimum of 5 percent of mezzanine
and 5 percent of junior notes (Deloitte, 2016).
Guarantee Pricing Mechanism under GACS
Guarantee price is based on a basket of single name CDS on Italian issuers (regardless of issuer type) pulled
from the Bloomberg database, with an underlying debt instrument rated by S&P, Fitch, or Moody's. The basket
composition is determined when the assurance is approved. It remains constant over time and is based on the
actual rating of the NPL securitization's eligible senior tranche (Deloitte, 2016).
Structure of Atlante Fund
Atlante functions similarly to a private equity firm. The fund has received funding from several banking
foundations and insurance firms. A total of €4.25 billion has been raised for the fund. According to
shareholders, at least 30 percent of the fund's assets would be used to purchase junior tranches of securitized
nonperforming loans. On the purchase side, Atlante is giving a greater price for bundles of NPLs, creating
market rivalry and encouraging other companies to bid higher. Senior tranches are protected by the Italian
government under GACS, making them more desirable to other NPL investors. The remaining 70 percent of
the money is allocated to bank investments to back recapitalizations. The fund has a five-year horizon, with
the option to extend it to up to eight years on an annual basis, and pays a 6 percent annual return.
The Atlante effect, which creates value not only by buying the junior tranches but also by stimulating
competition, boosts NPL values by the securitization process itself (the benefits of splitting the risks (Bocconi
Students Investment Club, 2016).
Evaluating the Effectiveness
During the previous few years, GACS has played a key role in the disposal of NPLs. Without considering the
most recent ongoing securitizations, 27 GACS transactions were completed between 2016 and 2020,
amounting for a total GBV of about €74 billion, of which 58 percent was secured. The nominal value of issued
notes is about €18 billion, with senior notes accounting for 81 percent, mezzanine notes for 12 percent, and
junior notes accounting for 7 percent. In terms of GBV, 20 of the 27 agreements had a deal size more than €1
billion, with five of them exceeding €5 billion.
Except for Intesa Sanpaolo and Cariparma, almost all Italian major banks employed GACS to accomplish their
deleveraging strategy. Deals in the Italian NPL market peaked in 2018, when the public guarantee benefited
€45.8 billion out of a total of €84 billion in NPE disposals. GACS completed a €24 billion jumbo sale (Siena

NPL 2018), the largest GBV deal in the Italian market to date.
Given the success in allowing the development of a market for banks' non-performing loans (and, as a result,
their deleveraging), the Decree Law of 25 March 2019 renewed the GACS for another 24 months (until the
end of May 2021), with the option to extend it for another 12 months (which has yet to be exercised).
On the other hand, tougher rules relating to meeting performance objectives that safeguard the note holder, as
well as higher fees to acquire the guarantee, lowered the attraction of GACS transactions for sellers. In
comparison to 2018, the number of GACS transactions has more than half in 2019, while volume (in terms of
GBV) has fallen by a third. Only three transactions have been submitted for the GACS guarantee in 2020. The
Coronavirus outbreak in Italy resulted in a halt to judicial procedures and a less liquid property market, slowing
collection operations (PwC, 2020).
The European Commission recently awarded Italy approval for a one-year extension, to the middle of 2022,
of a state guarantee plan that has been critical in clearing bad debts from the country's banks. The GACS
guarantee system Rome adopted in 2016 has helped convert Italy into Europe's largest market for distressed
bank loans by reducing the losses that banks must bear in order to shed bad debts. Over the last five years,
Italian lenders have reduced problem assets by more than €200 billion ($242 billion). The overall value of
GACS-backed disposals was €87 billion. When GACS was created in 2016 it had an NPL ratio of 17.1 percent
and in year ending 2020 the NPL ratio is only 5.2 percent.
In terms of experimentation, Italy's experience with NPLs is arguably the most extensive of any European
country. To embrace a broader range of solutions and learn from them, it's better to talk about asset-
management schemes (AMS) rather than AMCs in the strictest sense. Multiple players were involved in the
establishment of GACS for managing NPLs, particularly the involvement of Atlantis and a few other private
equity funds (generating lower-than-expected returns) in injecting cash and allowing NPL investors to
purchase the various tranches of notes issued by SPVs. Despite the GACS proved to be a beneficial tool for
the Italian economy, the global impact of COVID-19 slowed progress, resulting in a lower amount of NPL
securitizations in 2020 (€2.4 billion) than in previous years (€17.4 billion in 2019 and €45.8 billion in 2018).

10.7. Annex G – NPL Market – A case study of India
NPL Market in India
The decline in the Gross Non-Performing Assets (GNPA) ratio, which began after the March 2018 high, has
so far lasted through 2019-20 and 2020-21, with the GNPA ratio reaching 7.5 percent by the end of September
2020. Lower slippages (new accretion of NPAs during the year/total standard assets at the start of the year)
drove the improvement, which fell to 0.74 percent in September 2020. Public Sector Banks continued to have
the largest number of new slippages.
Write offs accounted for most of the decrease in NPAs throughout the year. Banks may choose to write off
NPAs older than three years since they need 100 percent provisioning. Furthermore, banks deliberately write
off non-performing assets (NPAs) to clean up their balance sheets, obtain tax benefits, and maximize capital
use. Borrowers of written-off debts, on the other hand, remained liable for payments. During 2019-20, the
proportion of performing loans to total advances grew across all commercial banks, except for private sector
banks and small financing banks.
At the end of September 2020, large borrower accounts (with an exposure of INR 50 million or more)
accounted for 79.8 percent of NPAs and 53.7percent of total loans. The GNPA ratio of public sector banks,
which was 10.3percnet in 2019-20, and the ratio of restructured standard assets to total financed amounts from
bigger borrower accounts, both trended lower. Asset quality improved substantially in September 2020
compared to March 2020 in industry, agriculture, and services, with a decrease in GNPA and stressed advances
ratios. However, in the case of retail advances, the GNPA ratio fell only little, and stressed advances remained
unchanged. The GNPA ratio was declining across the board in all main industry sub-sectors.
Without the asset quality halt given as a COVID-19 relief mechanism, the accretion to NPAs would have been
substantially greater. Given the uncertainties created by COVID-19, the financial system's asset quality may
worsen dramatically in the future. In its baseline stress scenario, the Reserve Bank of India (RBI) forecasts the
GNPA ratio to climb 600 basis points (bps) to 13.5 percent by September 2021, or nearly double to 14.8
percent in a severe stress scenario, bringing it to a 25-year high. (Reserve Bank of India , 2020)
The Reserve Bank of India (RBI) oversees India's financial sector. In addition to cooperative credit institutions,
the Indian banking system includes 12 public sector banks, 22 private sector banks, 46 foreign banks, 56
regional rural banks, 1485 urban cooperative banks, and 96,000 rural cooperative banks. (India Brand Equity
Foundation , 2021)
There are 27 Asset Reconstruction Companies (ARCs) which recover NPAs from secured lenders' books and
unlock their value. The Reserve Bank of India (RBI) has registered ARCs, which are governed under the
Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act of 2002.
(SARFAESI Act, 2002).
Qualified Institutional Buyers (QIBs) are the only people or investors who can help the ARCs generate cash
in India. Financial Institutions, Insurance Companies, Banks, State Financial Corporations, State Industrial
Development Corporations, trustees or ARCs registered under SARFAESI, and Asset Management
Companies registered under Securities and Exchange Board of India (SEBI) that invest on behalf of mutual
funds, pension funds, Foreign Institutional Investors, and other entities are included among the QIBs.
The Indian ARC Association (IAA) is a non-profit and non-governmental organization that represents all
ARCs. IAA has been in operation for over eight years and works with a variety of ministries, regulatory
agencies, and government entities to ensure smooth business operations. It also serves as a debate forum and
exchange of ideas. (Indian ARC Association, 2021)
Structure of ARCs in India
Asset Reconstruction Companies (Securitization Companies / Reconstruction Companies), often known as
ARCs, are companies that are registered under Section 3 of the SRFAESI Act, 2002. As a Non-Banking
Financial Company, it is governed by the RBI. Within RBI's rules, ARC works similarly to an AMC. Unlike
in many other countries, where debt aggregation arose because of government backing, ARCs in India were
established as private entities, mostly with the help of banks.
Only after obtaining a registration certificate under Section 3 of the SARFAESI Act, 2002, may an asset
reconstruction or securitization company be started. The primary criterion in this respect is that the ‘net owned
funds,' as defined by the RBI Act, must be worth at least INR 1 billion. Only secured debts that have been

categorized as non-performing assets can be taken over by the ARC (NPA). If debentures or bonds are not
paid, the beneficiary of the securities must issue a 90-day warning before the securities can be taken over.
(India Filings, 2021)
NPA Recovery Mechanism by ARCs
Starting with the loan amount accepted by a borrower (by supplying mortgaged asset), if the borrower fails to
repay it and it is due for 90 days or longer, it will be turned into NPA. In this situation, the bank must choose
between recovering the debt on its own or selling the NPA to an ARC. The money will be raised by ARC
using a subscription mechanism offered by the trust. The Security Receipt (SR) is an instrument that is issued
to Qualified Institutional Buyers (QIBs). Banks or FIs wanting to sell their poor assets to ARCs ask interested
ARCs to declare their interest, indicating their readiness to buy the financial assets. The seller banks or FIs
provide their terms and conditions for the sale of financial assets, to which prospective ARCs must agree. Due
diligence is performed before the intended ARCs submit their offer. The ARCs make a preliminary offer to
the seller's bank or FI.
They execute assignment of debt with seller bank/FI upon receipt of seller acceptance so that ARCs can take
additional actions to resolve acquired NPAs. After imposing a discount, the assets will be taken over either on
a sale or agency basis (typically 30 to 40 percent). The discount will be determined in cooperation with banks
and FIs and will be based on a variety of variables like security value, promoter profile, asset state (operating
or idle), age, and product market.
The entire procedure must be carried out in a transparent way and on mutually acceptable conditions. If 75
percent of the lenders by value agree in a consortium or multiple banking situation, the remaining banks and
FIs are obligated to accept the ARC's offer. If the board of directors of the individual banks and FI has
consented to the transfer of assets to ARCs, the borrower has no right to object. Almost all state governments
have reduced stamp duty and registration fees for debt assignment and registration to make the purchase of
financial assets by ARCs easier.
Evaluating the Effectiveness of ARCs
ARCs have been effectively used as part of a global NPA management strategy. Korea, Taiwan, Mexico, and
Thailand have all successfully used various ARC methods to address the issue of NPAs. Several governments
have also promoted asset transfers to ARCs by establishing a favorable regulatory environment.
The ARC's business strategy is like an asset management company (AMC), with assets being transferred to
one or more trusts (at the price at which the financial assets were acquired from the originator). The trusts then
issue security receipts (SRs) to qualified institutional buyers (QIBs) and pay the ARCs management fees. Any
difference between the acquired and realized prices is split between the trust beneficiaries (banks or FIs) and
the ARCs. Having stated that, the performance of ARCs and their efficacy may be evaluated using the
following measure:
i. Growth of the Industry - After being relatively stable in the early years of their existence (2002-2005),
the number of ARCs increased in 2008, and then again in 2016. Despite the rise in the number of ARCs,
the growth in their assets under management (AUM) has been essentially flat, except for a significant
spike in 2013-14. Except for the time of significant increase in the AUM during 2013-14, the AUM of
ARCs has been on a falling trend when compared to the volume of NPAs of banks and NBFCs.
ii. Funding Sources - Borrowings are a key source of money for ARCs, nearly equivalent to the businesses'
net owned funds. Any difficulties in generating money will almost certainly result in a greater reliance on
borrowings by these businesses. Furthermore, ARCs' funding sources have generally been dominated by
banks. Domestic sources, notably banks and financial institutions, account up most of the ARCs' capital,
with international sources being limited. A breakdown of ARC borrowings indicates their reliance on
banks as well. The percentage of bank borrowings has declined in recent years, with bonds and debentures
emerging as a key source of capital for these businesses.
iii. Profitability - Management/trusteeship fees, upside revenue from the difference between debt recovery
and purchase cost, and additional performance incentives provided by banks for an early recovery are the
main sources of income for ARCs. To motivate ARCs to focus on recovery, management fees are tied to
the net asset value (NAV) of SRs (rather than the volume of outstanding SRs, as was previously the case).
As a result, any reduction in ARCs' recovery ratings has a direct impact on their management costs. The
overall profitability patterns of ARCs point to a relatively steady return on assets (RoA) of around 3
percent. While the return on equity (RoE) had a considerable fall after 2014, it has now recovered to be
close to 7 percent from 2016 onwards. The RoA of ARCs is significantly greater than that of NBFCs.

