PRUDENTIAL REGULATIONS

FOR CORPORATE /COMMERCIAL BANKING

(Risk Management, Corporate Governance and Operations)

(Revised till January 2015)

BANKING POLICY & REGULATIONS DEPARTMENT

STATE BANK OF PAKISTAN

Disclaimer:
State Bank of Pakistan compiles a booklet of Prudential Regulations from time to time for
convenience of users. Updated version of such a booklet containing amendments in the
regulations made through circulars/circular letters to date is being issued. Due care has been taken
while incorporating amendments, however, errors and omission may be expected. In case of any
ambiguity, users are advised to refer to the original circulars/ circular letters on the relevant
subject(s), which are available on SBP’s website ([Link]).
 CONTENTS

PART-A Definitions. 04
PART-B Regulations. 09

RISK MANAGEMENT (R)

Regulation R-1 Exposure limits. 09
Regulation R-2 Limit on exposure against contingent liabilities. 09
Regulation R-3 Financial analysis & other conditions. 10
Regulation R-4 Security and margin requirements 11
Regulation R-5 Monitoring 12
Regulation R-6 Exposure in shares and TFCs/Sukuk. 13
Regulation R-7 Guarantees. 14
Regulation R-8 Classification and provisioning for assets. 15
Regulation R-9 Assuming obligations on behalf of NBFCs. 17
Regulation R-10 Payment of dividend. 17

CORPORATE GOVERNANCE (G)

Regulation G-1 Corporate Governance/ Board of Directors and Management. 17
Regulation G-2 Dealing with Directors, major shareholders and employees 23
of the banks/DFIs.
Regulation G-3 Contributions and donations for charitable, social, educational 23
and public welfare purposes.
Regulation G-4 Credit Rating. 24

OPERATIONS (O)
Regulation O-1 Undertaking of cash payments outside the bank’s 24
authorized place of business.
Regulation O-2 Window dressing. 24
Regulation O-3 Reconciliation of inter-branch accounts and settlement of 25
suspense account entries.
Regulation O-4 Maintenance of assets in Pakistan. 25
Regulation O-5 Foreign currency deposits under FE 25-1998 25

Annexures 27-51
 PREFACE

In order to align the regulatory framework to changing business environment and the best
international practices, the State Bank of Pakistan, in consultation with stakeholders, has revised the
Prudential Regulations on Risk Management, Corporate Governance and Operations for Corporate &
Commercial Banking. The revised regulations aim to assist banks/DFIs in better addressing their
unique risk factors and dynamic environment by giving more discretion in business decisions. These
regulations also describe minimum prudential benchmarks in critical risk areas to balance the
considerations of financial stability of banks/DFIs vis-à-vis diversity and innovation.

2) These Prudential Regulations do not supersede directives and instructions issued by the State Bank
in respect of areas not covered under these regulations. Banks/DFIs that are compliant to the revised
or new limits as introduced in these regulations shall follow the same instantly. However, such
institutions which are in breach of these limits will have to achieve the compliance by 30-06-2015,
unless otherwise specifically mentioned in the regulations.

3) Banks/DFIs are advised to ensure meticulous compliance of these Regulations in letter and spirit.
Any non-compliance or circumvention of the requirements will attract punitive action under the
provisions of the Banking Companies Ordinance, 1962.

SHAUKAT ZAMAN
Director
Banking Policy & Regulations Department
 PART - A
DEFINITIONS
For the purpose of these regulations: -

1. Account Holder means a person who has opened any account with a bank directly or through
branchless banking agent or is a holder of deposit/deposit certificate or any instrument
representing deposit/placing of money with a bank/DFI or has borrowed money from the
bank/DFI.

2. Branchless Banking Agent means an agent providing banking services to the customers of a
bank/DFI on behalf of the bank/DFI/MFBs under a valid agency agreement.

3. Alternate Director means a person who has been designated by a director during his absence, as per
provisions of the sub-section (2) of section 192 of Companies Ordinance, 1984.

4. Bank means a banking company as defined in the Banking Companies Ordinance, 1962.

5. Borrower or Obligor means a person on whom a bank/DFI has taken any exposure during the
course of business.

6. Chief Executive Officer (CEO), in relation to bank/DFI means an individual who, subject to the
control and directions of the Board of Directors , is entrusted with the whole, or substantially the
whole, of the powers of management of the affairs of the bank/DFI occupying the position of Chief
Executive Officer and include President, acting President, Managing Director, Country Head of
Foreign bank, Executive assuming charge of the bank for interim period or by whatever name called,
and whether under a contract of service or otherwise.

7. Contingent Liability means:

a) a possible obligation that arises from past events and whose existence will be confirmed only by
the occurrence or non- occurrence of one or more uncertain future events not wholly within the
control of the enterprise; or
b) a present obligation that arises from past events but is not recognized because:
i) it is not probable that an outflow of resources embodying economic benefits will be required
to settle the obligation; or
ii) the amount of the obligation cannot be measured with sufficient reliability; and includes
letters of credit, letters of guarantee, bid bonds/performance bonds, advance payment guarantees and
underwriting commitments.

8. Control refers to an ownership directly or indirectly through subsidiaries, of more than one half of
voting power of an enterprise.

9. Corporate Card means credit card issued to the employees of an entity where the repayment is to
be made by the said entity.

10. Derivative means a type of financial contract the value of which is determined by reference to
one or more underlying assets or indices. The major categories of such contracts include forwards,
futures, swaps and options. Derivative also includes structured financial products that have one or more
characteristics of forwards, futures, swaps and options.

11. DFI means Development Financial Institution and includes the Saudi Pak Industrial and
Agricultural Investment Company Limited, Pak Kuwait Investment Company Limited, Pak
Libya Holding Company Limited, Pak Oman Investment Company (Pvt.) Limited, , House Building
Finance Company Limited, Pak Brunei Investment Company Limited, PAIR Investment Company
Limited, Pak-China Investment Company Limited, and any other financial institution notified
under Section 3-A of the Banking Companies Ordinance, 1962.

12. Documents include vouchers, cheques, bills, pay-orders, promissory notes, securities for
leases/advances and claims by or against the bank/DFI or other papers supporting entries in the
books of a bank/DFI or any other document which establishes relationship between the bank/DFI and

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 its customers.

13. Director includes any person occupying the position of a director on the Board of a bank/DFI and
includes sponsor, nominee and alternate director or by whatever name called.

14. Executive Director1 means a paid employee or executive in the concerned bank/DFI who
is also a member of the Board of Directors2.

15. Equity of the Bank/DFI includes paid-up capital in respect of ordinary shares, general reserves,
balance in share premium account, reserve for issue of bonus shares, statutory reserves, and retained
earnings/accumulated losses as disclosed in latest annual audited financial statements. In case of
branches of foreign banks operating in Pakistan, equity will mean capital maintained, free of
losses and provisions, under Section 13 of the Banking Companies Ordinance, 1962.
For the purpose of Regulation R-1, reserve shall also include revaluation reserves on account of
fixed assets to the extent of 50% of their value. However, for this purpose assets must be prudently
valued by valuators on the panel of Pakistan Banks Association (PBA), fully taking into account
the possibility of price fluctuations and forced sale value. Revaluation reserves reflecting the
difference between the book value and the market value will be eligible up to 50%.

16. Exposure shall include:

A) Financing Facilities whether fund based or non-fund based extended by a bank /DFI
and include:
i) Any form of financing facility extended or Bills purchased/discounted, Bills purchased /
discounted on the guarantee of the person.
ii) Credit facilities extended through Corporate Cards.
iii) Any financing obligation undertaken on behalf of the person under a letter of credit including a
stand-by letter of credit, or similar instrument.
iv) Loan repayment financial guarantees issued on behalf of the person.
v) Any obligations undertaken on behalf of the person under any other guarantees including
underwriting commitments.
vi) Acceptance/endorsements made on account.
vii) Any other liability assumed on behalf of the person to advance funds pursuant to a
contractual commitment.

B) Subscription to or investment in shares, Participation Term Certificates, Term Finance

Certificates, Sukuk or any other Commercial Paper by whatever name called issued or
guaranteed by the persons.

C) Exposure (Net open position) on account of derivative transactions allowed under Financial
Derivatives Business Regulations (FDBR) issued vide BSD Circular No. 17 dated November 26,
2004. For the purpose of calculating exposure, the sanctioned limits, or outstanding, whichever are
higher, will be considered. However, in case of fully drawn term loans where there is no scope for re-
drawal of any portion of the sanctioned limit, bank/DFI may consider the outstanding as
exposure.

17. Family Member as defined in sub-section (ff) of section 5 of Banking Companies Ordinance 1962.

18. Financial Institutions for the purpose of these regulations mean Banks, Development
Financial Institutions (DFIs) and NBFCs.

19. Forced Sale Value (FSV) means the value which fully reflects the possibility of price
fluctuations and can currently be obtained by selling the mortgaged/pledged assets in
a forced/distressed sale conditions.

20. Government Securities shall include such types of Pak. Rupee obligations of the Federal

                                                            
1
Amended vide BPRD Circular Letter No. 06 of 2012 dated March 21, 2012

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 Government or a Provincial Government or of a Corporation wholly owned or controlled,
directly or indirectly, by the Federal Government or a Provincial Government and guaranteed
by the Federal Government as the Federal Government may, by notification in the Official
Gazette, declare, to the extent determined from time to time, to be Government Securities.

21. Group means persons, whether natural or juridical, if one of them or his dependent family
members or its subsidiary, have control or hold substantial ownership interest (as defined in these
regulations) over the other.

For the purpose of this definition:

a) Subsidiary will have the same meaning as defined in section 3 of the Companies Ordinance, 1984
i.e. a company or a body corporate shall deemed to be a subsidiary of another company if that
other company or body corporate directly or indirectly controls, beneficially owns or holds more
than 50% of its voting securities or otherwise has power to elect and appoint more than 50% of its
directors.
b) Control refers to an ownership directly or indirectly through subsidiaries, of more than one half of
voting power of an enterprise.
c) Substantial ownership/affiliation means beneficial shareholding of more than 25% by a
person and/or by his dependent family members, which will include his/her spouse, dependent lineal
ascendants and descendants and dependent brothers and sisters. However, shareholding in or by
the Government owned entities and financial institutions will not constitute substantial
ownership/affiliation, for the purpose of these regulations.

22. Independent Director means such a person who is not linked directly or indirectly with
bank/DFI or its sponsor or strategic shareholders. For the purpose of such determination, an
"independent director" is a director who:
• Has not been employed by Bank /DFI within the last five years;
• Has not been an employee or affiliate of any present or former external auditor/consultant/legal
advisor of Bank/DFI within the last three years;
• Has not been an executive officer or employee of a subsidiary or associate company of the
bank/DFI or where Directors of the bank/DFI has substantial beneficial interest (20% or more
shareholding of director’s own or combined with family members);
• Has not been employed by a company of which an executive officer of Bank/DFI has been a
director within the last three years;
• Is not affiliated with a not-for-profit entity that received contributions from Bank/DFI exceeding of
10 million or 2 percent of such charitable organization's consolidated gross revenues during the
current fiscal year or any of the last three completed fiscal years.
(Note: An independent director shall submit a declaration for his/her independence to SBP at the
time of his/her appointment.)

23. Key Executive1 means key executives of banks/DFIs and includes the following functional
responsibilities for the present:
a) Any executive, acting as second to CEO including Chief Operating Officer, Deputy Managing
Director or by whatever name called
b) Chief Financial Officer/Head of Finance/Head of Accounts
c) Head of Internal Audit
d) Country Treasurer
e) Head of Credit/Risk Management
f) Head of Operations
g) Head of Compliance
h) Head of Human Resource
i) Head of Information Technology
j) Head of Islamic Banking
k) Head of overseas operations of a bank at head office level 2
l) Country Head/Regional Head (where a region is consisting of more than one foreign countries)
                                                            
1
 Inserted vide BPRD Circular No. 04 of 2007 dated April 23, 2007. 
2
 k) to n) inserted vide BPRD Circular No. 05 of 2009 dated March 05, 2009. 
6
m) CEO/Head of subsidiary banking company outside Pakistan
n) CEO of Joint Venture (where majority stake is with the bank incorporated in Pakistan & authority
to appoint CEO)

The above list will be reviewed from time to time by SBP.

24. Large Exposure means an exposure of 10% or more of a bank’s/DFI’s equity to a single obligor
or a group.

25. Liquid Assets are the assets which are readily convertible into cash without recourse to a
court of law and mean encashment/realizable value of government securities, bank deposits,
certificates of deposit, shares of listed companies which are actively traded on the stock exchange, NIT
Units, certificates of mutual funds, Certificates of Investment (COIs) issued by DFIs/NBFCs rated at
least ‘A’ by a credit rating agency on the approved panel of State Bank of Pakistan, listed TFCs rated
at least ‘A’ by a credit rating agency on the approved panel of State Bank of Pakistan and certificates
of asset management companies for which there is a book maker quoting daily offer and bid
rates and there is active secondary market trading. These assets with appropriate margins should be
in possession of the banks/DFIs with perfected lien.
Guarantees issued by domestic banks/DFIs when received as collateral by banks/DFIs will be
treated at par with liquid assets whereas, for guarantees issued by foreign banks, the issuing
banks’ rating, assigned either by Standard & Poors, Moody’s or Fitch-IBCA, Japan Credit Rating
Agency (JCRA) should be ‘A’ and above or equivalent.
The inter-branch indemnity/guarantee issued by the bank’s overseas branch in favor of its sister
branch in Pakistan, would also be treated at par with liquid assets, provided the bank is rated ‘A’
and above or equivalent either by Standard & Poors, Moody’s, Fitch-IBCA or Japan Credit
Rating Agency (JCRA). The indemnity for this purpose should be similar to a guarantee i.e.
unconditional and demand in nature.

26. Major Shareholder of a bank/DFI means any person holding 5% or more of the share capital of
a bank/DFI either individually or in concert with family members.

27. Medium and Long Term Facilities mean facilities with maturities of more than one year and
Short Term Facilities mean facilities with maturities up to one year.

28. NBFC means Non-Banking Finance Company as defined in Section 282A of Companies
Ordinance 1984 and includes Leasing Company, Housing Finance Company, Investment Bank,
Discount House, Asset Management Company and a Venture Capital Company. For the purpose of
these regulations Modaraba will also be considered as NBFC.

29. Nominee Director means a person nominated on the board of a bank/DFI by sponsor(s),
persons, company, institution etc. by virtue of his/their shareholding in a bank/DFI.

30. PBA means Pakistan Banks Association.

31. Person means and includes an individual, a Hindu undivided family, a firm, an association or
body of individuals whether incorporated or not, a company and every other juridical person.

32. Recognized Rating Agency means rating agency either on the approved panel of State Bank of
Pakistan or Standard & Poor’s, Moody’s, Fitch or Japan Credit Rating Agency (JCRA)

33. Related Party in respect of a bank / DFI means:

a.) Directors, CEO, sponsor shareholders, employees or any of their family members.
b.) Any entity (proprietorship, firm, company or trust) in which a bank / DFI or any of the above
persons are interested as director, proprietor, partner or as a shareholder holding 5% or more of paid-up
capital in that entity.
c.) Any other entity which for its business acquisition or provision of services relies / depends to a
greater extent on the bank/DFI i.e. major portion (50% or more) of its business (upstream or
downstream) is with the bank/DFI.
d.) The relationship of the related party on the basis of Nominee Director appointed by

7
 Federal/Provincial government by virtue of their shareholding shall be excluded from this definition.
However, it shall include personal/family business interests of such director.

34. Secured means exposure backed by liquid assets, pledge stock, mortgage of land, plant,
building, machinery or any other fixed assets, hypothecation of stock (inventory), trust receipt,
assignment of receivable, lease rentals, and contact receivables but does not include
hypothecation of household goods. The unsecured exposure will be considered as clean.

35. Sponsor Shares1 mean 5% or more paid-up shares of a bank, acquired by a person(s)
individually or in concert with his family members (including his spouse, lineal ascendants and
descendents and dependent brothers and sisters), group companies, subsidiaries, and
affiliates/associates. Such acquisition of shareholding will include all the shares acquired
by aforesaid person(s) including, interalia, through (a) as original subscriber/promoter of the bank;
(b) subsequent right/bonus issues; (c) market based acquisition deal; (d)
reconstruction/restructuring of a bank carried out by SBP; (e) strategic sale through privatization
(f) amalgamation of banking companies; or (g) any other mode of acquisition. All shares acquired by
common shareholders, who are also sponsor shareholders, of amalgamating banking companies in
amalgamation transaction shall be considered Sponsor Shares.

36. Sponsor Shareholders2 mean all those shareholders of a bank holding sponsor shares.

37. Sponsor Director3 means the member of the Board of Directors of a bank holding sponsor shares.

38. Strategic Investment is an investment which a bank/DFI makes with the intention to hold it for
a period of minimum 5 years.
The following must be noted further in respect of strategic investment:
a. The bank should mark strategic investment as such at the time of investment.
b. If there are a series of purchases of stocks of a company, the minimum retention period of 5
years shall be counted from the date of the last purchase.

39. Substantial ownership/affiliation4 means beneficial shareholding of more than 20% by a person
and/or by his dependent family members, which will include his/her spouse, dependent lineal
ascendants and descendants and dependent brothers and sisters. However, shareholding in or by
the Government owned entities and financial institutions will not constitute substantial
ownership/affiliation, for the purpose of these regulations.

40. Underwriting Commitments mean commitments given by commercial banks/DFIs to the

limited companies at the time of new issue of equity/debt instrument, that in case the proposed issue
of equity/debt instrument is not fully subscribed, the un-subscribed portion will be taken up by them
(commercial banks/DFIs).

                                                            
1
Introduced vide BPRD Circular 4 of 2008 dated May 22, 2008.
2
Introduced vide BPRD Circular 4 of 2008 dated May 22, 2008.
3
Introduced vide BPRD Circular 4 of 2008 dated May 22, 2008.
4
Introduced vide BPRD Circular No. 04 of 2007 dated April 23, 2007.

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PART - B
REGULATIONS
REGULATION R-1
EXPOSURE LIMITS

1. Single Obligor/Group Limit

Exposure Limits for a single obligor, and obligor Group effective from 31-12-2013 and onward would
be as under:

Exposure limit as a % of bank’s/DFI’s equity

(as disclosed in the latest audited financial statements)
For single obligor For obligor group
Total (fund and non- Total (fund and
Effective date Fund based
fund based) exposure Fund based limit non-fund based)
limit
limit exposure limit
31-12-2013 25 25 25 25
30-06-2015 20 20 25 25

2. Related Party Exposure Limit:

Maximum exposure limit of a bank/DFI to its related party or group of related parties would be as
under:

Total exposure limit as a % of bank’s/DFI’s equity (as disclosed in

Effective Date the latest audited financial statements)
For Single Related Party For Related Group
30-06-2015 7.5% 15%

The related party exposures shall be subject to the following:

a) Loans given to employees under the Bank’s/DFI’s respective Human Resource policies duly
approved by its BOD or Country Head (in case of branches of foreign banks) are excluded from
this limit.
b) Placement of funds of FE-25 deposits by the bank with its own branches/subsidiaries overseas shall
also be excluded from this limit.
c) Bank’s/DFI’s investment in common shareholding of its subsidiaries shall not be counted
towards this exposure limit.
d) Facilities extended to related parties should be at arm’s length basis and on normal terms &
conditions applicable to other borrowers of the bank/DFI. Further, banks/DFIs shall ensure that the
standards are not compromised in such cases and market rates are used while extending facilities to
related parties.
e) Banks shall also follow the requirements of section 24 of the Banking Companies Ordinance, 1962.

3. For the purpose of para 1 and 2 above, banks/DFIs are required to follow the guidelines given at
Annexure-I. It is further clarified that the group will also cover SMEs, in cases where these are owned
by the same group.

4. Large Exposure Limit:

The aggregate amount of large exposures of a bank/DFI shall not, at any point in time, exceed 50% of
its total gross advances and investments (excluding investment in government securities and loans
secured against GOP guarantees). Large exposure limits shall not be applicable to investment in
government securities and loans secured against GOP guarantees.

5. Different concentration limits may be assigned to different banks/DFIs by SBP based on their
supervisory assessment.

REGULATION R-2
LIMIT ON EXPOSURE AGAINST CONTINGENT LIABILITIES

1. Contingent liabilities of a bank/DFI shall not exceed at any point in time 10 times of its equity.
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2. The banks/DFIs that are Authorized Derivative Dealers in terms of BSD Circular No. 17 of 2004
shall restrict their exposure to derivatives up to 5 times of their equity within overall limit of
contingent liabilities.
3. Following shall not constitute contingent liabilities for the purpose of this regulation:
a) Bills for collection.
b) Non-fund based exposure to the extent covered by cash/liquid assets.
c) Letters of credit/guarantee where the payment is guaranteed by the State Bank of
Pakistan/Federal Government or banks/DFIs rated at least ‘A’ by a recognized rating agency.
d) Claims other than those related to provision of facilities (fund based or non-fund based) to the
banks’/DFIs’ constituents, where the probability of conversion of these claims into liabilities are
remote.
4. For the purpose of this regulation, weightage of 50% shall be given to bid/mobilization
advance/performance bonds and 10% to forward foreign exchange contracts.

REGULATION R-3
FINANCIAL ANALYSIS & OTHER CONDITIONS

1. Financial Analysis:
a) At the time of allowing any exposure (including renewal, enhancement and rescheduling /
restructuring) and annual review of long term facilities, Banks/DFIs shall, as a matter of rule, obtain a
copy of financial statements relating to the business of every borrower. The financial statements
should be duly audited by a practicing Chartered Accountant. In case of a borrower other than a
public company or a private company which is a subsidiary of a public company, financial
statements audited by a practicing Cost and Management Accountant are reckoned equally
acceptable. However, if the borrower is a public limited company and aggregate exposure from all
Banks/DFIs exceeds Rs. 500 million, banks/DFIs should obtain the financial statements duly
audited by a firm of Chartered Accountants which has received satisfactory rating under the Quality
Control Review (QCR) Program of the Institute of Chartered Accountants of Pakistan.
Subsequently, if the firm’s rating is downgraded in QCR program, then the financial statements of
such borrowers should be audited in the subsequent year by a firm having satisfactory rating under
QCR.

b) In case of public sector entities and allied departments / divisions of government which are not
under obligation to prepare and get audited their annual financials from accounting firms,
banks/DFIs should devise criteria to obtain management accounts or some other mechanism be
adopted to assess their financial position and performance.

c) The Board of Directors of the bank/DFI shall approve a credit policy prescribing a minimum
current ratio and linkage between borrower’s equity and its total financing facilities from all
financial institutions. The Credit Policy shall emphasize upon higher credit standards and provide full
guidance to the management about the above requirements for various categories of clients and
corresponding risk mitigants etc. acceptable to the bank/DFI. The policy shall also have explicit
provisions for circumstances or conditions under which the bank/DFI may extend financing
facilities that are in breach of these limits, should the bank decide to do so. The policy shall clearly
provide approving authorities that would be responsible to allow exemptions in accordance with the
policy. All such exceptions allowed shall be reported to the Board of Directors at least on quarterly
basis.

d) Banks/DFIs are advised to properly assess the credit need of the borrower based on their
financial analysis and genuine credit requirements.

2. Credit Report While considering proposals for any exposure (including renewal,
enhancement and rescheduling/restructuring), banks/DFIs should give due weightage to the credit
report relating to the borrower and its group obtained from Credit Information Bureau (CIB) of State
Bank of Pakistan. If the banks/DFIs decide to take exposure on defaulters, they should
strictly follow their risk management policies and credit approval criteria and properly record
reasons and justifications in the approval form. The banks/DFIs shall ensure that CIB report is not
older than two months at the time of approval of credit limits.

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3. Borrower Basic Fact Sheet Banks/DFIs are required to obtain Borrower’s Basic Fact Sheet
(BBFS) as per format given at Annexure-II from their prospective borrowers at the time of
sanctioning fresh facility, or enhancement, renewal, rescheduling and restructuring of an existing
facility. However, if the Loan Application Form already contains all the information as required in
BBFS, then no separate BBFS may be required.

REGULATION R-4
SECURITY AND MARGIN REQUIREMENTS

1. Security Requirements
a) All exposures shall be adequately secured. However, banks/DFIs, in aggregate, may provide clean
financing facility in any form up to Rs 2,000,000/- (Rupees two million only) to any single
obligor. Financing facilities granted without securities including those granted against personal
guarantees shall be deemed as ‘clean’ for the purpose of this regulation. Further, at the time of
granting a clean facility, banks/DFIs shall obtain a written declaration to the effect that the borrower,
has not availed of such facilities from other banks/DFIs so as to exceed the prescribed limit of Rs
2,000,000/- in aggregate.
b) In case of clean placements with banks/DFIs in Pakistan, single obligor limits given in
Prudential Regulation R-1 shall be observed. However, for Banks/DFIs rated below ‘A-3’ (short
term) or ‘BBB’ (long term) clean exposure limit given in para a) above shall be applicable.
c) In case of Nostro Balances with financial institutions abroad, banks shall prudently set limits duly
approved by their Board of Directors and that shall be exempt from the above limits.

d) Banks/DFIs shall ensure that the aggregate exposure against all their clean facilities shall not, at any
point in time, exceed the amount of their equity as disclosed in their latest audited financial
statements. However, following shall be excluded / exempted from aggregate limits for unsecured /
clean exposure:
(i) Facilities provided to finance the export of commodities eligible under Export Finance Scheme
backed by LCs.
(ii) Financing covered by the guarantee of Pakistan Export Finance Guarantee Agency up to the
amount of guarantee.
(iii) Loans/ advances given to the employees of the banks/ DFIs in accordance with their
entitlement / staff loan policy.
(iv) Investment in COIs / interbank placements with NBFCs, provided the investee NBFC is at least
rated ‘A’ for long-term rating and ‘A2’ for short-term rating or equivalent by a recognized rating
agency.
(v) Investment of banks/DFIs in subordinated and unsecured TFCs, issued by other banks/DFIs to
raise Tier-II Capital as per State Bank of Pakistan’s instructions.
e) Banks/DFIs will be free to decide about obtaining security/collateral against the L/C facilities for
the interim period, i.e. from the date of opening of L/C till the receipt of title documents to the
goods.

2. Requirement of Personal Guarantee

Banks/DFIs shall formulate a policy, duly approved by their Board of Directors, about obtaining
personal guarantees of directors of private limited companies. Banks/DFIs may, at their discretion,
link this requirement to the credit rating of the borrower, their past experience with it or its financial
strength and operating performance.

3. Margin Requirements
a) Banks/DFIs are free to determine the margin requirements on facilities provided by them to their
clients taking into account the risk profile of the borrower(s) in order to secure their interests.
However, in cases where margin has been prescribed by State Bank/Government of Pakistan,
appropriate margin shall at least be equal to the prescribed margin.

b) Exposure against the shares of listed companies shall be subject to minimum margin of 30% of
their current market value. However, the banks/DFIs may consider to set higher margin requirements,
and maintain list of shares acceptable as security, keeping in view liquidity, trading activity and other
factors. Banks/DFIs will monitor the margin at least on weekly basis and will take appropriate action
for top-up and sell-out on the basis of their Board of Directors’ approved credit policy and prior

11
written authorization from the borrower enabling the bank/DFI to do this.

c) Exposure against TFCs/Sukuks rated ‘BBB’ and above by a credit rating agency on the approved
panel of State Bank of Pakistan shall be subject to a minimum margin of 20%.

d) The cash margin requirement of 100% on Caustic Soda (PCT heading 2815.1200) for opening
Import Letter of Credit as advised by the Federal Government and notified in terms of BPD Circular
Letter No. 5 dated 4th May, 2002, will also continue to remain applicable.

REGULATION R-5
MONITORING

1. Collateral Management
a) The banks/DFIs shall have in place Collateral Management Policy duly approved by the BOD or
Country Head (in case of branches of foreign banks). The policy may be part of the bank’s overall
credit policy or separate as deemed appropriate by the bank/DFI. The Policy shall cover different
aspects related to collateral such as generally acceptable forms, quality, valuation at the time of
acceptance as well as over the tenor of loan, haircuts, price volatility, diversification, margin calls
limits, substitution of collateral and managing collateral in the event of a counterparty default.
b) The policy shall clearly delineate the responsibilities in various scenarios, including safe custody
& inspection of collateral, where bank/DFI is a sole lender or where it is one of multiple lenders. In
the later case the policy should cover the aspect of coordination with other financial institutions
particularly where financing is made against hypothecation of stock and/or receivables on pari-passu
or ranking charge basis and pledge of stock.
c) The Banks/DFIs shall devise an appropriate mechanism to ensure that the financing extended is
utilized for the intended purpose. Further, they will also ensure that financing is not used for non
productive purpose like hoarding, speculation etc.

2. Joint Inspection of Pledged Stocks

a) All the banks/DFIs financing any particular customer against pledge of stocks of below
mentioned commodities shall conduct joint inspection of the pledged stocks at least once in a quarter,
where aggregate exposure against such stocks equals or exceeds the amount shown against each
commodity:

Sr. No. Commodity Aggregate Committed

Exposure (limits)
1 Cotton (bales), excluding phutti Rs. 500 million `
2 Sugar Rs. 500 million
3 Wheat Rs. 250 million
4 Rice/Paddy Rs. 150 million
5 Edible Oil Rs. 250 million

Nonetheless, the banks/DFIs can, if they decide so, voluntarily conduct joint inspections for smaller
committed exposures and for commodities other than the ones mentioned above.
b) The bank/DFI with the largest committed exposure (limit) shall act as the lead bank/DFI to
coordinate the quarterly joint inspection. In case two or more banks/DFIs have the same level of
highest committed exposure, they shall mutually agree on which bank/DFI to assume the
responsibility. The lead bank/DFI once selected shall perform coordination for one year and
subsequently transfer the responsibility if, during the one year period, some other bank/DFI commits
the largest exposure. In case of syndicate financing against pledge of stocks, the agent bank/DFI shall
act as the lead bank/DFI for coordinating the quarterly joint inspection.
c) The Borrower’s Basic Fact Sheet (BBFS) shall serve as the main source for obtaining information
on exposures committed by the banks/DFIs against pledged stocks for any particular customer. Any
bank/DFI taking exposure on a customer against pledge of stocks shall inform, after seeking prior
written consent from obligor as per law, about the same to all the banks/DFIs already financing that
customer, within five working days of the credit approval.

