Benefit on forced sale value likely

SBP may allow relaxation in provisioning for loans given to businesses affected by floods.

KARACHI: The State Bank of Pakistan (SBP) may allow relaxation in the provisioning for loans given to businesses affected by the floods.

According to a research report published by AKD Securities, this relaxation will probably be given by extending “the forced sale value (FSV) benefit to plant and machinery held as collateral and/or enhancing the discounting factor (from 40 to 50 per cent) on collateral that is already FSV-eligible.”

AKD analyst Raza Jafri pointed out that “in October 2009, the SBP raised the discounting factor on eligible collateral from 30 to 40 per cent and could potentially raise it again.”

He explained that this move could “lead to some degree of earnings preservation for banks” but added that “it would not alter what continues to be a tough operating environment.”

Analysts expect banks to face pressure from rising non-performing loans in the wake of floods in the country. “Investment in banking sector scrips should be postponed until after results for the third quarter of the current calendar year,” said Jafri.

However, other experts insist that the provisioning will not be completed by the end of the current quarter. “Provisioning will likely go into the fourth quarter and we expect the central bank to make this amendment at the end of that quarter,” said Khurrum Shehzad, InvestCap’s Head of Research. He also contended that this “relaxation will probably only be extended to flood-affected areas” adding that “SBP has relevant data and does not need to rely on concessions across the board”.

Shehzad said that “such benefits jeopardize asset quality in the long-run and the SBP has followed a conservative approach in recent years to minimize this risk.”

Published in The Express Tribune, September 24^th, 2010.