iv. Acquisition of Assets - ARCs often purchase assets from banks and financial institutions through bilateral
agreements or auctions. Until recently, auctions (85 percent of total sales) have dominated the ARC
transactions. For ARCs in the acquisition process, determining the value of acquired assets is a crucial
business problem. Given that ARCs and banks are on opposite ends of the transaction, banks benefit from
a greater acquisition ratio (measured as acquisition cost to book value of assets). It has long been claimed
that banks have been hampered in their efforts to offload troubled assets due to a low acquisition ratio
and, as a result, a greater haircut. Although the average acquisition ratio has significantly increased over
time, it remains in the low 30 to 40 percent range. Further, the acquisition ratio continues to vary widely
between ARCs, with the variance growing with time.
v. Asset Resolution - ARCs' asset resolution techniques are split into five categories (Table 32), with ARCs
favoring the approach of postponing payment obligations. The percentage of assets resolved by way of
enforcing the security interest has steadily decreased over time. Changes in management or seizing control
of assets have also been used sparingly as a means of resolving disputes.
TABLE 32: RESOLUTION MODELS
Mar- Mar- Mar-

Resolution Methods Mar-16 Mar-17
18 19 20
1. Rescheduling of payment of debt 37.0 36.5 36.8 35.7 32.0
2. Enforcement of security interest 32.0 35.1 31.5 28.6 26.6
3. Settlement of dues of borrower 30.0 24.8 25.2 28.4 26.0
4. Taking possession of assets 2.0 3.9 6.2 7.2 1.5
5. By sale of business 0.0 0.4 0.3 0.1 13.9
vi. Recovery and Redemption of SRs - SR recovery is a key metric for assessing the effectiveness of ARCs.
ARCs are required by regulatory standards to report the NAV of the SRs they issue, which is utilized by
investors to value the SRs. ARCs must acquire a recovery rating from a recognized credit rating agency
to establish the NAV (CRA). In most cases, the CRA bases its recovery rate on an evaluation of the
resolution technique used. In the books of ARCs, the age profile of exceptional SRs indicates a
concentration of older SRs. Given that the ARCs have a five-year (extendable to eight-year) horizon to
redeem the SRs, the age of the SRs issued is likely to drive their redemption performance. In other words,
the younger SRs would outnumber the older SRs in the outstanding stock of SRs. However, as of March
2020, around 42 percent of outstanding SRs were over five years old and would have to be redeemed
during the following four years to prevent write offs. (Reserve Bank of India , 2021)
ARCs have been demonstrated to be the most effective recovery channel for NPAs, according to numerous
economists. For banks, ARCs are still a significant source of loan recovery. Most of the auctions failed due to
the difficulties experienced by ARCs, particularly the limited finances available and the mismatch in pricing
expectations (30 percent to 40 percent haircuts on purchasing NPAs) between FIs and ARCs. As a result, India
has underused the option of exiting through the sale of stressed loans to ARCs. With the SARFAESI Act's
application extended to co-operative banks, recovery via the ARCs channel is projected to gain traction in the
coming years.

10.8. Annex H – NPL Market – A case study of Malaysia
Historical NPL Market of Malaysia

Malaysia was struck by the Asian financial crisis in mid-1997, which remains the country's worst financial
crisis since independence. As a result, the country was on the verge of recession, with the economy
experiencing a negative growth rate of 7.5 percent in 1998. Many businesses are having significant financial
issues, which has resulted in a high level of nonperforming loans (NPLs) of 14.6 percent in the Malaysian
economy.
In January 1998, the Malaysian government formed the National Economic Action Council (NEAC) to combat
the economic downturn brought on by the Asian financial crisis. The National Economic Recovery Plan
(NERP) was created by the NEAC to steer the country back to economic stability. The NERP recommended
that the Ministry of Finance establish an AMC to buy NPLs from financial institutions to address the growing
NPLs in the banking industry. As a result, Danaharta was founded in June 1998 as a wholly owned subsidiary
of the Ministry of Finance. (Bank Negara Malaysia , 2005)
NPL Market Players
In addition to Danaharta, the NERP specified a Special Purpose Vehicle (SPV) Called Danamodal as part of
its proposals to be deployed alongside Danaharta. Danamodal was formed soon after as a bank and FI
recapitalization SPV. FIs were forced to transfer their NPL portfolios to Danaharta to be eligible for
recapitalization.
The first-loss concept was implemented by Danamodal, which meant that the FIs' shareholders were forced to
suffer the initial losses on the sale of NPLs to Danaharta. Danamodal would only recapitalize viable FIs on
commercially reasonable conditions and in accordance with market principles. Due diligence assessments
were conducted by international investment bankers to evaluate if banking institutions were eligible for capital
injection and their recapitalization requirements.
The Corporate Debt Restructuring Company (CDRC) was also established to aid corporate debt restructuring,
with the goal of providing a forum for creditors and debtors to identify appropriate and realistic debt
restructuring plans without resorting to legal action (Yale Program on Financial Stability, 2020).
Funding Structure of Danaharta
The government provided Danaharta with an initial capital injection of RM 3 billion, allowing Danaharta to
acquire NPLs from banks. Danaharta chose to offer government-guaranteed zero-coupon domestic bonds to
banks with a five-year maturity to facilitate additional NPL purchases. Danaharta was given government
assistance to ensure that they would not default on bond repayments to the banks in return for the NPLs.
Commercial banks, financing businesses, development banks, merchant banks, Islamic banks, and locally
incorporated foreign banks were all eligible to sell NPLs to Danaharta, if the NPL had a value of RM5 million
or more. Danaharta's activities were constrained by the NPL size criterion, which allowed for a stronger
emphasis on higher-value NPLs, which represented for around 70 percent of the overall NPL value in the
Malaysian banking industry. Bank Negara Malaysia (BNM), Malaysia's central bank, ordered banks and
financial institutions with NPL ratios of 10 percent or above to sell their NPLs to Danaharta (Yale Program on
Financial Stability, 2020).
Danaharta Operating Model
Danaharta, which functioned as an Asset Management Company (AMC), had a two-pronged strategy: it
bought NPLs outright from banks and other FIs, and it managed NPL portfolios on behalf of the banks (agency
model). It methodically handled the NPLs in its portfolio, account by account, with the goal of maximizing
recovery values for managed and acquired NPLs.
An AMC approach was more suitable for Danaharta because maximum NPL recovery was paramount — as
other agency models such as a warehouse agency model, take a long-term approach when recovering NPLs,
as it waits for the market to pick up before beginning NPL recovery. This was not a suitable approach for
Danaharta as Malaysia had suffered through the Asian financial crisis (Bank Negara Malaysia , 2005).
Evaluating the Performance of Danaharta

The ratio of NPLs to total loans was 8.5 percent at the end of May 1998 (the year Danaharta was founded).
The economy's decline and the collapse of the property and stock markets were direct causes of NPLs.
However, state-directed credit policies, a lack of competition, and a lack of prudential rules are more
fundamental reasons for the large NPLs.
Danaharta's activities ended in September 2005, with a total loan rights acquired (LRA) portfolio of RM47.68
billion, including RM19.71 billion in acquired NPLs and RM27.97 billion in managed NPLs. Danaharta
acquired NPLs at a 54.6 percent discount on average, allowing the company to keep its expenditures down. In
2005 the NPL ratio was around 9 percent which could indicate that Danharta may have prevented the NPL
ratio to grow even further.
Danaharta was able to collect RM30.35 billion from its NPL portfolio, with a 58 percent average recovery
rate, which was a significant achievement given the country's economic difficulties during the Asian financial
crisis of 1997. On purchased NPLs, the average recovery rate was 49 percent, while on managed NPLs, it was
65 percent. Danaharta's total recovery rate and recovery strategies are depicted and broken down in Table 33.
TABLE 33: RECOVERY METHODS USED BY DANAHARTA
Recovery Adjusted LRA RM Recovery RM Billion Recovery Rate (%)

Method Billion (a) (b) C=(b)/(a)
Acquired Managed Acquired Managed Acquired Managed

NPLs NPLs NPLs NPLs NPLs NPLs
Plain Loan
1.07 3.77 0.86 3.58 80% 95%
Restructuring
Settlement 3.55 8.55 3.11 6.41 88% 75%
Schemes of
3.14 6.82 1.84 4.32 59% 63%
Arrangement
Appointment of
Special 1.66 2.59 0.84 0.58 51% 22%
Administrators
Foreclosure 9.12 3.69 2.62 1.65 29% 45%
Others 3.81 3.29 1.74 2.60 46% 79%
Legal Action 0.28 1.08 0.06 0.14 20% 13%
Total 22.63 29.79 11.07 19.28 49% 65%
Overall 52.42 30.35 58%
Danaharta's overall performance was judged a success since it prevented future rises in NPLs, repaid bonds
on schedule, completed operations in seven years, and cost the government a modest amount of money.
Danaharta's plan was deemed "well-conceived" by the IMF, since it had a manageable portfolio of loans to
resolve and an appropriate focus on resolution rather than warehousing or fast disposal (Yale Program on
Financial Stability, 2020).

Reasons for Danaharta’s Success
Danaharta was deemed a “fairly effective” policy instrument by the Bank for International Settlements (BIS)
for recovering NPLs for Malaysian banks and financial institutions because it had legal authority, a coordinated
strategy, government financial support, and political backing that allowed it to operate efficiently and
effectively.
The Danaharta Act is said to have been a key factor in Danaharta's success. Danaharta was given unique
powers under the Act when it was tasked with maximizing NPL recovery. Danaharta was given the following
unique powers under the Act:
1. The capacity to purchase assets as a result of statutory vesting
2. The power to appoint Special Administrators to oversee the operations of insolvent businesses.
3. The opportunity to swiftly market foreclosed assets (through amendments in National Land Code)
4. The court was not allowed to issue an injunction against Danaharta.
5. The Act ensured that third-party rights were protected; for example, when Danaharta bought a secured loan
from a bank, the ownership of the collateral was not transferred to Danaharta; instead, Danaharta assumed the
selling bank's or financial institution's rights as a chargee of the asset, such as land (Bank Negara Malaysia ,
2005).