12
REGULATION R-6
EXPOSURE IN SHARES AND TFCs/SUKUK

1. Acquisition of Shares/Mutual Funds:

A. Single Company Investment Limit:
i) Banks / DFIs shall not own shares of any single company in excess of 5% of their own equity.
This limit will also be applicable to units of all types of mutual funds and REITs.
ii) Banks/DFIs will obtain prior approval from the State Bank for purchasing shares of a
company exceeding, in aggregate, 10% of the capital of Investee Company or 5% of their paid-up
capital, whichever is lower. These limits will be calculated as under:
iii) In the case of investee company, limit will be calculated by taking 10% of the number of its paid-
up shares,
iv) In the case of investing bank/DFI, limit will be calculated by taking 5% of paid-up shares of
the bank/DFI, and then multiplying with their face value.
The bank’s/DFI's request will be considered in the light of the nature of relationship of the
investing bank and the investee company. Further, other factors, such as financial standing of the
investing bank, its aggregate investment portfolio, experience in managing the same, efficacy of
internal controls etc. will also be taken into account.

B. Aggregate Investment Limits:

i.) Aggregate equity investment limit for banks, and DFIs which are mobilizing funds as
deposits/COIs from general public/individuals, shall be 30% of their respective equity.
ii.) For Islamic banks, and DFIs which are not mobilizing funds as deposits/COIs from general
public/individuals, the aggregate investment limit will be 35% of their respective equity.
iii.) Within the above limits, Banks/DFIs may take maximum exposure in future contracts up to 10%
of their equity on aggregate basis. In this connection, the 10% exposure limit for future contracts will
include both positions taken in futures buying and selling.
iv.) Exposure as a result of strategic investment and investment in units of all forms of Mutual
Funds, excluding NIT units till its privatization, shall also be considered part of above limits.
v.) Aggregate investment limit in units of REIT shall be 10% of equity of the bank/DFI,
exclusive of the above aggregate limits.
vi.) Investments of the bank/DFI in its subsidiary companies (listed as well as non-listed) shall not be
included in these limits.

2. The limits prescribed in para 1 above shall not apply to the shares acquired due to the
underwriting commitments, satisfaction of debts or debt-equity conversion scheme. However these
will be sold off/off loaded within a period of eighteen months; otherwise the same will be counted
towards the above limit from the expiry of that period. The banks/DFIs are required to plan their
disposal to ensure compliance within the due date.

3. Investment in preference shares, which fulfill the criteria of equity instrument as laid down in
Annexure-III, shall be considered as part of investment in equities. Correspondingly, any investment
in preference shares that do not conform to these conditions shall not be included in the limits
prescribed under this regulation. However, such investment portfolio will be considered as part of the
maximum exposure limit as prescribed under R-1 of these regulations.

4. For the purpose of calculating bank’s/DFI’s exposure, investments will be valued at cost of
acquisition unless mentioned otherwise. While calculating the maximum limit for investment in
shares, the amount of provisions created against permanent impairment by debiting the Profit & Loss
account, as instructed vide BSD Circular No.10 dated July 13, 2004, may be deducted from the cost of
acquisition of such investments and the maximum limit.

5. Financing against Shares/TFCs/Sukuk

Banks/DFIs shall not:
a) take exposure against the security of shares/TFCs/Sukuk issued by them.
b) provide unsecured credit to finance subscription towards floatation of share capital and issue of
TFCs/Sukuk.
c) take exposure against the non-listed TFCs/Sukuk or the shares of companies not listed on the Stock
Exchange(s). However, banks/DFIs may make direct investment in non-listed TFCs.

13
d) take exposure on any person against the shares/TFCs/Sukuk issued by that person or its group
companies.
e) take exposure against ‘sponsor director’s shares’ (issued in their own name or in the name of their
family members) of banks/DFIs.
f) take exposure on any one person (whether singly or together with other family members or
companies owned and controlled by him or his family members) against shares of any
commercial bank/DFI in excess of 5% of paid-up capital of the share issuing bank/DFI.
g) take exposure against the shares/TFCs of listed companies that are not member of the Central
Depository System.
h) take exposure against unsecured or non-rated TFCs or TFCs rated below ‘BBB’ or
equivalent. Exposure may, however, be taken against unsecured/subordinated TFCs, which are issued
by the banks/DFIs for meeting their minimum capital requirements, as per terms and conditions
stipulated in BSD Circular No. 8 of June 27, 2006.
i) take exposure against shares unless the beneficiary of the facility is absolute owner of the shares so
pledged or has the necessary mandate to pledge the shares of third party as security for availing
financing facility from the bank/ DFI.

REGULATION R-7
GUARANTEES

1. All guarantees issued by the banks/DFIs shall be fully secured, except in the cases mentioned at
Annexure-IV where it may be waived up to 50% by the banks/DFIs at their own discretion, provided
that banks/DFIs hold at least 20% of the guaranteed amount in the form of liquid assets as security.

2. The banks/DFIs can issue guarantees on behalf of Pakistani firms and companies functioning in
Pakistan against the back to back/counter-guarantees of banks/DFIs rated at least ‘A’ or equivalent by a
credit rating agency on the approved panel of State Bank of Pakistan. Besides, the counter-guarantee of
bank/DFI situated in a foreign country is also acceptable if it has the rating of at least 'A' or
equivalent on global or National Rating scale by Standard & Poor, Moody's, Fitch, Japan Credit
Rating Agency (JCRA) or a local credit rating agency of the respective country provided the
guarantee issuing bank in Pakistan is comfortable with and accepts the counter -guarantee of such
foreign bank.

3. Furthermore, the Banks/DFIs may provide guarantees/ performance bonds, in favour of residents of
Pakistan, on the basis of counter guarantee of the banks falling within the world ranking of 1000 on the
basis of Balance Sheet size. In this regard the banks/DFIs will have a Board approved policy
having internal limits for acceptance of such counter guarantees based on, interalia, their own risk
appetite and risk profile of the counter-guarantee issuing bank. The Banks/DFIs shall also institute a
mechanism to monitor such limits.

4. Banks/DFIs shall ensure that counter-guarantees received are properly evaluated and their own
guarantees against such guarantees are issued with due care.

5. Cases where payments are not received within 20 working days by the banks/DFIs when the
guarantees of overseas banks are invoked, shall be reported to SBP indicating the steps being taken by
the bank/DFI to recover the amount due under the guarantee.

6. In case of back to back letter of credit issued by the banks/DFIs for export oriented goods and
services, banks/DFIs are free to decide the security arrangements at their own discretion subject to the
condition that the original L/C has been established by branches of guarantee issuing bank or a bank
rated at least ‘A’ by Standard & Poor, Moody’s, Fitch or Japan Credit Rating Agency (JCRA).

7. The guarantees shall be for a specific amount and expiry date and shall contain claim lodgment
date. However, banks/DFIs are allowed to issue open-ended guarantees without clearance from State
Bank of Pakistan provided banks/DFIs have secured their interest by adequate collateral or other
arrangements acceptable to the bank/DFI for issuance of such guarantees in favour of Government
departments, corporations/autonomous bodies owned/controlled by the Government and guarantees
required by the courts.

14
REGULATION R-8
CLASSIFICATION AND PROVISIONING FOR ASSETS

1. Loans/Advances:
a) Banks/DFIs shall observe the prudential guidelines given at Annexure-V in the matter of
classification of their asset portfolio and provisioning there-against on time based criteria.

b) In addition to the time-based criteria prescribed in Annexure-V, subjective evaluation of

performing and non-performing credit portfolio shall be made for risk assessment and, where
considered necessary, any account including the performing account will be classified, and the
category of classification determined on the basis of time based criteria shall be further
downgraded. Such evaluation shall be carried out on the basis of credit worthiness of the
borrower, its cash flow, operation in the account, adequacy of the security, inclusive of its
realizable value and documentation covering the advances.

2. Benefit of collateral/security held:

a) Banks/DFIs are allowed to take the benefit of Forced Sale Value (FSV) of the pledged stocks, plant
& machinery under charge, and mortgaged residential, commercial and industrial properties held
Category of Asset Forced Sale Value Benefit allowed from
the date of classification

Mortgaged residential, commercial and industrial • 75% for first year

properties (land & building only) • 60% for second year
• 45% for third year
• 30% for fourth year, and
• 20% for fifth year
Plant & Machinery under charge • 30% for first year
• 20% for second year, and
• 10% for third year

Pledged stock • 40% for first, second, and third year

as collateral against Non Performing Loans (NPLs) for calculating provisioning requirement as
tabulated above.
The benefit of FSV against NPLs shall not be available after the period prescribed above. For the
purpose of determination of FSV, Annexure-VI of PR for Corporate / Commercial Banking shall
be followed.
b) Banks/DFIs may avail the above benefit of FSV subject to compliance with the following
conditions:
i.) The additional impact on profitability arising from availing the benefit of FSV shall not be available
for payment of cash or stock dividend/bonus to employees.
ii.) Heads of Credit of respective banks/DFIs shall ensure that FSV used for taking benefit of
provisioning is determined accurately as per guidelines contained in PRs and is reflective of market
conditions under forced sale situations; and
iii.) Borrower-wise details of all such cases where banks/DFIs have availed the benefit of FSV shall be
maintained for verification by State Bank’s inspection team during regular/special inspection.
c) Any misuse of FSV benefit detected during regular/special inspection of State Bank shall
attract strict punitive action under the relevant provisions of the Banking Companies
Ordinance, 1962. Furthermore, State Bank may also withdraw the benefit of FSV from
bank/DFI found involved in its misuse.

3. Rescheduling/Restructuring:
a) Banks/DFIs may reschedule/restructure their loans as per their policy but it should not merely to
avoid classification. The rescheduling/restructuring of non-performing loans shall not change the
status of classification of a loan/advance etc. unless the terms and conditions of
rescheduling/restructuring are fully met for a period of at least one year (excluding grace period, if
any) from the date of such rescheduling/restructuring and at least 10% of the total restructured loan

15
amount (principal + mark-up), is recovered in cash. However, the condition of one year retention
period, prescribed for restructured/rescheduled loan account to remain in the classified category, will
not apply in case the borrower has repaid or adjusted in cash at least 35% of the total restructured
loan amount (principal + mark-up), either at the time of restructuring agreement or later-on during the
grace period if any.
b) The unrealized mark-up on loans (declassified after rescheduling/restructuring) shall not be taken
to income account unless at least 50% of the amount is realized in cash. However, any short
recovery in this respect will not impact the de-classification of this account if all other criteria
(meeting the terms and conditions for at least one year and payment of at least 10% of outstanding
amount by the borrower) are met. The banks/DFIs are further directed to ensure that status of
classification, as well as provisioning, is not changed in relevant reports to the State Bank of
Pakistan merely because a loan has been rescheduled or restructured. However, while reporting to
the Credit Information Bureau (CIB) of State Bank of Pakistan, such loans/advances may be shown as
‘rescheduled/restructured’ instead of ‘overdue’.
c) Where a borrower subsequently defaults (either principal or mark-up) after the
rescheduled/restructured loan has been declassified by the bank/DFI as per above guidelines, the loan
will again be classified in the same category it was in at the time of
rescheduling/restructuring and the unrealized markup on such loans taken to income account shall also
be reversed. However, banks/DFIs at their discretion may further downgrade the classification,
taking into account the subjective criteria.
d) At the time of rescheduling/restructuring, banks/DFIs shall consider and examine the requests for
working capital strictly on merit, keeping in view the viability of the project/business and
appropriately securing their interest etc.
e) All fresh loans granted by the banks/DFIs to a borrower after rescheduling/ restructuring of its
existing facilities may be monitored separately, and will be subject to classification under this
Regulation on the strength of their own specific terms and conditions.

4. Investments and Other Assets:

The banks shall classify their investments into three categories viz. ‘Held for Trading’, ‘Available for
Sale’ and ‘Held to Maturity’. However, investments in subsidiaries and associates shall be reported
separately in accordance with International Financial Reporting Standards as applicable in Pakistan
and shall not be subject to mark to market. All investments and other assets shall be tested for
impairment periodically. Investment portfolio in ‘Held for Trading’ and ‘Available for Sale’ and other
assets will be subject to detailed evaluation for the purpose of their classification keeping in view
various subjective and objective factors given as under.

a) Quoted Securities:
Government Securities will be valued at PKRV (Reuter Page). TFCs, PTCs, Sukuk and shares will be
valued at their market value. The difference between the market value and book value will be treated
as surplus/deficit.

b) Un-quoted Securities:
PTCs and TFCs and Sukuk will be classified on the valuation date on the basis of default in their
repayment in line with the criteria prescribed for classification of medium and long-term facilities.
Shares will be carried at the cost. However, in cases where the breakup value of such shares is less than
the cost, the difference of the cost and breakup value will be classified as loss and provided for
accordingly by charging to the Profit and Loss account of the bank/DFI.

c) Treatment of Surplus/deficit:
The measurement of surplus/deficit shall be done on portfolio basis in line with BSD Circular No. 10 of
2004 as amended from time to time. That is, surplus/deficit arising as a result of revaluation of ‘Held
for Trading’ securities shall be taken into Profit & Loss Account. The surplus/deficit on revaluation of
‘Available for Sale’ category shall be taken to “Surplus/Deficit on Revaluation of Securities” through
“Statement of Comprehensive Income.” and not to Profit and Loss Account. Impairment in the value of
‘Available for Sale’ or ‘Held to Maturity’ securities will be provided for by charging it to the Profit and
Loss Account.

d) Other Assets:
Classification of Other Assets and provision required there-against shall be determined keeping in view

16
the risk involved and the requirements of the International Financial Reporting Standards.

5. Timing of Creating Provisions:

Banks/DFIs shall review, at least on a quarterly basis, the collectability of their loans/advances
portfolio and shall properly document the evaluations so made. Shortfall in provisioning, if any,
determined, as a result of quarterly assessment shall be provided for immediately in their books of
accounts by the banks/DFIs on quarterly basis.

6. Reversal of Provision:
In case of cash recovery banks/DFIs may reverse specific provision held against classified assets,
subject to the condition that provision will be maintained in accordance with Annexure V.

However, the accounts classified and provision made on the advice of State Bank of Pakistan will not
be declassified / provision will not be reversed without prior approval of State Bank of Pakistan,
except in cases where cash recovery has been made through customer’s own sources, to the extent that
balance provision is maintained in accordance with this regulation.

7. Verification by the Auditors:

The external auditors as a part of their annual audits of banks/DFIs shall verify that all requirements
of Regulation R-8 for classification and provisioning for assets have been complied with. The State
Bank of Pakistan shall also check the adequacy of provisioning during on-site inspection.

REGULATION R-9
ASSUMING OBLIGATIONS ON BEHALF OF NBFCs

1. Banks/DFIs shall not issue any guarantee or letter of comfort nor assume any obligation
whatsoever in respect of deposits, sale of investment certificates, issue of commercial papers, or
borrowings of any non-banking finance company.
2. Banks/DFIs may, however, underwrite TFCs, commercial papers and other debt instruments issued
by NBFCs, and issue guarantees in favor of multilateral agencies for providing credit to NBFCs.
Banks/DFIs may also allow exposure to any of their client against the guarantee of an NBFC which is
rated at least ‘A’ or equivalent by a credit rating agency on the approved panel of State Bank of
Pakistan. However, the banks/DFIs shall ensure that such aggregate exposure remains within the
single obligor exposure limit as prescribed in Regulation R-1.
3. Before taking exposure against the guarantee of NBFC, banks/DFIs shall ensure that total
guarantees issued by an NBFC in favour of banks/DFIs do not exceed 2.5 times of capital of the
NBFC as evidenced by the latest available audited financial statements of the NBFC and such other
means as the banks/DFIs may deem appropriate.

REGULATION R-10
PAYMENT OF DIVIDEND

Banks/DFIs shall not pay any dividend on their shares unless and until:
a) they meet the minimum capital requirement (MCR) and capital adequacy ratio requirement
(CAR) as laid down by the State Bank of Pakistan from time to time;
b) all their classified assets have been fully and duly provided for in accordance with the Prudential
Regulations and to the satisfaction of the State Bank of Pakistan; and
c) all the requirements laid down in Banking Companies Ordinance, 1962 relating to payment of
dividend are fully complied.

REGULATION G-1
CORPORATE GOVERNANCE/BOARD OF DIRECTORS AND MANAGEMENT

The following guidelines are required to be followed by banks/DFIs incorporated in Pakistan. They
will also follow ‘Code of Corporate Governance’ issued by the Securities & Exchange
Commission of Pakistan (SECP) so long as any provision thereof does not conflict with any
provision of the Banking Companies Ordinance, 1962, Prudential Regulations and the
instructions/guidelines issued by the State Bank of Pakistan. Foreign banks are required to adhere to
these guidelines wherever feasible and applicable. However, they need not necessarily seek approval

17
 of their Board of Directors, as stipulated below in the case of local banks/DFIs:

A. FIT AND PROPER TEST

The “Fit and Proper Test” (FPT) is applicable on the sponsors (both individual & companies) who
apply for a commercial banking license, the investors acquiring strategic/controlling stake in the
banks/DFIs, major shareholders of the banking companies and for the appointment of Directors,
CEO, and Key Executives of the banks/DFIs. The fitness & propriety will be assessed on the
following broad elements (Annexure A):
a) Integrity, Honesty & Reputation
b) Track Record
c) Solvency & Integrity
d) Qualification & Experience
e) Conflict of Interest
f) Others

2. First three elements are applicable to all categories of individuals, whereas the last three elements
will be considered while assessing the FPT of Directors, CEO& Key Executives of banks/DFIs. In
addition to above requirements, sponsors and strategic investors are evaluated respectively in terms
of “Guidelines & Criteria for setting up of a Commercial Bank” & “Criteria for Establishment
of Islamic Commercial Banks” issued by SBP and Code of Corporate Governance issued by SECP.

3. The sponsors, the strategic investors, and appointment of the Directors and CEO require prior
clearance in writing from SBP. The CEO and Key Executives shall be full time employees of the
bank/DFI. The Directors and CEO will not assume the charge of their respective offices until their
appointments are approved in writing by SBP. All the requests for seeking approval of SBP for
appointment of Directors& CEO of the banks/DFIs should be routed through respective banks/DFIs
along with information on Annexure-I & II (of Corporate Governance).

4. The appointment of Key Executives will not require prior clearance of SBP. However, Banks
will seek State Bank’s prior approval for overseas appointments.1 Further, the banks/DFIs must
themselves ensure while appointing Key Executives that they qualify FPT in letter and spirit. The
information on appointment of Key Executive is required to be forwarded to SBP on prescribed
format at Annexure-III (of Corporate Governance) within seven days of assumption of the charge of
the post by the incumbent. The information submitted may be checked on post fact basis by
Banking Inspection Department of SBP during inspection.

5. Further, to ensure compliance with SBP’s FPT Criteria in respect of appointment on key positions,
the Banks/DFIs shall conduct prior self assessment of the fitness and propriety of their Directors,
Presidents/CEOs and Key Executives and furnish an undertaking to this effect as per enclosed
Annexure-IV(of Corporate Governance). Any FPT documents received without the undertaking shall
not be considered by SBP.2

6. Moreover, the appointment, compensation package (including retirement benefits),

promotion/demotion and renewal of the employment contracts of Key Executives shall invariably be
approved by the Board of Directors or the concerned Board Committee of the Bank/DFI. The Board
of Directors shall also formulate an organization-wide rotation policy, inter-alia ensuring that the Key
Executives are rotated appropriately after having served on a particular position for a reasonable time
(five to six years). However, for those Key Executives who have already completed six years in the
same position, the rotation should take effect immediately after implementation of rotation policy.
Under extreme situations only, the positions of Head of IT, Treasury, HR, Islamic Banking, Legal,
Company/Corporate Secretary, Chief Operating Officer (COO) and Deputy CEO/Deputy MD may be
exempted from compulsory rotation. Further, the Banks/DFIs shall ensure that none of the posts of
Key Executives shall be filled by an executive on acting/additional charge basis for more than three
(3) months.

7. The sponsors are required to seek prior approval of SBP along with the information at
                                                            
1
Inserted vide BPRD Circular No. 05 of 2009 dated March 05, 2009
2
Para 5 & 6 inserted vide BPRD Circular No. 5 of 2015 dated March 12, 2015.
18
Annexure-II and other information as required in the “Guidelines & Criteria for Setting up a
Commercial Bank” and” Criteria for Establishment of Islamic Commercial Banks”. The
strategic investors contemplating to acquire strategic/controlling stake are required to seek
prior approval from SBP either directly or through the concerned department/Ministry of
Government executing strategic sale transaction of the bank as required and provided in the
transaction structure. The bank should also ensure to give prior intimation to SBP before dealing with
any investors/bank/institutions/person for sale/purchase of sponsors/ strategic shares and seek
approval of SBP for conducting due diligence of bank/DFI in terms of BPD Circular No. 8 of 2003.

8. The major shareholders are required to seek prior approval in writing from SBP for acquiring 5%
or more shares along-with information on Annexure-II, with proper justification for holding more
than 5% shares of the paid up capital. All the banks/DFIs are required to ensure that major
shareholders have sought such an approval from SBP and place it on record.

9. Fit & Proper Test prescribed in the guideline is continuous in nature. All persons subject to
FPT should immediately submit any change in the information already submitted (at the time of
clearance) either through Company Secretary or Human Resources Department to Banking Policy
and Regulations Department. Violation of the instructions, circumvention, concealment, misreporting
and delay in submission of information to SBP may result in withdrawal of SBP approval, besides
penal action under the provisions of BCO.

10. Deposit of sponsor shares in blocked account with Central Depository Company of Pakistan
(CDC).1
a) All sponsor shares and subsequent right and bonus shares shall be deposited in a blocked
account with CDC. The procedure for deposit of sponsor shares in the CDC blocked account is
provided at Annexure-AA of Corporate Governance (BPRD Circular No. 04 of 2008).
b) No withdrawal of the sponsor shares from the blocked account would be allowed without prior
written permission of SBP.
c) Blocked Account should be opened by the sponsor shareholders of banks exclusively for
deposit of the sponsor shares and subsequent right and bonus shares issued thereon.
d) Charges for opening and operating of the blocked account with CDC will be borne by the
sponsor shareholders.
e) These instructions shall not be applicable to the shareholding of Federal and Provincial
governments in banks.

11. Every Chairman, Managing Director or Chief Executive Officer (by whatever name called) of a
banking company shall furnish to the State Bank of Pakistan through the banking company returns on
yearly basis containing full particulars of the extent and value of his holding of shares, whether
directly or indirectly, in the banking company and of any change in the extent of such holding or any
variation in the rights attaching thereto as per attached annexure (referred as Annexure-I in the
circular) within 15 days of the close of each calendar year.2

B. RESPONSIBILITIES OF THE BOARD OF DIRECTORS:

1. The Board of Directors shall assume its role independent of the influence of the
Management and should know its responsibilities and powers in clear terms. It should be
ensured that the Board of Directors focus on policy making and general direction, oversight and
supervision of the affairs and business of the bank/DFI and does not play any role in the day-
to-day operations, as that is the role of the Management.

2. The Board shall approve and monitor the objectives, strategies and overall business plans of the
institution and shall oversee that the affairs of the institution are carried out prudently within the
framework of existing laws & regulations and high business ethics.

3. All the members of the Board should undertake and fulfill their duties & responsibilities
                                                            
1
Inserted vide BPRD Circular No. 4 of 2008 dated May 28, 2008
2
Introduced vide BPRD Circular No. 04 of 2010 dated March 04, 2010.
19
 keeping in view their legal obligations under all the applicable laws and regulations. All Board
members should preferably attend at least 1-2 weeks training program(s) which will enable
them to play effective role as a director of bank/DFI, at an institution like Pakistan Institute of
Corporate Governance or other similar institution within first year of their directorship on the
Board of bank/DFI. Further, the Company Secretary of the Banks/DFIs shall provide to all Board
members the extracts from the relevant laws, rules and regulations regarding their powers, duties
and responsibilities and keep them updated of any revisions/amendments therein.1

4. The Board shall clearly define the authorities and key responsibilities of both the Directors and
the Senior Management without delegating its policy-making powers to the Management and
shall ensure that the Management is in the hands of qualified personnel.

5. The Board shall approve and ensure implementation of policies, including but not limited to, in
areas of Risk Management, Credit, Treasury & Investment, Internal Control System and Audit, IT
Security, Human Resource, Expenditure, Accounting & Disclosure, and any other
operational area which the Board and/or the Management may deem appropriate from
time to time. The Board shall also be responsible to review and update existing policies
periodically and whenever circumstances justify.

6. As regards Internal Audit or Internal Control, a separate department shall be created which shall
be manned preferably by professionals responsible to conduct audit of the bank’s/DFI’s
various Divisions, Offices, Units, Branches etc. in accordance with the guidelines of the
Audit Manual duly approved by the Broad of Directors. The Head of this department will report
directly to the Board of Directors or Board Committee on Internal Audit.

7. The business conditions and markets are ever changing and so are their requirements. The
Board, therefore, is required to ensure existence of an effective ‘Management Information
System’ to remain fully informed of the activities, operating performance and financial
condition of the institution, the environment in which it operates, the various risks it is exposed
to and to evaluate performance of the Management at regular intervals.

8. The Board should meet frequently (preferably on monthly basis, but in any event, not less than
once every quarter) and the individual directors of an institution should attend at least half of the
meetings held in a financial year. The Board should ensure that it receives sufficient information
from Management on the agenda items well in advance of each meeting to enable it to
effectively participate in and contribute to each meeting. Any advisor, if appointed by the
Board member, shall neither attend the Board meeting(s) on behalf of the Board member
nor shall regularly sit in the Board meeting(s) as an observer or any other capacity. Further, the
banks/DFIs, incorporated in Pakistan, shall submit certified copies of the minutes of meeting of
their Board of Directors (BoD) and the General Meetings /Extra Ordinary General Meetings
(AGMs/EOGMs), within twenty one days of the date of the meeting to the Director, Off-site
Supervision and Enforcement Department, State Bank of Pakistan, Karachi. It may be ensured
that the minutes also contain the details of matters decided/resolved through circulation. The
minutes may be forwarded in the form of hard copies, duly certified by the company secretary
along with soft copies on a floppy diskette/compact disk.2

9. The Board should carry out its responsibilities in such a way that the external auditors and
supervisors can see and form judgment on the quality of Board’s work and its contributions
through proper and detailed minutes of the deliberations held and decisions taken during the Board
meetings.

10. To share the load of activities, the Board may form specialized committees with well-defined
objectives, authorities and tenure. These committees, comprising of at least one non-executive
Board member, shall oversee areas like Audit, Risk Management, Credit, and Recruitment,
Remuneration & Nomination. The Chairman of the Board shall not be member of the
aforementioned committees. Further, the Audit Committee of the Board shall invariably be

                                                            
1
Introduced vide BPRD Circular Letter No. 13 of 2011 dated May 28, 2011.
2
Introduced vide BPRD Circular No. 02 of 2013 dated March 19, 2013.
20
 chaired by an Independent Director. These committees of the Board should neither indulge in
day-to-day affairs/operations of the bank nor enjoy any credit approval authority for
transaction/limits. These committees should apprise the Board of their activities and
achievements on regular basis.1

11. The Board should ensure that it receives management letter from the external auditors without
delay. It should also be ensured that appropriate action is taken in consultation with the Audit
Committee of the Board to deal with control or other weaknesses identified in the
management letter. A copy of that letter should be submitted to the State Bank of Pakistan so
that it can monitor follow-up actions.

12. Whenever the Board of Directors/relevant appointing/removing authority of a bank/DFI

considers to remove its President/Chief Executive Officer/Country Head/Country Manager
before the expiration of his/her term of office through the defined statutory process, State Bank of
Pakistan (SBP) must invariably be informed at least two months ahead of the implementation of
such decision along-with the reasons for the same.2

13. The President/CEO/Country Head/Country Manager, wherever, decides to tender resignation

before completion of his/her term of office, he/she must inform SBP at least two months before
tendering resignation.

14. The Chairman of the Board of Directors/relevant removing authority of bank/DFI would be
responsible for submission of the requisite information to SBP.

15. Acting CEO appointed pursuant to resignation/removal of the CEO is invariably required to meet
the FPT Criteria prescribed for the CEO and the Banks/DFIs shall duly submit FPT documents of
such person to SBP before assumption of charge. In case of temporary vacation (not exceeding
one month) of the office of CEO, the Banks/DFIs shall ensure to entrust charge of the office of
CEO to such an officer who meets the FPT Criteria prescribed for Key Executives and whose
FPT documents have already been submitted to SBP.3

16. The banks incorporated in Pakistan having foreign participation/equity can hold board meetings
abroad in following manner in a calendar year4:

17. Banks having more than 51% foreign shareholding and

i. Maximum of 4 Board Meetings.
minimum two directors residing abroad.

Banks having more than 40% foreign shareholding and

ii. 3 Board Meetings.
minimum one director residing abroad.

Banks having upto 40% foreign shareholding and minimum

iii. 1 Board Meeting.
one director residing abroad.

17. The bank concerned will, however, only inform SBP in writing before its Board Meeting abroad in
accordance with the above instructions. The banks/DFIs are advised to hold BoDs meetings at the
place of residence of foreign directors. Further, those having no foreign shareholding and
directorship shall not be allowed BoDs meetings abroad. They are also encouraged to make
maximum use of video conferencing facilities for Board Meetings.

