In a circular issued to the banks, DFIs and microfinance banks on 4th October, the SBP has prescribed the procedure to be followed for the sale of mortgaged property, its valuation and bidding process. Known as Financial Institutions (Recovery of Finances) Rules, 2018, the circular says that before sending the first notice to the mortgagor, the financial institution will forward the case to a chartered accountant firm to determine the outstanding mortgage money. In case of more than one mortgagees of the mortgaged property, the financial institutions will also request these mortgagees to submit their respective claims to the nominated chartered accountant firm along with complete documents to support their claims. The fee of the chartered accountant firm will be initially borne by the financial institution which may subsequently be considered as the expense for the sale of mortgaged property. For valuation of the mortgaged property, financial institution will hire three valuers from the approved list of professional valuers maintained by the Pakistan Banks’ Association and the highest among the three values determined by the valuers will be considered reserve price. After the valuation of the mortgaged property, the financial institution will arrange public auction for the sale of mortgaged property. In case there are more than one bidders with competitive offers, the financial institution will declare the highest bidder as the successful bidder. On acceptance of the bid by the institution, the successful bidder shall deposit minimum twenty five percent of the bid amount within two business days of the auction and the rest of the amount shall be deposited within 15 days of the auction. In case no bid is received, the auction will be cancelled and the entire exercise will be repeated by the financial institution, subject to the condition that if no bid was received in three auctions, the financial institution, at its discretion, may purchase the mortgaged property at a price 10 percent higher than the reserve price.

A casual look at the financial institutions’ recovery rules, 2018 announced by the SBP would indicate that recovery rules for the mortgaged property are well-intentioned, well-founded and quite comprehensive. Also, rules framed for all the banks, DFIs and microfinance banks seem to be meant to nudge the financial institutions to follow a uniform set of procedures when dealing with the recovery process of the mortgaged property. However, although procedure prescribed for the financial institutions appears to be straight forward and largely in line with the present practice, yet it could be easily argued that the new arrangement will increase the cost of recoveries and is not very much needed in the current situation when the problem of recoveries in Pakistan is not so severe. Apparently, the chartered accountant firms and valuers seem to have been favoured by obliging the financial institutions to hire their services for determining the outstanding mortgage money and evaluate the mortgaged property to determine its forced sale value. It may be mentioned here that services of chartered accountants and valuers are not inexpensive. Moreover, this requirement will be particularly pinching for those institutions which already have their own in-house arrangement for such purposes. Also, there is no need to ask the financial institutions to purchase the mortgaged property at a price 10 percent higher than the reserve price if no bid is received in three auctions. In our view, it would have been fair if the financial institutions are required or made to pay only the reserve price for the mortgaged property in such cases. We say this because the value of mortgaged property would probably be not even equal to the reserve price if no bid is received in these auctions. Besides, non-performing loans (NPLs) and their recoveries are no big issue in Pakistan because of the conservative attitude of bankers and their tendency to avoid risky ventures as well as the strict regulatory and supervisory role of the SBP to ensure sound banking in the country. This could be ascertained from the fact that asset quality has improved and NPLs to loans ratio has come down from 10.1 percent in CY16 to 10 years low of 8.4 percent in CY17. Capital Adequacy Ratio (CAR) of 15.8 percent as of December, 2017 was also much higher than the minimum required level of 11.275 percent. SBP has also taken a significant leap in updating its supervisory methodology and adopted a forward looking methodology, i.e., Risk-Based Supervision (RBS). The new approach aims to help SBP in better understanding risks at the institution level. Hopefully, all of this will further reduce the ratio of NPLs to total assets significantly and lessen the need for the SBP to intervene in matters related to recovery rules and procedures of the financial institutions.