10.9. Annex I – EBA NPL Templates
The EBA NPL Templates comprise two sets of templates:
 “EBA NPL transaction templates”, aimed to serve for the financial due diligence and valuation of
portfolios.
 “EBA NPL portfolio screening template”, designed for the initial screening of portfolios.
i. The EBA NPL transaction templates are asset class specific and provide data loan by loan, at the
most granular level, including information on counterparties related to the loan and the collateral
provided. The EBA NPL transaction templates aim at enabling potential bidders to perform a
detailed analysis of the assets, commonly performed during the financial due diligence and
valuation phase, regarding the NPL portfolio which forms the subject matter of the transaction.
a. The EBA NPL transaction templates provide data at the most granular level, which includes
the following data categories: Portfolio, Counterparty Group, Counterparty, Loan, Historical
Collection and Repayment Schedule, External Collection, Forbearance, Property Collateral,
Non-Property Collateral, Forbearance, Enforcement and Swap.
b. In the NPL transactions template, each data field is classified with a level of criticality for the
FDD and valuation of the portfolio: “critical”, “important” or “moderate” to assist the user
with navigating through the high number of data fields and to help ensuring that essential
information is provided clearly. “Critical” are the fields which are essential for investors to
adequately run their pricing models and to allow a transaction to reach the binding offer stage.
“Important” are the fields which are expected to have a material impact on the transaction
price of the Portfolio. “Moderate” are the fields which add value to the Portfolio but are not
expected to have significant pricing impact in general.
ii. The EBA NPL portfolio screening template provides information, which is commonly required to
perform a market sounding exercise. In this template, stratified data provides a high level view of
an NPL portfolio to investors and other third parties potentially involved in transactions. The EBA
NPL screening template aims at enabling potential bidders to perform an initial screening,
commonly performed during the first phase of an intended NPL transaction. The EBA NPL
portfolio screening template includes information on an aggregated level, which is covered by the
EBA NPL transaction templates, for example on a loan by loan or collateral by collateral level.
The NPL Transaction Templates & NPL Screening Template are publicly available and can be accessed via
the following link:
https://www.eba.europa.eu/risk-analysis-and-data/npls

10.10. Annex J – Credit Approval Cycle Phases
Figure 27 illustrates the three phases of credit approval cycle and further defines each of the three phases in
detail below.
FIGURE 27: CREDIT APPROVAL CYCLE
Approval
Appraisal Approval Disbursement
Pre-Approval Post-Approval
Phase 1: Pre-Approval Appraisal and Assessment

The appraisal stage is generally initiated upon the Relation Management (RM) team (front office) receiving a
request for loan from a client. The RMs have the primary responsibility for gathering enough information,
corroborating that information, and making objective evaluations about clients to determine if the clients are
reputable and involved in lawful business activities, with income and wealth from legal sources. The RM team
prepares the credit proposal after completing the preliminary credit assessment and usually sends it to the
independent credit risk management team for review.
The credit risk team conducts an independent and impartial evaluation of the loan proposals. A thorough due
diligence of the proposals is carried out and the analysis includes a detailed review of borrower’s financial
position, and considers the external influences like the economy and industry in which the borrower operates
in. Credit Officers ensure the limits being sanctioned to the borrower are in line with the need and financial
strength of the borrower. The credit analysts also generally ensure that all the terms/conditions and necessary
requirements are being met by the borrower. In case of any non-conformity, the same shall be highlighted in
the due diligence report and conveyed explicitly to the approving authorities. Once the due diligence and KYC
activities are completed by the credit team, the case is forwarded to the credit approving authorities to take the
final decision.
Phase 2 - Approval
The credit approving authorities consisting of all the signatories to credit applications ensure that the loan
proposals fit with business strategy and credit and risk policies as well as the applicable laws and regulations.
The credit approval powers generally rest with the management level credit or risk management committees,
except for certain higher risk / large cases which are approved by the board level risk management committee.
Phase 3 - Post Approval (Disbursement)
After the loan is approved by the credit approving authorities and before the amount is disbursed to the
borrower, the Credit Administration Department (CAD) plays an important role in ensuring that all
documentations are complete and in line with the credit policy of the bank and applicable laws and regulations.
CAD may also require for additional information or documents, based on the bank’s policies and credit risk
of the borrower.
The loan documentation that the CAD ensures can be broken down to different categories depending on the
nature of collaterals: such as if the loan is secured against government securities then bank would require
power of attorney, latter of guarantee, and letter of encashment, where if the loan is secured against immovable
property then valuation certificate, insurance policy, and collateral inspection would be required. Annex D
contains detailed documents required under multiple scenarios. Once all the documents are completed and
arranged, CAD provides its approval on the disbursement authorization, upon which the branch or business
team proceeds with the loan disbursement. CAD also plays a key part in credit risk management by ensuring
the loan monitoring reports are prepared on timely basis. Some of the common reports include loan ageing
report and classified accounts reports, which are both usually reported monthly to the business team and the
management level risk committee.

10.11. Annex K - Salient Features of the Recovery Ordinance
Salient features of the Recovery Ordinance are:
 Summary Procedure: Where a borrower (corporate or non-corporate) or a bank or DFI78 commits a
default in fulfilling any obligation with regard to any finance, the bank or DFI or the borrower , as
the case may be, can institute a suit in the special banking Court (the “Banking Court”), or where the
claim exceeds one hundred million rupees, in the High Court.79 A defendant who has been duly
served is not entitled to defend the suit unless he files an application for leave to defend within 30
days of the date of first service.80 The Banking Courts may grant a leave to defend if it is viewed that
substantial questions of law or fact have been raised in respect of which evidence needs to be
recorded.81 Where (i) a defendant defaults in filing an application for leave to defend; (ii) the
application is rejected; or (iii) a defendant fails to fulfill the conditions attached to the grant of leave
to defend, the Banking Court can decree the suit82 provided that in the case of (i) above, a decree
may be set aside by the Banking Court on an application filed by the defendant within 21 days of the
date of decree.83
Where leave to defend has been granted in a suit, the suit has to be disposed of within 90 days from
the day on which leave was granted, failing which the defendant may be required to furnish security
in such amount as the Banking Court may deem fit.84 If the defendant fails to furnish security when
required to do so, the Banking Court is required to pass an interim or final decree in such amount as
it deems appropriate.
 Banking Courts: A Judge of a Banking Court is appointed by the Federal Government after
consultation with the Chief Justice of the High Court of the Province in which the Banking Court.
The qualification criteria for appointment as a Judge of the Banking court prescribed under the law
is prior appointment as a Judge of a High Court or a District Judge.85
The Banking Courts may, at their discretion, seek assistance on technical aspects of banking
transactions by an amicus curiae who has at least ten years’ experience of banking at a senior
management level in a financial institution of repute or the SBP and has a degree in commerce and
account, economics, business administration or has completed a course in banking with the Institute
of Bankers, Pakistan.86
 Availability of Recovery Proceedings under the Recovery Ordinance to Financial Institutions:
"financial institution", for the purposes of the Recovery Ordinance, means and includes any company
whether incorporated within or outside Pakistan which transacts the business of banking, financing,
leasing, investment, unit, mutual or modaraba funds.87
The Banking Court jurisdiction extends to a suit filed by a ‘financial institution’ for fulfillment of
‘obligations’ of a ‘customer’ with regard to any ‘finance’ provided by the ‘financial institution’. On
a plain reading of the Recovery Ordinance, a foreign financial institution (such as the IFC) falls
within the meaning of ‘financial institution’;88 interest based facilities89 that may be provided will
come within the ambit of ‘finance’;90 and any of its borrowers in Pakistan will fall within the
78 Whilst the right to initiate recovery proceedings under the Recovery Ordinance is available to a variety of financial institutions
(including non-banking finance companies, leasing companies etc.), the same falls outside of our scope of work.
79
Section 9 read with Section 2(b) of the Recovery Ordinance as amended vide the Financial Institutions (Recovery of Finances)
Act, 2016.
80
Section 10 of the Recovery Ordinance.
81
Section 10(8) of the Recovery Ordinance.
82
In terms of Sections 10(1) and 10(11) of the Recovery Ordinance, where the borrower defaults in filing an application for leave to
defend or the application is rejected or a defendant fails to fulfill the conditions attached to the grant of leave to defend, the allegations of
fact in the plaint are to be deemed to be admitted and the Banking Court can, in such a case, decree the suit on the basis thereof. Where
the application for leave to defend is rejected or where a defendant fails to fulfill the conditions attached to the grant of leave to defend,
the Banking Court is to forthwith proceed to pass judgment and decree in favor of the plaintiff.
83
84
85
86
87
Section 2 (a) of the Recovery Ordinance.
88
As defined in section 2(a) of the Recovery Ordinance.
89
An argument, if any, based on a cursory reading of section 29(2) of the Recovery Ordinance, may be made that interest bearing loans
are not included within the meaning of ‘finance’. This argument is fallacious for several reasons.
90
As defined in section 2 (d) of the 2001 Ordinance.

definition of ‘customer’;91 and agreements, undertakings, representations, warranties, or covenants
that may be made by such borrower, will be covered by the definition of ‘obligation’.92This means
such foreign financial institutions can avail the protections and benefits stated in the Recovery
Ordinance. This principle has been upheld in various reported judgements as well.93
 Restrictions on dealing with secured property: After the publication of summons pursuant to the
institution of a suit for recovery under the Recovery Ordinance, no borrower can, without the prior
permission of the Banking Court, transfer or encumber any property on which a security interest has
been created in favor of a financial institution and any such transaction shall be void. However, this
restriction does not bar the borrower from selling any property which has been retained by him for the
purposes of dealing with the same in the ordinary course of business subject to the terms of the security
documentation.94 Further, the Banking Court may, on an application by a bank or DFI, pass an order to
prevent such property from being transferred or dealt with in a manner which is likely to prejudice the
security in favor of the bank or DFI, attach such property, transfer possession of such property to the
bank or DFI or appoint one or more receivers of such property.95
 Attachment before judgment and appointment of receiver: In a suit for recovery filed before the Banking
Court, banks and DFIs, with a view to prevent secured property from being transferred, alienated,
encumbered, wasted or otherwise, may apply to the Banking Court to restrain the borrower from dealing
with the property in any manner, attach such property, transfer possession of such property to the bank
or DFI, or appoint receivers for such property.96
 Interim and Final Decree: A Banking Court may pass an interim decree in respect of that part of the claim
which relates to the principal amount and which appears to be payable by the defendant to the plaintiff.97
The final decree passed by a Banking Court shall provide for payment from the date of default of the
amounts found to be payable and for costs including, in the case of a suit filed by a bank or DFI, cost of
funds of the bank or DFI as certified by the SBP, for the period from the date of default till realization of
the cost of funds.98 Cost of funds, as the name suggests, is meant only to compensate the bank or DFI
for the cost that they had to bear for their stuck up finances.99 To calculate the cost of funds, SBP
issues a certificate of costs of funds specific to each bank or DFI for a specific period after taking into
account all the relevant considerations. In practice, cost of funds is generally awarded in the final decree
awarded to a bank or DFI. [Subject to confirmation and revision - For all practical purposes,
notwithstanding the liquidation damages/indemnity clauses in the security documentation, apart from
cost of funds, no other amount is recoverable in Pakistan.
 Execution of Decree: Upon pronouncement of judgment and decree by a Banking Court, the suit
automatically stands converted into execution proceedings without the need to file a separate application
or fresh notice to be issued to the judgment debtor.100 We understand, in Sindh the practice is that an
application is filed for initiating execution proceedings, albeit not required under the law. As part of the
execution stage, sale of movable and immovable property is administered through a Court appointed
administrator through public auction under the provisions of the CPC. Separate procedure and modalities
have been prescribed with respect to sale of movable and immovable property.
i. Appeal: Any person aggrieved by a judgment, decree, sentence, or final order of a Banking Court may, within
thirty days thereof, refer an appeal to the High Court. The appeal is required to be heard by at least two judges.
The admission of the appeal is not per se to operate as a stay and no stay is to be granted therein unless the
decree holder has been given an opportunity of being heard and unless the appellant deposits in cash with the
High Court an amount equivalent to the decretal amount inclusive of costs, or in the case of an appeal other
than an appeal against an interim decree, at the discretion of the High Court furnishes security equal in value
to such amount.101
91
As defined in section 2 (c) of the 2001 Ordinance.
92
As defined in section 2 (e) of the 2001 Ordinance.
93
International Finance Corporation v. Sarah Textiles Ltd., (2009 CLD 761 (Lahore)).
94
95
96
97
98
Sections 3 and 17 of the Recovery Ordinance.
99
Habib Bank Limited vs. Karachi Pipe Mills Limited (2006 CLD 842 at 849).
100 Section 19(1) of the Recovery Ordinance.
101 Section 21 of the Recovery Ordinance.