C. MANAGEMENT:
No member of the Board of Directors of a bank/DFI holding 5% or more of the paid-up capital of the
bank/DFI either individually or in concert with family members or concerns /companies in which

                                                            
1
Amended vide BPRD Circular No. 9 of 2015 dated May 06, 2015.
2
Para 12, 13, & 14 amended vide BPRD Circular No. 9 of 2008 dated August 19, 2008
3
Inserted vide BPRD Circular Letter No. 12 of 2011 dated May 13, 2011
4
Revised vide BPRD Circular No. 11 of 2013 dated May 06, 2013
21
 he/she has the controlling interest, shall be appointed in the bank /DFI in any capacity
except as Chief Executive of the bank/DFI. Further, maximum two members of Board of
Directors of a bank/DFI including its CEO can be the Executive Directors.

2. The banks/DFIs during a calendar year may pay a reasonable and appropriate remuneration
for attending the Board or its committee(s) meeting(s), to their non-executive directors and
chairman. The scale of remuneration to be paid to the non-executive directors and chairman for
attending the Board and/or committee meetings shall be approved by the shareholders on a pre
or post facto basis in the Annual General Meeting (AGM). However, no such remuneration
shall be paid to the executive directors except usual TA/DA as per bank’s/DFI’s standard rules
and regulations. No consultancy or allied work will be awarded to the directors or to the
firms/institutions/companies etc. in which they hold substantial interest. Further, the
administrative expenses pertaining to the office, staff and security allocated to the Chairman of
the Board should be determined rationally.1

3. Chairman of the Board of Directors may, if deemed necessary, appoint one advisor to advise
and facilitate him in discharge of his duties/responsibilities. The appointment of such an advisor will
be subject to the following conditions:
a) The advisor must possess the required technical experience relating to banking and finance at
a senior level to enable him /her to render a professional advice to the Board.
b) The terms of reference of the advisor shall be approved by the Board.
c) A reasonable remuneration may be paid to the advisor with the approval of the Board of
Directors.
d) The advisor may attend the meetings of Board of Directors and Board Committees
in which his/her participation is required but he/she will not be a member of the Board and/or
its committees.
e) The advisor shall be required to sign an appropriate confidentiality agreement to ensure
confidentiality of documents/information that may come to his/her knowledge, before
assuming any such role.2

D. COMPLIANCE OFFICER:
Banks/DFIs shall put in place a Compliance Program to ensure that all relevant laws are complied
with, in letter and spirit, and, thus, minimize legal and regulatory risks. For this purpose, the
Board of Directors, or Country Manager in case of foreign banks, shall appoint/designate a
suitably qualified and experienced person as Compliance Officer on a countrywide basis, who
may be assisted by other Compliance Officers down the line. The Head of Compliance will report
directly to the President/Chief Executive Officer of the bank/DFI. The Compliance Officers will
primarily be responsible for banks/DFI’s effective compliance relating to:
(a) SBP Prudential Regulations.
(b) Relevant provisions of existing laws and regulations.
(c) Guidelines for KYC.
(d) Anti money laundering laws and regulations.
(e) Timely submission of accurate data/returns to regulator and other agencies.
(f) Monitor and report suspicious transactions to President/Chief Executive Officer of the bank/DFI
and other related agencies.
2. Banks/DFIs are, however, free to add other areas of compliance under the responsibilities of
Compliance Officer and consider setting up a compliance committee under him, as they deem fit to
protect the interest of the institution.
3. The Compliance Officers will (i) serve as a contact point between President/Chief
Executive Officer and senior management, with regard to functioning of the compliance
program (ii) provide assistance in this area to branches and other departments of the bank/DFI,
and (iii) act as liaison with State Bank of Pakistan concerning the issues related to compliance.’
4. Banks/DFIs are, therefore, advised to put in place, in writing, a complete program of
compliance down the line under the supervision of a Compliance Officer.

                                                            
1
Amended vide BPRD Circular No. 9 of 2015 dated May 06, 2015
2
Amended vide BPRD Circular Letter No. 12 of 2009 dated April 24, 2009
22
 E. FITNESS AND PROPRIETY OF KEY EXECUTIVES:
Banks/DFIs shall strictly follow the guidelines contained in the ‘Fit and Proper Test’ (FPT) during the
course of appointment of key executives.

2. The banks/DFIs should also develop and implement appropriate screening procedures to ensure
high standards and integrity at the time of hiring all employees, whether contractual or
permanent.

3. In case it is found at subsequent stage/during the course of inspection that guidelines of FPT
have not been followed or the incumbent is not a fit and proper person, strict punitive action will be
taken under the relevant provisions of Banking Companies Ordinance 1962, in addition to directing
the banks/DFIs to dispense with the services of concerned officer if recruited afresh; and in case
of existing employee, the same to be transferred from the post immediately.

REGULATION G-2
DEALING WITH DIRECTORS, MAJOR SHARE-HOLDERS AND EMPLOYEES OF THE
BANKS/DFIs

Banks/DFIs shall not enter into leasing, renting and sale/purchase of any kind with their directors,
officers, employees or such persons who either individually or in concert with family members
beneficially own 5% or more of the equity of the bank/DFI. This restriction does not apply in case
of purchase of vehicles, laptops, mobile phone devices and iPads1 by the paid directors, officers or
employees of the banks/DFIs which remained in their own use, provided such sale is covered under
the employees service rules duly approved by the Board of Directors of the banks/DFIs and is
effected by the banks/DFIs at least at book value at the date of such transaction.

2. Banks/DFIs shall not:

a) take unsecured exposure on, or take exposure against the guarantee of:
i) any of their directors;
ii) any of the family members of any of their directors;
iii) any firm or private company in which the bank/DFI or any of the persons referred to in (i) or
(ii) are interested as director, proprietor or partner; or
iv) any public limited company in which the bank/DFI or any of the persons as aforesaid are
substantially interested; and
v) their Chief Executive and shareholders holding 5% or more of the share capital of the
bank/DFI, including their spouses, parents, and children or to firms and companies in which
they are interested as partners, directors or shareholders holding 5% or more of the share
capital of that concern.

b) take any exposure on any of their directors or to individuals, firms or companies in which they or
any of their directors, either directly in the borrowing entity or in any of its group companies, hold
key management positions, or are interested as partner, director or guarantor, as the case may be,
their Chief Executives and shareholders holding 5% or more of the share capital of the bank/DFI,
including their spouses, parents, and children or to firms and companies in which they are interested
as partners, directors or shareholders holding 5% or more of the share capital of that concern,
without the approval of the majority of the directors of that bank/DFI excluding the director
concerned. The facilities to the persons mentioned above shall be extended at market terms and
conditions and be dealt with at arm length basis.

REGULATION G-3
CONTRIBUTIONS AND DONATIONS FOR CHARITABLE, SOCIAL, EDUCATIONAL AND
PUBLIC WELFARE PURPOSES

Banks/DFIs shall strictly observe the following rules in the matter of making any
donation/contribution for charitable, social, educational or public welfare purposes:
i) The total donations/contributions made by the bank/DFI during the year shall not exceed such
amount as approved by their Board of Directors. It is expected that banks/DFIs making these

                                                            
1
Introduced vide BPRD Circular Letter No. 32 of 2013 dated December 17, 2013
23
 donations/contributions would have already met provisioning and capital adequacy requirements.
ii) The banks/DFIs shall develop policy/guidelines duly approved by the Board of Directors for
making donations/contributions.

2. All donations or contributions to be made during the year must be specifically approved by the
Board of Directors on pre or post facto basis as convenient.

3. Banks/DFIs are further directed to expressly disclose in their annual audited financial
statements the total donation/contribution made during the year along with names of donees, to
whom total donations/ contributions during the year were made in excess of Rs 100,000/. In the
case of donations where any director or his family members have interest in the donee, the names of
such directors, their interest in the donee and the names and addresses of all donees, shall also be
given.

REGULATION G-4
CREDIT RATING

With a view to safeguard the interest of prospective investors, depositors and creditors, it shall
be mandatory for all banks/DFIs to have themselves credit rated by a credit rating agency on the
approved panel of the State Bank of Pakistan.
2. Foreign banks which are credit rated by M/s. Standard & Poor, Moody’s Fitch-Ibca and
Japan Credit Rating Agency (JCRA) are given a minimum rating of A3/A- and above shall be
exempt from the application of this requirement. All other foreign banks have to go through credit
rating process in Pakistan.
3. The credit rating will be an ongoing process i.e. credit rating should be updated on a
continuous basis from year to year, within six months from the date of close of each financial year
and the rating report complete in all respects be submitted to the State Bank of Pakistan and
made public within a period of seven days of the notification of rating by the credit rating agency.
Further, the banks/DFIs will disclose their credit rating prominently in their published annual and
quarterly financial statements.

REGULATION O-1
UNDERTAKING OF CASH PAYMENTS OUTSIDE THE BANK’S AUTHORIZED PLACE OF
BUSINESS

Banks shall not undertake any business of cash payments, other than the authorized place of
business, except through the installation of Automated Teller Machine (ATM). Banks desirous of
providing the facility of withdrawal through Authorized Merchant Establishments at various Points of
Sale (POS) may do so upto a maximum cash limit of Rs 10,000/- For this purpose, adequate and
suitable security measures should be put in place for cash feeding and safety of the Automated Teller
Machines.

2. Branchless banking receipts/payments are allowed in accordance with branchless banking

regulations.

3. Banks may do collection and payment of cash for their prime customers through cash carrying
companies registered with concerned Government department. This facility should, however, be
provided through designated branches of the banks and after the banks have devised procedures
including necessary security measures.

REGULATION O-2
WINDOW DRESSING

Banks/DFIs shall refrain from adopting any measures or practices whereby they would either
artificially or temporarily show an ostensibly different position of bank’s/DFI’s accounts as given in
their financial statements. Particular care shall be taken in showing their deposits, MCR, non-
performing loans/assets, provisioning, profit, inter-branch and inter-bank accounts, or any other
method to artificially inflate balance sheet or show improved profitability.

24
REGULATION O-3
RECONCILIATION OF INTER-BRANCH ACCOUNTS
AND SETTLEMENT OF SUSPENSE ACCOUNT ENTRIES

All entries outstanding in the Inter-Branch Accounts (by whatever name called) and/or Suspense
Account must be reconciled/cleared and taken to the proper head of account within a maximum
period of 30 days from the date the entry is made in the above-named accounts.

2. Entries made on account of tax at source, advance tax paid, tax recoverable, advance expense on
new branches, advance rent paid, legal expenses, mark-up/service charge recoverable, Qarze Hasna
for marriage, and forward cover fee, shall not be classified as Suspense Account and may be recorded
in their respective head of account under other assets and the above instructions shall not be
applicable to these items . Further, outstanding amount of the premium on Crop Loan Insurance
Scheme (CLIS) receivable from Government of Pakistan (GoP) shall also be classified in other assets.
The outstanding amount shall, however, be reconciled/cleared immediately on reimbursement of
premium amount from the GoP. Besides, entries relating to frauds and forgeries, cash theft and looted,
payments against equity, scrips/debt instruments and contributory payments of capital nature to be
capitalized at a later stage shall also be excluded from the purview of the said regulation. The
exclusion of entries relating to frauds and forgeries, cash theft and looted will, however, be subject to
the condition that the same are cleared immediately on receipt of insurance claims.

3. Banks/DFIs shall institute an effective internal control system for the operations of Inter-Branch
and Suspense Accounts, which ensures reconciliation/clearing of the entries in shortest possible time
and also clearly fixes the responsibilities on the official(s) for neglecting the timely reconciliation and
clearance.

REGULATION O-4
MAINTENANCE OF ASSETS IN PAKISTAN

Every bank/DFI shall maintain in Pakistan not less than 80% of the assets created by it against such
time and demand liabilities as specified in Part-A of Form X (prescribed under Rule 17 of the
Banking Companies Rules, 1963). Accordingly, assets held abroad by any bank/DFI shall not, at any
point in time, exceed 20% of its time and demand liabilities specified in the said Form X. All other
assets financed from sources other than time and demand liabilities specified in the said Form X shall
be held within Pakistan.

REGULATION O-5
FOREIGN CURRENCY DEPOSITS UNDER FE 25-1998

Banks shall not invest FE 25 deposits in foreign currency/local currency denominated instruments
below investment grade. Neither, shall they invest/place such deposits in fund management schemes
of other banks/DFIs/NBFCs whether in Pakistan or abroad.
2. Banks shall be required to maintain the prescribed ratio of Cash Reserve/Special Cash Reserve
against FE 25 deposits in US Dollars.
3. Placement of funds of FE-25 deposits with any one bank/financial institution, whether in Pakistan
or abroad, shall be subject to the following conditions:
a) The investing bank shall comply with Regulation R-1 (Annexure-1 Para G), which mentions
different weightages according to credit ratings of financial institutions.
b) The investing bank will not place in a single institution an amount exceeding 25% of the total
investable funds, available with the investing bank, under the FE-25 Deposit Scheme.
The conditions above shall, however, not be applicable to placement of funds by the bank with its
own branches overseas. Furthermore, compliance with all other relevant Prudential Regulations shall
also be ensured.
4. Banks shall be free to decide the rate of return on deposits mobilized under FE-25.
5. Banks shall be free to use such deposits for their trade-related activities provided the exchange risks
are adequately covered and a square position is maintained.
6. Foreign currency deposits mobilized under FE 25 scheme, after netting-off the deposits utilized to
finance trade related activities such as financing against Import and Export documents, should not at
any point exceed twenty percent of the local currency deposits of the banks at the close of business on

25
the last working day of the preceding quarter. Banks/DFIs may also exclude FE-25 Deposits in the
form of the Foreign Direct Investment and funds received for social and economic uplift through
international donor agencies/welfare organizations from the calculation of above limit of 20%. This
will, however, be subject to the condition that the banks/DFIs will obtain an undertaking from the
Account Holder that such funds are remitted from abroad and would be used for poverty alleviation
and socio-economic uplift. The genuineness of all such exclusions will be verified by the SBP
Inspectors during the subsequent inspections.
7. Banks will report the amount of FE 25 deposits and their utilization in the Weekly Statement of
Position through reporting chart of account DWH Portal as required by the SBP.

********************

26
 ANNEXURE-I

GUIDELINES REGARDING LIMIT ON EXPOSURE

TO A SINGLE OBLIGOR UNDER REGULATION R-1

1. In arriving at exposure under Regulation R-1:

A) 100% of the deposits placed with lending bank/DFI, under perfected lien and in the same currency,
as that of the loan, shall be deducted.

B) 90% of the following shall be deducted;

i) deposits placed with the lending bank/DFI, under perfected lien, in a currency other than that of the
loan;
ii) deposits with another bank/DFI under perfected lien;
iii)encashment value of Federal Investment Bonds, Pakistan Investment Bonds, Treasury Bills and
National Saving Scheme securities, lodged by the borrower as collateral; and
iv) Pak. Rupee equivalent of face value of Special US Dollar Bonds converted at inter-bank rate,
lodged by the borrower as collateral.

C) 85% of the unconditional financial guarantees accepted as collateral and payable on demand by
banks/DFIs, rated at least ‘A’ or equivalent by a recognized rating agency) shall be deducted. Similar
weightage to guarantees issued by the International Finance Corporation (IFC), Commonwealth
Development Corporation (CDC) Deutsche Investitions und Entwicklungsgesellschaft mbH (DEG),
Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden N.V (FMO) and Asian
Development Bank (ADB) shall also apply.

D) 50% of listed Term Finance Certificates held as security with duly marked lien shall be deducted.
The TFCs to qualify for this purpose should have been rated at least ‘A’ or equivalent by a credit
rating agency on the approved panel of State Bank of Pakistan.

E) Weightage of 10% shall be given to pre-shipment/post-shipment credit provided to finance exports

of goods covered by letter of credit/firm contracts including financing provided from the bank’s
/DFI’s own sources.

F) Weightage of 50% shall be given to;

i) documentary credits (except Standby Letter of Credits where 100% exposure would be counted)
opened by banks/DFIs;
ii) guarantees/bonds other than financial guarantees;
iii)underwriting commitments.

G) The following different weightages will be applicable to exposure taken against commercial
banks/DFIs in respect of placements;
i) 25% weightage on exposure to banks/DFIs with ‘AAA’ rating.
ii) 50% weightage on exposure to banks/DFIs rated ‘A' and AA.
iii) 100% weightage on exposure to banks /DFIs rated below ‘A’.

The banks/DFIs shall ensure that the overall limit for each financial institution in respect of inter-
bank placements is invariably approved by their Board of Directors.

2. For the purpose of the Regulation R-1, exposure shall not include the following:

a.) Loans and advances (including bills purchased and discounted) given to the Federal Government or
any of their agencies under the commodity operations program of the Federal Government, or
guaranteed by the Federal Government.

b.) Obligations under letters of credit and letters of guarantee to the extent of cash margin held by the
bank/DFI.

27
 c.) Letters of credit, which do not create any obligation on the part of the bank/DFI (no liability L/C) to
make payments on account of imports.

d.) Letters of credit opened on behalf of Federal Government where payment is guaranteed by State
Bank of Pakistan/Federal Government.

e.) Facilities provided to commercial banks/DFIs through REPO transactions with underlying SLR
eligible securities.
f.) Letters of credit established for the import of plant and machinery subject to the condition that
financial close has been done in case of such LCs.

g.) Bills discounted/purchased from the borrower, drawn against the L/Cs of banks/DFIs meeting the
following criteria.

Sr. Aggregate amount of Minimum rating of the L/C

No. Maturity of the bill(s) bill(s) purchased/ issuing and accepting banks/DFIs
discounted/purchased discounted on account of assigned by Recognized Rating
one person Agencies

a) Short term (not more

Up to US$ 250,000 No restriction
than 1 year)

b) Short term (not more

More than US$ 250,000 At least “BBB” and above
than 1 year)

c) Long term (more than 1

-Any- At least “A” and above
year)

3. For the purpose of Regulation R-1, net open exposure shall be used in the calculation on account of
derivative transactions as allowed under Financial Derivatives Business Regulations issued vide BSD
Circular No. 17 dated November 26, 2004.

For the purpose of Regulation R-1, reserve shall also include revaluation reserves on account of fixed
assets of the bank/DFI to the extent of 50% of their value. However, for this purpose assets must be
prudently valued by valuators on the panel of Pakistan Bank Association (PBA), fully taking into
account the possibility of price fluctuations and forced sale value. Revaluation reserves reflecting the
difference between the book value and the market value will be eligible up to 50%.

28
 ANNEXURE II
 

BORROWER’S BASIC FACT SHEET- FOR CORPORATE

PRESCRIBED UNDER REGULATION R-3

Date of Request._____________

(TO BE COMPLETED IN CAPITAL LETTERS OR TYPEWRITTEN)

BORROWER’S PROFILE:

Name Address

Phone # Fax # E-mail Address

Office Res.
Computerized National Identity Card # National Tax # Sales Tax #

Import Registration Export Date of Date of opening of A/c.

# Establishment
Registration #

2. NATURE OF BUSINESS:

Industrial Commercial Agricultural Services Any other

3. DETAILS OF DIRECTORS/OWNERS/PARTNERS:

Name Address

Phone # Fax # E-mail Address

Office Res.

Computerized National Identity Card # National Tax #

Share-holding Amount % of Share-holding

29
4. CORPORATE STATUS:

Sole Partnership Public/Private Limited Company

Proprietorship

5. MANAGEMENT:

A) EXECUTIVE DIRECTORS/PARTNERS:
Name Address CNIC # Phone #

1.

2.

B) NON-EXECUTIVE DIRECTORS/PARTNERS:
Name Address CNIC # Phone #

1.

2.

6. REQUESTED LIMITS:

Amount Tenor

Fund Based

Non-Fund Based

7. BUSINESS HANDLED/EFFECTED WITH ALL FINANCIAL

INSTITUTIONS DURING THE LAST ACCOUNTING YEAR:

Imports Exports Remittances effected (if any)

8. EXISTING LIMITS AND STATUS:

Status

Amount Expiry Regular Amount Overdue(if any)

Date

Fund Based

Non-Fund
Based

9. ANY WRITE-OFF, RESCHEDULING/ RESTRUCTURING

AVAILED DURING THE LAST THREE YEARS:
30
 Amount during Amount during Amount during

Name of 1st Year 2nd Year 3rd Year

Financial
Institution Write- Rescheduled/ Write- Rescheduled/ Write- Rescheduled/
off Restructured off Restructured off Restructured

10. DETAILS OF CLEAN FACILITIES CURRENTLY AVAILED:

Name of Financial Nature of Facility Total Limit Amount

Institution Outstanding

1.

2.

11. DETAILS OF PRIME SECURITIES MORTGAGED/ PLEDGED:

A) AGAINST EXISTING FACILITIES:

Name of Financial Nature of Total Rank of Charge Net Realizable Value
Institution Security Amount
1.
2.
B) AGAINST REQUESTED/ FRESH/ ADDITIONAL FACILITIES:
Name of Financial Nature of Security Total Amount Net Realizable
Institution Value
1.
2.

12. DETAILS OF SECONDARY COLLATERAL MORTGAGED/ PLEDGED:

A) AGAINST EXISTING FACILITIES:
Name of Financial Nature of Total Rank of Charge Net Realizable Value
Institution Security Amount
1.
2.
B) AGAINST REQUESTED/ FRESH/ ADDITIONAL FACILITIES:
Name of Financial Nature of Security Total Amount Net Realizable Value
Institution
1.
2.

13. CREDIT RATING (WHERE APPLICABLE):

Name of Rating Agency Rating

14. DETAILS OF ASSOCIATED CONCERNS

(AS DEFINED IN COMPANIES ORDINANCE, 1984):
Name of Name of Share-holding % of Total Share Capital
Concern Directors

31
15. FACILITIES TO ASSOCIATED CONCERNS BY THE CONCERNED FI:
Name of Nature & Outstanding Nature & Overdues Defaults
Concern Amount of as on-------- Value of
Limit Securities

16. DETAILS OF PERSONAL GUARANTEES PROVIDED BY THE

DIRECTORS/PARTNERS ETC. TO FIs TO SECURE CREDIT:
Names of the Institutions/persons Amount Validity NIC # NTN Net-worth
Guarantors to whom Guarantee of Period
given Guarantee

17. DIVIDEND DECLARED (AMOUNT) DURING THE LAST THREE YEARS:

During 1st Year During 2nd Year During 3rd Year

18. SHARE PRICES OF THE BORROWING ENTITY:

Listed Company Break-up Value of the Shares
Current Price Preceding 12 Months in case of Private Limited Company
Average

19. NET-WORTH (PARTICULARS OF ASSETS OWNED IN THEIR

OWN NAMES BY THE DIRECTORS/PARTNERS/PROPRIETORS):
Owner’s Name Particulars of Market value Particulars of Liabilities
Assets

20. DETAILS OF ALL OVERDUES (IF OVER 90 DAYS):

Name of Financial Institution Amount

21. Details of payment schedule if term loan sought.

22. Latest Audited Financial Statements as per requirements of Regulation R-3 to be
submitted with the LAF (Loan Application Form).
23. Memorandum and Articles of Association, By-laws etc. to be submitted by the borrower
along with the request.
24. I/We do hereby authorise the bank/DFI to share information about my pledged stock with
other banks/DFIs to monitor the position as per SBP Prudential Regulations.
I certify and undertake that the information furnished above is true to the best of my
knowledge.

CHIEF EXECUTIVE’S/
BORROWER’S
SIGNATURE & STAMP

COUNTER SIGNED BY:

AUTHORISED SIGNATURE
& STAMP

(BANK/DFI OFFICIAL)

32
 ANNEXURE-III

CRITERIA FOR PREFERENCE SHARES FOR INCLUSION IN INVESTMENT IN EQUITIES

a) Redemption of such preference shares is at the option of the issuer.

b) In case the issuer has an option to redeem the preference shares, as per agreed terms and conditions, the
redemption will be made through a sinking fund created out of the profits of the company.
c) The terms and conditions of such shares does not give rise to a contractual obligation on the part of the
issuer to deliver another financial asset or exchange another financial instrument under conditions that are or
can be potentially unfavorable to the issuer. However, an option to convert preference shares into common
shares can be the feature of the preference shares.
d) The terms and conditions of the preference shares are not such as to compel the issuer economically,
financially or otherwise to redeem the shares.
e) Payment and distribution of dividend to the holders of preferred shares, whether cumulative or non-
cumulative, is at the discretion of the issuer.

33
 ANNEXURE-IV
CASES ELIGIBLE FOR RELAXATION UNDER REGULATION R-7

The following cases will be eligible for relaxation under regulation R-7:

1. For bid bonds issued on behalf of local consultancy firms/ contractors of goods and services
bidding for international contracts/Tenders where the consultancy fees and other payments are to be
received in foreign exchange.

2. For issue of performance bonds on behalf of local construction companies/ contractors of goods
and services bidding for international tenders. Provided that the liability of the bank/DFI will be on
reducing balance basis after taking into account progressive billing certified by the beneficiary/project
owner and payment received against these bills.

3. For issue of guarantees on behalf of local construction companies/ contractors of goods and
services bidding for international tenders in respect of mobilization advance.
a) Guarantees issued should contain clause that the mobilization advance and other proceeds under the
contract shall be routed by the beneficiary/project owner through the account of the contractors
maintained with the guaranteeing bank/DFI.
b) At the time of issuing such guarantee the construction company/contractor shall sign an
agreement with the bank/DFI that cash proceeds out of mobilization advance will be released as
per satisfaction of the bank/DFI about the progress of the contract.

4. While issuing guarantees to the exporters of cotton in terms of F.E. Circular No.77 dated
December 4, 1988, banks/DFIs may settle the type and quantum of security with their customers.

5. Issue of performance bonds/bid bonds and guarantees issued for mobilization advances on behalf of
the manufacturers of engineering goods. The term ‘engineering goods’ shall have the same
meanings as are given to locally manufactured machinery in State Bank of Pakistan scheme for
financing locally manufactured machinery. Such condition may, however, not be necessary in case of
guarantees issued by the International Banks.

34
 ANNEXURE-V

GUIDELINES IN THE MATTER OF CLASSIFICATION

AND PROVISIONING FOR ASSETS (REGULATION R-8)
All Financing Facilities (including Short, Medium and Long Term)

TREATMENT OF PROVISIONS TO
CLASSIFICATION DETERMINANT
INCOME BE MADE
(1) (2) (3) (4)

1. Substandard. Where mark-up/ Unrealized mark-up Provision of 25% of the difference

interest or /interest to be kept in resulting from the outstanding
principal is Memorandum Account balance of principal less the amount
of liquid assets realizable without
overdue by 90 and not to be credited to
recourse to a Court of Law and
days or more Income Account except Forced Sale Value (FSV) of
from the due date. when realized in cash. pledged stocks, plant & machinery
Unrealized mark under charge, and mortgaged
up/interest already taken residential, commercial & industrial
to income account to be properties (land & building only) to
reversed and kept in the extent allowed in Para 2 of the
Regulation R-8 (see Note 2 below)
Memorandum Account.

2. Doubtful. Where mark-up/ As above. Provision of 50% of the difference

interest or resulting from the outstanding
principal is balance of principal less the amount
of liquid assets realizable without
overdue by 180
recourse to a Court of Law and FSV
days or more of pledged stocks, plant &
from the due date. machinery under charge, and
mortgaged residential, commercial
& industrial properties (land &
building only) to the extent allowed
in Para 2 of the Regulation R-8 (see
Note 2 below).
3. Loss. (a) Where mark- As above Provision of 100% of the difference
up/ interest or resulting from the outstanding
principal is balance of principal less the amount
of liquid assets realizable without
overdue by one
recourse to a Court of Law and FSV
year or more from of pledged stocks, plant &
the due date machinery under charge, and
mortgaged residential, commercial
& industrial properties (land &
building only) to the extent allowed
in Para 2 of the Regulation R-8 (see
Note 2 below).

As above.
(b) Where Trade As above.
Bills
(Import/Export or
Inland Bills) are
not paid/adjusted
within 180 days

35
 of the due date.

Notes :
1) Classified loans/advances that have been guaranteed by the Government would not require provisioning,
however, mark up/interest on such accounts to be taken to Memorandum Account instead of Income Account.
2) FSV shall be determined in accordance with the guidelines contained in Annexure-VI to these Regulations.
 

36
 ANNEXURE-VI

Uniform Criteria for Determining the Value of Pledged Stock, Plant & Machinery under
Charge and Mortgaged Properties (Prudential Regulation R-8)

Only liquid assets, pledged stock, plant & machinery under charge, and property having registered or
equitable mortgage shall be considered for taking benefit for provisioning, provided no NOC for
creating further charge to another bank / DFI / NBFC has been issued by the bank/DFI. The aforesaid
assets having pari-passu charge shall be considered on proportionate basis of outstanding amount.

2. Hypothecated assets, excluding plant & machinery under charge, shall not be considered for taking the
FSV benefit for provisioning requirement. Similarly, all assets with second charge and floating charge
shall not be considered for taking the FSV benefit for provisioning requirement.

3. Valuations shall be carried out by an independent professional evaluator who should be listed on the
panel of evaluators maintained by the Pakistan Banks Association (PBA). The evaluator while
assigning any values to the pledged stock, plant & machinery under charge, and mortgaged property, shall
take into account all relevant factors affecting the salability of such assets including any difficulty
in obtaining their possession, their location & condition, and the prevailing economic conditions in
the relevant sector, business or industry. The values of pledged stock, plant & machinery under charge, and
mortgaged property so determined by the evaluators must represent a reasonably good estimate of the
amount that could currently be obtained by selling such assets in a forced / distressed sale condition.
The evaluators should also mention in their report the assumptions made, the calculations / formulae /
basis used and the method adopted in determination of the values i.e. the Market Value and Forced Sale
Value (FSV).

4. The valuation process will include conducting a “Full-scope Valuation” of the assets in the first year
and then followed by “Desktop Valuations” in the second and third year. Full-scope Valuation shall be
valid for three years from the date of last Full-scope Valuation.

5. The following may be noted in respect of the Desktop and Full-scope Valuations:
Desktop Valuation is defined as “an Interim Brief Review of Full-scope Valuation, so that any
significant change in the factors, on which the Full-scope Valuation was based, is accounted for and
brought to the notice of the lending bank/DFI”.
In case the loan amount exceeds Rs 100 million, the Desktop Valuation will be done by the same
evaluator, who had conducted the Full-scope Valuation (the evaluator should be on the panel of the
PBA) whereas for loans below this threshold, the Desktop Valuation may be done by the banks/DFIs
themselves or by the approved evaluators. For conducting Desktop Valuation, the evaluator will
pay a short visit to the borrower’s site. The bank’s/DFI’s responsibility in this respect will be to
ensure that the evaluator is contacted for conducting Desktop Valuation and is provided all necessary
information which is materially important for the interim review.
The Desktop Valuation shall be used for determining any additional provisioning requirement only and
will not be applied for reducing the provisioning requirement assessed on the basis of Full-scope Valuation.
In cases where the evaluators are not allowed by the borrowers to enter in their premises, the Full-
scope Valuation, conducted as such, will not be accepted for provisioning benefit.

6. State Bank of Pakistan may check the valuations of the assets under mortgage/charge, through an
independent evaluator, on random basis, to verify the reasonableness of the valuations. The
unjustified differences in the valuations of banks/DFIs and State Bank of Pakistan shall render the
concerned bank/DFI and evaluator to penal actions including, inter alia, withdrawal of FSV benefit.

7. Various categories of assets to be considered for valuation would be as under (no other assets shall be
taken into consideration):
a) Liquid Assets:
37
Valuation of Liquid Assets shall be determined by the bank / DFI itself and verified by the external
auditors. However, in the case of pledged shares of listed companies, values should be taken at market value
as per active list of Stock Exchange(s) on the balance sheet date. Moreover, valuation of shares pledged
against loans/advances shall be considered only if such shares are in dematerialized form in the Central
Depository Company of Pakistan (CDC), otherwise these will not be admissible for deduction as
liquid assets while determining required provisions.
b) Mortgaged Property and Plant & Machinery under Charge:
Valuation of residential, commercial & industrial property (land and building only) and plant &
machinery would be accepted as determined by evaluators in accordance with the criteria given
above.
c) Pledged Stocks:
In case of pledged stocks of perishable and non-perishable goods, forced sale value should be
provided by evaluators, and such valuation should not be more than six months old, at each balance sheet
date. The goods should be perfectly pledged, the operation of the godown(s) or warehouse(s) should be in
the control of the bank/DFI and regular valid insurance and other documents should be available. In case
of perishable goods, the evaluator should also give the approximate date of complete erosion of value.

38
 CORPORATE GOVERNANCE ANNEXURES
ANNEXURE A
ASSESSMENT OF FITNESS AND PROPRIETY

1. INTEGRITY, HONESTY AND REPUTATION

i) Has not been convicted/involved in any fraud/forgery, financial

crime etc, in Pakistan or elsewhere, or is not being subject to any
pending proceedings leading to such a conviction.

ii) Has not been subject to any adverse findings or any settlement in
civil/criminal proceedings particularly with regard to investments,
financial matters/business, misconduct, fraud, formation or
management of a corporate body etc by SBP, other regulatory
authorities (within or outside Pakistan), professional bodies or
government bodies/agencies.

iii) Has not contravened any of the requirements and standards of SBP
or the equivalent standards/requirements of other regulatory
authorities (outside Pakistan as well), professional bodies or
government bodies/agencies.

iv) Has not been involved with (management or conduct of the affairs
of) a company/firm or any other organization that has been refused
registration/licence to carry out trade, business etc.

v) Has not been involved with (management or conduct of the affairs

of) a company/firm whose registration/licence has been revoked or
cancelled or gone into liquidation or other similar proceedings due
to mismanagement of affairs, financial misconduct or mal
practices.

vi) Has not been debarred for being Chief Executive, Chairman,
Director, Controlling Shareholder/Sponsor or Key Executive of a
company/firm or in similar capacity.

2. TRACK RECORD

i) The person must have an impeccable track record in the companies

served either in the capacity of an employee or director/Chief
Executive or as Chairman.

ii) Has not been demoted, dismissed or forced to resign from

employment by the bank/DFI, or has not been removed by any
regulator or government body, in the capacity of employee,
director, chairman or key executive of the company/firm or any
other position of trust.
39
3. SOLVENCY & FINANCIAL INTEGRITY

i) Has not been associated with any illegal activity concerning

banking business, deposit taking, financial dealing and other
business.

ii) Has not been in default of payment of dues owed to any financial
institution and/ or default in payment of any taxes in individual
capacity or as proprietary concern or any partnership firm or in any
private unlisted/listed company.

iii) Has not been associated as director and/or chief executive with the
corporate bodies who have defaulted in payment of Government
duties/taxes etc.

iv) Has sufficient means to discharge his/her financial obligations, if

any.

4. QUALIFICATION & EXPERIENCE

This section shall apply separately for Directors, CEO and Key Executives
of Banks/DFIs as under: -

i. Directors on the Board

a. Must have management/business experience of at least 5 years at

senior level in an active capacity. In case of lawyers, 7 years
experience is required, provided that they are not
practicing/involved with or acting as legal counsel/adviser or on
payroll of a bank where he is proposed to be appointed as director.

b. Minimum qualification for a person to be appointed as Director on

the Board of a bank/DFI is graduation. Higher education
accomplished in the discipline of banking and finance may be an
added qualification.

ii. Chief Executive Officer

a. Must be a career banker having at least 5 years of experience at

senior level as EVP and above or equivalent i.e. Group Head of
Financial/Business Line in a bank and posses expertise and skill set
to undertake responsibilities of the position effectively and
prudently.

b. Should be between 40 to 70 years of age.

40
 c. Should have minimum qualification of graduation or equivalent in
the discipline of banking, finance, economics, business
administration and related fields. CEO of the Islamic Bank should
preferably be having experience/training in Islamic Banking.

iii. Key Executive

a. Must be a qualified professional possessing relevant experience &

degree relating to the job/assignment.

5. CONFLICT OF INTEREST

i. The CEO is not a Chairman of the Board of Directors of the same

bank/DFI .

ii. The Directors on the Board should avoid conflict of interest in their
activities with, and commitments to, other organizations.

iii. Is not a director (including as a nominee director of the Government) of

any other bank/DFI. However, this clause will not be applicable in
case of Managing Director and other employees of National
Investment Trust (NIT) nominated on the Board of banks/DFIs, till its
privatization.

iv. No person can become a Director of the bank/DFI, if he/she is :

a. Holding substantial interest or is working as Chairman,
Director, Chief Executive, Chief Financial Officer, Chief Internal
Auditor, Research Analyst or Trader (by whatever
name/designation called) of a:

i. Exchange Company (firm or sole proprietorship)

ii. Member of a Stock Exchange
iii. Corporate Brokerage House
iv. Any company/entity owned and controlled by the
person mentioned at (i) to (iii) above

b. Acting, either in personal capacity and/or through firm/

company where he/she has substantial interest, as consultant
/advisor to bank/DFI in which he/she intends to become a
director.

6. OTHERS

i. Not more than 25% directors of the same family are permitted to be on
the Board of a bank/DFI.

ii. Maximum two members of Board of Directors of a bank/DFI including

its CEO can be the Executive Directors.

41
iii. Directors should preferably be professionals from diversified
field/industry. However, a minimum of 25% members of Board of
Directors of a bank/DFI shall be Independent Directors.

iv. No member of Senate, National/ Provincial Assembly, Local bodies

shall be appointed/ recommended for appointment as Member of
Board of Directors and/or Chief Executive Officer/Key Executive of
any bank/DFI.

v. No Key Executive shall head more than one functional area.

Furthermore, he/she shall not hold directorship in his /her personal
capacity: (a) in a business concern which is also a client of the
bank/DFI, and (b) in any other financial institution.

42
 ANNEXURE - I
PROFORMA - FIT & PROPER TEST
Full Name

Photo Father’s Name

1X 1 1/2
Date of Birth Place of Birth (City and Country)

Nationality (ies) NTN Number

C.N.I.C No. N.I.C. No.(Old)

Passport Number (for foreign national)

Present Residential Address in Full

Permanent Residential Address in Full

Residential Telephone Number (s) Mobile Number

If you have changed your name, state previous name and reason for change

Academic Education
Qualification Name & Address of Degree Date of Completion
Awarding Institution

Professional Education
Qualification Name & Address of Institution/ Date of Completion
Professional Body

Trainings if any

Cont’d…

43
Existing Employment
Present Designation Present Department

Official Address

Telephone Number (s) Email

Please provide complete and true particulars of all business (es), including proprietary
concern/partnership firms, companies, in which you have been associated as a
proprietor, partner or a director thereof during the last ten years and the accounts maintained
by them:
Name of Proprietary Name of bank and/or NBFIs Account Number (s)
Concern/Partnership Firm/ Together with Name of
Company Branches

Position held during the last ten years (along with name and address of company/institution/
body where appointment held, nature of the company/institution/body and dates of
appointment)

Position of the shares held in the bank Number of shares held as of ___
As a Sponsor Shareholder
• Own name
• In name of your company
• In name of your family member
Other than Sponsor Shareholder
• Own name
• In name of your company
• In name of your family member

(Signature of concerned official)

44
 ANNEXURE-II

Affidavit
(On Non-Judicial Stamp Paper)

I, ________________ son/daughter/wife of _______________________ adult, resident

of _________________________________________________________________________
and holding CNIC No. ______________________________ do hereby state on solemn
affirmation as under:-

a. that the deponent hereby confirm that the statement made and the
information supplied in the attached questionnaire and the Annexure-I and
the answers thereof are correct and that there are no other facts that are
relevant for “Fit and Proper Test”

b. that the deponent undertake that the State Bank of Pakistan may seek
additional information from any third party it deems necessary in view of
assessing “Fit and Proper Test”

c. that the deponent undertake to bring to the attention of the State Bank of
Pakistan any matter which may potentially affect my status as being someone
fit and proper as and when it crops up; and

d. that whatever is stated above is correct to the best of my knowledge and belief
and nothing has been concealed therefrom.

DEPONENT

The Deponent is identified by me

Signature _______________________
ADVOCATE
(Name and Seal)

Solemnly affirmed before me on this ______ day of _____________ at ______________ by

the Deponent above named who is identified to me by ________________, Advocate,
who is known to me personally.

Signature__________________________________________
OATH COMMISSIONER FOR TAKING AFFIDAVIT
(Name and Seal)

45
 QUESTIONNAIRE FOR ACCESSING “FIT & PROPER TEST”
Please answer the following questions by entering a tick (√ ) in the
appropriate box. If answer of any of these questions in YES and need
explanation, use a separate sheet with proper reference to the question.

Yes No

1. Have you ever been convicted/involved in any fraud/forgery, □ □

financial crime etc, in Pakistan or elsewhere, or is being subject to
any pending proceedings leading to any conviction?
2. Have you ever been associated with any illegal activity □ □
concerning banking business, deposit taking, financial dealing
and other business
3. Have you ever been subject to any adverse findings or any □ □
settlement in civil/criminal proceedings particularly with regard
to investments, financial/business, misconduct, fraud, formation
or management of a corporate body etc by SBP, other regulators,
professional bodies or government bodies/agencies?
4. Have you ever contravened any of the requirements and □ □
standards of regulatory system or the equivalent standards or
requirements of other regulatory authorities?
5. Have you ever been involved with a company or firm or other □ □
organization that has been refused registration/licence to carry
out trade, business etc?
6. Have you ever been involved with a company/firm whose □ □
registration/licence has been revoked or cancelled or gone into
liquidation or other similar proceedings?
7. Have you ever been debarred for being Chief Executive, □ □
Chairman, Director or Sponsor/Strategic Investor of a company,
especially financial institutions?
8. Have you ever been dismissed/ asked to resign/resigned in □ □
Pakistan or elsewhere in order to avoid legal or disciplinary
action?
9. Have you ever resigned from a professional or regulatory □ □
body in Pakistan or elsewhere in order to avoid legal or
disciplinary action?
10. Have you ever been disqualified/ removed by □ □
regulators/Government bodies/ agencies?
11. Have you ever been in default of payment of dues owed to any □ □
financial institution in individual capacity or as proprietary
concern or any partnership firm or in any private unlisted/listed
company?
12 Have you ever been in default of taxes in individual capacity or □ □
as proprietary concern or any partnership firm or in any private
listed/unlisted company?
13 Have you ever been associated as director and/or chief executive □ □
with the corporate bodies whose corporate and tax record,
including custom duties, central excise and sales tax has been
unsatisfactory?
cont’d...

46
 Yes No
14. Have you entered into any agreement with any other person □ □
(natural or legal) which will influence the way in which you
exercise your voting rights or the way in which you otherwise
behave in your relationship with the authorized entity?
15. Are you a director on the Board of Directors of any other □ □
Financial Institution(s)?
16. Are you a Chairman, Chief Executive, Chief Financial Officer, □ □
Chief Internal Auditor, Research Analyst or Trader (by whatever
name/designation called) of a Exchange Company (firm or sole
proprietorship), member of a Stock Exchange, Corporate
Brokerage House?
17. Are you owing/controlling any Exchange Company or □ □
Corporate Entity?
18. Have you been or are you working as consultant or adviser of □ □
bank/DFI in which you intend to become a director?
19. Are you employee of the Bank/DFI? □ □
20. Are you employee of a company/entity/organization where □ □
sponsor shareholders of bank/DFI have substantial interest
21. Are you a member/office bearer of any political party or □ □
member of Senate/National/Provincial Assembly/Local Body?
22. If independent director, have you enclosed declaration in this □ □
behalf?
23. Any other information that is relevant for the purpose of SBP □ □
and needs to be mentioned?

Signature ______________________

Name ______________________

Position ______________________

Date ______________________

47
 ANNEXURE - III

PROFORMA - FITNESS & PROPRIETARY OF KEY EXECUTIVES

Position and Grade held by the Executive

Date of assumption of current position (dd/mm/yyyy)

Photo
Full Name
1X 1 1/2
Father’s Name

Date of Birth Place of Birth (City and Country)

Nationality (ies) NTN Number

C.N.I.C No. N.I.C. No.(Old)

Telephone Number (s) Mobile number

Academic Education
Qualification Name & Address of Degree Date of Completion
Awarding Institution

Professional Education
Qualification Name & Address of Degree Date of Completion
Awarding Institution

Trainings if any

Previous Employment (s) (date-wise)

Designation Department
Official Address
Telephone Number (s)

Has ever been convicted of any offence Yes No

If yes, nature of offence and penalty imposed

Has ever been censured or penalized by any financial regulator (local or Yes No
foreign)?
If yes, reasons for adverse findings and amount of penalty imposed (if any)

Have you ever been dismissed from employment Yes No

If yes, name of the employer and reason for dismissal

(Signature of the concerned official) (Signature and Stamp of Employer)

48
 ANNEXURE- IV
(BPRD Circular No. 5 of 2015)

DECLARATION BY THE PROPOSING BANK/DFI

 
(To be signed either by the President/Chief Executive Officer, Head of Human
Resources or the Company Secretary of the incorporated Bank/DFI)

I, _______________________ on behalf of ___________________ (name of proposing

Bank/DFI) ("the proposing Bank/DFI") submit the FPT Proforma in respect of Mr./Ms.
_______________ for the proposed position of ____________________ and declare that:

(i) To the best of my knowledge, information and belief, the information that is
being submitted to SBP is true, accurate and supports my view that this person
fulfils all the criteria for the post for which he/she is proposed.

(ii) Select (9) as appropriate:

   

a) The Bank/DFI has satisfied itself that the proposed person meets the
requirements of all the applicable laws, rules and regulations including  
Companies Ordinance, 1984, Banking Companies Ordinance, 1962,
Banks Nationalization Act, 1974 (if applicable) and FPT Criteria and is, □ 
in the opinion of the Bank/DFI, capable of fulfilling the assigned role.  
 
  OR  
 
  The Bank/DFI acknowledges that the proposed person needs an  
exemption from some provision(s) of the applicable laws, rules and
regulations, details of which are given in the attached letter along with   □
justifications thereof.

b)  The bank/DFI has obtained copies of educational degrees/certificates and  

verified the same from relevant institutions/universities or obtained
certified copies of verification from previous employer directly. □ 
 
  OR 
  The bank/DFI undertakes to confirm to the SBP within a period of four  
(4) months hereof that educational degrees/certificates shall be got
verified by them and status of the same shall be communicated to SBP □ 
accordingly.
 
c)  The bank/DFI has obtained satisfactory confidential reports from the
former employer(s). □ 

 
 

Signature & Stamp of Bank/DFI’s Official: ________________________________

49
 OR
The bank/DFI undertakes to obtain confidential reports from the former
employer(s) within a period of three (3) months hereof and status of the □
same shall be communicated to SBP accordingly.
 
(iii) I am aware that it may be:
a. an offence and/or
b. grounds for refusal of this application and/or
c. grounds for revocation of an authorization granted on the basis of this application
and/or
d. grounds for SBP to commence an administrative sanctions procedure against both
myself and/or the Bank/DFI

if the undersigned and/or the Bank/DFI knowingly or recklessly

• provide false or misleading information and/or to make a false or misleading statement
(which, I acknowledge, may include the withholding by me and/or the Bank/DFI of
relevant information) in this application for authorization
• fail to inform and/or withhold from the SBP details of any change in
circumstances/new information which is relevant and/or material to the status of the
proposed person anytime from now on.
• fail to inform to SBP immediately any legal and/or contractual infirmity resulting from
behavior, conduct or incapacity in whatever form any time from now on which could
potentially debar the person from holding the position.

Dated this day of

Name: Signature:

Position/Designation:

For and on behalf of (name of Bank/DFI):

 

50
 Annexure-AA
(BPRD Circular 04 of 2008)

Procedure for deposit of sponsor shares into

a blocked account with CDC

Following procedure shall be followed by banks for deposit / transfer of

sponsor shares into CDC account:

1. The existing sponsor shareholders who have already deposited

their shares with SBP BSC shall :
a) Open account (sub-participant account or investor account) at
CDC exclusively for depositing sponsor shares and subsequent
bonus and right shares.
b) Confirm the account number to SBP through company secretary
of the bank.
c) On receipt of above confirmation, SBP will allow the withdrawal
of shares deposited with SBP BSC for deposit with CDC.
d) The bank shall confirm the deposit of sponsor shares in the CDC account
within 15 days of release of shares by SBP.

2. The prospective sponsor shareholders shall open CDC account (sub- participant
account or investor account) and confirm the account number to SBP through
Company Secretary of the bank at least 15 days prior to issuance/transfer of
shares. Further, they shall arrange for confirmation of submission of shares in
CDC account within 3 days of issuance of shares.

3. For those sponsor shareholders who are yet to deposit their sponsor shares in a
blocked account with CDC, shall either open a new account or identify an
existing account and confirm the same through Company Secretary of the
bank to SBP by 31st May, 2008 along with schedule for transfer of sponsor
shares in the account by 31st July, 2008. 

************************

51
Frequently Asked Questions (FAQs)
regarding Prudential Regulations of
Corporate/Commercial Banking
Frequently Asked Questions (FAQs) regarding Prudential Regulations of Corporate/Commercial Banking

Banking Policy and Regulations Department, State Bank of Pakistan, Karachi

Banking Policy and Regulations Department, State Bank of Pakistan, Karachi | 2

 Frequently Asked Questions (FAQs) regarding Prudential Regulations of Corporate/Commercial Banking

Definitions:

i. While identifying ‘Group’, will the shareholding in Government-owned entities/financial institutions

or vice-versa, form the ‘Group’?

No, the shareholding in or by the Government-owned entities and financial institutions does not form a
‘Group’.

ii. If a person is director on the board of more than one company, will such companies together be
treated as Group on the basis of such ‘Common Directorship’?

No, Group will not be formed just on the basis of Common Directorship. For the purpose of Prudential
Regulations, a group will comprise all persons, whether natural or juridical, if one of them or his dependent
family members or its subsidiary, have control or hold substantial ownership interest (as defined in the
regulations) over the other.

iii. Does an affiliation arising on the basis of Nominee Director appointed by a Federal/Provincial
Government constitute the ‘Related Party’?

No, a relationship that is based on the Nominee Director of Government will be excluded from the
definition of ‘Related Party’. However, the definition will include personal/family business interests of
such nominee director.

iv. Are the facilities extended against the security of Trust Receipt only be treated as ‘Secured’
exposure?

Yes, a bank’s exposure against the security of Trust Receipt only may be treated as secured exposure.
However, the banks are free to take collateral/securities, to secure their risks/exposure, in addition to the
Trust Receipt.

v. Can the guarantees received as collateral from a commercial Bank/DFI/NBFC and Foreign bank be
treated at par with ‘Liquid Assets’?

 Guarantees issued by domestic banks/DFIs (regardless of their rating) when received as collateral by
banks/DFIs will be treated at par with liquid assets.
 A guarantee received from a foreign bank(not licensed by State Bank of Pakistan) will be treated as
liquid asset only if the foreign bank have a minimum “A” rating assigned by Standard & Poors,
Moody’s, Fitch-IBCA, or Japan Credit Rating Agency (JCRA). Guarantees received from local NBFCs
are not treated at par with liquid assets. However, banks/DFIs’ exposure to an obligor/borrower against
the Guarantee of a NBFC would be considered as secured, subject to compliance with Regulation R-9.

vi. Does the definition of ‘Exposure’ also include bills purchased/discounted by the banks/DFIs?

Yes, the definition of exposure also includes bills purchased/ discounted. However, bills
purchased/discounted from borrower, drawn against the LCs, may be treated/exempted as per the
provisions of Regulation R-1 (Annexure-I) and Regulation R-4 of Corporate/Commercial Banking.

Banking Policy and Regulations Department, State Bank of Pakistan, Karachi | 3

 Frequently Asked Questions (FAQs) regarding Prudential Regulations of Corporate/Commercial Banking

vii. Can the revaluation reserve/surplus on fixed assets be counted in the ‘Equity of the bank/DFI’ for
calculating limits/benchmarks under all Regulations of Corporate/Commercial Banking?

No, the benefit of surplus on revaluation of fixed assets (up to 50% of the amount) will be counted towards
the equity only for the purpose of Regulation R-1 (i.e. Exposure Limits).

viii. Does the pledged goods (as collateral) also form part of the Liquid Assets?

No, pledged assets are not categorized as liquid assets. However, for the purpose of term ‘Secured’, these
assets are categorized as a security. (Pledged stock is also eligible for taking FSV benefit for provisioning
Under PR R-8).

ix. Can a bank/DFI extend credit facilities against the lien on COIs / Deposits maintained with NBFCs?

Yes, as defined in the Regulations, COIs/Deposits of NBFCs/DFIs rated “A” and above can be treated as
liquid securities and loans can be extended against them (subject to the requirement that these assets are
under perfect lien of the lending bank/DFI with appropriate margin).

1. Risk Management:

Regulation R-1(Exposure Limits):

i. Does revaluation reserve also include revaluation of assets other than fixed assets for the
purpose of calculating single obligor/group exposure limits of the bank/DFI?
No, for the purpose of calculating single obligor/group exposure limits revaluation reserves will not
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Frequently Asked Questions (FAQs) regarding Prudential Regulations of Corporate/Commercial Banking

include appreciation on account of assets other than fixed assets.

ii. Does the group exposure limit cover exposure on Corporate and SMEs, owned by the same
group, or, exposure taken on them is calculated separately?

Yes, the group exposure limit will be calculated by taking financing facilities given to both
Corporate and SMEs belonging to the same group.

iii. Can a bank place an overall limit on its inter-bank placements for all the banks?

Under Para No. 1(G) of Annexure-I of Prudential Regulation R-1 for Corporate/Commercial
Banking, Banks/DFIs are explicitly required to ensure that the overall limit for each financial
institution in respect of inter-bank placements is invariably approved by their Board of Directors.
Thus, the sum of all these limits (for each financial institution) will become the overall limit for all
banks in respect of interbank placements.

iv. Does the exposure in respect of banks/DFIs’ financing facilities calculated under Regulation R-
1 mean the sanctioned limit or the outstanding amount?

For the purpose of calculating exposure in respect of financing facilities, the sanctioned limits, or
outstanding, whichever is higher, will be considered. However, in case of fully drawn term loans
where there is no scope for re-drawal of any portion of the sanctioned limit, bank/DFI may consider
the outstanding as exposure.

v. Would investments (more than 5% of the equity of banks/DFIs) made by international bodies
like World Bank, IFC etc. make them fall under the definition of related party in the context
of exposure limits under Para No. 2 of PR R-1 of Corporate/Commercial Banking?

Relationships arising from investments of international multilateral agencies like IFC, ADB and
Islamic Development Bank etc (e.g. more than 5% shareholding in banks/DFIs vis-à-vis in other
entities) would not fall under the definition of related party for the purpose of exposure limits under
Para No. 2 of PR R-1 of Corporate/Commercial Banking.

vi. While calculating Single Obligor/Obligor Group exposure limit under Regulation R-1 (Para 1,
Para 2 and Annexure-I), is there any weightage (haircut/adjustment) available for exposure
on NBFCs?

No; as per Regulation R-1 (Para 1, Para 2 and Annexure-I) no weightage is available against
exposure taken on the NBFCs. Such exposure will be taken at its entire value for the purpose of
Regulation R-1.

vii. Does the Single Obligor/Obligor Group exposure limit under PR R-1 apply on interbank
placement with banks and DFIs?

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Frequently Asked Questions (FAQs) regarding Prudential Regulations of Corporate/Commercial Banking

Yes, the interbank placement is also subject to Single Obligor limits under Regulation R-1.
However, for calculating the Single Obligor Limit in such cases, the following adjustment
weightages may be applied (as explained in Para 1-(G) of Annexure-I):

 25% weightage on exposure to banks / DFIs with ‘AAA’ rating,

 50% weightage on exposure to banks / DFIs rated ‘A' and ‘AA’,
 100% weightage on exposure to banks / DFIs rated below ‘A’,

Further, the banks/DFIs are required to ensure that the overall limit for each financial institution in
respect of interbank placements is invariably approved by their Board of Directors.

viii. Does Standby Letter of Credit (SBLC) have any weightage (haircut/adjustment) as normal
LCs while calculating per party limit under PR R-1?

No, Since a SBLC is a type of financial guarantee, no weightage (haircut/adjustment) or conversion

factor under Annexure-I is allowed for calculating the exposure limits.

ix. Are the facilities under Long Term Financing Facility for Plant and Machinery exempt from
the Single Obligor limit under R-1?

No, in arriving at exposure under Regulation R-1, weightage of 25% shall be given in respect of the
Long Term Financing Facility for import of Plant & Machinery.

Regulation R-2(Limit on Exposure against Contingent Liabilities):

i. A 50% weightage is available for LCs while calculating the bank’s/DFI’s ‘Single Obligor
Limit’ under Regulation R-1. Is any such weightage (on LC) also available while calculating
the Bank’s/DFI’s ‘aggregate exposure limit’ in respect of contingent liabilities under
Regulation R-2?

No, while calculating the ‘aggregate exposure limit’ of a bank/DFI in contingent liabilities under
Regulation R-2, such weightage is not available against L/Cs. However, non fund based exposure to
the extent covered by cash /liquid assets would not constitute contingent liability for the purpose of
PR R-2 of Corporate/Commercial Banking.

Regulation R-3(Financial Analysis):

i. Can the condition of obtaining CIB Report and BBFS be waived when a loan is fully secured
by liquid assets?

No, the condition of obtaining CIB Report and BBFS cannot be waived even if the loan is fully
secured by Liquid Assets. However, if the Loan Application Form already contains all the
information as required in BBFS, then no separate BBFS may be required.

ii. Can a bank/DFI allow lending to the borrowers with CIB showing default?

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Frequently Asked Questions (FAQs) regarding Prudential Regulations of Corporate/Commercial Banking

The banks/DFIs may allow financing to defaulters keeping in view their risk management policies
and credit approval criteria, and that they properly record reasons and justifications in the approval
form.

iii. Can a bank take exposure (Fresh/Renewal) on a borrower if any of the group companies has
an overdue exposure in eCIB?

While considering any exposure (including renewal, enhancement and rescheduling/restructuring

etc) to a borrower, banks are not only required to give due weightage to the credit report relating to
the borrower but also those of the group companies. However, if the banks/DFIs decide to take
exposure on defaulters, they should strictly follow their risk management policies and credit
approval criteria and properly record reasons and justifications of the same in the approval form.

iv. Is the requirement of CIB report and Borrower Basic Fact Sheet applicable in case of
placement with financial institutions (banks/DFIs/NBFCs)?

BBFS and CIB are not required in case of placements with financial institutions
(banks/DFIs/NBFCs).

v. In respect of the financial conditions of borrower/obligor (e.g. current ratio, debt-equity ratio
etc.), is there any mandatory minimum standards that banks/DFIs should observe before
granting the financing facilities?

No, the State Bank has not prescribed any minimum financial ratios for the obligor/borrower.
However, Regulation R-3 requires the banks/DFIs to have duly approved, effective credit policy in
place which, inter alia, prescribes the minimum current ratio, linkage between borrower’s equity
and total financing facilities. Moreover, the banks/DFIs are required to obtain financial statements,
CIB report, and basic facts of the borrower; and carry out the due assessment of its financial
condition and financing needs before granting any new financing facility or renewal, enhancement,
rescheduling etc. of the facility.

vi. As the requirement of Personal Guarantee is at bank’s discretion, Is it necessary to report the
net worth of Directors (who have given Personal guarantee to secure credit) as required in
BBFS (Borrower’s Basic Fact Sheet)?