10.12. Annex L – Foreclosure Process
Briefly, a foreclosure procedure entails:
 Upon default, bank or DFI shall get the outstanding mortgage money determined by a chartered account
firm that neither is nor has been a statutory auditor of the bank or DFI or the mortgagor in the last three
years.102
 After seven days of due notice to the parties, the chartered accountant firm shall examine the accounts
and determine the mortgagor’s total liability including cost of funds and within thirty business days of
appointment submit its report to the bank or DFI.103
 The bank or DFI thereafter shall serve a notice to the defaulter to satisfy the outstanding payment not
exceeding the amount determined by the chartered accountant firm as above within fourteen days.104
 Upon failure to the aforementioned, a second notice to be sent on similar terms. 105
 Upon failure to satisfy the second notice, a final notice demanding payment within thirty days shall be
sent to the mortgagor.106
 If the mortgagor fails to complete the payments in the time stipulated above, the bank or DFI shall initiate
sale of mortgaged property through public auction, through the following procedure:107
a) the bank or DFI shall have the property evaluated by three reputable valuation company listed on the
panel of PBA within seven business days after the expiry of thirty days period of final notice issued
to the mortgagor;108
b) issue a public notice in daily newspapers, which include:(a) particulars of the property; (b)details of
the borrower; (c) outstanding amount; (d) any encumbrances; (e) reserve price (this will be
determined by the valuation company and the property cannot be sold for less than this amount); and
(f) time and place of the auction;
c) within 15 days of the aforementioned publication, the public auction shall be held;109
d) in case there is more than one bidder with competitive offers, the highest bidder shall be successful; 110
e) if on the bidding date only one bidder with offer equal to or more than the reserve price comes
forward, the property may be sold to such bidder;111
f) on acceptance of bid by the bank or DFI, the successful bidder shall submit 25 percent of the bid
amount within two business days of auction whereas the rest of the amount shall be deposited within
15 days from the date of the initial deposit;112
g) in case no bid is received, the auction shall be cancelled and the entire exercise shall be repeated
provided that where no bid is received in three auctions, the financial institution may purchase the
mortgage property at a price 10 percent higher than the reserve price.113
 The bank or DFI can participate in the auction, however, it may only be able to buy the property for an
amount 10 percent higher than the highest bid. If within three business days, the mortgagor can match the
bank’s or DFI’s bid, the borrower shall be allowed to purchase the property.114
102
Rule 3(a) of the Recovery Rules.
103
Rule 3(b) of the Recovery Rules.
104
105
106
107
108
Rule 3(b) of the Recovery Rules.
109
Rule 3(c) of the Recovery Rules.
110
111
112
Rule 3(c) of the Financial Institutions (Recovery of Finances) Rules, 2018.
113
Rule 3(b) of the Financial Institutions (Recovery of Finances) Rules, 2018.
114

 If the mortgagor does not give voluntary possession of the property, the Banking Court shall put the
Bank/DFI (or the purchaser), in possession of the same. However, in case of bona fide lease, the Banking
Court shall not order eviction until expiry of such lease.115
 For purposes of executing and registration of sale deed, bank or DFI shall be deemed to be the duly
authorized attorney.116 Upon consummation of the sale of mortgaged property, any surplus left, after
paying in full all the dues of the mortgagees, shall be paid to the mortgagor.117 Thereafter, proper accounts
of the sale proceeds shall be filed by the mortgagee in the Banking Court within 14 days of the sale.118
 Disbursement
Judicial pronouncements on disbursement are at variance. On one hand the judgments in Habib Bank Ltd vs.
Taj Textile Mills Ltd119 and in Muhammad Arshad and another vs. Citibank N.A.120 (“Citibank Case”) respect
the sanctity of the commercial bargain between the borrower and the conventional bank under the restructuring
arrangement and seem to support the proposition that disbursement under the fresh mark-up agreement is not
necessary.
On the other hand, there is case law121 pursuant to which conventional banks will be denied recovery for lack
of actual disbursement of funds under the fresh mark-up agreement. Without actual disbursement, the fresh
mark-up agreement has been held “to be without consideration and void”.122 Even where conventional banks
make actual disbursements under the fresh mark-up agreement subsequently used to settle earlier loans,
recovery under the fresh mark-up agreement may not be permitted according to a body of judicial opinion.123
 Mark-up on mark-up
Mark-up on mark-up was first made unlawful vide Mark-up Circulars and reaffirmed by subsequent
notifications and circulars124 issued by SBP from time to time as well various judgments of the Pakistan
courts125 that establish that charging additional mark-up is illegal and un-Islamic. Following these judgments
conventional banks can only restructure loans if they do not charge additional mark-up under the fresh mark-
up agreement.
Having said so, the courts have in several instances adopted a lenient and flexible approach in enforcing the
principle prohibiting mark-up on mark-up. There have been cases where: (a) mark-up on mark-up was literally
interpreted to allow additional mark-up as long as it was charged only on the outstanding principal amount of
the original finance facility and not on the mark-up element;126 and (b) additional mark-up was allowed on the
sale price or principal amount (principal plus mark-up under the original loan) under the fresh mark-up
115
116
117
118
119
2009 CLD 1143 [Lahore].
120
2006 CLD 1011 [Supreme Court].
121
See Mushtaq Ahmed Vohra vs. Crescent Investment Bank Limited, 2005 CLD 444 [Karachi]; UBL vs. Ch. Ghulam Hussain
1998 CLC 816 [Lahore]; Habib Bank vs. M/s. Qayyum Spinning Ltd., 2001 MLD 1351 [Karachi]; United Bank Limited vs. M/s.
Gravure Packaging (Pvt.) Limited, 2001 YLR 1549.
122
Mushtaq Ahmed Vohra vs. Crescent Investment Bank Limited, 2005 CLD 444 [Karachi] decided on 15th June, 2004at page
451.
123
Qamaruzaaman Khan vs. Industrial Development Bank of Pakistan and others, 2009 CLD 460 [Karachi]; Habib Bank vs.
Qayyum Spinning Ltd. MLD 2001 Kar. 1351.
124
Circulars subsequent to Circular 13 and 32, namely BCD Circular No. 27 dated 12.11.1984, BCD Circular No. 37 dated
10.12.1984, BCD Circular No. 23 dated 25.5.1985 and BCD Circular No.4 dated 30.6.1988 further provide that mark- up cannot
be charged on ‘marked-up price’ and that Banks/DFIs should ensure ‘that instructions governing elimination of “Riba” from
banking are strictly observed both in letter and spirit’. Additionally, SBP by way of BPD Circular No. 24 and BPD Circular No.
37 also set up a committee for resolution of disputes between borrowers and the banks where mark-up on mark-up was allegedly
charged by the banks ‘in violation of guidelines issued by SBP for elimination of “riba” from banking system’.
125
Habib Bank vs. M/s. Qayyum Spinning Ltd and United Bank Limited vs. M/s. Gravure Packaging (Pvt.) Limited 2001 YLR
1549 which have placed reliance on Federal Shariat Court (FSC) and Shariat Appellate Bench of Supreme Court judgments in
Dr. Mehmoodur Rehman Faisal and others v. The Secretary Ministry of Law, Justice & Parliamentary Affairs, Government of
Pakistan PLD 1992 FSC 1 and Dr. M. Aslam Khaki v Syed Muhammad HashimPLD 2000 SC 225.
126
Habib Bank Ltd. vs. Taj Textile Mills Ltd 2009 CLD 1143 [Lahore]: It is doubtful whether the approach adopted by the Court
in Habib Bank Ltd (2009) is consistent with SBP Circulars. SBP Circulars issued subsequent to Circulars 13 and 32 prohibited
charging mark –up on “marked-up price”, which suggests that a literal interpretation of charging mark-up on mark-up, as adopted
by the Court in Habib Bank case is contrary to law. Mark-up, as per SBP Circulars, cannot be charged on marked up price, i.e.
total outstanding balance (principal plus mark-up) under the original finance facility.

agreement.127 It is emphasized that in the Citibank Case, the Supreme Court did not directly discuss the issue
of mark-up on mark-up; however, it did permit recovery of additional mark-up under the fresh mark-up
agreement.128
There is, as such, uncertainty created on aspects of debt rescheduling (as discussed above) resulting from
inconsistent and confusing judicial pronouncements. Notwithstanding these, based on market practice, loans
are being rescheduled on the basis of fresh mark-up agreements.
127
Saudi Pak Commercial Bank Ltd. vs. Qazi Ehtishamul Haq and another, 2008 CLD 566 [Karachi]; Investment Corporation of
Pakistan vs. Sheikhupura Textile Mills Ltd. 2004 CLD 1396 [Karachi]; and Yousuf Hardware Industries and others vs. UBL, Spl.
HCAs No. 186 & 187 of 1998 [Karachi] (Unreported Judgment).
128
Observations of the Banking Court, Lahore Appellate Bench of the High Court and the Supreme Court read together suggest
that the outstanding liability (principal plus mark-up) under the original finance agreement, amounting to Rs, 1,297,000/-, formed
the principal amount under the restructuring/renewal agreement dated 26-06-1999. Additional mark-up was then charged under the
restructuring/renewal agreement resulting in the marked up price of Rs. 2,105,280/- as mentioned therein. It is therefore, arguable
that the Supreme Court by allowing recovery by the Bank of Rs. 1,795,176/-, by necessary implication, allowed charging mark-up
on marked- up price. Having said so, the discussion on the merits of this argument is beyond the scope of this article.