Banks/DFIs are required to obtain duly filled in Borrower’s Basic Fact Sheet while ensuring that all
relevant details have been properly provided by the borrower(s) in the Borrower’s Basic Fact Sheet.

vii. What should be the frequency and timeline for obtaining the audited financial statements?

At the time of allowing any exposure (including renewal, enhancement and rescheduling
/restructuring) and annual review of long term facilities, Banks/DFIs are required to obtain copy of
latest financial statements relating to the business of every borrower. Where finalization/audit of the
financial statements of a public limited company is pending due to some judicial/statutory exigency,
the bank/DFI may use last available audited financial statements together with management

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Frequently Asked Questions (FAQs) regarding Prudential Regulations of Corporate/Commercial Banking

accounts of the borrower. However, upon the finalization of financial statements, bank should make
due assessment of the same.
Regulation R-4(Security and Margin Requirements):

i. Can a loan be secured against the pledge of stocks in transit?

The level of risks associated with such type of security is relatively high. However, if terms of the
documents of collateral entitle the bank to enforce/realize the value of its security in case of default
or loss, the loan may be treated as secured. However, special care and prudence is required while
extending any exposure against such collateral.

ii. Does PR R-4 of Corporate/Commercial Banking prescribe any margin requirements on

facilities provided by them to their clients?

As per PR R-4 of Corporate/Commercial Banking, Banks/DFIs are free to determine the margin
requirements on facilities provided by them taking into account the risk profile of the borrower(s).
However, in cases where margin has been prescribed by State Bank/Government of Pakistan,
appropriate margin shall at least be equal to the prescribed margin.

iii. Do weightages (adjustments/haircuts) as given in Annexure-I of Regulation R-1 apply to

interbank placements for the purpose of calculating clean exposure limits under Regulation
R-4?

Yes, the weightages (adjustments/haircuts) of Annexure-I will be available for calculating the
permissible clean exposure limits (per party and aggregate clean exposure) under Regulation R-4.

iv. Does the aggregate clean exposure limit include all the funded and non-funded clean exposure
of the bank?

Yes, while calculating the overall clean exposure limit, all the funded and non-funded exposure of
the bank would be included except for the cases mentioned in Para (d) of PR R-4 of
Corporate/Commercial Banking.

v. Are clean inter-bank placements exempt from aggregate clean exposure limit under PR R-4?

No, inter-bank placements are not altogether exempt from aggregate clean exposure limit under PR
R-4.

vi. Does adjustment weightages as given in Annexure –I of regulation R-1 apply to interbank
placements for the purpose of calculating clean exposure limits under regulation R-4?

Yes, the adjustment weightages of Annexure-I will be available for calculating the permissible
clean exposure limits (Single Obligor and aggregate clean exposure) under regulation R-4.

vii. Does the “aggregate clean exposure”, mentioned in Regulation R-4 also include investment in
shares, commercial papers and unsecured PTCs/TFCs?

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Frequently Asked Questions (FAQs) regarding Prudential Regulations of Corporate/Commercial Banking

The Aggregate Clean exposure does not include investments in shares and commercial papers.
However, investment in unsecured PTCs and TFCs (excluding those issued by banks/DFIs to raise
Tier-II Capital as per SBP instructions) are included in the aggregate clean exposure.

Regulation R-5 (Monitoring):

i. Are the banks/DFIs required to institute mechanism for ensuring the proper utilization of
both non-fund and fund-based financing?

Yes, in terms of Para 1 (c) of the Regulation R-5, banks/DFIs are required to devise an appropriate
mechanism to ensure both fund and non-fund based financing provided are utilized for the intended
purpose. Banks/DFIs are required to ensure that financing is not used for non productive purpose
like hoarding, speculation etc.

Regulation R-6 (Exposure in Shares/TFCs/Sukuks):

i. If a bank has to take up the shares of any company due to underwriting commitments and
such act causes the bank’s holding to exceed 5% of paid-up shares in the subject company,
will that company be considered as Related Party of the bank/DFI for the purpose of Para 2
of Regulation R-1 of Prudential Regulations of Corporate/Commercial Banking?

If a bank has to take up shares of any company due to underwriting commitments and such act
causes the bank to hold 5% or more shareholding in the subject company, it will not be considered
as “Related Party” for the purpose of Para 2 of Regulation R-1 of PRs. However, in the event of
inability of the bank to off-load shares acquired in underwriting commitment within the period of
18 months, the subject company will be treated as related party for the purpose of Para 2 of
Regulation R-1 of PRs.

ii. Are the per scrip exposure limit prescribed under PR R-6 1(A) of Corporate/Commercial
Banking applicable to strategic investment and investments in units of all forms of mutual
funds/REITS or the same would be counted towards the aggregate investment limit only?

The limits mentioned under PR R-6 1(A) of Corporate/Commercial Banking are also applicable to
strategic investments and investments in units of all forms of Mutual Funds/REITs excluding NIT
units till its privatization.

iii. Can the purchase of shares in the ready or future market (long position) and its sale towards
the future (short position) be netted off for the purpose of calculation of maximum exposure
in futures i.e. 10% of bank’s equity?

The purchase of shares in the ready or future market and its sale towards the future can not be
netted off for the purpose of calculation of maximum exposure in futures i.e. 10% of bank’s equity
since the Regulation R-6 provides for inclusion of the positions both in the buying (long) and
selling (short).

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Frequently Asked Questions (FAQs) regarding Prudential Regulations of Corporate/Commercial Banking

iv. Will banks/DFIs’ aggregate investment in units of REIT be counted towards the aggregate
investment limits of 30% of equity of the banks prescribed in the Regulation R-6 of
Prudential Regulations for Corporate/Commercial Banking?

Banks/DFIs’ investment in units of REIT shall not be counted towards the aggregate investment
limits of 30% and 35% of equity of the banks and Islamic banks/DFIs respectively, prescribed in
the Regulation R-6 of Prudential Regulations for Corporate/Commercial Banking. Instead,
aggregate investment in units of REITs shall be 10% of the equity of the bank/DFI.

v. Will banks/DFIs investments in its subsidiaries subject to the investment limits prescribed
under PR R-6 of Corporate/Commercial Banking?

Investments of the bank/DFI in its subsidiary companies (listed as well as non-listed) shall not be
included in the limits prescribed under PR R-6 of Corporate/Commercial Banking. However, the
single obligor exposure limit under PR R-1 of Prudential Regulations for Corporate/Commercial
Banking will be applicable on exposure to the subsidiary and any type of placement in the form of
deposit, purchase of COI, certificates, etc. shall be considered part of the exposure of the Bank/DFI.
Further, the exposure of the Bank/DFI on mutual funds launched/administered by the subsidiary
shall also be considered exposure on the subsidiary.

vi. Do Prudential Regulations of Corporate/Commercial Banking prescribe any limit in respect

of Banks/DFIs’ total exposure in equity market (equity investment, margin financing,
repo/reverse repo transaction and financing against shares)?

As per BPRD Circular No. 3 of 2008, the total exposure of banks/DFIs in shares whether in equity
investment, margin financing, repo/reverse repo transaction and financing against shares, etc at any
given point of time, should not exceed 50% of the equity of the Bank/DFI and subject to
compliance of limits laid down in Regulation R-6 of Prudential Regulations for
Corporate/Commercial Banking. Financing to asset management companies, and their mutual funds
shall also be counted towards the aforesaid limit.

vii. Would the seed capital as well as incremental investment in the subsidiary companies be
exempt from the capping requirement of regulatory limits under PR R-6 of
Corporate/Commercial Banking?

Yes, the seed capital as well as incremental investment in the subsidiary companies will be exempt
for the purpose of calculating aggregate investment limit of 30%.

viii. Does PR R-6 prescribe any investment limits in respect of banks/DFIs’ investment in Real
Estate Sector?

Under PR R-6 of Corporate/Commercial Banking, Banks/DFIs are required not to own units of a
REIT (Real Estate Investments Trust) in excess of 5% of their own equity. Furthermore, Aggregate
investment limit in units of REIT is required to be not more than 10% of equity of the bank/DFI,
exclusive of the aggregate limit prescribed under PR R-6 of Corporate/Commercial Banking. As

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Frequently Asked Questions (FAQs) regarding Prudential Regulations of Corporate/Commercial Banking

regards the aggregate exposure in Real Estate Sector, Banks/DFIs are required to follow the
instructions of BPRD Circulars No.1 and 02 of 2014.

ix. Do Banks/DFIs have to seek permission regarding disposal of strategic investments?

Banks/DFIs may dispose of strategic investments after retaining the same for the minimum period
prescribed under BPRD Circular Letter No 16 dated August 1, 2006.

x. Can a bank take exposure against the security of mutual funds managed by the subsidiary of
the borrower?

In terms of Para No.5 (d) of PR R-6 of Corporate/Commercial Banking, the bank cannot take
exposure (fund based and non fund based) against the security of mutual fund units managed by a
borrower’s group companies.

xi. Is Para No. 5 of PR R-6 of Corporate/Commercial Banking applicable in case of financing

against mutual funds as collateral/security?

Yes, Financing against mutual funds as collaterals is also subject to restrictions mentioned under
Para No. 5 of PR R-6 of Corporate/Commercial Banking.

xii. Whether the 30% limit on banks/DFIs total investment in shares includes both listed and un-
listed shares (ordinary and preference)?

Yes, the 30% limit includes both listed and non-listed (ordinary and preference shares). However,
only those preference shares will attract the 30% capping requirement which fulfill the criteria of
equity instrument as laid down in Annexure-III of PR R-6 of Corporate/Commercial Banking. Any
investment in preference shares that do not conform to these conditions shall instead be considered
as part of the maximum exposure limit as prescribed under R-1 of these regulations.

xiii. Is the bank’s investment in Margin Financing subject to the usual margin requirements of
30%?

Yes, the Margin Financing is subject to 30% margin requirement (please refer Regulation R-4).

xiv. Are all forms of mutual funds treated at par with shares while calculating the banks/DFIs’
investments under PR R-6 of Corporate/Commercial Banking?

Yes, the limits prescribed under PR R-6 1(A) of Corporate/Commercial banking are applicable to
investments in units of all forms of Mutual Funds excluding NIT units.

xv. Is the Investment of banks/DFIs in COIs with NBFCs, considered clean?

Certificates of Investment (COIs) issued by NBFCs rated at least ‘A’ by a credit rating agency on
the approved panel of State Bank of Pakistan are treated as liquid assets and hence secured.
Furthermore, Investment in COIs / interbank placements with NBFCs at least rated ‘A’ for long-

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Frequently Asked Questions (FAQs) regarding Prudential Regulations of Corporate/Commercial Banking

term rating and ‘A2’ for short-term rating or equivalent by a recognized rating agency, are
exempted from aggregate limits for unsecured/clean exposure.

xvi. Can a bank/DFI make direct investment in or allow financing facilities against the unsecured/
unlisted/un-rated TFCs?

 A bank/DFI cannot take exposure against unsecured, non-listed and non-rated TFCs or TFCs
rated below ‘BBB’ or equivalent. Exposure may, however, be taken against
unsecured/subordinated TFCs, which are issued by the banks/DFIs for meeting their minimum
capital requirements, as per terms and conditions stipulated in BSD Circular No. 8 of June 27,
2006 and BPRD Circular No. 06 of August 15, 2013.

 Banks/DFIs may make direct investment in non-listed TFCs, subject to compliance with other
Regulations.

xvii. Are such mutual funds which invest in Government Securities exempt from exposure limits
under Regulation R-6?

No, mutual funds comprising investments in T-bills and PIBs etc are not exempted from exposure
in the applicable exposure limit.

xviii. Is there any criterion for categorizing banks/DFIs’ investment in hybrid instruments (i.e.
preference shares) into debt or equity investment?

The detailed criterion is given in Annexure-III of PR R-6 of Corporate/Commercial Banking.

xix. Can the provisions, held against permanent impairment in the value of investment in shares,
be deducted from the cost of acquisition to arrive at exposure limit?

Yes, the amount of provisions created by debiting the Profit & Loss account for the permanent
impairment in the value of shares, as instructed vide BSD Circular No. 10 dated July 13, 2004, may
be deducted from the cost of acquisition of such investments to arrive at the exposure limit.

xx. Can a bank provide financing to individual against shares of a company in which he himself is
a shareholder and/or director?

Regulation R-6(Para No.5(d) as such does not restrict financing to an individual against the shares
of a company, other than a banking company, in which he/she is a director/shareholder, provided
that such company is not a group company (as defined in the PRs) of the person.

xxi. Does the exposure in Margin Financing or financing against the security of shares form part
of the share portfolio for the purpose of calculating the exposure limits under Regulation R-6?

No, the Margin Financing or financing against the security of shares are not treated as part of the
shares portfolio of the banks/DFIs for the purpose of calculating investment limits under Regulation
R-6. However, exposure under Margin Financing will be treated as part of the total exposure while
calculating the Single Obligor funded exposure limit under Regulation R-1 and BPRD Circular No.
3 of 2008.

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Frequently Asked Questions (FAQs) regarding Prudential Regulations of Corporate/Commercial Banking

xxii. Is Para No. 5 of Regulation R-6 applicable in case of financing against mutual funds as
collateral/security?

Yes, financing against the security/collateral of mutual funds is also subject to restrictions
mentioned under Para No. 5 of Regulation R-6.

Regulation R-7(Guarantees):

i. Are all Guarantees issued by banks/DFIs required to be fully secured?

All guarantees issued by the banks/DFIs are required to be fully secured, except in the cases
mentioned below where it may be waived up to 50% by the banks/DFIs at their own discretion,
provided that banks/DFIs hold at least 20% of the guaranteed amount in the form of liquid assets as
security:
i. For bid bonds issued on behalf of local consultancy firms/ contractors of goods and services
bidding for international contracts/Tenders where the consultancy fees and other payments are
to be received in foreign exchange.
ii. For issue of performance bonds on behalf of local construction companies/ contractors of goods
and services bidding for international tenders.
iii. For issue of guarantees on behalf of local construction companies/ contractors of goods and
services bidding for international tenders in respect of mobilization advance.

ii. Can the banks/DFIs issue open-ended Guarantees?

Banks/DFIs are allowed to issue open-ended guarantees provided banks/DFIs have secured their
interest by adequate collateral or other arrangements acceptable to the bank/DFI for issuance of
such guarantees in favour of Government departments, corporations/autonomous bodies
owned/controlled by the Government and guarantees required by the courts.

iii. Does PR R-7 of Corporate/Commercial Banking prescribe any limit in respect of amount of
Guarantees to be issued against the counter guarantees as detailed in PR R-7 of
Corporate/Commercial Banking?

Banks/DFIs are required to have a board approved policy having internal limits for acceptance of
counter guarantees based on, interalia, their own risk appetite and risk profile of the counter-
guarantee issuing bank. The Banks/DFIs are required to institute a mechanism to monitor such
limits.

Regulation R-8(Classification and Provisioning):

i. In how many ways can a loan be classified?

PR R-8 of Corporate/Commercial Banking prescribes two criteria for classifying a loan. Objective
criteria requires classification based on time frame of delinquency/default in the payment of markup
or principal as detailed in Annexure-V of PR R-8. Apart from objective criteria, subjective criteria
is also used for classification of a loan, which may besides other factors include cash flow patterns
of the borrower, adequacy of his security inclusive of its realizable value, documentation covering
the advances and other market conditions relevant for the particular business of the borrower etc.
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Frequently Asked Questions (FAQs) regarding Prudential Regulations of Corporate/Commercial Banking

ii. Under what conditions the category of classification may be changed or the account may be
declassified after rescheduling/restructuring?

If a loan has been rescheduled/restructured then the category of classification may be changed
under following circumstances:

i. The borrower has adjusted at least 10% of the total restructured loan amount in cash and the
terms and conditions of rescheduling/restructuring are fully met for a period of at least one
year (excluding grace period) from date of rescheduling/restructuring.
ii. The borrower has adjusted at least 35% of the total restructured loan amount in cash at the
time of restructuring agreement or later-on during the grace period, if any.

iii. PR R-8 of Corporate/Commercial Banking stipulates that the status of classification of an

account which has been rescheduled/restructured can be changed if 35% of the amount is
recovered in Cash without retaining it in the classified category for one year. Is the said
exemption also subject to meeting the other terms and conditions of
rescheduling/restructuring?

No, if the borrower has adjusted at least 35% of the total restructured loan amount at the time of
restructuring agreement or later-on during the grace period if any, then the status of classification of
account which has been rescheduled/restructured may be changed without retaining it in the
classified category for one year. However, if the borrower subsequently defaults then the loan
would be classified in the same category as it was in at the time of classification.

iv. If rescheduled/restructured loan/account has been declassified after remaining in the

classified category based on improved performance of the borrower/after fulfilling the terms
and conditions of restructuring/ rescheduling by the borrower, and if the borrower
subsequently defaults then which category of classification would be used?

If a borrower subsequently defaults after the rescheduled/restructured loan has been declassified by
the bank/DFI, the loan will again be classified in the same category as it was in at the time of
rescheduling and restructuring.

v. Can category of classification of a non performing loan determined on the basis of time based
criteria be further downgraded?

Yes, category of classification determined on the basis of time based criteria can be further
downgraded based of subjective evaluation of the non-performing loan. Such evaluation shall be
carried out on the basis of credit worthiness of the borrower, its cash flow, operation in account and
adequacy of security etc.

vi. Would deferment of installment or mark-up in respect of a credit facility be considered as

rescheduling?
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Frequently Asked Questions (FAQs) regarding Prudential Regulations of Corporate/Commercial Banking

Mere deferment of a single installment or mark-up does not mean rescheduling unless it does not
go to such extent where the original schedule of payment is altered or changed due to such
deferment.

vii. Can a rescheduled/restructured loan be reported as “overdue” in the CIB Reports submitted
to the State Bank of Pakistan?

While reporting to the Credit Information Bureau (CIB) of State Bank of Pakistan, such
loans/advances may be shown as ‘rescheduled/restructured’ instead of ‘overdue’.

viii. Under What conditions the category of classification may be changed or the account be
declassified if the loan has not been rescheduled/restructured?

A classified loan account which has not been restructured/rescheduled, can only be declassified, if
the borrower clears up the 100% overdue principal and mark-up.

ix. Can a bank/DFI reverse the provision already held against restructured/rescheduled account
before or after its declassification?

In case of restructured/rescheduled accounts, the bank/DFI may reverse the provision already held
to the extent of cash recovery, subject to the condition that the remaining outstanding should be
provided to the extent as required by the category of classification in which the restructured/
rescheduled loan actually appears, till the time of declassification of the loan account. After
declassification of the restructured/ rescheduled account as per criteria laid down in Regulation R-8,
the bank/DFI may reverse the available provision up to 100% of its value if the bank/DFI deems
such reversal advisable.

x. Can a bank/DFI reverse the unrealized markup lying in suspense account accrued on a
restructured/rescheduled account before or after declassification?

A bank/DFI cannot reverse (take to income account) the unrealized mark-up lying in Suspense
Account accrued on a restructured/rescheduled account till its declassification, except the portion of
suspended mark-up which is realized by the bank/DFI in cash. Whereas, after declassification of the
restructured/rescheduled account, the suspended mark-up may be reversed by the bank/DFI,
provided at least 50% of the total suspended mark-up is recovered by the bank/DFI.

xi. In how many ways can a loan be declassified under PR R-8 of Corporate/Commercial
Banking?

A loan may be declassified in the following ways:

i. If the bank has received overdue principal and mark-up on a restructured/rescheduled account,
then such loan will be declassified after meeting all conditions as stipulated in Para 3(a) of
Prudential Regulation R-8 of Corporate and Commercial Banking.
ii. If the account is not a restructured/rescheduled one, then recovery of 100% overdue principal
and mark-up may justify its declassification.

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Frequently Asked Questions (FAQs) regarding Prudential Regulations of Corporate/Commercial Banking

iii. The accounts classified on advice of SBP will not be declassified without prior approval of SBP
except in cases where cash recovery has been made through customer’s own sources, to the
extent that balance provision is maintained in accordance with the PR R-8.

xii. Will a fresh finance, allowed to a company at the time of restructuring/rescheduling of an old
loan, also be classified in the category as the old restructured/rescheduled loan appears?

The fresh loan granted in such case may be monitored separately and will be subject to
classification on the strength of its own specific terms and conditions.

xiii. If the evaluators are not allowed to enter the premises for conducting full-scope evaluation,
then such evaluation (forced-sale value) may qualify for provisioning benefit?

In cases where evaluators are not allowed by the borrowers to enter in their premises/or the
circumstances warrant inaccessibility to the premises, the full-scope evaluation, conducted as such,
will not be accepted for provisioning benefit.

xiv. What is the valuation process for the purpose of assessing the forced sale value (FSV) of the
eligible securities for provisioning benefit?

The banks/DFIs will be required to get a Full Scope Valuation once in three years. After the Full
Scope Valuation, the banks/DFIs will get two ‘Desktop Valuations’ in the next two years.

xv. What is the difference between full-scope valuation and Desk-top valuation?

Desktop Valuation is defined as an Interim Brief Review of Full-scope Valuation, so that any
significant change in the factors, on which the Full-scope Valuation was based, is accounted for and
brought to the notice of the lending bank/DFI.

xvi. Does PR R-8 of Corporate/Commercial Banking prescribe any criteria regarding the
“evaluators” conducting the valuations of the assets?

Yes, all Full scope Valuations are required to be carried out by the independent evaluators listed on
the panel of evaluators maintained by Pakistan Banks Association (PBA). In case the loan amount
exceeds Rs 100 million, the valuations (both Full-Scope as well as Desk-top Valuation) of the
assets shall be carried out by the same evaluator (who is on the panel of PBA). However, for loan
amount less than Rs 100 million, banks/DFIs or the approved evaluator may conduct the desktop
valuation.

xvii. Full-scope valuation of assets is valid for three years. Is that timeline also applicable to
valuation of pledged stock of perishable and non-perishable goods?

Under PR R-8 of Corporate/Commercial Banking, the valuation of pledged stocks of perishable and
non-perishable goods should not be more than six months old at each balance sheet date. In case of
perishable goods, the evaluator should also give the approximate date of complete erosion of value.

Banking Policy and Regulations Department, State Bank of Pakistan, Karachi | 16

Frequently Asked Questions (FAQs) regarding Prudential Regulations of Corporate/Commercial Banking

xviii. What assets shall be considered for taking FSV benefit for provisioning requirement under
PR R-8 of Corporate/Commercial Banking?

Liquid assets, pledged stock, plant and machinery under charge, property having registered or
equitable mortgage shall be considered for taking benefit for provisioning. Pledged shares which
are in dematerialized form in CDC would be considered for deduction as liquid assets while
determining required provisions.

xix. What assets shall not be considered for taking FSV benefit for provisioning requirement
under PR R-8 of Corporate/Commercial Banking?

Hypothecated assets excluding plant and machinery under charge, assets with second charge and
floating charge shall not be considered for taking benefit for provisioning.

xx. Under PR R-8 of Corporate/Commercial Banking, whether the bonus to employees arising
from availing the benefit of Forced Sale Value (FSV) is referred to shares/stock bonus or
annual employees’ performance bonus?

The term bonus refers to bonus to employees in any form whether it is in the form of stock or in
form of cash. Therefore, any benefit to employees is not admissible on account of additional impact
on profitability arising from availing the benefit of FSV as allowed under the Regulation R-8 of
Corporate/Commercial Banking.

Regulation R-9(Assuming Obligations on behalf of NBFCs):

i. Can the banks/DFIs take exposure on Single Obligor/Obligor Group against the Guarantee of
NBFC?

Yes, Banks/DFIs may take exposure on Single Obligor/Obligor Group against the Guarantee of
NBFCs subject to following conditions:

i. The NBFC is rated at least “A” or equivalent by a credit Rating Agency on the approved panel
of SBP.
ii. Aggregate Exposure remains within the Single Obligor/Obligor Group limits prescribed under
PR R-1 of Corporate/Commercial Banking.
iii. Total Guarantees issued by NBFC in favor of banks/DFIs does not exceed 2.5 times of the
capital of the NBFC.

ii. Will banks/DFIs’ exposure on any obligor against the Guarantee of an NBFC be considered
as secured?

Banking Policy and Regulations Department, State Bank of Pakistan, Karachi | 17

Frequently Asked Questions (FAQs) regarding Prudential Regulations of Corporate/Commercial Banking

Yes, Banks/DFIs’ exposure to any obligor against the Guarantee of an NBFC would be considered
as secured provided the banks/DFIs meet the criteria prescribed under PR R-9 of
Corporate/Commercial Banking before taking any exposure.

iii. Can the banks/DFIs issue underwriting commitments in respect of TFCs, commercial papers
and other debt instruments issued by NBFCs?

Yes, the banks/DFIs can issue underwriting commitments in respect of TFCs, commercial papers
and other debt instruments issued by NBFCs.

Regulation R-10 (Payment of Dividend):

i. PR R-10 of Corporate/Commercial Banking stipulates that banks/DFIs, interalia can pay the
dividend on their shares only if all the classified assets have been fully and duly provided for
in accordance with PRs (taking the FSV benefit etc). However, PR R-8 stipulates that
banks/DFIs may avail the FSV benefit subject to the condition that profitability arising from
FSV benefit shall not be available for payment of cash /stock dividend, isn’t it a
contradiction?

No, PR R-10 of Corporate/Commercial Banking, interalia, prohibits paying of dividend on their

shares unless all the classified assets have been fully provided for taking into account FSV benefit
etc. However, the additional impact on the profitability arising due to FSV benefit availed in respect
of the classified assets is not eligible for payment of dividend on their shares under PR R-8 of
Corporate/Commercial Banking.

Banking Policy and Regulations Department, State Bank of Pakistan, Karachi | 18

 Frequently Asked Questions (FAQs) regarding Prudential Regulations of Corporate/Commercial Banking

2. Corporate Governance:

i. How to calculate 7 days within which FPT is required to be submitted to SBP?

It simply goes by counting 7 consecutive calendar days in a row. It should not be construed as 7 working
days.
ii. What about submission of FPT documents of those executives who are not Group Heads as such
but are directly reporting to CEO?
As per new instructions (BPRD Circular No 5 of 2015), executives directly reporting to CEO and/or
COO shall also be considered as Key Executives and their FPT documents need to be submitted to SBP
in case of fresh appointment/reappointment.
iii. Does Annexure-IV(Corporate Governance Annexure) (undertaking) by a bank for an appointee
require to be submitted on a stamp paper?
No it does not specifically require non-judicial stamp paper for submission of an Annexure-IV
(undertaking).
iv. Can a key executive hold charge of 2 posts at the same time?
As per PR G-1, no key executive shall head more than one functional area. In peculiar circumstances, He
may hold an additional charge of another key post but the same needs to be regularized within 3 months.
v. Can a key executive hold directorship with any other financial institution in personal capacity?
No, he cannot unless he is nominated by his bank.
vi. Can a director hold multiple directorships with more than one bank at the same time?
No, he cannot in light of PR G-1 and Section 20 of BCO except NIT Nominees.
vii. Can CEO hold directorship with any other bank?
CEO is also a deemed director. If he holds directorship with any other bank the same will be seen as
dual/common directorship which is prohibited under Section 20 of BCO and PR G-1 of
Corporate/Commercial Banking.
viii. How to comply with the requirements of SECP's Code of Corporate Governance when SBP’s FPT
Criteria is already in place?
In terms of PR G-1 of Corporate/Commercial Banking, Code is applicable to the banks up to the extent it
is not contrary to the provisions of BCO and PRs (FPT Criteria & other instructions).
ix. How many independent directors are required for a Board having nine or seven board members to
comply with the requirement of 25% independent directors?
This can be determined on the basis of rounding off to the nearest tenth decimal place. For example, if
25% of 7 directors comes to 1.75, after rounding off, the bank should have 2 independent directors.
Similarly, 25% of 9 directors comes to 2.25, therefore the bank should have at least 2 independent
directors.
x. Whether the minutes of Board Meeting of Banks/DFIs should be recorded by names?
Yes, the Board Meeting minutes should be recorded by name in order to evaluate the performance and
contribution of individual board members.

Banking Policy and Regulations Department, State Bank of Pakistan, Karachi | 19

 Frequently Asked Questions (FAQs) regarding Prudential Regulations of Corporate/Commercial Banking

xi. Whether Incharge of Bank’s Representative Office in other countries requires prior clearance
from SBP?
Since, Incharge of Representative Office are not amongst the Overseas Executives/Key Executives as
stipulated in BPRD Circular No. 5 of 2015, therefore the same do not require prior SBP clearance.
xii. Can the proposed board member whose FPT clearance is pending with SBP attend BoDs meeting?
No, board members cannot attend board meetings without SBP’s prior approval.
xiii. What is the timeline of filling up the casual vacancy on the Board of Directors?
As per Code of Corporate Governance, casual vacancy on the Board of Directors shall be filled up by the
directors at the earliest but not later than 90 days.
xiv. Can a director/chairman of the board of a company be given loan against the shares of that
company?
Prudential Regulations do not place any restriction on a director or chairman willing to avail financing
facility from some bank/DFI in their individual capacity, against the shares of the company (other than
the bank/DFI) on whose board they hold the position of director or chairman.

************

Banking Policy and Regulations Department, State Bank of Pakistan, Karachi | 20

 State Bank of Pakistan

Prudential Regulations
for Small &
Medium Enterprises Financing

(Updated till December 31, 2017)

Infrastructure, Housing & SME Finance Department

I.I. Chundrigar Road, Karachi

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 Small & Medium Enterprise Financing Prudential Regulations

The Team

NAME DESIGNATION TELEPHONE NO. & E-MAIL

Syed Samar Hasnain Executive Director (+92-21) 99221606

[Link]@[Link]

Mr. Ghulam Muhammad Director (+92-21) 99221414

[Link]@[Link]

Mr. Imran Ahmad Additional Director (+92-21) 99221951

[Link]@[Link]

Mr. Muhammad Azam Joint Director (+92-21) 32455561

[Link]@[Link]

Website Address: [Link]

UAN: 111 727 111

ii
 Small & Medium Enterprise Financing Prudential Regulations

Preface

SME sector contributes significantly towards national GDP, employment generation and export earnings. Hence,
the impact of financial inclusion of SMEs has important implications for economic growth, competitiveness, and
job creation. The potential for this sector to contribute to the economic development objectives of Pakistan, in
areas like creating jobs, increasing incomes, improving competitiveness, boosting exports and fostering
economic growth is the justification for a strategy of support to unleash the sector’s potential. Keeping this in
view, SBP issued separate Prudential Regulations for SMEs in 2003, which were subsequently revised in 2013
and 2016 in line with the changing market dynamics.

Banks & DFIs had tilt towards larger-size medium enterprises as compared to small enterprises (SEs) in their
banking business. Therefore, for improving SEs’ access to finance, SME definition prescribed in the PRs issued
in 2003 was segregated and small enterprises and medium enterprises were separately defined in 2013, along
with formulation of specific regulations for the small enterprises (SEs). We feel that a separate definition for
small enterprises is helping banks & DFIs in aligning their business strategy with the SE Financing needs.

Then in 2016, certain amendments were made in these regulations while responding to market changes. These
included changes in the definition of small enterprise (SE) and medium enterprise (ME), upward revision in per
party exposure limit for SE financing, requirement of audited accounts for SE Financing for exposure above Rs
15 million, waiver of general reserve requirement against SEs’ non-fund based portfolio and rationalization of
cash repayment requirement for immediate declassification of SE and ME restructured/ rescheduled loans.

Recently, a holistic exercise was undertaken by SBP in collaboration with concerned stakeholders to plug in the
gaps in the way of smooth SME financing in the country. In this regard, ‘Policy for Promotion of SME Finance’
was launched by the Prime Minister of Pakistan on 22nd December 2017. In this perspective, amendments have
been introduced in following SME financing PRs to allow rapid promotion of SME financing in the country:

1) Regulation SME R-1: SME Specific Credit Policy

2) Regulation SME R-2: e-CIB Report
3) Regulation SME R-9: General Measures
4) Regulation SE R-7: General Reserve against Small Enterprise Finance
5) Regulation SE R-10: Turn-Around-Time
6) Regulation ME R-6: Turn-Around-Time (newly introduced)

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 Small & Medium Enterprise Financing Prudential Regulations

It is worth mentioning that providing enabling regulatory framework is one important aspect only. Visible
improvement in SME Financing will only occur when banks & DFIs re-position themselves strategically in the
market by appropriately aligning their business strategies with the specific needs of the SME sector. The
regulatory framework will bear its intended results, only if banks & DFIs take the necessary steps including the
following:

 Bring strategic change at higher level to expand share in SME portfolio.

 Use relevant/ practical cash flow estimation techniques and other proxies to assess repayment capacity
of SME borrowers.
 Adopt program-based lending & down scaling strategies.
 Make appropriate alignment in their risk management processes.
 Allocate adequate resources for research & development.
 Take effective measures to capture market niche by conducting market segmentation.
 Strengthen credit appraisal and monitoring mechanism by greater use of technology and
documentation to undertake effective review of SME Portfolio.
 Adopt measures for greater financial awareness of SMEs specially SEs.

State Bank of Pakistan monitors the situation closely, and works with banks & DFIs to make SME banking a viable
success on sustainable basis. For this purpose, SBP is open to review any regulatory provision, if necessary, while
ensuring at the same time that banks & DFIs observe due prudence and necessary oversight.

The Prudential Regulations for small and medium enterprises (SMEs) financing cover Risk Management (R)
aspects. The Prudential Regulations for Corporate/ Commercial Banking may be referred to for areas concerning
Corporate Governance (G) and Operations (O) aspects as well as Anti-Money Laundering and Combating the
Financing of Terrorism (AML/ CFT) Regulations issued by BP&RD. However, in case of international operations,
the prudential regulations of host country shall prevail.

The Prudential Regulations for small and medium enterprises (SMEs) financing do not supersede other directives
issued by State Bank of Pakistan in respect of areas not covered here. Any violation or circumvention of these
regulations shall render the bank/DFI officer(s) concerned liable for penalties under the Banking Companies
Ordinance, 1962.

Ghulam Muhammad
Director
Infrastructure, Housing & SME Finance Department
Dated: December 31, 2017

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 Small & Medium Enterprise Financing Prudential Regulations

Table of Contents

Preface ......................................................................................................................................................... iii

Chapter No: 01 Prudential Regulations – General for Small & Medium Enterprise Financing ............................1
Regulation SME R-1: SME Specific Credit Policy .....................................................................................................2
Regulation SME R-2: Electronic Credit Information Bureau (e-CIB) Report ...........................................................2
Regulation SME R-3: Personal Guarantee ..............................................................................................................3
Regulation SME R-4: Limit on Clean Facility ...........................................................................................................3
Regulation SME R-5: Proper Utilization of Loan .....................................................................................................3
Regulation SME R-6: Restriction on Facilities to Related Parties ...........................................................................3
Regulation SME R-7: Translation of Loan Documents into Urdu Language ...........................................................3
Regulation SME R-8: Securities and Margin Requirements ...................................................................................4
Regulation SME R-9: General Measures.................................................................................................................4
Chapter No: 02 Prudential Regulations for Small Enterprise Financing .............................................................6
Regulation SE R-1: Definition of Small Enterprise ..................................................................................................7
Regulation SE R-2: Per Party Exposure Limit ..........................................................................................................7
Regulation SE R-3: Requirement of Audited Accounts ...........................................................................................7
Regulation SE R-4: Repayment Capacity of the Borrower and Cash Flow Based Lending .....................................7
Regulation SE R-5: Collateral Valuation..................................................................................................................8
Regulation SE R-6: Recovery of Outstanding Dues .................................................................................................8
Regulation SE R-7: General Reserve against Small Enterprise Finance ..................................................................8
Regulation SE R-8: Classification and Provisioning for Loans/ Advances ...............................................................8
Regulation SE R-9: Restructuring/ Rescheduling of Loans/ Advances ...................................................................9
Regulation SE R-10: Turn-Around-Time............................................................................................................... 10
Chapter No: 03 Prudential Regulations for Medium Enterprise Financing ...................................................... 11
Regulation ME R-1: Definition of Medium Enterprise ......................................................................................... 12
Regulation ME R-2: Repayment Capacity and Cash Flow Based Lending ........................................................... 12
Regulation ME R-3: Per Party Exposure Limit ..................................................................................................... 12
Regulation ME R-4: Requirement of Audited Accounts ...................................................................................... 13
Regulation ME R-5: Classification and Provisioning for Assets ........................................................................... 13
Regulation ME R-6: Turn-Around-Time ............................................................................................................... 15
ANNEXURE-I......................................................................................................................................................... 17
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 Small & Medium Enterprise Financing Prudential Regulations

ANNEXURE-II........................................................................................................................................................ 19
ANNEXURE-III....................................................................................................................................................... 21
ANNEXURE-IV ...................................................................................................................................................... 23
ANNEXURE-V ....................................................................................................................................................... 26

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 Small & Medium Enterprise Financing Prudential Regulations

Chapter No: 01 Prudential Regulations – General for

Small & Medium Enterprise Financing

1
 Regulation SME R-1: SME Specific Credit Policy
Banks & DFIs shall prepare a comprehensive SME Specific Credit Policy duly approved by their
Board of Directors. The Credit Policy shall give special mention to Small Enterprises (SE) financing
keeping in view their specific characteristics and business conditions. The Credit Policy shall,
interalia, cover following for SME financing:
i. Clearly laid down procedures on loan administration, disbursement, monitoring, and
recovery mechanism.
ii. Specification of main functions, major responsibilities of various staff positions, as well as
their powers/ authority relating to approval/sanctioning of financing limits.
iii. For loan size of upto Rs 2 million, it will be at the discretion of the banks & DFIs to obtain
the insurance cover of the hypothecated stock/ other securities keeping in view the credit-
worthiness, past experience and financial strength of the prospective borrower. However,
if a bank/DFI decides to obtain an insurance cover, then it will not force to the respective
borrower for arranging the same from an insurance company of the bank’s/ DFI’s choice.
iv. Banks & DFIs are encouraged to adopt program based lending. The Chief Executive Officer
of the bank/ DFI concerned will approve conventional/ Shariah-compliant program-based
products on recommendation of the respective committee. Such programs may carry
objective/ quantitative parameters for eligibility of borrowers, besides standardization and
simplification of loan documents required from the borrowers under the subject Program.
v. Banks & DFIs shall adopt standardized and simplified loan application forms circulated by
PBA.

In case of SE Financing, following minimum points shall be covered under banks’/ DFIs’ Credit
Policy:

vi. Clearly devised plan of the banks & DFIs regarding their frequency of visits to be made to
SE borrowers’ business sites keeping in view their human resource limitations and the
amount of exposure taken upon SEs. However, banks & DFIs shall ensure that at least one
visit must be made to SE borrowers’ sites during a year’s time.
vii. In case the finance is secured against hypothecation of stock, banks & DFIs shall obtain stock
report at least semi-annually.

Regulation SME R-2: Electronic Credit Information Bureau (e-CIB) Report

While considering any credit proposal (including renewal, enhancement and rescheduling/
restructuring), banks & DFIs shall obtain e-CIB Report on their prospective borrower(s) from
Electronic Credit Information Bureau (e-CIB) of State Bank of Pakistan. Banks & DFIs shall give due
weightage to the credit report relating to the borrower(s) and concerned group. However, they
can take exposure on defaulters keeping in view their risk management policies and criteria,
provided they properly record reasons and justifications in the approval form.

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 Small & Medium Enterprise Financing Prudential Regulations

Regulation SME R-3: Personal Guarantee

All facilities, except those secured against liquid assets, shall be backed by personal guarantees of
the owners of SMEs. In case of limited companies, guarantees of sponsor directors shall be
obtained.

Regulation SME R-4: Limit on Clean Facility

Banks & DFIs can take clean exposure (facilities secured solely against personal guarantees) on an
SME borrower up to Rs 5 million. Before taking clean exposure, banks & DFIs shall obtain a
declaration from the SME to ensure that the accumulated clean exposure on an SME does not
exceed the prescribed limit mentioned above.

It may be noted that clean exposure limit shall not include the clean consumer financing limits
(Credit Card and Personal Loans etc.) allowed to sponsors of the said SME under Prudential
Regulations for Consumer Financing.

Regulation SME R-5: Proper Utilization of Loan

Banks & DFIs shall ensure that loan has been utilized for the same purposes as specified in the
Loan Application Form. In case of financing to medium enterprises, banks & DFIs shall develop
and implement an appropriate system for monitoring utilization of loans. Such system may
include obtaining stock reports/ position of current assets in case of Working Capital Loans; and
supporting documents in case of Term Loans.

With regard to small enterprise financing, banks & DFIs shall adopt the following measures:
i. In case of working capital/ revolving credits, banks & DFIs will obtain a declaration from the
borrowing SE stating that it has utilized the loan proceeds for the intended purpose only.
ii. In the case of fixed assets/ project financing, banks & DFIs will adopt the same process as
mentioned above in the case of medium enterprise financing.

Regulation SME R-6: Restriction on Facilities to Related Parties

Banks & DFIs shall not take any exposure on an SME in which any of its directors, major
shareholders holding 5% or more of the share capital of the bank/ DFI or its Chief Executive, or an
Employee or any family member of these persons is interested, except as specified in section 24
of the BCO, 1962. In this regard, it will, however, suffice if banks & DFIs obtain an undertaking
from the small enterprise stating that there is no existence of any interest between the borrower
and the above-mentioned related parties.

Regulation SME R-7: Translation of Loan Documents into Urdu Language

To facilitate SMEs in better understanding important terms and conditions of loans, banks & DFIs
shall translate and make available Loan Application Form and other related documents, except
charge documents, in Urdu as well. Further, banks & DFIs will also provide information on

3
 Small & Medium Enterprise Financing Prudential Regulations

important terms with brief explanation of each term for convenience and better understanding
of the borrowers.

Regulation SME R-8: Securities and Margin Requirements

i. Subject to the relaxation for clean facilities up to Rs. 5 million for SEs and MEs, all facilities
over and above this limit shall be appropriately secured as per satisfaction of the banks &
DFIs.
ii. Banks & DFIs are free to determine the margin requirements on securities against facilities
provided by them to their clients taking into account the risk profile of the borrower(s) in
order to secure their interests. However, this relaxation shall not apply in case of items,
imports of which are banned by the Government. Banks & DFIs are advised not to open
import letter of credit for banned items in any case till such time the lifting of ban on any
such item is notified by the State Bank of Pakistan.
iii. Banks & DFIs shall continue to observe margin restrictions on shares/ TFCs/ Sukuk as per
existing instructions under Prudential Regulations for Corporate/ Commercial Banking (R-
6). Further, the cash margin requirement of 100% on Caustic Soda (PCT heading 2815.1200)
for opening Import Letter of Credit as advised by the Federal Government and notified in
terms of BPD Circular Letter No. 5 dated 4th May 2002, shall also continue to remain
applicable.
iv. State Bank of Pakistan shall continue to exercise its powers for fixation/ reinstatement of
margin requirements on financing facilities being provided by banks & DFIs for various
purposes including Import Letter of Credit on a particular item(s), as and when required.
v. In addition to above, the restrictions prescribed under paragraph 5 of Regulation R-6 of the
Prudential Regulations for Corporate/ Commercial Banking will also be applicable in case of
financing to small and medium enterprises.

Regulation SME R-9: General Measures

i. Banks & DFIs shall establish SME Banking oriented Research & Development (R&D)
divisions/ units in their institutions. These R&D divisions/ units shall fulfil research related
needs of their institutes and provide them support in adopting suitable SME banking and
financing practices.
ii. Banks & DFIs shall put in place an efficient MIS (Management Information System) which
will support them effectively catering reporting needs of their SME financing portfolio. The
system should be flexible enough to generate necessary information and at least following
reports in order to enable management, take important policy decisions and/ or make
appropriate modifications in their lending programs:
a. Delinquency reports (for 30, 60, 90, 180 & 365 days and above) on monthly basis.
b. Reports interrelating delinquencies with various customers and sectors types etc.
c. List of SMEs having any kind of banking relationship(s) to be divisible w.r.t.
organizational structure (proprietorships, partnerships, limited company etc.) and/
or nature of business (trading, service and manufacturing etc.).

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 Small & Medium Enterprise Financing Prudential Regulations

iii. To address and minimize grievances of SMEs and stakeholders, banks & DFIs shall put in
place an effective, simple and transparent customers’ complaints resolution and helping
mechanism in their institutes, on permanent basis.
iv. Banks & DFIs shall develop and offer customized lending products while adopting program
based lending and supply chain financing methodologies to cater specific SME financing
needs of various SME clusters. In this regard, banks & DFIs should explore mechanism for
adopting advanced delivery channels (branchless banking, tele-marketing etc.) and SME
credit scoring model etc.
v. Banks & DFIs are also encouraged to leverage database of their walk-in and permanent
customers (depositors/ account-holders) which belong to SME sector, for cross selling of
financing products. This will provide them relatively more comfort in increasing SME
financing portfolio.
vi. Pricing policy of banks & DFIs that include mark-up rates (including the IRR on the loan
products), processing & documentation fee, prepayment/ late-payment penalties etc. shall
be mentioned explicitly in the loan agreements viz banks shall strictly avoid imposing any
hidden charges in addition to those explicitly stated in the loan agreement.
vii. Banks & DFIs shall take measures for capacity building of their SME banking staff in SME
related areas. In this regard, they will design and implement dedicated capacity building
programs in coordination with their own training departments. Besides, SME financing staff
shall also be nominated for training programs offered by external training institutes like
NIBAF and IBP etc.

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 Small & Medium Enterprise Financing Prudential Regulations

Chapter No: 02 Prudential Regulations for

Small Enterprise Financing

6
 Small & Medium Enterprise Financing Prudential Regulations

Regulation SE R-1: Definition of Small Enterprise

A Small Enterprise (SE) is a business entity, which meets the following parameters:

Number of Employees Annual Sales Turnover

*Up to 50 Up to Rs. 150 million
*including contract employees.
Further, an entity has to fulfill both the criteria of number of employees and sales turnover for
categorization as small enterprise. However, in cases where an entity fulfils one parameter of SE
and its second parameter falls within the range prescribed for medium enterprise (ME) or above
the upper limit prescribed for ME, then the subject entity shall be classified as ME or commercial/
corporate entity as the case may be.

Regulation SE R-2: Per Party Exposure Limit

Small Enterprise can avail exposure up to Rs 25 million from a single bank/ DFI or from all banks
& DFIs. Banks & DFIs are allowed to deduct the liquid assets (encashment value of bank deposits,
certificates of deposit/ investment, Pakistan Investment Bonds, Treasury Bills and National Saving
Scheme Securities) held under their perfected lien for the purpose of calculation of per party
exposure limit.

Regulation SE R-3: Requirement of Audited Accounts

Banks & DFIs are not required to obtain copy of audited accounts in case of lending to the small
enterprises for exposure upto Rs 15 million. However, in such cases, banks & DFIs may ask the
borrower to submit financial accounts in some form, signed by the borrower, to help banks & DFIs
assess SEs’ cash flows or carry out counter verification etc.

In case of lending to small enterprises above Rs 15 million, banks & DFIs shall obtain from the
small enterprises a copy of financial statements duly audited by a practicing Chartered Accountant
or a practicing Cost and Management Accountant for analysis and record. However, banks & DFIs
may waive the requirement of obtaining audited copy of financial statements when the exposure
net of liquid assets does not exceed the limit of Rs 15 million.

Regulation SE R-4: Repayment Capacity of the Borrower and Cash Flow Based Lending
Normally, small enterprises do not maintain proper financial accounts for the satisfaction of banks
& DFIs. Their record generally contains sale/ purchase books and cash received/ paid records in a
rudimentary form. Banks & DFIs shall use relevant/ practical cash flow estimation techniques and
other proxies to assess repayment capacity of SE borrower. To supplement, banks & DFIs are
encouraged to use the available sector/ cluster specific financial models that can capture cost
structure, revenue streams and margins in the sectors. For program-based lending, banks & DFIs
may also use, as a substitute, Income Estimation Models to assess repayment capacity of the
borrowers.

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 Small & Medium Enterprise Financing Prudential Regulations

Regulation SE R-5: Collateral Valuation

For valuation of securities against loans up to Rs 5 million, banks & DFIs at their own discretion
may either use the services of their own evaluating staff or the services of PBA approved
evaluator. However, valuation of securities for loans above Rs 5 million shall be done only by an
evaluator on the approved panel of PBA.

Regulation SE R-6: Recovery of Outstanding Dues

To facilitate the recovery efforts, banks & DFIs are allowed to undertake cash collection/ recovery
at places other than their authorized places of business as stipulated in the ‘Fair Debt Collection
Guidelines’ issued by Banking Policy and Regulations Department. However, in order to prevent
fraud and misappropriation of collected cash, adequate security and risk management measures
(including but not limited to adequate insurance cover all the time) must be in place and this
process should be appropriately documented, and audited at the bank/ DFI level. The banks &
DFIs are also encouraged to make use of mobile and wireless technologies/ devices for instant
updating of cash collection from field into their books and accounts, and sending confirmatory
SMS/ alert messages to borrowers.

Regulation SE R-7: General Reserve against Small Enterprise Finance

Banks & DFIs shall maintain general reserve equivalent to 1% of their unsecured SE portfolio to
protect them from the risks associated with the economic and cyclical nature of this business. This
reserve requirement shall, however, be maintained only for the performing fund based SE
portfolio of banks & DFIs. In order to calculate the general reserve, liquid securities under
perfected lien (encashment value of bank deposits, certificates of deposit/ investment, Pakistan
Investment Bonds, Treasury Bills and National Saving Scheme Securities) held against banks’/ DFIs’
fund-based SE portfolio shall be netted.

Regulation SE R-8: Classification and Provisioning for Loans/ Advances

1. Banks & DFIs shall observe prudential guidelines given in this Regulation and at Annexure I
& II of these Regulations in the matter of classification of their SE asset portfolio and
provisioning there-against.
2. In addition to the time-based criteria prescribed in Annexure I, subjective evaluation of
performing and non-performing credit portfolio may be made for risk assessment purpose
and, where considered necessary, any account including the performing account shall be
classified, and the category of classification determined on the basis of time based criteria
shall be further downgraded. However, classification for program-based lending shall be
done based on objective (time-based) criteria only, though banks & DFIs at their own
discretion may also classify such portfolio on subjective basis.
3. In case of revolving/ running finance accounts, if the borrower pays mark-up regularly
without showing turn-over in the principal portion of the account, and bank/ DFI is satisfied
with this conduct and is willing to roll over the facility periodically; then such account will not

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 Small & Medium Enterprise Financing Prudential Regulations

attract ‘subjective classification’ on the basis of lower/ nil activity in the principal account.
However, banks & DFIs can classify, at their discretion, such accounts as per their own policy.
4. Banks & DFIs can avail the benefit of Forced Sale Value (FSV) of collateral held against loans/
advances, determined in accordance with the guidelines laid down in Annexure II, before
making any provision.
5. Party-wise details of cases, where banks & DFIs have taken the benefit of FSV shall be
maintained for verification by State Bank’s teams during their regular/ special inspection.
6. Banks & DFIs shall review, at least on a quarterly basis, the collectability of their loans/
advances portfolio and shall properly document the evaluations so made. Shortfall in
provisioning, if any, determined, because of quarterly assessment shall be provided for
immediately in their books of accounts by the banks & DFIs on quarterly basis.
7. In case of cash recovery, other than rescheduling/ restructuring, banks & DFIs may reverse
specific provision held against classified assets only to the extent that required provision as
determined under this Regulation is maintained.
8. Banks & DFIs will make suitable arrangements for ensuring that FSV used for taking benefit
of provisioning is determined accurately as per guidelines contained in these PRs and is
reflective of market conditions under forced sale situations.
9. The external auditors shall, as part of their annual audits of banks & DFIs, verify that all
requirements as stipulated above and in Annexure I & II for classification and provisioning
have been complied with. State Bank of Pakistan shall also check the adequacy of
provisioning during on-site inspection.

Regulation SE R-9: Restructuring/ Rescheduling of Loans/ Advances

1. The banks & DFIs may reschedule/ restructure problem loans as per their own policy duly
approved by their Board of Directors. However, the rescheduling/ restructuring of non-
performing loans shall not change the status of classification of a loan/ advance etc. unless
the following minimum conditions are met:
i. At least 10% of the outstanding loan amount is recovered in cash and the terms and
conditions of rescheduling/ restructuring are fully met for a period of at least 6 months
(excluding grace period, if any) from the date of such rescheduling/ restructuring.
However, the condition of 6 Months retention period, prescribed for restructured/
rescheduled loan account to remain in the classified category, shall not apply in case
the borrower has repaid or adjusted in cash at least 35% of the total restructured loan
amount (principal + mark-up), either at the time of restructuring agreement or later-
on any time before the completion of 6 Months period as above mentioned.
ii. Rescheduling shall not be done simply to avoid classification.
iii. While reporting to the Credit Information Bureau (e-CIB) of State Bank of Pakistan,
such loans/ advances may be shown as ‘rescheduled/ restructured’ instead of
‘default’.
iv. Restructuring/ rescheduling of a loan account shall not lead to disqualification of the
borrower for fresh credit facilities or enhancement in the existing limits. Such fresh

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 Small & Medium Enterprise Financing Prudential Regulations

loans may be monitored separately, and shall be subject to classification on the

strength of their own specific terms and conditions.
v. Where a borrower subsequently defaults (either principal or mark-up) after the
rescheduled/ restructured loan has been declassified by a bank/ DFI, the loan shall
again be classified in the same category it was in at the time of rescheduling/
restructuring and the unrealized markup on such loans taken to income account shall
also be reversed. However, banks & DFIs at their discretion may further downgrade
the classification, taking into account the subjective criteria.

Regulation SE R-10: Turn-Around-Time

Banks & DFIs shall not take more than 15 working days for the credit approval process (from the
date of receipt of complete information). In this respect, the following minimum points shall also
be considered:
i. The pre-approval requirements and post-approval requirements (security/ collateral
documentation etc.) shall be advised preferably in one go.
ii. The facility shall be disbursed only after security documentation is completed by the
customer.

10
Chapter No: 03 Prudential Regulations for
Medium Enterprise Financing

11
 Small & Medium Enterprise Financing Prudential Regulations

Regulation ME R-1: Definition of Medium Enterprise

Medium Enterprise (ME) is a business entity, ideally not a public limited company which meets
the following parameters:
*Number of Employees Annual Sales Turn-Over

51-250 (Manufacturing & Service MEs) Above Rs 150 million and up to Rs 800 million
51-100 (Trading MEs) (All types of Medium Enterprises)
*including contract employees.
Further, an entity has to fulfill both the criteria of number of employees and sales turnover for
categorization as medium enterprise. However, when an entity’s one parameter is as per ME
criteria and its second parameter is as per SE criteria, than subject entity would be categorized as
ME. Similarly, when an entity’s one parameter is as per ME and its second parameter is above the
upper limit prescribed for ME, then the subject entity shall be categorized as commercial/
corporate entity.

Regulation ME R-2: Repayment Capacity and Cash Flow Based Lending

1. Banks & DFIs shall specifically identify the sources of repayment and assess the repayment
capacity of the borrower on the basis of assets conversion cycle and expected future cash
flows. In order to add value, banks & DFIs are encouraged to assess conditions prevailing in
the particular sector/ industry they are lending to and its future prospects. Banks & DFIs
should be able to identify the key drivers of their borrowers’ businesses, the key risks
associated with their businesses and their risk mitigants. Banks & DFIs may also use Income
Estimation Models specially in program-based lending to assess repayment capacity of the
borrowers.
2. The rationale and parameters used to project the future cash flows shall be documented and
annexed with the cash flow analysis undertaken by banks & DFIs.

Regulation ME R-3: Per Party Exposure Limit

Medium Enterprise can avail financing (including leased assets) upto Rs 200 million from a single
bank/ DFI or from all banks & DFIs. It is expected that Medium Enterprises approaching this limit
should have achieved certain sophistication as they migrate into larger firms and should be able
to meet the requirements of Prudential Regulations for Corporate/ Commercial Banking.

Banks & DFIs are allowed to deduct the liquid assets (encashment value of bank deposits,
certificates of deposit/ investment, Pakistan Investment Bonds, Treasury Bills and National Saving
Scheme Securities) held under their perfected lien for the purpose of calculation of per party
exposure limit.

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 Small & Medium Enterprise Financing Prudential Regulations

Regulation ME R-4: Requirement of Audited Accounts

In case of lending to medium enterprises, banks & DFIs shall obtain a copy of financial statements
duly audited by a practicing Chartered Accountant, from the medium enterprise who is a limited
company or where the exposure of a bank/ DFI exceeds Rs 10 million, for analysis and record.
Banks & DFIs may also accept a copy of financial statements duly audited by a practicing Cost and
Management Accountant in case of a borrower other than a public company or a private
company, which is a subsidiary of a public company. However, banks & DFIs may waive the
requirement of obtaining audited copy of financial statements when the exposure net of liquid
assets does not exceed the limit of Rs 10 million.

Regulation ME R-5: Classification and Provisioning for Assets

Loans/ Advances
1. Banks & & DFIs shall observe the prudential guidelines given at Annexure III & IV in the matter
of classification of their ME asset portfolio and provisioning there-against. In addition to the
time-based criteria prescribed in Annexure III, subjective evaluation of performing and non-
performing credit portfolio may be made for risk assessment purpose and, where considered
necessary, any account including the performing account shall be classified, and the category
of classification determined on the basis of time based criteria shall be further downgraded.
Such evaluation shall be carried out on the basis of credit worthiness of the borrower, its cash
flow, operation in the account, adequacy of the security inclusive of its realizable value and
documentation covering the advances. However, classification for program-based lending
shall be based on objective criteria. Nevertheless, banks & DFIs may, at their own discretion,
also classify such portfolio on subjective basis.
2. Banks & DFIs shall classify their loans/ advances and make provisions in accordance with the
criteria prescribed above, and further stipulated in Annexure III & IV and also keeping in view
the following:
a. Banks & DFIs may avail the prescribed benefit of FSV subject to compliance with the
following conditions:
I. The additional impact on profitability arising from availing the benefit of FSV against
the pledged stocks, plant & machinery under charge, and mortgaged residential,
commercial & industrial properties shall not be available for payment of cash or
stock dividend.
II. Heads of Credit of respective banks & DFIs shall ensure that FSV used for taking
benefit of provisioning is determined accurately as per guidelines contained in PRs
and is reflective of market conditions under forced sale situations; and
III. Party-wise details of all such cases where banks & DFIs have availed the benefit of
FSV shall be maintained for verification by State Bank’s inspection team during
regular/ special inspection.
b. Any misuse of FSV benefit detected during regular/ special inspection of SBP shall attract
strict punitive action under the relevant provisions of the Banking Companies Ordinance,

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 Small & Medium Enterprise Financing Prudential Regulations

1962. Further, SBP may also withdraw the benefit of FSV from banks & DFIs found
involved in its misuse.

Rescheduling/ Restructuring
3. The rescheduling/ restructuring of non-performing loans shall not change the status of
classification of a loan/ advance etc. unless the terms and conditions of rescheduling/
restructuring are fully met for a period of at least one year (excluding grace period, if any)
from the date of such rescheduling/ restructuring and at least 10% of the outstanding amount
is recovered in cash. However, the condition of one year retention period, prescribed for
restructured/ rescheduled loan account to remain in the classified category, shall not apply in
case the borrower has repaid or adjusted in cash at least 35% of the total restructured loan
amount (principal + mark-up), either at the time of restructuring agreement or later-on any
time before the completion of one year period as above mentioned. Further, banks & DFIs
may credit their income account to the extent of cash recovery made against accrued markup
on the restructured/ rescheduled loans.
4. Banks & DFIs shall ensure that Rescheduling is not done simply to avoid classification. While
reporting to the Credit Information Bureau (e-CIB) of State Bank of Pakistan, such loans/
advances may be shown as ‘rescheduled/ restructured’ instead of ‘default’.
Where a borrower subsequently defaults (either principal or mark-up) after the rescheduled/
restructured loan has been declassified by a bank/ DFI as per above guidelines, the loan shall
again be classified in the same category it was in at the time of rescheduling/ restructuring
and the unrealized markup on such loans taken to income account shall also be reversed.
However, banks & DFIs may, at their discretion, further downgrade the classification, taking
into account the subjective criteria.
At the time of rescheduling/ restructuring, banks & DFIs shall consider and examine the
requests for working capital strictly on merit, keeping in view the viability of the project/
business and appropriately securing their interest etc.
All fresh loans granted by the banks & DFIs to a party after rescheduling/ restructuring of its
existing facilities may be monitored separately, and will be subject to classification under this
Regulation on the strength of their own specific terms and conditions.