10.13. Annex M – Examples of Creditors’ Schemes of Arrangement
A few case examples where a Scheme may successfully be affected (along with questions of law raised and
principles developed by the High Court) are:
 (Gulshan Weaving Mills Limited & others v. Al Baraka Bank (Pakistan) Limited and 8 others (2018 CLD
389)):
The company and its secured creditors had filed a Scheme before the Court for the repayment of the
existing liabilities of the company by sale of all its fixed assets by and under the supervision of an asset
sale committee consisting of four members amongst the secured creditors.
In this case the issue of whether the consent of the shareholders was required even though the Scheme
did not target the shareholders was considered. The High Court held that it is not always necessary to call
meeting of such class of person to which Scheme is not targeted. However, where Scheme proposed
between one set of stakeholders also affects or varies rights and interest of any other set of stakeholder,
then it is necessary to call meetings of affected class of person and seek approval of proposed Scheme
from such class of stakeholders as well. If such course is not adopted and the affected class is neglected,
then also the sponsors of the Scheme of arrangement may fail to secure the approval of the High Court.
 Paramount Spinning Mills Limited v. Bank of Punjab (2019 SHC 420):
The company and certain secured creditors had filed a Scheme for repayment by the company through
sale of its assets to the secured creditors of the outstanding amounts due to the secured creditors, or a
portion thereof.
The secured creditors had already filed suits of recovery for finance under the Recovery Ordinance against
the company and the company had also filed various cases against its creditors, both of which were
pending. The company and the secured creditors had then reached an agreement and a Scheme was
accordingly filed. More than 75 percent in value of the secured creditors had consented to the Scheme
and although consent had not been obtained from two secured creditors (one was absent and the other had
opposed the Scheme), the Court held that since the statutory threshold had been complied with, the
Scheme was sanctioned.
 Saudi Pak Industrial & Agricultural Investment Company Limited v. Chenab Limited (2019 LHC 3938):
The Lahore High Court considered the application of the secured creditors of the company (who had
earlier filed for the winding-up of the company). The secured creditors sought the permission of the High
Court to allow the company to take steps for rehabilitation of certain units of the company, which was
allowed subject to certain directions such as submitting monthly financial statements of the company.
 Messrs Consolidated Exports Ltd. v. Messrs Dyer Textile and Printing Mills Limited (PLD 1984 Karachi
541)
The High Court of Sindh, whilst allowing the Scheme, held that:
“19. I also find it in the public interest if the winding up proceedings are, stayed to allow the
respondents an opportunity to run their textile mills as this course would not only benefit the
economy of the country but would also provide employment to a large number of workmen. It
will not be out of place to mention that the Government has financially supported the sick textile
mills under its various schemes. I was informed at the bar that respondents Mills was the largest
textile Mill before its closure in the private sector, having 1,612 workers out of which 1,264
workers have filed the claims and would be benefited by the present scheme.”

10.14. Annex N – CIRC
The relevant laws governing the CIRC included the Corporate and Industrial Restructuring Corporation
Ordinance, 2000 (Ordinance) and the Corporate and Industrial Restructuring Corporation Rules, 2001 (CIRC
Rules). Salient features of the CIRC Laws are:
Scope of CIRC functions/powersIn 2000, the CIRC was set up with the mandate to acquire, restructure,
rehabilitate, manage, dispose, and realize non-performing loans and other assets of specified banks and
financial institutions (such as United Bank Limited, National Bank of Pakistan, National Development Finance
Corporation, Industrial Development Bank of Pakistan and Agriculture Development Bank of Pakistan (now
Zarai Taraqiati Bank Limited) – which were all, at the time, owned/controlled by the Federal Government). 129
The scope of CIRC functions was, however, not only limited to restructuring of NPLs of these banks and DFIs.
The Ordinance refers to distressed borrowers as “Obligors” which are defined in Section 2 (o) as
“(o) “obligor” means any individual, proprietorship concern, company or other body corporate,
trust, partnership or other entity that has, with respect to a non-performing asset, a contractual or
legal obligation or duty to make payment, effect performance, provide security, or collateral with
respect to any financial asset whether as principal, surety, guarantor or otherwise and whether such
obligation is primary, secondary, matured or contingent;”
Several provisions exist within the Ordinance which allow the CIRC to rehabilitate distressed
borrowers/obligors in addition to restructuring of NPLs of the scheduled banks/DFIs.
The CIRC was empowered to take several actions to rehabilitate distressed borrowers as stipulated in Section
18 of the Ordinance, few relevant provisions include:
Section 18 (b) (d) in Chapter III (Powers and Functions of the Corporation) states:
(b) to acquire, purchase, manage, restructure, rehabilitate, sell and dispose of any obligor being a
corporation or a company;
(d) to purchase, take over, own, hold, sell, lease, and otherwise dispose of, re-organize, restructure,
rehabilitate and otherwise enter into any settlement or contract, realize, pledge, mortgage,
hypothecate, control, manage, and arrange finance for any asset, property, undertaking, collateral
or security underlying or relating to or securing any financial asset or instrument, including any
intellectual property, trade mark, equity, financial interest, legal and contractual right, asset,
guarantee and other undertaking ;
Moreover, the Chief Executive of the of the CIRC was empowered as per Sections 8 (3) (a) to,
“to deal with, negotiate, enter into and sign agreements and contracts with any obligor or financial
institution in respect of the non-performing assets or related collateral and to take any and all
actions, in any manner to advance the business of the Corporation as specified in section 18”
And as per Section 8 (3) (b) to,
“to deal with, negotiate, enter into and sign agreements and contracts with any obligor or financial
institution in respect of the non-performing assets or related collateral and to take any and all
actions, in any manner to advance the business of the Corporation as specified in section 18;”
The Ordinance further provides rights and remedies to the CIRC for the for the rehabilitation, management
and restructuring of the obligor in Section 23. According to Section 23 (a) (b) and (c):
“(a) the Corporation may request the Commission as provided in section 295 of the Companies
Ordinance, 1984 (XLVII of 1984) (Management by Advisor) to take action under section
295 of the said Ordinance if it is of the opinion that the condition of the obligor warrants
such action. The Commission may in pursuance of the said section and after complying
with its requirements and giving the obligor an opportunity to be head, appoint the Chief
Executive or his nominee as an Administrator, hereinafter referred to as the Administrator,
to manage the affairs of the obligor;
(b) (all the provisions of section 295 of the Companies Ordinance, 1984 (XLVII of 1984) shall
129
Section 2(1) and Section 20 read with Schedule to the Corporate Industrial Restructuring Corporation Ordinance, 2000.

apply, as far as possible, to the functioning of the Administrator as stated herein; and
(c) the Corporation shall be entitled to apply to the Commission to avail the benefits of section
296 of the Companies Ordinance, 1984 (XLVII of 1984)”
Acquisition of NPLs by CIRC
Section 21 of the Ordinance, as reproduced below allows the CIRC to pay financial institutions by “mutual
agreement” which are governed by the Rules.
“21. Consideration for transfer of non-performing assets. The Corporation shall pay to the
concerned financial institution the outstanding amount as consideration for the transfer of non-
performing assets by mutual agreement upon such terms and conditions and in such manner as may
be prescribed by rules to be notified in the official Gazette.”
Rule 15 of the Rules states:
“15. Transfer letter.- Upon the final recommendations and findings by the Governor State Bank
based on the findings, report and the recommendations of the Verification Committee or in
accordance with the provisions of sub-section (14) of Section 10 of the Ordinance, the Corporation
shall issue to the financial institution a transfer letter for the transfer to the Corporation of the non-
performing assets that are on the books of the financial institution whether such non-performing
assets are held by the financial institution along or jointly with other institution or institutions as of
a date specified in the transfer letter. The form of the transfer letter shall, as nearly as possible, he
as set out in Appendix III. (Transfer and Assignment Agreement)”
The acquisition of NPLs as per Rule 15 read with Section 21 of the Ordinance is done contractually, that is,
by virtue of a Transfer and Assignment Agreement as provided in Appendix III of the Rules. However, it is
important to keep in mind that the process of the transferring the NPLs is initiated per Rule 13 of the Rules,
according to which the CIRC is to issue a selection letter (as set out in Appendix II of the Rules) to a financial
institution informing it of its selection in the CIRC’s asset rehabilitation program.
A summary of select case laws relating to CIRC Laws is in Table 34.
TABLE 34: CASE LAWS RELATING TO CIRC LAWS
S No. Citation Case Summary
1. 2007 CLD 1555  The grievances of the appellant were against sale of mortgaged
SHC properties on nominal sale consideration as opposed to two offers
made before the SHC but did not entail any aspect of collusive, mala
(East Yarn Trading
fide or illegal acts committed during sale process.
Company v. United
Bank Limited)  The Court held that the order in favor of CIRC was not against
the law particularly when the sale proceeds were much higher
level than the offers that had been received by nazirs of the
court.
 Other grievances of the appellants regarding procedural
irregularities were dismissed on factual grounds.
2. 2005 CLD 422 SHC  CIRC had offered a scheme of amicable settlement of non-
(National Bank of performing assets in line with SBP Circular No. 29 of 2002
Pakistan v. Pakasco (“Circular”) which contemplated payment of 10 percent of settled
Limited) upon by borrower upon signing of settlement agreement with the
remaining being paid off in quarterly instalments.
 CIRC extended a similar offer towards judgment debtors on similar
terms but later reneged and instead of accepting repayment in
installments demanded a lump sum payment.

S No. Citation Case Summary
 Albeit CIRC was neither a banking company nor a FI, the Court
held that CIRC had extended the offer through a device common in
commercial transactions — ‘incorporation by reference’ and
therefore the terms of the Circular were binding on CIRC.
3. 2005 CLD 169 (PQ  Case concerned sale through auction of two properties. Both
Chemicals v. AW properties were taken over as non-performing asset by CIRC and
Brothers) then subsequently advertised for sale by CIRC. Appellant contested
that the sale in question required two separate bids for each of the
two properties and that it had presented the highest bid for one of
the two properties. Respondent no. 01 who had offered a
consolidated bid for two properties (contrary to requirement of
advertisement) had subsequently raised its bid and the sale was
approved by single judge without notice to the appellant or any other
bidder. This was tantamount to a material irregularity and hence the
appellant sought the sale to be set aside.
 The Court following examination of arguments ruled that sale
through private negotiations was not precluded where it was
reasonable to do so and interested parties had been notified.
 When notice is claimed merely upon the principles of natural
justice, the irregularity can always be rectified at the appellate or
revisional stage. Upon examination that whether the offer of
Respondent no. 01 could be matched, the appellant had repeatedly
stated that it was only interested in one of the two properties and not
both. Therefore, the Court went on to rule that under such
circumstances it would have been extremely unconscionable to
allow appeal particularly when less than one tenth of amount offered
by Respondent no. 01 would have been recovered and a public
agency (CIRC) would be required to bear additional expense of
preserving and maintaining the non-performing asset.
 It was argued by the Appellant that issuance of public notice on
behalf of CIRC indicated that the right to recover stood transferred
to CIRC and therefore the Recovery Ordinance was not applicable.
Rationale for such an argument was that per section 19 of the
Ordinance, CIRC would not be deemed as a banking company. This
argument however stood rebutted on the basis that under section 32
of Ordinance in respect of any non-performing asset, the CIRC shall
be entitled to exercise all rights and remedies available under laws
relating to banking and company laws.

10.15. Annex O – List of Debt Collection Companies
A non-exhaustive list of debt collection agencies (based on web searches) operating in Pakistan is in Table
35. These companies offer debt collection, recovery, asset re-possession and similar services for consumer
loans.
TABLE 35: LIST OF DEBT COLLECTION AGENCIES IN PAKISTAN
S.no Debt Recovery/Collection Servicers Official Website
1 ALAMS Recovery Services (Pvt) Ltd https://alamsrecovery.com/
2 Evaluation Grid https://evaluationgrid.co/
3 FSL Debt Recovery (Pvt) Ltd https://fslprivate.com/Debt-Recovery.html
4 Hamza and Hamza Law Associates https://hamzaandhamza.com/debt-recovery-

services/
5 ICIL Pakistan https://www.icilpk.com/debt-collection-

services.html
6 PK Legal and Associates https://pklegal.org/legal-services-related-to-debt-

recovery-cases-in-pakistani-courts/
7 Solution Seekers Pakistan http://solutionseekerspakistan.com/
8 Tamweel Solutions http://www.tamweelsolutions.com/
9 Zafar and Associates LLP https://zallp.com/practice/debt_recovery/
10 24 Justice https://24justice.pk/debt-recovery-in-pakistan/

10.16. Annex P - Project Scope & Methodology
The key areas of focus of NPL Diagnostic Assessment Report are:
 Review of market conditions to identify key gaps in the legal and regulatory and operating environment
which will include bottlenecks related to the infrastructure for debt servicing, debt enforcement, out-of-
court workouts (OCW), debt recovery and restructuring, debtor restructuring and recapitalization, court
insolvency resolutions. It also assessed the state of the primary market for NPL resolution, impediments
to scaling the primary market for NPL resolution and to creating a secondary market for NPLs, including
addressing gaps in commercial, financial, regulatory, legal, judicial, extra-judicial, supervisory,
prudential, macro prudential, tax and accounting frameworks and any incentives for stakeholders. Review
of NPL sale by law and practice, NPL resolution by law and practice, and the frameworks and existing
legislation relating to NPL Investment.
 A market assessment and scoping of private and public stakeholders/investors, identifying what limits
them from investments in the sector and asset class in the current legal environment, and defining and
developing potential NPL transaction structures to execute a transaction for NPL market creation.
 Recommendations on key reforms, solutions and capacity building that could facilitate market entry for
NPL investors.
Scope & Objectives

The purpose of this NPL Market Assessment Diagnostic Report is to analyze and review various aspects of
the non-performing loans (NPL) market to identify bottlenecks and practical areas that could be addressed in
the short and medium term to create a market for NPLs in Pakistan. In doing so, the following areas have been
reviewed:
1. Legal and Regulatory Assessment: Review of the existing legal, regulatory, and procedural impediments in
Pakistan related to the NPLs. Review the court system, relevant laws, legal processes and options available to
regulated banks, regulated debt recovery or collection entities, and other non-regulated NPL servicers to
recover or restructure debt claims. Review the legislation including basic banking laws to understand the
existing provisions applicable to the setting-up of NPL servicers and AMCs in Pakistan. Identifying legal
obstacles, problems in creation of secondary market for NPLs. Provide recommendations to facilitate market
conditions for NPL investors.
2. Tax Treatment of NPLs: Review of tax treatment of NPLs in law and in practice requirements for allowing
deductibility of losses when making provisions or recognizing write offs, analysis of loan loss provisions and
write offs, mandatory write offs. Tax treatment of the sale of NPLs below net book value. Tax treatment,
including deductibility, of losses incurred by FIs in NPL related transactions.
3. Accounting and Prudential Treatment: Identify, review, and analyse impediments related to the supervisory
regime, accounting, and prudential treatment of NPL recognition and management by FIs. Reviewing the
Prudential requirements as to the accounting treatment of NPL related transactions. Assessment of NPL
reporting framework, alignment with accounting standards and other global regulations. Reviewing the
financial limits pertaining to NPL and analyse credit information and credit risk management frameworks and
resolution policies, procedures, and practices of financial institutions.
4. Collateral Valuation: Review and analysis of collateral valuation framework for NPLs and under what
conditions are banks required to use licensed external evaluators. Review of the valuation methods being used
as well as those allowed by the regulator. Evaluation of price gap between bank collateral valuation and market
value. Scoping out local property developers/operators well-versed in property completion, rehabilitation, and
repositioning.
5. NPL Servicing Infrastructure and AMCs: Analysis of licensing requirements and appointment of NPL
Servicers to conduct NPL Servicing on behalf of banks and non-bank entities. Review of data availability,
information technology and cultural impediments to NPL Servicing by bank and non-bank NPL Servicers.
Review the regulatory obstacles to licensing and operations for private and public AMC and highlighting any
restriction on ownership of NPLs depending on type of purchasers’ entity.
6. NPL Resolution Models and Market Analysis: Review of the prevailing market conditions and operating
environment of primary and secondary markets of NPL. A mapping of stakeholders involved in NPL
ownership, management, and oversight. Present NPL sectoral distributions, volumes, and trends across various

financial institutions. Identify optimal legal transaction models for NPL transactions, for both domestic and
foreign investors. Evaluate existing corporate restructuring companies and providing recommendations to
improve the investment climate for NPL investors, purchasers, and servicers.
Methodology
To prepare this NPL Diagnostic Study Report. The following methodology was followed:
1. Project Kick-Off Phase

 Introducing the EYFR project team to the IFC team
 Further refining and reinforcing the key objectives/ outcomes of the project
 Agreeing communication and escalation protocols between EYFR and IFC team.
 Identifying and designating points of contact.
 Outlining the operating model of how the project will be delivered.
 Agreeing the detailed timelines, protocols for approvals, work-, and milestones.
2. Inception Phase
We followed a top-down approach and developed a Level 1 (high level) outline of the NPL Diagnostic
Assessment Report based on the objectives of the project provided in the ToRs. Level 1 outline lays out the
key parameters of the study and key questions to be asked during the research to be conducted. The level 1
outline is mapped with the research questions given in the Scope of Work from items 1 to 6 in ToRs.
 Working with the project team to prepare a more detailed Level 2 (detailed) outline. Level 2 outline
expands on the level 1 outline goes in greater depth to lay out details of the parameters of the study.
 Prepared a list of well-known credible potential list of stakeholder and sources of information and mapped
with Level 1 outline prepared. These sources comprise:
a) The World Bank / IFC /ADB and IMF reports
b) Regulatory bodies such as the State Bank of Pakistan, SECP and other laws/ statutes
c) EY’s internal knowledgebase regarding NPLs markets and similar subjects.
d) Information published by the Government such as through Economic Survey or the Bureau of
Statistics.
 A list of external stakeholders, such as personnel in banking or regulatory space was prepared who would
need to be interviewed to augment the research performed, validate the suggestions laid out or to
understand the information that is not publicly available.
 A proposed list of benchmark countries or models was presented in the Inception Report with the reasons
for selection.
 Prepared a resource plan assigning the report outline (level 2) with potential information sources to the
concerned team members.
 Finalization of the Inception Report including the Report Outline
3. Information Collection and Analysis

On completion of inception phase, the information collection and desk-research were performed to understand
and document the current state of affairs, identify and highlight the challenges being faced, and suggesting
key recommendation (across all areas of study) to address the key challenges. This phase comprises the
following three steps:
Step 1: The information sources finalized during the Inception phase have been reviewed and studied.
Knowledge and data obtained is drawn and mapped against the level 2 outline prepared. The research material

and sources may be expanded if required. The as-is situation key challenges and recommendations are
identified and documented.
With respect to the legal and regulatory assessment, following tasks have been specifically performed:
 Preparing a list of laws relevant for the purposes of preparing and submitting the deliverables
 Researching the relevant laws pertaining to NPLs, recovery and/or restructuring of loans
 Researching the various circulars/notifications issued by the State Bank of Pakistan in connection with
NPLS (including but not limited to BPD Circular No. 29 of 2002 and the Prudential Regulations),
recovery and/or restructuring of loans
 Researching the relevant laws relating to securitization issued by the State Bank of Pakistan and the
Securities and Exchange Commission of Pakistan
 Researching the relevant case laws pertaining to recovery and/or restructuring of loans and sale and
purchase of loans
 Reviewing the relevant laws pertaining to NPLs, recovery and/or restructuring of loans, including but not
limited to the Banking Companies Ordinance, 1962, the Corporate Restructuring Companies Act, 2016,
the Financial Institutions (Recovery of Finances) Ordinance, 2001, the Companies Act, 2017, the
Financial Institutions (Secured Transactions) Act, 2016 and the rules issued thereunder, the Contract Act,
1872, the Transfer of Property Act, 1882, the Registration Act, 1908
 Preparing a general overview of the legal framework for the NPL market including legal treatment of
NPLs, recovery proceedings (including court and out-of court workout), securitization and restructuring
of NPLs, including sale and purchase of loans, establishing and regulating NPL Servicers and AMCs (if
any) and the role of PCRCL
 Allocating resources and preparing responses to any questionnaires provided by IFC-WBG Team
 Preparing responses to specific questions raised in the TORs (such as Can an outstanding loan or security
interest be assigned without consent and notification which is under litigation or otherwise? Does the
transfer of mortgage or collateral require consent from or notification to the borrower? Does the
securitization law allow the sale of NPLs (and the underlying secured collateral) at any stage)?
 Identifying the bottleneck and legal remedies available to financial institutions for recovery of NPLs and
identifying legal obstacles in relation to creation of secondary market for NPLs.
Step 2: Study of global models (as listed in the Inception phase) will be performed. The first step will be to
draw a framework to be used for the study of global models. This framework includes the key parameters to
study and key questions to ask during the research of every global model to be studied.
Step 3: As necessary, working group / stakeholder session have been performed to discuss the findings of the
research performed. We consider stakeholders will comprise participants from (i) the banking (and financial
services) industry, (ii) State Bank of Pakistan (being the regulator), (iii) Securities and Exchange Commission
of Pakistan (being the regulator of Non-Banking Financial Institutes/Companies, having an overlapping role
with SBP), (iv) Litigations lawyers, (v) Potential investors and (vi) Experts and members from appropriate
government bodies. During the stakeholder sessions, the objective has been primarily to discuss the challenges
and recommendations identified during the above two steps.

10.17. Annex Q – COVID Relief measures adopted by SBP
SBP vide its BPRD circular letter No. 13 of 2020, has provided regulatory relief to dampen the effects of
COVID-19 and allowed banks to offer deferral of principal component of instalments to its borrowers for one
year, provided that the borrower will continue to service the mark-up amount as per agreed terms & conditions.
The specific relief measures for corporate and consumer loans are:
For Corporate/ Commercial Banking
i. At the request of obligor received before 30 June 2020, banks or DFIs will defer repayment of
principal loan amount by 1 year and will convey their decision to an obligor within 15 working days
of the written request. In case of declination of request, banks or DFIs are to record reasons and send
it to obligor and send a copy to Director, Offsite Supervision and Enforcement Department (OSED),
SBP. Banks are to weekly submit deferments details to Director, OSED. Deferment will not affect
the credit history of the obligor and will not be reported in the Credit Information Bureau [“CIB”] as
restructuring.
ii. Deferment of financing facilities exceeding one year, may be rescheduled at the request of obligor.
If the rescheduling is done within 180 days of the loans being past due, such financing facilities be
treated as regular and reported in the e-CIB.
iii. Unless the payment obligations are past due by 180 days, banks or DFIs shall not classify financing
facilities of obligors which have requested for rescheduling / restructuring. If the rescheduling /
restructuring is not executed within 180 days, such financing facilities to be classified as “Doubtful”.
iv. Treatment of accrued mark-up income of regular financing facilities which have been rescheduled /
restructured more than once, shall not be applicable on financing facilities in bullet point 1 and 2
above.
For Consumer Financing Facilities
i. At the request of borrower received by 30th June 2020, the payment of principal instalments may be
deferred for one year at no fee or increase in mark-up rate, for instance if a borrower continues to
pay mark-up on agreed terms & conditions.
ii. Decision on request is to be made within 15 working days from the receipt of request. In case of
refusal, decision should be supported by reason for refusal.
iii. Banks and DFIs to report weekly to SBP details of deferments granted by them to their borrowers.
iv. In case borrower is unable to pay mark-up or need deferment exceeding one year, financing facilities,
upon request, may be rescheduled or restructured.
v. If the rescheduling / restructuring done within 180 days of loans being past due, such financing
facilities:
a) continued to be treated as regular
b) not to affect the credit history of the borrower
c) not be reported in the ECIB / private credit Bureau as restructuring
vi. The financing facilities not to be (adversely) classified unless payment obligations are past due by
180 days. In case of being 180 days past due, such financing facilities will be classified under the
instructions of prudential regulations of consumer financing.
vii. Certain restrictions on rescheduling/ restructuring will not be applicable on Consumer Financing
loan, which is rescheduled / restructured before March 31, 2021.
viii. The aforesaid instructions, except for the bullet points 1,2 and 3 shall stand expired on 31 March
2021 and will not be applicable on the non-performing loans as on 31 December, 2019.