Timing of Creating Provisions

5. Banks & DFIs shall review, at least on a quarterly basis, the collectability of their loans/
advances portfolio and shall properly document the evaluations so made. Shortfall in
provisioning, if any, determined, as a result of quarterly assessment shall be provided for
immediately in their books of accounts on quarterly basis.

Reversal of Provision
6. In case of cash recovery, other than rescheduling/ restructuring, banks & DFIs may reverse
specific provision held against classified assets only to the extent that required provision as
determined under this Regulation is maintained. While calculating the remaining provision

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 Small & Medium Enterprise Financing Prudential Regulations

required to be held after cash recovery and reversal of provision there-against, banks & DFIs
shall still enjoy the benefit of netting-off the amount of liquid assets and FSV of collateral from
the outstanding amount, as described in this regulation. Further, the provision made on the
advice of State Bank of Pakistan except where cash recovery is made shall not be reversed
without prior approval of State Bank of Pakistan.

Verification by the Auditors

7. The external auditors shall verify as part of their annual audits of banks & DFIs that all
requirements as stipulated above and Annexure III & IV for classification and provisioning for
assets have been complied with. State Bank of Pakistan shall also check the adequacy of
provisioning during on-site inspection.

Regulation ME R-6: Turn-Around-Time

Banks & DFIs shall not take more than 25 working days for the credit approval process (from the
date of receipt of complete information). In this respect, the following minimum points shall also
be considered:

i. The pre-approval requirements and post-approval requirements (security/ collateral

documentation etc.) shall be advised preferably in one go.
ii. The facility shall be disbursed only after the customer completes security documentation.

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 Small & Medium Enterprise Financing Prudential Regulations

Annexures to Prudential Regulations for

Small & Medium Enterprises Financing

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 Small & Medium Enterprise Financing Prudential Regulations

ANNEXURE-I
Small Enterprise Financing (Regulation SE R-8)
Guidelines in the Matter of
Classification and Provisioning for Loans/ Advances

All Financing Facilities (including Short, Medium and Long Term)

CLASSIFICATION DETERMINANT TREATMENT OF PROVISIONS TO BE MADE

INCOME
(1) (2) (3) (4)

1. OAEM Where mark- Unrealized mark-up/ Provision of 10% of the difference

(Other up/ interest or interest to be kept in resulting from the outstanding balance
Assets principal is Memorandum of principal less the amount of liquid
Especially overdue by 90 Account and not to be assets realizable without recourse to a
Mentioned). days or more credited to Income Court of Law and Forced Sale Value
from the due Account except when (FSV) of pledged stocks, plant &
date. realized in cash. machinery under charge and
Unrealized markup/ mortgaged residential, commercial and
interest already taken industrial properties (land & building
to income account to only) to the extent allowed in Annexure
be reversed and kept II.
in Memorandum
Account.

2. Substandard. Where mark- As above. Provision of 25% of the difference

up/ interest or resulting from the outstanding balance
principal is of principal less the amount of liquid
overdue by 180 assets realizable without recourse to a
days or more Court of Law and Forced Sale Value
from the due (FSV) of pledged stocks, plant &
date. machinery under charge and
mortgaged residential, commercial and
industrial properties (land & building
only) to the extent allowed in Annexure
II.
3. Doubtful. Where mark- As above. Provision of 50% of the difference
up/ interest or resulting from the outstanding balance
principal is of principal less the amount of liquid
overdue by 1 assets realizable without recourse to a
year or more Court of Law and Forced Sale Value
from the due (FSV) of pledged stocks, plant &
date. machinery under charge and
mortgaged residential, commercial and
industrial properties (land & building

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 Small & Medium Enterprise Financing Prudential Regulations

only) to the extent allowed in Annexure

II.
4. Loss. (a) Where As above Provision of 100% of the difference
mark-up/ resulting from the outstanding balance
interest or of principal less the amount of liquid
principal is assets realizable without recourse to a
overdue by 18 Court of Law and Forced Sale Value
months or more (FSV) of pledged stocks, plant &
from the due machinery under charge and
date. mortgaged residential, commercial and
industrial properties (land & building
(b) Where only) to the extent allowed in Annexure
Trade Bills II.
(Import/ Export
or Inland Bills)
are not paid/
adjusted within
180 days of the
due date.

Note:

Classified loans/ advances that have been guaranteed by the Government would not require
provisioning. However, mark up/ interest on such accounts would be taken to Memorandum
Account instead of Income Account.

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 Small & Medium Enterprise Financing Prudential Regulations

ANNEXURE-II
Small Enterprise Financing (Regulation SE R-8)

Uniform Criteria for Determining the Value of Pledged Stock, Plant & Machinery
Under Charge and Mortgaged Properties

1. Banks & DFIs are allowed to take the benefit of Forced Sale Value (FSV) of pledged stocks, plant
& machinery under charge, and mortgaged residential, commercial and industrial properties held
as collateral against Non Performing Loans (NPLs) for calculating provisioning requirement as
tabulated below:

Category of Asset Forced Sale Value Benefit allowed from the

date of classification
Mortgaged residential, commercial and  75% for first year
industrial properties (Land & building only)  60% for second year
 45% for third year
 30% for fourth year, and
 20% for fifth year
Plant & Machinery under charge  30% for first year
 20% for second year, and
 10% for third year
Pledged stock  40% for first, second, and third year

The benefit of FSV against NPLs shall not be available after the period prescribed above.

2. While taking benefit of FSV and arriving at its value, the following minimum points shall be
taken into account:

a) At the time of classification, valuation shall not be more than 3 years old.
b) Valuations shall be carried out by an independent professional evaluator who should be
listed on the panel of evaluators maintained by the Pakistan Banks’ Association (PBA).
c) Only liquid assets, pledged stock, plant & machinery under charge and property having
registered or equitable mortgage shall be considered for taking benefit for provisioning,
provided no NOC for creating further charge to another bank/ DFI/ NBFC has been issued
by the bank/ DFI. Assets having pari-passu charge shall be considered on proportionate
basis of the outstanding amount.
d) Hypothecated assets and assets with second charge & floating charge shall not be
considered for taking the benefit for provisioning purposes.
e) The evaluator, while assigning any values to the pledged stock, plant and machinery under
charge and mortgaged residential, commercial and industrial properties (land and
building only), shall take into account all relevant factors affecting the salability of such
assets including any difficulty in obtaining their possession, their location, condition and
the prevailing economic conditions in the relevant sector, business or industry. The values
of pledged stock, plant and machinery under charge and mortgaged property so
determined by the evaluators have to be reasonably good estimate of the amount that
could currently be obtained by selling such assets in a forced/ distressed sale condition.

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 Small & Medium Enterprise Financing Prudential Regulations

The evaluators should also mention in their report the assumptions made, the
calculations/ formulae/ basis used and the method adopted in determination of the
values i.e. the forced sales value (FSV).
f) In cases where the evaluators are not allowed by the borrowers to enter in their premises,
the benefit of FSV shall not be accepted for provisioning purposes.
g) The additional impact on profitability arising from availing the benefit of FSV against
pledged stocks, plant and machinery under charge, and mortgaged residential,
commercial and industrial properties (land and building only) shall not be available for
payment of cash or stock dividend.

3. Any misuse of FSV benefit detected during regular/ special inspection of SBP shall attract strict
punitive action under the relevant provisions of the Banking Companies Ordinance, 1962. Further,
SBP may also withdraw the benefit of FSV from banks & DFIs found involved in its misuse.

4. Various categories of assets to be considered for valuation would be as under (no other assets
shall be taken into consideration):

a) Liquid Assets:
Valuation of Liquid Assets shall be determined by the bank & DFI itself and verified by the external
auditors. However, in the case of pledged shares of listed companies, values should be taken at
market value as per active list of Stock Exchange on the balance sheet date. Moreover, valuation
of shares pledged against loans/ advances shall be considered only if such shares are in
dematerialized form in the Central Depository Company of Pakistan (CDC), otherwise these will
not be admissible for deduction as liquid assets while determining required provisions.

b) Mortgaged Property and Plant & Machinery under Charge:

Valuation of residential, commercial and industrial property (land and building only) and plant &
machinery would be accepted as determined by the evaluators in accordance with the criteria
given above.

c) Pledged Stocks:
In case of pledged stocks of perishable and non-perishable goods, forced sale value should be
provided by evaluators, and such valuation should not be more than six months old, at each
balance sheet date. The goods should be perfectly pledged, the operation of the godown (s) or
warehouse(s) should be in the control of banks & DFIs and relevant documents should be
available. In case of perishable goods, the evaluator should also give the approximate date of
complete erosion of value of pledged stock.

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 Small & Medium Enterprise Financing Prudential Regulations

ANNEXURE-III
Medium Enterprise Financing (Regulation ME R-5)

Guidelines in the Matter of Classification

and Provisioning for Assets

All Financing Facilities (including Short, Medium and Long Term)

CLASSIFICATION DETERMINANT TREATMENT OF PROVISIONS TO

INCOME BE MADE
(1) (2) (3) (4)

1. Substandard. Where mark-up/ Unrealized mark- Provision of 25% of the

interest or up/ interest to be difference resulting from the
principal is kept in outstanding balance of
overdue by 90 Memorandum principal less the amount of
days or more Account and not to liquid assets realizable without
from the due be credited to recourse to a Court of Law and
date. Income Account Forced Sale Value (FSV) of
except when pledged stocks, plant &
realized in cash. machinery under charge and
Unrealized mortgaged residential,
markup/ interest commercial and industrial
already taken to properties (land & building
income account to only) to the extent allowed in
be reversed and Annexure IV.
kept in
Memorandum
Account.

2. Doubtful. Where mark-up/ As above. Provision of 50% of the

interest or difference resulting from the
principal is outstanding balance of
overdue by 180 principal less the amount of
days or more liquid assets realizable without
from the due recourse to a Court of Law and
date. Forced Sale Value (FSV) of
pledged stocks, plant &
machinery under charge and
mortgaged residential,
commercial and industrial
properties (land & building
only) to the extent allowed in
Annexure IV.

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 Small & Medium Enterprise Financing Prudential Regulations

1. Loss. (a) Where As above. Provision of 100% of the

mark-up/ difference resulting from the
interest or outstanding balance of
principal is principal less the amount of
overdue by one liquid assets realizable without
year or more recourse to a Court of Law and
from the due Forced Sale Value (FSV) of
date. pledged stocks, plant &
machinery under charge and
(b) Where Trade mortgaged residential,
Bills (Import/ commercial and industrial
Export or Inland properties (land & building
Bills) are not only) to the extent allowed in
paid/adjusted Annexure IV.
within 180 days
of the due date.

Note:
Classified loans/advances that have been guaranteed by the Government would not require
provisioning; however, mark up/interest on such accounts would be taken to Memorandum
Account instead of Income Account.

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 Small & Medium Enterprise Financing Prudential Regulations

ANNEXURE-IV
Prudential Regulations for Medium Enterprise Financing (Regulation ME R-5)

Uniform Criteria for Determining the Value of Pledged Stock, Plant & Machinery
under Charge and Mortgaged Properties

1. Only liquid assets, pledged stock, plant & machinery under charge and residential, commercial
and industrial property having registered or equitable mortgage shall be considered for taking
benefit for provisioning, provided no NOC for creating further charge to another bank/ DFI/ NBFC
has been issued by the bank/ DFI. The aforesaid assets having pari-passu charge shall be
considered on proportionate basis of outstanding amount.

2. Hypothecated assets and assets with second charge & floating charge shall not be considered
for taking the benefit for provisioning.

3. Banks & DFIs are allowed to take the benefit of Forced Sale Value (FSV) of pledged stocks, plant
& machinery under charge, and mortgaged residential, commercial and industrial properties held
as collateral against Non Performing Loans (NPLs) for calculating provisioning requirement as
tabulated below:

Category of Asset Forced Sale Value Benefit allowed from the date
of classification
Mortgaged residential, commercial  75% for first year
and industrial properties (land &  60% for second year
building only)  45% for third year
 30% for fourth year, and
 20% for fifth year
Plant & Machinery under charge  30% for first year
 20% for second year, and
 10% for third year
Pledged stock  40% for first, second, and third year

The benefit of FSV against NPLs shall not be available after the period prescribed above.

4. Valuations shall be carried out by an independent professional evaluator who should be listed
on the panel of evaluators maintained by the Pakistan Banks’ Association (PBA). For selection and
listing of the evaluators, PBA lays down the minimum eligibility criteria with the prior approval of
the State Bank of Pakistan. The evaluator, while assigning any values to the pledged stock, plant
& machinery under charge and residential, commercial and industrial mortgaged property, shall
take into account all relevant factors affecting the salability of such assets including any difficulty
in obtaining their possession, their location, condition and the prevailing economic conditions in
the relevant sector, business or industry. The values of pledged stock, plant & machinery under
charge and residential, commercial and industrial mortgaged property so determined by the
evaluators must have to be a reasonably good estimate of the amount that could currently be
obtained by selling such assets in a forced/ distressed sale condition. The evaluators should also

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 Small & Medium Enterprise Financing Prudential Regulations

mention in their report the assumptions made, the calculations/ formulae/basis used and the
method adopted in determination of the values i.e. the forced sale value (FSV).

5. The valuation process shall include conducting a ‘Full-Scope Valuation’ of the assets in the first
year and then followed by ‘Desktop Evaluations’ in the second and third year. Full-scope valuation
shall be valid for three years from the date of last Full-scope valuation.

6. The following may be noted in respect of the Desktop and Full-Scope Valuations:

 Desktop Evaluation is defined as “an Interim Brief Review of Full-Scope Evaluation, so that
any significant change in the factors, on which the full-scope valuation was based, is
accounted for and brought to the notice of the lending bank/ DFI.”

 In case the loans exceed Rs 100 million, the Desktop Valuation shall be done by the same
evaluator, who had conducted the Full-Scope Valuation (the evaluator should be on the
approved panel of the PBA) whereas for loans below this threshold, the Desktop Valuation
may be done by banks & DFIs themselves or by the approved evaluators. For conducting
Desktop Evaluation, the evaluators shall pay a short visit to the borrower’s site. Banks’/
DFIs’ responsibility in this respect will be to ensure that the evaluator is contacted for
conducting Desktop Valuation, and is provided all necessary information which is
materially important for the interim review.

 Desktop Valuation shall be used for determining any additional provisioning requirement
only and will not be applied for reducing the provisioning requirement, assessed on the
basis of Full-Scope Valuation.

 In cases where the evaluators are not allowed by the borrowers to enter in their premises,
the Full-Scope Valuation, conducted as such, will not be accepted for provisioning benefit.

7. State Bank of Pakistan may check the valuations of the assets under mortgage/ charge, through
an independent evaluator, on random basis, to verify the reasonableness of the valuations. The
unjustified differences in the valuations of banks & DFIs and State Bank of Pakistan shall render
the concerned bank/ DFI and evaluator to penal actions including, interalia, withdrawal of FSV
benefit.

8. Various categories of assets to be considered for valuation would be as under (no other assets
shall be taken into consideration):

a) Liquid Assets:
Valuation of Liquid Assets shall be determined by a bank/ DFI itself and verified by the external
auditors. However, in the case of pledged shares of listed companies, values should be taken at
market value as per active list of Stock Exchange(s) on the balance sheet date. Moreover,
valuation of shares pledged against loans/ advances shall be considered only if such shares are in
dematerialized form in the Central Depository Company of Pakistan (CDC); otherwise, these will
not be admissible for deduction as liquid assets while determining required provisions.

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 Small & Medium Enterprise Financing Prudential Regulations

b) Mortgaged Property and Plant & Machinery under Charge:

Valuation of residential, commercial and industrial mortgaged property (land and building only)
and plant & machinery would be accepted as determined by the evaluators in accordance with
the criteria given above.

c) Pledged Stocks:
In case of pledged stocks of perishable and non-perishable goods, forced sale value should be
provided by evaluators, and such valuation should not be more than six months old, at each
balance sheet date. The goods should be perfectly pledged, the operation of the godown(s) or
warehouse(s) should be in the control of banks & DFIs and regular valid insurance and other
documents should be available. In case of perishable goods, the evaluator should also give the
approximate date of complete erosion of value.

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 Small & Medium Enterprise Financing Prudential Regulations

ANNEXURE-V
DEFINITIONS OF IMPORTANT TERMS

For the purpose of these regulations:

1. Bank means a banking company as defined in Banking Companies Ordinance, 1962.

2. Borrower means a person on which a bank/ DFI has taken any exposure during the course of
business.

3. Contingent liability means:

(a) a possible obligation that arises from past events and whose existence shall be
confirmed only by the occurrence or non- occurrence of one or more uncertain future
events not wholly within the control of the enterprise; or
(b) a present obligation that arises from past events but is not recognized because:
(i) it is not probable that an outflow of resources embodying economic benefits will
be required to settle the obligation; or
(ii) the amount of the obligation cannot be measured with sufficient reliability; and
includes letters of credit, letters of guarantee, bid bonds/ performance bonds,
advance payment guarantees and underwriting commitments.

4. DFI means Development Financial Institution and includes the Saudi Pak Industrial and
Agricultural Investment Company Limited, the Pak Kuwait Investment Company Limited,
the Pak Libya Holding Company Limited, the Pak Oman Investment Company (Pvt.) Limited,
Pak-Brunei Investment Company Limited, Pak-China Investment Company Limited, Pak-
Iran Joint Investment Company Limited, House Building Finance Corporation and any other
financial institution notified under Section 3-A of the Banking Companies Ordinance, 1962.

5. Documents include vouchers, cheques, bills, pay-orders, promissory notes, securities for
leases/advances, and claims by or against banks & DFIs or other papers supporting entries
in the books of a bank & DFI.

6. Exposure means financing facilities whether fund based and/or non-fund based and
include:
(i) Any form of financing facility extended or bills purchased/discounted except ones
drawn against the L/Cs of banks & DFIs rated at least ‘A’ by Standard & Poor, Moody’s,
Fitch-Ibca or credit rating agency on the approved panel of State Bank of Pakistan and
duly accepted by such L/C issuing banks & DFIs
(ii) Any financing facility extended or bills purchased/discounted on the guarantee of the
person
(iii) Subscription to or investment in shares, Participation Term Certificates, Term Finance
Certificates, Sukuk or any other Commercial Paper by whatever name called (at book
value) issued or guaranteed by the persons
(iv) Credit facilities extended through corporate cards
(v) Any financing obligation undertaken on behalf of the person under a letter of credit
including a stand-by letter of credit, or similar instrument
(vi) Loan repayment financial guarantees issued on behalf of the person

26
 Small & Medium Enterprise Financing Prudential Regulations

(vii) Any obligations undertaken on behalf of the person under any other guarantees
including underwriting commitments
(viii) Acceptance/ endorsements made on account
(ix) Any other liability assumed on behalf of the client to advance funds pursuant to a
contractual commitment

7. Forced Sale Value (FSV) means the value, which fully reflects the possibility of price
fluctuations and can currently be obtained by selling the mortgaged/ pledged assets in a
forced/ distressed sale conditions.

8. Government Securities include such types of Pak. Rupee obligations of the Federal
Government or a Provincial Government or of a Corporation wholly owned or controlled,
directly or indirectly, by the Federal Government or a Provincial Government and
guaranteed by the Federal Government as the Federal Government may, by notification in
the Official Gazette, declare, to the extent determined from time to time, to be Government
Securities.

9. Group means persons, whether natural or juridical, if one of them or his dependent family
members or its subsidiary, have control or hold substantial ownership interest over the
other. For the purpose of this:

(a) Subsidiary shall have the same meaning as defined in sub-section 3(2) of the
Companies Ordinance, 1984 i.e. a company or a body corporate shall deemed to be
a subsidiary of another company if that other company or body corporate directly or
indirectly controls, beneficially owns or holds more than 50% of its voting securities
or otherwise has power to elect and appoint more than 50% of its directors.

(b) Control refers to an ownership directly or indirectly through subsidiaries, of more

than one-half of voting power of an enterprise.

(c) Substantial ownership/affiliation means beneficial shareholding of more than 25%

by a person and/or by his dependent family members, which shall include his/her
spouse, dependent lineal ascendants and descendants and dependent brothers and
sisters. However, shareholding in or by the Government owned entities and financial
institutions shall not constitute substantial ownership/affiliation, for the purpose of
these regulations.

10. Liquid Assets are the assets which are readily convertible into cash without recourse to a
court of law and mean encashment/realizable value of government securities, bank
deposits, gold ornaments, gold bullion, certificates of deposit, shares of listed companies
which are actively traded on the stock exchange, NIT Units, certificates of mutual funds,
Certificates of Investment (COIs) issued by DFIs/NBFCs rated at least ‘A’ by a credit rating
agency on the approved panel of State Bank of Pakistan, listed TFCs rated at least ‘A’ by a
credit rating agency on the approved panel of State Bank of Pakistan and certificates of
asset management companies for which there is a book maker quoting daily offer and bid
rates and there is active secondary market trading. These assets with appropriate margins
should be in possession of the banks & DFIs with perfected lien.

27
 Small & Medium Enterprise Financing Prudential Regulations

Guarantees issued by domestic banks & DFIs when received as collateral by banks & DFIs
shall be treated at par with liquid assets whereas, for guarantees issued by foreign banks,
the issuing banks’ rating, assigned either by Standard & Poors, Moody’s, or Fitch-Ibca
should be ‘A’ and above or equivalent.

The inter-branch indemnity/guarantee issued by the bank’s overseas branch in favor of its
sister branch in Pakistan, would also be treated at par with liquid assets, provided the bank
is rated ‘A’ and above or equivalent either by Standard & Poors, Moody’s or Fitch-Ibca. The
indemnity for this purpose should be similar to a guarantee i.e. unconditional and demand
in nature.

11. Medium and Long Term Facilities mean facilities with maturities of more than one year and
Short Term Facilities mean facilities with maturities up to one year.

12. NBFC means Non-Banking Finance Company and includes a Leasing Company, Housing
Finance Company, Investment Bank, Discount House, Asset Management Company and a
Venture Capital Company.

13. Other Form of Security means hypothecation of stock (inventory), assignment of

receivables, lease rentals, contract receivables, etc.

14. PBA means Pakistan Banks Association.

15. Readily Realizable Assets mean and include liquid assets and stocks pledged to the banks
& DFIs in possession, with ‘perfected lien’ duly supported with complete documentation.

16. Secured means exposure backed by tangible security and any other form of security with
appropriate margins (in cases where margin has been prescribed by State Bank, appropriate
margin shall at least be equal to the prescribed margin). Exposure without any security or
collateral is defined as clean.

The banks & DFIs may also take exposure against Trust Receipts. They are, however, free to
take collateral/securities, to secure their risks/exposure, in addition to the Trust Receipts.

Banks & DFIs shall be free to decide about obtaining security/collateral against the L/C
facilities for the interim period, i.e. from the date of opening of L/C till the receipt of title
documents to the goods.

17. Tangible Security means readily realizable assets (as defined in these Prudential
Regulations), mortgage of land, plant, building, machinery and any other fixed assets.

28
 State Bank of Pakistan
Infrastructure, Housing & SME Finance Department

Frequently Asked Questions - Prudential Regulations for SME Financing

SME Definition Regulation SE R-1 and ME R-1

1. Which criterion (turnover or no. of employees) supersedes the other for defining the business
entity?

Clarification: Out of both employees and turnover criterion, there is no superseding criterion.

2. A business entity having 55 employees and sales turnover of Rs 70 Million will be categorized as
Small Enterprise (SE) or Medium Enterprise (ME)?

Clarification: The entity will be categorized as ME. In this regard, clarification has already been
provided in amended PRs (issued in May, 2016).

3. An obligor with 45 employees and sales turnover of Rs. 845 Million will be categorized as SE or
ME or corporate/commercial?

Clarification: The entity will be categorized as corporate/commercial concern.

4. A trading business entity having 120 employees but sales turnover of Rs. 350 Million will be
categorized in which category SE, ME or corporate/commercial?

Clarification: The entity will be categorized as corporate/commercial concern.

5. How will the number of employees be determined? Should this be included in the BBFS?

Clarification: It is responsibility of the bank/DFI to ascertain the number of employees of their

prospective SME borrowers. There is no column in both the SE & ME BBFS, which calls for
information on number of employees of borrowing entity.

6. What is the minimum period for contractual employees to be eligible for inclusion as part of
number of employees for SE or ME as in certain sectors, labor or supervisors are hired on
seasonal basis only?

Clarification: Under SME PRs, no minimum service period has been prescribed for contractual
employees. In case where the number of employees fluctuates, maximum number of employees
during the year (including contract employees) will be taken.

Regulation SE R-3 and ME R-4: Requirement of Audited Accounts

1. Can Wealth Tax or Income Tax returns of SE or ME individuals replace the requirement of
Balance Sheet?

Clarification: Wealth tax or IT returns cannot replace the requirement of Balance Sheet as
prescribed under SME Regulation ME R-4.

Page 1 of 4
Regulation SME R-6: Restriction on Facilities to Related Parties
1. Whether any SME loan, secured or unsecured, can be allowed to Bank staff or their blood
relatives/ spouses such as parents, brothers, sisters, if they are not depending on the bank
staff?

Clarification: The term “family member” has been defined in sub-section (ff) of Section 5 of
Banking Companies Ordinance 1962, which states that “family members in relation to a person
mean his spouse, dependent lineal ascendants and descendants and dependent brothers and
sisters”. Therefore, independent lineal ascendants and descendants and independent brothers
and sisters of employees who are not included in the definition of “family member” may be
granted financing facilities if they provide the prescribed undertaking to the bank regarding non-
existence of any interest between the borrower and the bank employee as related parties.

2. Can a Bank grant unsecured loans on the guarantee of a spouse of an employee of the Bank?

Clarification: As per SME R-6 “The banks/DFIs shall not take any exposure on an SME in which
any of its director, major shareholder holding 5% or more of the share capital of the bank/DFI or
its Chief Executive, or an Employee or any family member of these persons is interested, except
as specified in section 24 of the BCO, 1962. In this regard, it will, however, suffice if banks/DFIs
obtain an undertaking from the Small Enterprise stating that there is no existence of any interest
between the borrower and the above-mentioned related parties.”

Section 24 of BCO 1962 referred in above Regulation specifies restriction regarding loans and
advances against the securities of own shares of banking companies or unsecured advances
against the guarantee of any of its directors or any family member of any of its directors of
banking companies. Section 24 does not contain any instructions or restrictions regarding loans
and advances to the bank employees and their dependent family members. Hence, bank can
grant unsecured loans on the guarantee of spouse of a bank employee.

Regulation SME R-7: Translation of Loan Documents into Urdu

1. Will Urdu version of loan documents be provided to the customers on demand basis only and
not mandatorily?

Clarification: In terms of Regulation SME R-7, Banks/DFIs should make available to their SME
borrowers, the Loan Application Form, BBFS and other related documents, except charge
documents, in Urdu as well. However, it will be incorrect to construe that the Urdu version of
documents should be provided to the customers on demand only.

2. If both sets of documents (English & Urdu) are provided to customer for better understanding,
should the Bank obtain signatures on Urdu version of documents as well, where provided?

Clarification: The matter of getting signature on either one set of documents or both sets of
documents (English & Urdu Version) has been left to the discretion of the bank.

Page 2 of 4
Regulation SME R- 9 (General measures)
1. As per SME R-9 Para i, “Pricing policy of banks/DFIs that include mark-up rates (including the
IRR on the loan products), processing & documentation fee, prepayment/ late-payment
penalties etc. shall be mentioned explicitly in the loan agreements, i.e. the banks shall strictly
avoid imposing any hidden charges in addition to those explicitly stated in the loan
agreement”.

The loan processing fee, charges on valuation of property, search report, credit worthiness
report, stock inspection are incurred prior to sanction of loan i.e. these are already in the
knowledge of customer at the time of sanction of loan. Besides, processing fee is also included
in schedule of charges. Whether the requirement of regulation SME R-9 Para i is met if bank only
mentions “documentation fee” in its facility letter?

Clarification: Para i of Regulation SME R-9 emphasize the need for proper disclosure on pricing
policy and various fees/charges/penalties that may be received by the banks/DFIs from their
borrowers. The various fees/charges as mentioned in above query are although incurred before
the approval of facility, yet they still need to be included in the loan agreement documents and
mentioned as “already incurred/recovered” from the borrower.

Regulations SE R-2 and ME- R 3: Per Party Exposure Limit

2. What will be the treatment of a customer which falls under SE category but intends to avail
exposure of above Rs. 25 million?

Clarification: Borrower falling under the definition of SE may be allowed higher credit limits, if
the bank/DFI is satisfied to extend them higher loan limit. However, such an exposure will be
governed under PRs for ME Financing.

3. What will be the treatment of a customer which falls under ME category but intends to avail
exposure of above Rs. 200 million?

Clarification: Borrowers falling under the definition of ME may be allowed higher credit limits, if
the banks/DFIs are satisfied to extend them higher loan limit. In this case, when the exposure is
above Rs 200 million, then the subject loan portfolio will be governed under SBP PRs for
Corporate/Commercial Banking.