10.18. Annex R – EBA disclosure on NPLs and Forborne Exposures
These guidelines require the following disclosures from all banks on account of NPLs and Forborne
Exposures:
 ‘Credit quality of forborne exposures’, in which banks are required to disclose the gross carrying amount,
broken down by exposure class, of FBEs, the related accumulated impairment, provisions, changes in fair
value, and the collateral and financial guarantees received, and to explain the drivers of any significant
changes over the time.
 ‘Credit quality of performing and non-performing exposures by past due days’, in which banks are
required to disclose the gross carrying amount, broken down by exposure class, of performing and non-
performing exposures, including a further breakdown of past-due exposures by the number of days that
they have been past due. Credit institutions are also required to explain the drivers of any significant
changes across the time periods.
 ‘Performing and non-performing exposures and related provisions’, in which banks are required to
disclose information on the gross carrying amount of impairments, provisions, accumulated changes in
fair value due to credit risk, accumulated partial write offs, and collateral and financial guarantees
received – for both performing and non-performing exposures – with a breakdown by exposure class.
Further details are requested on the stage of the exposures for banks governed by International Financial
Reporting Standards (IFRS).
 Collateral obtained by taking possession and execution processes, in which banks are required to disclose
information on the instruments and value of the collateral obtained by taking possession.
In addition to the above, these guidelines require the following further disclosures from (significant) banks
with more than 5 percent Gross NPL Ratio on account of NPLs and Forborne Exposures:
o ‘Quality of forbearance’, in which banks are required to disclose the number of times that an
exposure has been forborne and provide information about the non-performing FBEs that have
failed to meet the nonperforming exit criteria.
o ‘Quality of non-performing exposures by geography’, in which banks are required to disclose
the gross carrying amount of performing and non-performing exposures and the related
accumulated impairment, provisions and accumulated change in fair value due to credit risk by
or country.
o ‘Credit quality of loans and advances by industry’, in which banks are required to disclose the
gross carrying amount of loans and advances to non-financial corporations and the related
accumulated impairment and accumulated change in fair value due to credit risk by
industry/sector of activity of the counterparty.
o ‘Collateral valuation – loans and advances’, in which banks are required to disclose information
on the gross carrying amount of loans and advances collateralized, the related accumulated
impairment, and the value of the collateral/financial guarantees received and the partial write
offs for these exposures. All this information is to be broken down by past-due bucket. In
addition, further detailed information is to be provided broken down by loan-to-value bucket.
o Changes in the stock of non-performing loans and advances’, in which banks are required to
disclose information on the movements of the gross carrying amount of NPLs and advances
during the period, with specific details on the net cumulative recoveries related to these changes.
o ‘Collateral obtained by taking possession and execution processes – vintage breakdown’, in
which banks are required to disclose information on the value and the related impairment of
assets cancelled in exchange for the collateral obtained by taking possession, on the value and
the related impairment of the collateral obtained, and on the vintage of the foreclosed assets.
In addition to the above, the ECB has stated the following supervisory expectations with respect to reporting
and disclosures of NPLs and Forborne Exposures through its Guidance for Banks on NPLs issued in 2017.
 NPL Strategy: High NPL banks are required to report their NPL strategy to their Joint Supervisory Teams
(JSTs) in the first quarter of each calendar year. To facilitate comparison, banks also submit the standard
template, summarizing the quantitative targets and the level of progress made in the past 12 months
against the plan. Specific details in the template include volumes of non-performing exposures which are

unlikely to be paid, total gross loans along with non-performing exposure ratios, transitions from
performing to non-performing and vice versa, non-performing exposure increases or decreases, cash
recoveries, loss budget and forborne exposures.
 NPL governance and operations: Material and structural changes in the NPL operating model control
framework are communicated to the respective supervisory teams in a timely fashion. Furthermore, high
NPL banks proactively share periodic NPL monitoring reports, at a suitable level of aggregation, with the
supervisor. Specific details have not been prescribed by the regulator in this regard.
 Forbearance: Disclosures are required on forbearance, especially on key areas including credit quality of
forbearance, quality and effectiveness of forbearance and ageing profile of forbearance on a regulatory
portfolio basis. To facilitate consistent disclosures on forbearance, banks are required to submit the
quantitative information and standard templates. Specific details in the template include:
o Credit quality of forborne exposures (performing, non-performing, defaulted, and impaired),
associated amount of impairment raised (performing and non-performing)
o Quality of forbearance: including forborne exposures by number of forbearance measures
granted in the past and re-defaults having occurred in the past 12 months
o Ageing of forborne exposures: time since the granting of forbearance measures, across a
sufficient number of time brackets (<3 months, 3-6 months, 6-12 months and >12 months)
o Net present value impact of forbearance measures granted in the past 6/12/24 months.
 NPL impairment and write offs: The supervisor can request banks to provide data regarding the models
they use to calculate impairment allowances for NPLs on a collective basis. The data should be provided
on an annual basis or more regularly if requested by supervisors. The specific information to include,
description of each granular group of exposures with shared credit risk characteristics created for the
purpose of the collective estimation of provisions; description of the non performing exposure portfolios
to which the segments (product type, collateralization, client segment) pertain; description of loss given
default as applied at the level of the segment; cure rate for NPLs as applied at the level of the segment
and aggregated non performing exposure at default at the level of the segment.
 Interest Accrued on NPLs: Regarding the interest accrued on NPLs, on an annual basis or more regularly
if requested by supervisors, banks should share the relevant information which includes total loans,
performing loans, individually assessed non-performing loans (impaired and non-impaired), collectively
assessed non-performing loans (impaired and non-impaired). These details should be provided for original
effective interest income in Profit & Loss (before impairment), accrued effective interest income after
consideration of impairment and unwinding and cash collected (only Interest-related).

10.19. Annex S – Key common features of restructuring policy and practices in banks in Pakistan
Having looked at the policies and practices of some of the leading banks, there are some common features
with respect to rescheduling or restructuring of loans. The Board of Directors delegates its powers for credit
write offs, rescheduling, restructuring, litigation and recovery to the President of the Bank. The President
exercises these powers in accordance with the restructuring or rescheduling policy and any SBP rules and
guidelines issued from time to time. The President may further delegate this authority for rescheduling or
restructuring, as deemed appropriate.
 Policies provide that rescheduling or restructuring is not intended to defer identification of problems and
consequent misrepresentation or misclassification of risk and inaccurate reflection of reserves. Meaning
that while rescheduling and restructuring is permissible, it is not to be done simply to break time frame
and to allow an unwarranted improvement in the classified category of the loan.
 In line with the PRs, banks’ policies of rescheduling or restructuring of loans is also based on the principal
of granting concessions, that they would not otherwise consider, for borrowers whose accounts present
problems due to economic or legal reasons. However, before setting out to consider any concessions,
banks attempt to satisfy or conclude:
a) Where other financial institutions are involved, or in case of a syndicated loan, other lenders must
agree, in writing, to the proposed rescheduling or restructuring
b) The default is not willful, (the borrower is not misrepresenting actual facts with the purpose of
securing concessions)
c) The borrower has a viable business plan for the future, as demonstrated by financial projections; such
projections are to be thoroughly examined to assess the validity of assumptions used and the veracity
of cash flows projected
d) The management, despite the initial setback has a demonstrated competence and ability to run the
business profitably in the future
e) Willingness and ability of the sponsors to participate in a rescue program by injecting fresh equity
or equivalent such as sponsors or subordinated loans to demonstrate commitment to the business,
and make the whole exercise a meaningful one
f) There should be reasonable down payment to indicate the seriousness of the management towards
the proposed plan. (Repayment made by the borrower during the preceding one year may be given
due weightage in determining the amount of down payment)
 In terms of the recovery options available to a bank, it may be decided to grant concession in the form of
rescheduling or restructuring of the financial obligations. Key considerations are to ensure that the
discounted expected monetary value (the amount of cash flow multiplied by its estimated probability of
inflows accruing to the Bank) if concession is granted, significantly exceeds the net (net of legal and other
expenses) present value of cash flow arising from liquidation of available securities.
 Normally, rescheduling or restructuring proposals are not considered or initiated unless the proposed
restructuring plan results in substantive improvement in a Bank's risk. This may be achieved through
enhancement of security or collateral or through injection of fresh equity (or equivalent) or a combination
of these.
 The mark-up/interest outstanding at the time of rescheduling or restructuring is usually added to unpaid
principal in accordance with the contractual loan (restructuring) agreement. Having said that,
capitalization of interest / mark-up / principal may not be undertaken if any part of the borrower's
obligations towards a Bank are classified substandard or worse. In doing so, banks ensure that
compounding of mark-up does not take place because of capitalization in violation of SBP Circular No.
13 dated 20 June 1984. Similarly, there should be no penal mark-up, as prohibited under SBP Circular
No. 32 dated 26 November1984.
 The restructured repayment schedule agreed with the borrower should be based upon the cash generation
capacity of the business, sponsor’s ability to inject funds into the business, and the remaining economic
life of the business (plant & machine, in case of manufacturing concerns). As a rule of thumb, the post
restructuring repayment period is restricted to seven to nine years with the grace period not exceeding
one year.

 Where the restructuring package for a business involves a change in sponsors/ management, due care is
exercised to ensure that the incoming management has integrity, the capability to successfully manage
the business and is considered credit-worthy:
a) In case of change of management, where incoming management has no relationship whatsoever with
the outgoing one, the account is considered as a new relationship
b) Personal Guarantees of outgoing directors are not released until and unless proper security for the
outstanding amount of the loan including personal guarantees of the incoming directors are obtained
c) Further, rescheduling or restructuring in ‘litigation’ cases (if required) is implemented through the
court except otherwise advised by the legal counsel
 For all restructured loans, the income recognition is on cash basis (as a conservative measure). Accrued
mark-up is not taken to income account. No incremental financial accommodation (fund based or non-
fund based) is granted to the borrower who has already been given financial relief in the shape of mark-
up waiver, say, for more than three years as part of the restructuring package; and
 A specialist watch-list category for close monitoring of restructuring loans for a post-restructuring period
of six months to one year (from the date of restructuring/rescheduling) is created to closely monitor and
measure the success and performance of the restructured package.

10.20. Annex T – Provisions Against NPLs According to the PRs
The SBP has issued PRs for multiple financing facilities. This means the NPL classification and provisioning percentages to vary from one PR to another. Table 36 lists all the
PRs along with their respective NPL classification categories and provision percentages depending on the days past due.
TABLE 36: PROVISIONS AGAINST NPLS ACCORDING TO THE PRS
Prudential Regulation / More than More than 60 More than 90 More than 180 More than 365 More than 548 More than 730
Days Past Due 30 days days days days days days days
Substandard Doubtful 50% Loss 100%

Corporate and Commercial Financing
25% Provision Provision Provision
Small Enterprise (SE) Financing

OAEM 10% Substandard Doubtful 50% Loss 100%
SE is defined as having number of employees up to 50 and Provision 25% Provision Provision Provision
Annual Sales Turnover of up to PKR 150 Million.
Medium Enterprise (ME) Financing

ME is defined as having number of employees b/w 51-250 25% Provision Provision Provision
and Annual Sales Turnover b/w PKR 150 - 800 Million.

Infrastructure Project Financing
Provision 25% Provision Provision Provision

Agriculture Financing
Loss 100%
Credit Card Finance
Provision

Prudential Regulation / More than More than 60 More than 90 More than 180 More than 365 More than 548 More than 730
Days Past Due 30 days days days days days days days

Auto Loans Finance
25% Provision Provision Provision
Substandard Loss 100%

Personal Loans Finance
25% Provision Provision
Substandard
OAEM 0% Doubtful 50% Loss 100%
Microfinance Banks Finance 25%
Provision Provision Provision
Provision

Housing Loan Finance

10.21. Annex U – Debt Collection Agencies: Eligibility/Other Criteria for Approved Agencies
Certain eligibility criteria for enlistment as Approved Agencies under the PBA Guidelines and other
requirements in connection therewith may be noted:
Eligibility Criteria for Approved Agencies
The following information is required for qualification of applicants to be on the list of Approved Agencies:
 Duly Completed Application Form
 Detailed Company Profile
 Bank statements for last one year
 Ownership guidelines or rent deed of premise (for example the main office)
 Bank Letter stating CNIC Number, A/C Opening Date, Account Number and Name of the Proprietor/
Partner/ Director of the account or Proof of Ownership
 Authorized Signatory List with contact details
 Letter of Recommendation from at least one FI
 Undertaking/ Certificate of Compliance as per PBA format
 Copy of CNIC of Owner(s) and Authorized Signatories
 Copies of Legal Agreements signed with FI – if any
Appraisal & Assessment of Applicants
On the basis of the data provided by the agency, both at the time of enlistment and on a periodic basis, PBA
calculates the weighted average scores of all the enrolled agencies. The score is calculated based on:
 Number of years of experience in collection/recovery
 Number of FIs for which collection/recovery is carried out
 Number of cities in which collection/recovery is carried out
 Size of professional team
 Number of repossession cases handled and concluded during the year
 Performance Rating of FIs (to be sought from FIs directly by PBA)
At the time of enlistment, the agency’s rating is calculated based on the first four factors only. For annual
reviews, the last two factors are also considered.
Fee Structure for Approved Agencies
Following types of fees are applicable on the Approved Agencies:
 Processing Fee (PKR 5,000) – For processing of fresh applications, all applicants are charged a processing
fee with the application for enlistment.
 Annual Subscription (PKR 15,000) – This is the renewal fee, payable for the first time and thereafter in
December each year for subsequent renewal.
Renewals of Agency Contract with Approved Agencies
Approved Agencies are to be enlisted a period of one year, beginning January 1 and ending December 31,
renewable for every subsequent year subject to compliance of the prescribed terms and conditions. Renewals
will be based on annual reviews, which will be carried out for approved agencies that have completed six
months of enlistment.130 This would ensure that the Approved Agency has put into place all processes and
procedures which are necessary in abiding by the rules defined by PBA. Agencies that have not completed six
130
Please see paragraph 5.06 of the PBA Guidelines.

months of enlistment by the time of reviews are renewed without Annual Reviews. Their reviews will fall due
from the ensuing year.
Compliance with Code of Conduct and de-listing131
Sub-contracting of outsourcing arrangements by Approved Agencies is strictly prohibited and Approved
Agencies cannot induct any contractual or third-party staff for the outsourced assignment for FIs, ensuring that
all the staff are hired by the Approved Agency itself. The Code generally instructs the Approved Agency or
its staff to treat all the customers (including customers who are late in paying outstanding amount(s) owed by
them to the FIs and/or are in default) with respect, dignity, and courtesy for discharging the responsibilities
imparted to them by the financial institutions.
The Approved Agencies are required to take an undertaking and /or a certificate affirming their compliance
with the “Guidelines for Collection, Recovery and/or Repossession Agencies” along with the Prudential
Regulations and relevant circulars/notifications issued by the SBP. The contents of the undertaking provided
to the PBA is binding on Approved Agencies. Non-compliance with these guidelines can lead to delisting of
the collection agency.
Engagement of Approved Agencies by Banks/DFIs
The regulatory framework permits an agency relationship between banks or DFIs and Approved Agencies
(Approved Agents only have negligible discretionary powers and prior approval of the bank or DFI is required
for debt recovery/collection/repossession actions). Banks and DFIs may use the services of or renew the
contracts with Approved Agencies only.132
Banks and DFIs already using the services of unlisted agencies at the time of issuance of list of approved
agencies may continue to do so till the expiry of the current term of the agreement. 133
Each bank and DFI should enter into separate legal agreements with their respective Approved Agencies and
banks/DFIs should incorporate an escape clause in agreements with Approved Agencies to enable cancellation
of contracts with the Approved Agencies that are delisted by PBA.134
Further sub-contracting of outsourcing arrangements by Approved Agencies is strictly prohibited.135
Considerations for FIs seeking Debt Recovery/Collection though Approved Agencies
Individual Financial Institutions can enter into separate legal agreements with the respective Approved
Agencies. The legal agreement as a minimum should address service levels and performance requirements,
audit and monitoring procedure, business continuity plan, default arrangements and termination provisions,
pricing and fee structure, dispute resolution arrangements, liability and indemnity, confidentiality, privacy,
and security of information and ensuring SBP access to documentation and accounting records in relation to
the activity performed and right to conduct onsite visits at the agency.
Further, banks notify PBA the names of Approved Agencies de-listed by the bank or blacklisted by them for
reasons of performance issues or irregularities. PBA will then deduct points from the score of the agencies for
each bank that has delisted them and will confidentially circulate the names of such Agencies to the banking
industry for information. Banks are also instructed to abide by the “Guidelines on Outsourcing Arrangements”
issued by the SBP when seeking arrangements with Approved Agencies.
131
Please see paragraph 4 of the PBA Guidelines.
132
Please see paragraph 3.01(a) of the PBA Guidelines.
133
Please see paragraph 3.01(c) of the PBA Guidelines.
134
Please see paragraph 3.01(d) and (e) of the PBA Guidelines.
135
Please see paragraph 3.02(a) of the PBA Guidelines.

10.22. Annex V – Mechanism for Collection of Periodic Cash Flows
For the NPL transaction structure explained in Section 9.4 (Option 2), it is assumed that the investors will be
able to collect cashflows from the PCRCL fund(s) or trust(s), periodically, through dividend distributions
and/or through redemption of units owned by the investors. The details of these two options are further
explained in this annex.
Dividend Distribution
Currently, there is no specific law or regulation that regulates the operation of unit trust(s) set up by a CRC,
similarly, in terms of the general trust laws, there are no restrictions or limitations on the amount or the
frequency of dividend declaration(s) by a fund or unit trust of a CRC. It is also important to note that, the
requirement of the Companies Act, 2017 restricting dividend distributions to be out of profits only, does not
apply to unit trusts. Therefore, by interpretation and in the absence of any other specific law, it may be possible
for the investors of funds and unit trusts to sweep full cash flows on a periodic basis by way of dividend
declarations. Taxation and other foreign exchange remittance laws and requirements will apply as described
in Section 9.4 (Option 2).
Redemption of Units of Funds/Trusts

In addition to dividend distributions or otherwise exclusively, investors of PCRCL funds/trusts will be able to
sweep full cash flows periodically through redemption of fund or trust units they own. This option may be
exercised in the following way:
 Fund/trust issues units at a discount to the par value. The par value equals the total future value
(recoverable value) of the portfolio. The discounted value or the purchase price of the units represents the
initial purchase price of the portfolio.
 The transaction structure allows for the redemption of units at the par value at an agreed frequency for
example on a monthly basis. This will enable investors to recover cash flows in excess of the initial net
asset value of the portfolio.
 The fund/trust books revenue at a predetermined IRR (internal rate of return). Servicing fee, taxes and
other similar expenses are accounted for in the normal course.
 By the end of the portfolio term, assuming no changes to the initial projected cash flows, the total cash
flows redeemed through redemption of units at par value will have been equal to the sum of the initial
purchase price and any surplus recovered on the portfolio.
 Taxation and other foreign exchange remittance laws and requirements will apply as described in Section
9.4 (Option 2).
With not specific law applying to unit trusts set up by CRC there are also no general restrictions on the issuance
of units at a discount or in relation to the terms of redemption. This means unit trusts or funds set up by CRC
may issue units at a discount which are redeemable at par value at agreed frequencies.

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Non-Performing Loan

© International Finance Corporation 2022. All rights reserved.

ABL Allied Bank Limited

ABS Asset Backed Securities

AMC Asset Management Company

AUM Assets Under Management

BSD Banking Supervision Department

BOD Board of Directors

BPRD Banking Policy and Regulation Department

CAD Credit Administration Department

CEO Chief Executive Officer

CIRC Corporate and Industrial Restructuring Corporation

CPC Civil Procedure Code

CRC Corporate Restructuring Companies

CRSIU Committee for Revival of Sick Industrial Units

DARP Distressed Assets Recover Program

DFI Development Financial Institution

DPD Days Past Due

DPS Debt Property Swap

EBA European Banking Authority

ECB European Central Bank

eCIB Electronic Credit Information Bureau

FATF Financial Action Task Force

FBEs Foreign Bank Exposures

FDD Foreign Demand Draft

FIA Federal Investigation Agency Act, 1974

FSV Forced Sale Value

FMC Fund Management Companies

IFC International Finance Corporation

IFRS International Financial Reporting Standard

IFAS International Financial Accounting Standards

IVSC International Valuation Standards Council

ITO Income Tax Ordinance

HBL Habib Bank Limited

JSTs Joint Supervisory Teams

KKR Kohlberg Kravis Roberts & Co.

LGD Loss Given Default

MCB Muslim Commercial Bank

MENA Middle East & North Africa

MUFAP Mutual Funds Association of Pakistan

NAB National Accountability Bureau

NAV Net Asset Value

NBP National Bank of Pakistan

NBFC Non-Bank Finance Companies

NIT National Investment Trust

NPL Non-Performing Loan

NPFs Non-Performing Finances

OAEM Other Assets Especially Mentioned

OECD Organisation for Economic Co-operation and Development

ORBO Offences in respect of Banks (special courts) Ordinance, 1984

PBA Pakistan Banks’ Association

PCATP Pakistan Council of Architects and Town Planners

PCRCL Pakistan Corporate Restructuring Company Limited

PEC Pakistan Engineering Council

PPC Pakistan Penal Code, 1860

RBI Reserve Bank of India

RICS Royal Institution of Chartered Surveyors

PRs Prudential Regulations

SAM/SAMG Special Asset Management Department/Group