4. Which criteria will supersede the other: the definition of SE/ME or the maximum exposure
taken on the company?

Clarification: Criteria of definition and maximum exposure limit do not supersede each other.
Banks can allow higher exposure limits to entities meeting the definition of SE or ME, however,
in such cases, those PRs will be applicable under which the said higher per party exposure limit
is covered/allowed.

5. If a loan is allowed to trading ME under PRs for ME Financing and during currency of the loan,
either sales of the trading concern fall below PKR 150 million or number of employees falls
below 100 (any one of two criterion is violated ), how will the case be treated?

Page 3 of 4
 Clarification: The subject business entity loan will still be categorized under ME portfolio till
expiry of the loan period. Thereafter, for renewal of limit, the category of entity will be
determined afresh in the light of number of employees and sales criteria.

6. Are the defined exposures of Rs.25 million in SE and Rs.200 million in ME inclusive of Non-
Fund based limits or they just represent the fund based exposures?

Clarification: The term exposure as defined in Annexure VII of the revised SME PRs includes
both financing facilities i.e. fund based and/or non-fund based. Hence, per party exposure limit
as prescribed under Regulations SE R- 2 and ME R-3 respectively includes both the fund based as
well as non fund based exposures.

Miscellaneous Query:
1. Do the PRs for SME Financing require maintenance of current ratio and debt equity ratio?

Clarification: PRs for SME do not require maintenance of current ratio and debt equity ratio.

*****************************************

Page 4 of 4
PRUDENTIAL REGULATIONS
FOR
CONSUMER FINANCING

(Updated on August 03, 2016)

BANKING POLICY & REGULATIONS DEPARTMENT

STATE BANK OF PAKISTAN
Disclaimer:

State Bank of Pakistan compiles a booklet of Prudential Regulations from time to time for
convenience of users. Updated version of such a booklet containing amendments in the
regulations made through circulars/Circular letters to date is being issued. Due care has been
taken while incorporating amendments, however, errors and omission may be expected. In
case of any ambiguity, users are advised to refer to the original circulars/circular letters on
the relevant subject(s), which are available on SBP’s website ([Link])
 THE TEAM

NAME DESIGNATION

Syed Irfan Ali Executive Director (BPRG)

Shaukat Zaman Director (BPRD)

Senior Joint Director (BPRD)

Amer Hassan
Email : [Link]@[Link]

Joint Director (BPRD)

Kazi Sarfaraz
Email : [Link]@[Link]

Joint Director (BPRD)

Akhtar Ali
Email : [Link]@[Link]

Joint Director (BPRD)

Shah Nawaz
Email : [Link]@[Link]

Assistant Director (BPRD)

Dilshad Bano
Email : [Link]@[Link]

Website Address: [Link]

 CONTENTS

PART-A Definitions 7

PART-B Minimum requirements for consumer 10

financing.

PART-C Regulations 15

Regulation R-1 Facilities to related persons & proper 15

utilization of clean financing facilities

Regulation R-2 Limit on exposure against total consumer 15

financing.

Regulation R-3 Total financing facilities to be commensurate 16

with the income.

Regulation R-4 General reserve against consumer finance. 16

Regulation R-5 Rescheduling / Restructuring of Performing 17

/ Non Performing consumer financing
facilities

Regulation R-6 Classification & Provisioning of Receivables 19

Regulation R-7 Margin requirements. 19

Regulation R-8 Maximum Clean Limit for Credit Card And 19

Personal Loan/Financing from all
Banks/DFIs

REGULATIONS FOR CREDIT CARDS

Regulation O-1 Receipt of credit cards. 21

Regulation O-2 Unauthorized/wrong transactions. 21

Regulation O-3 Due date for payment. 21

Regulation O-4 Foreign Currency Transactions 21

Regulation R-9 Classification and provisioning. 22

REGULATIONS FOR AUTO FINANCING

Regulation R-10 Prohibition on financing commercial vehicles. 23

Regulation R-11 Maximum tenure of financing. 23

Regulation R-12 Minimum down payment. 23

Regulation R-13 Hypothecation of vehicles. 23

Regulation R-14 Insurance / Takaful. 23

Regulation O-5 Repossession of vehicles. 23

Regulation O-6 Issuance of No Objection Certificate upon 24

adjustment of loan

Regulation O-7 Financing the purchase of used cars. 24

Regulation O-8 Authorized auto dealers. 24

Regulation R-15 Classification and provisioning. 24

REGULATIONS FOR PERSONAL LOANS INCLUDING LOANS

FOR THE PURCHASE OF CONSUMER DURABLES

Regulation R-16 Hypothecation. 26

Regulation R-17 Maximum tenure of financing. 26

Regulation R-18 Running / revolving finance. 26

Regulation R-19 Renewal of revolving finance. 26

Regulation R-20 Adjustment of excess amount deposited. 27

Regulation R-21 Classification and provisioning. 27

Annexure 28
 PREFACE

The amendments made in the Prudential Regulations for Consumer Financing

during January 31, 2011 to June 30, 2016 have been incorporated in this updated
version for ease of reference of the users.

The Prudential Regulations for Consumer Financing covers Risk Management (R),
and Operations (O) aspects. However, in case of international operations, the
Prudential Regulations of host country shall prevail.

The Prudential Regulations for Consumer Financing do not supersede other

instructions issued by State Bank of Pakistan in respect of areas not covered here.
Any violation or circumvention of these regulations shall render the
bank/DFI/officer(s) concerned liable for penalties under the Banking Companies
Ordinance, 1962.

SHAUKAT ZAMAN
Director
Banking Policy & Regulation Department
 PART – A
DEFINITIONS

1. Bank means a banking company as defined in the Banking Companies

Ordinance, 1962.

2. Borrower means an individual to whom a bank/DFI has allowed any consumer

financing during the course of business.

3. Consumer Financing means any financing allowed to individuals for personal,

domestic or household purposes. The facilities categorized as Consumer
Financing are given as under, unless specifically mentioned otherwise:

i) Credit Cards mean cards which allow a customer to make payments on

credit. Supplementary credit cards shall be considered part of the principal
borrower for the purposes of these regulations. Corporate Cards will not
fall under this category and shall be regulated by Prudential Regulations for
Corporate/Commercial Banking or Prudential Regulations for SMEs
Financing as the case may be. The regulations for credit cards shall also be
applicable on charge cards, debit cards, stored value cards and BTF (Balance
Transfer Facility).
ii) Auto Loans / Financing means the loans or financing facilities to purchase
the vehicle for personal use.

iii) Personal Loans / Financing means the loans to individuals for the payment
of goods, services and expenses and includes Running Finance/Revolving
Credit to individuals.

4. Days Past Due means number of days consumer finance facility is over due

5. DFI means Development Financial Institution and includes, the Saudi Pak Industrial
and Agricultural Investment Company Limited, the Pak Kuwait Investment
Company Limited, the Pak Libya Holding Company Limited, the Pak Oman
Investment Company Limited, House Building Finance Company Limited, Pak
Brunei Investment Company Limited1, PAIR Investment Company Limited2, Pak-
China Investment Company Limited3, and any other financial institution notified
under Section 3-A of the Banking Companies Ordinance, 1962.

6. Documents include vouchers, cheques, bills, pay-orders, promissory notes,

securities for leases/advances and claims by or against the bank/DFI or other
papers supporting entries in the books of a bank/DFI.

7. Equity of the Bank/DFI includes paid-up capital, perpetual non-cumulative

preference shares, general reserves, balance in share premium account, reserve
for issue of bonus shares, statutory reserves and retained earnings / accumulated
losses as disclosed in latest annual audited financial statements. In case of
branches of foreign banks operating in Pakistan, equity will mean capital

1 Specified vide GoP Notification No.F.1(4)-BKG(R&S)/2002 dated December 21, 2006.

2 Specified vide GoP Notification No.F.1 (4)-BKG(R&S)/2002 dated July 21, 2007.
3 Specified Vide GoP Notification No.F.1 (4)-BKG(R&S)/2002 dated November 29, 2007.

7
 maintained, free of losses and provisions, under Section 13 of the Banking
Companies Ordinance, 1962.

8. Financial Institutions mean banks, Development Financial Institutions (DFIs)

and Non-Banking Finance Companies (NBFCs).

9. Financing Facilities include loans / advances / financing allowed to borrowers

by conventional banks / Islamic banking institutions/DFIs.

10. Free Credit Period means number of days during which bank does not charge
the mark-up / finance charges on retail transactions of their credit card
customers, who make full payment of their monthly billed amount.

11. Government Securities shall include such types of Pak. Rupee obligations of the
Federal Government or a Provincial Government or of a Corporation wholly
owned or controlled, directly or indirectly, by the Federal Government or a
Provincial Government and guaranteed by the Federal Government as the
Federal Government may, by notification in the Official Gazette, declare, to the
extent determined from time to time, to be Government Securities.

12. Grace Period means period during which no repayments of financing facility are
scheduled.

13. Islamic Banking Institutions mean islamic commercial banks, Islamic banking
subsidiaries and Islamic banking branches of conventional banks, licensed by
State Bank of Pakistan.

14. Liquid Assets are the assets which are readily convertible into cash without
recourse to a court of law and mean encashment/realizable value of government
securities, bank deposits, gold ornaments, gold bullion1, certificates of deposit,
shares of listed companies which are actively traded on the stock exchange, NIT
Units, Certificates of Investment (COIs) and realizable value of life
insurance/investment policy (provided lien of the bank on insurance policy is
legally enforceable) issued by DFIs/NBFCs/Insurance Companies rated at least
‘A’ by a credit rating agency on the approved panel of State Bank of Pakistan,
listed TFCs rated at least ‘A’ by a credit rating agency on the approved panel of
State Bank of Pakistan and certificates of mutual funds for which there is a book
maker quoting daily offer and bid rates and there is active secondary market
trading. These assets with appropriate margins should be in possession of the
banks/DFIs with perfected lien.

Guarantees issued by domestic banks/DFIs when received as collateral by

banks/DFIs will be treated at par with liquid assets, provided such bank meets
the Minimum Capital Requirements and Capital Adequacy Ratios as per the
standard regulatory definitions and is not restricted by the regulator from
enhancing consumer finance portfolio; whereas, for guarantees issued by foreign
banks, the issuing banks’ rating, assigned either by Standard & Poors, Moody’s,
Fitch-Ibca or Japan Credit Rating Agency should be ‘A’ and above or equivalent.

1
Inserted vide BPRD Circular Letter No. 16 of 2010 dated July 15, 2010.
8
 The inter-branch indemnity/guarantee issued by the bank’s overseas branch in
favor of its sister branch in Pakistan, would also be treated at par with liquid
assets, provided the bank is rated ‘A’ and above or equivalent either by Standard
& Poors, Moody’s, Fitch-Ibca or Japan Credit Rating Agency. The indemnity for
this purpose should be similar to a guarantee i.e. unconditional and payable on
demand in nature.

15. Negative Amortization means minimum payment due, in credit card /

revolving credit / financing products of similar nature, that is not sufficient to
amortize the principal amount due and is only apportioned to mark-up or profit
/ service charges / fees payable.

16. NBFC means Non-Banking Finance Company as defined in Section 282A of

Companies Ordinance 1984 (or as amended from time to time) and includes a
Leasing Company, Housing Finance Company, Investment Bank, Discount
House, Asset Management Company and a Venture Capital Company. For the
purpose of these regulations Modaraba as defined in Modaraba Rules formed
under the Modaraba Companies and Modaraba (floatation and Control)
Ordinance, 1980 will also be considered as NBFC.

17. Rescheduling means where bank/DFIs, due to borrower’s financial difficulty,

grants concession in the form of allowing / extending the grace period of the
existing financing facility, without changing the other terms & conditions of the
consumer financing facility.

18. Restructuring means where bank/DFI, due to borrower’s financial difficulty,

grants concession to the borrower that the bank/DFI would not otherwise
consider. Restructuring would normally involve relaxing the terms & conditions
of the consumer financing facility which inter-alia include repayment tenor,
mark-up/profit rate and charges/fee.

19. Secured means exposure backed by tangible security with appropriate margins
(in cases where margin has been prescribed by State Bank of Pakistan,
appropriate margin shall at least be equal to the prescribed margin). Exposure
without any tangible security is defined as clean.

20. Tangible Security means liquid assets (as defined in these Prudential
Regulations), mortgage of land and building, hypothecation or charge on vehicle,
but does not include hypothecation of household goods, etc.

21. Teaser Rate means lower/concessional mark-up/profit rate which is employed

only for short period at the inception of consumer financing facility.

9
 PART – B
MINIMUM REQUIREMENTS FOR CONSUMER FINANCING

Apart from the specific regulations given under each mode of financing separately,
general requirements laid down here should also be followed by the banks/DFIs
while undertaking consumer financing. It may be noted that these are the minimum
requirements and should not in any way be construed to restrict the role of the
management of the banks/DFIs to further strengthen the risk management processes
through establishing comprehensive credit risk management systems appropriate to
their type, scope, sophistication and scale of operations. The Board of Directors of
the banks/DFIs are required to establish policies, procedures and practices to define
risks, stipulate responsibilities, specify security requirements, design internal
controls and then ensure strict compliance with them.

PRE-OPERATIONS:

Before embarking upon or undertaking consumer financing, the banks/DFIs shall

implement/follow the guidelines given below on an on-going basis.

1. Banks/DFIs shall establish separate Risk Management capacity for the purpose
of consumer financing that should be commensurate with the size, scope and
complexity of the consumer finance business and suitably staffed by personnel
having sufficient expertise and experience in the field of consumer
finance/business.

2. The banks/DFIs shall prepare comprehensive consumer credit policy duly

approved by their Board of Directors (in case of the branches of foreign banks, by
Country Head and Executive/Management Committee), which shall interalia
cover credit initiation principles, loan administration including documentation,
disbursement, effective monitoring and appropriate recovery mechanism. The
policy shall explicitly specify the functions, responsibilities and various staff
positions’ powers/authority relating to approval/sanction of consumer financing
facility.

3. Islamic Banking Institutions (IBIs) offering Shariah compliant consumer

financing products shall have their comprehensive consumer credit policy duly
approved by Shariah Board in addition of their Board of Directors. IBIs shall also
have efficient Shariah review and compliance mechanism; and their Risk
Management Department shall inter-alia consider shariah non-compliance risks
while processing the consumer financing application.

4. For every type of consumer finance product, the bank/DFI shall develop a
specific product program. The program shall include the objective/quantitative
parameters for the eligibility of the borrower and determining the maximum
permissible financing limit per borrower.

5. Banks/DFIs shall put in place an efficient and adequately automated computer

based MIS for the purpose of consumer finance, which should be commensurate
with the size, scope, complexity of the consumer finance business and be able to
effectively cater to the needs of consumer financing portfolio. It should be flexible
enough to generate necessary information reports used by the management for

10
 effective monitoring of the bank’s/DFI’s exposure in the area. The MIS is
expected to generate the following periodical reports:

• Delinquency reports (for 30, 60, 90, 180 & 360 days and above) on monthly
basis. Depending upon the size and scope of consumer finance business and
underlying risks, the delinquency reports should be interrelated in respect
of various types of customers, or various attributes of the customers, to
enable the management to take important policy decisions and make
appropriate modifications in the lending program.
• Quarterly product wise profit and loss account duly adjusted with the
provisions on account of classified accounts. These profit and loss
statements should be placed before the Board of Directors in the immediate
next Board Meeting. The branches of foreign banks in order to comply with
this condition shall place the reports before a committee comprising of at
least CEO/Country Manager, CFO, Head of Consumer Business and Head
of Risk Management.

6. The banks/DFIs shall develop comprehensive recovery procedures for the

delinquent consumer financing facilities. The recovery procedures may vary
from product to product. However, distinct and objective triggers should be
prescribed for taking pre-planned enforcement/recovery measures.

7. The banks/DFIs desirous of undertaking consumer finance will become a

member of at least one Consumer Credit Information Bureau. Moreover, the
banks/DFIs may share information/data among themselves or subscribe to other
databases as they deem fit and appropriate.

8. The financial institutions starting consumer financing are encouraged to impart

sufficient training on an ongoing basis to their staff to raise their capability
regarding various aspects of consumer finance.

9. The banks/DFIs shall prepare standardized set of borrowing and recourse

documents (duly cleared by their legal counsels) for each type of consumer
financing.

10. Banks/DFIs carrying out consumer finance, in coordination with their

association (Pakistan Banks’ Association), shall develop a common glossary of
important terms along with their definitions, in both English & Urdu Versions.
This glossary will also be available on website of the banks and their association.
While printing new documents (other than legal documents as mentioned in Para
9 above), all banks will use standard terms from this glossary.

OPERATIONS:

1. Consumer financing, like other credit facilities, must be subject to the

bank’s/DFI’s risk management process setup for this particular business. The
process may interalia include, identifying source of repayment and assessing
customers’ ability to repay, his/her past dealings with the bank/DFI, the net
worth, objectives of obtaining finance and information obtained from a
Consumer Credit Information Bureau. Further, Banks/DFIs are encouraged to

11
 also incorporate the extent of fixed & variable expenses of borrower in credit
assessment for better risk management. Banks/DFIs are expected to take
reasonable steps to assess and verify the income of borrowers through different
modes and, depending upon the underlying risks, review and update income
assessment mechanism on periodical basis. The reasonable timeline for periodical
review of income assessment mechanisms shall be specified in the relevant board
approved policy.

2. Before allowing any facility, the banks/DFIs shall obtain a consumer credit
report(s) from the Credit Information Bureau of State Bank of Pakistan or from
any consumer Credit Information Bureau(s) of which they are member1,
provided the report(s) incorporates credit data reported by all Banks/DFIs. The
report(s) will be given due weightage while making credit decision.

3. At the time of granting finance facility under various modes of consumer

financing, banks/DFIs shall obtain a written declaration on the prescribed format
attached as Annexure CF-1 from the borrower divulging details of various
finance facilities already obtained from other banks/financial institutions1.
However, where this information is already part of the loan application form,
requirement of obtaining undertaking as per annexure CF-1 may be waived. The
banks/DFIs should study the details reported by the customer in financing
facility application form/undertaking and allow fresh finance/limit only after
ensuring compliance with the limits, set in these PRs, for exposure and for total
monthly amortization payments of consumer financing. This should help
banks/DFIs to capture information on the finance facilities availed by the
customer between the latest available credit information bureau report and
financing facility application date.

4. Banks/DFIs shall provide to the customer the statement of account at

appropriate intervals e.g. on monthly basis to the credit card/revolving credit
customers, unless there has been no transaction or no outstanding balance on the
account since last statement, and at least yearly to other product customers. The
statement of account of credit card customers should reflect the movement of
reward points, if applicable.

5. A detailed repayment schedule, where payment is due in installments, should be

provided to the borrower at the outset. Where alterations become imminent
because of prepayments, change in benchmark rate or any other reason, the
revised schedule should be provided to the borrower at the earliest convenience
of the bank/DFI but not later than 15 days of the change. Further, even in case of
insignificant changes, upon the request of the customer, the bank/DFI shall
provide him revised repayment schedule free of cost at least once.

6. Internal audit and control function of the bank/DFI, apart from other things,
should be designed and strengthened so that it can efficiently undertake an
objective review of the consumer finance portfolio from time to time to assess
various risks and possible weaknesses. The internal audit should also assess the
adequacy of the internal controls and ensure that the required policies and
standards are developed and practiced. Internal audit should also comment on
1 Amended vide BPRD Circular No.4 of 2009 dated February 11, 2009
12
 the steps taken by the management to rectify the weaknesses pointed out by
them in their previous reports for reducing the level of risk.

7. Banks/DFIs are encouraged to consider the feasibility of adopting the tiered

mark-up rates or risk based pricing according to the credit worthiness of
individual borrowers. For instance, banks/DFIs may, inter alia, consider credit
history, purchase patterns & month-on book in credit cards, payment behavior,
loyalty, cost of borrowings and product profitability in assessing feasibility of
tired mark-up rates. However, banks/DFIs having regular consumer finance
portfolio of more than Rs1.0 billion (outstanding amount) should prepare and
present such feasibility report to Board Risk Management Committee for review
and information; and update the same every year thereafter.

8. The banks/DFIs shall ensure that their accounting and computer systems are
well equipped to avoid charging of mark-up on mark-up. For this purpose, it
should be ensured that the mark-up/profit charged on the outstanding amount is
kept separate from the principal.

9. The banks/DFIs shall ensure that any repayment (full or partial) made by the
borrower is accounted for, as per agreed terms and conditions, before applying
mark-up/profit on the outstanding amount.

10. To bring uniformity in calculation and reporting of Days Past Due (DPDs),
Banks/DFIs shall ensure that counting of DPDs for all consumer financing
products starts from payment due date. For a missed payment, or payment less
than minimum due amount, first DPD shall be very next day of payment due
date.

11. Banks/DFIs shall not increase a borrower’s aggregate credit limit, for revolving
facilities (credit card/overdraft/finance facilities of similar product structure),
unless the borrower has specifically requested for the limit enhancement.

12. Banks/DFIs, with last four quarters consumer finance outstanding portfolio in
excess of Rs.5 billion, are encouraged to perform affordability assessment tests on
(reasonably representative) sample of consumer finance portfolio with variable
mark-up/profit rate. Affordability assessment test may include the shock to
customer’s ability to repay (e.g. DBRs) the financing facility based on plausible
changes in interest rates as observed during the last business cycle. The results of
affordability test will be presented to Board Risk Management Committee for
review and analysis at least once a year.

DISCLOSURE/ETHICS:

1. The banks/DFIs must clearly disclose, all the important terms, conditions, fees,
charges and penalties, which interalia include Annualized Percentage Rate, pre-
payment penalties and the conditions under which they apply. For ease of
reference and guidance of their customers, banks/DFIs are encouraged to
publish brochures regarding frequently asked questions.

13
 For the purposes of this regulation, Annualized Percentage Rate means as
follows:

Mark-up/Profit paid for the period x 365 x 100

Outstanding Principal Amount No. of Days

2. Minimum Payment Due (MPD) of the credit card or of any other product of
revolving credit nature shall be sufficient, so as to avoid the negative
amortization. Banks/DFIs shall also specify in their relevant approved policies,
minimum percentage of principal repayment included in minimum payment due
and disclose the same in Key Fact Sheet.

14
 PART – C
REGULATIONS

REGULATION R-1
FACILITIES TO RELATED PERSONS AND PROPER UTILIZATION OF CLEAN
FINANCING FACILITIES

Facilities to Related Persons: The consumer finance facilities extended by

banks/DFIs to their directors, major shareholders, employees and family members
of these persons shall be at arm’s length basis and on normal terms and conditions
applicable for other customers of the banks/DFIs1. The banks/DFIs shall ensure that
the appraisal standards are not compromised in such cases and market rates are
used for these persons. This condition shall not apply to the consumer financing
allowed by the banks/DFIs to their employees as part of compensation package
provided the detailed terms and conditions of the benefits which the banks/DFIs
want to give to their employees are specifically mentioned in the Employees Service
Rules/HR Policy. These employees Service Rules/HR policy should be duly
approved by the Board of Directors. Further, such consumer financing to the
employees should be treated as staff financing facilities and not as general consumer
financing2.

Proper Utilization of Clean Financing Facilities: While the State Bank of Pakistan’s
intent is not to create any undue hindrance in the smooth flow of consumer
financing to the borrowers, the banks /DFIs are, however, expected to institute
reasonable checks, so that clean financing facilities are not mis-utilized.

REGULATION R-2
LIMIT ON EXPOSURE AGAINST TOTAL CONSUMER FINANCING

Banks/DFIs shall ensure that the aggregate exposure under all consumer financing
facilities at the end of first year and second year of the start of their consumer
financing does not exceed 2 times and 4 times of their equity respectively. For
subsequent years, following limits are placed on the total consumer financing
facilities:

PERCENTAGE OF CLASSIFIED CONSUMER

FINANCING TO TOTAL CONSUMER MAXIMUM LIMIT
FINANCING
a) Below 3% 10 times of the equity
b) Below 5% 6 times of the equity
c) Below 10% 4 times of the equity
d) 10% & above 2 times of the equity

1 While allowing financing to their directors, banks/DFIs shall also ensure the compliance with the Banking Companies
Ordinance, 1962
2 Substituted vide BPRD Circular No.01 of 2011 dated January 06, 2011

15
REGULATION R-3
TOTAL FINANCING FACILITIES TO BE COMMENSURATE WITH THE
INCOME

1. While extending financing facilities to their customers, the banks/DFIs should

ensure that the total installment of the financing facilities extended by the
financial institutions is commensurate with monthly income and repayment
capacity of the borrower. In this regard, while determining the credit worthiness
and repayment capacity of the prospective borrower, the banks/DFIs shall
ensure that the total monthly amortization payments of consumer financing
facilities should not exceed 50% of the net disposable income of the prospective
borrower1. This measure would be in addition to banks’/DFIs’ usual evaluations
of each proposal concerning credit worthiness of the borrowers, to ensure that
the banks’/DFIs’ portfolio under consumer finance fulfills the prudential norms
and instructions issued by the State Bank of Pakistan and does not impair the
soundness and safety of the bank/DFI itself.

2. Banks/DFIs may consider the income of spouse of the borrower, while

calculating the DBR, provided specific consent of the spouse is obtained and
he/she is reported as co-borrower in eCIB database2. However, banks/DFIs
should take particular care while performing the income assessment of the non-
salaried couple/non salaried spouse, to avoid inflated income level through the
artificial build up of their bank account statements.

3. Banks/DFIs may waive the requirement of 50% Debt Burden in case a Credit
Card and Personal loan/financing limit is properly secured through liquid assets
(as defined in prudential regulations) with minimum 30% margin3. Further,
banks/DFIs may also set minimum margin of below 30% provided the liquid
securities with prescribed margin cover principal due, mark-up/profit and all
other receivables. Margin shortfall, if any, shall be recouped within one month of
occurrence. In case of failure to recoup it, the bank/DFI shall create provision at
quarter end, equivalent to margin shortfall amount.

4. Banks/DFIs desirous of offering Excess over Limit (EOL) facility in consumer

finance products shall provide an option to customers, while marketing their
financing products, to subscribe EOL facility or otherwise. EOL, after utilization,
should be repayable in full in next monthly bill payment. Banks/DFIs requiring
time to upgrade their systems may do so within six months of issuance of these
regulations.

REGULATION R-4
GENERAL RESERVE AGAINST CONSUMER FINANCE:

The banks/DFIs shall maintain a general reserve at least equivalent to the

percentages given below of both secured and un-secured consumer finance portfolio
(net of cash collateral, govt. securities and gold), to protect them from the risks
associated with the economic cyclical nature of this business.

1 Amended vide BPRD Circular No. 04 of 2009 dated February 11, 2009.
2
Banks/DFIs, before allowing any consumer finance facility, should utilize the co-borrower utility available in ECIB
database to determine the finance facilities wherein spouse is a co-borrower.
3 Inserted vide BPRD Circular No. 01 of 2011 dated January 06, 2011.

16
The above reserve requirement will, however, be maintained for the performing
portion only of consumer portfolio.

Category of Rate of General

NPL / Gross Loans
Financing Provision
Un-secured Ratio ≤ 5% 4.0%
portfolio 5% < Ratio ≤ 10% 5.0%
10% < Ratio ≤ 20% 6.0%
Ratio > 20% 7.0%
Secured Portfolio Ratio ≤ 5% 1.0%
5% < Ratio ≤ 10% 1.5%
10% < Ratio ≤ 20% 2.0%
Ratio > 20% 2.5%

Banks/DFIs are encouraged to develop appropriate models (e.g. historical

experience-based loss rate models duly adjusted for current conditions, migration
analysis or other relevant statistical methodologies) to estimate the amount of
expected losses for consumer financing portfolio, which may serve the purpose of a
collective impairment assessment.

Banks/DFIs with outstanding consumer financing portfolio (including housing

finance) in excess of Rs. 5 billion are required to start maintaining the data regarding
loan disbursement, defaults, recoveries there against and costs to recovery (as
specified at Annexure CF-II) for consumer financing portfolio (including housing
finance) for a period covering at least one business cycle.

REGULATION R-51
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:

i) Club or consolidate outstanding amounts on account of personal

loans/financing and credit cards and create one financing facility. The new

1 Inserted vide BPRD Circular Letter No. 43 of 2009 dated December 31, 2009.
17
 facility so created shall be placed in the lowest category of classification
amongst the classifications of the financing facilities clubbed.

ii) Convert revolving facility into an installment based financing facility with
maximum repayment tenor of 5 years.

iii) 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:

i). Consumer financing facilities of any borrower should not be rescheduled/

restructured more than once within 12 months and three times during five
year period,

ii). The loan account has existed for at least 9 months before
rescheduling/restructuring as a performing loan account,

iii). 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 installments (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 installments 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:

18
 Type of Consumer Classification
Financing
Unsecured Loss
Secured 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.

REGULATION R-6
CLASSIFICATION & PROVISIONING OF RECEIVABLES

Receivables outstanding in other assets or any other head of balance sheet, on

account of, insurance or takaful / recovery charges / or any other item (other than
those amounts which are already transferred to memorandum account) against the
non-performing loans/financing facilities shall also be classified with 100%
provisions maintained there against.

REGULATION R-7
MARGIN REQUIREMENTS:

Banks/DFIs are free to determine the margin requirements on consumer facilities

provided by them to their clients taking into account the risk profile of the
borrower(s) in order to secure their interests. However, this relaxation shall not
apply in case of items, import of which is banned by the Government.

Banks/DFIs will continue to observe margin restrictions on shares/TFCs as per

existing instructions under Prudential Regulations for Corporate/Commercial
Banking (R-6). Further, the restrictions prescribed under paragraph B of Regulation
R-6 of the Prudential Regulations for Corporate/Commercial Banking will also be
applicable in case of Consumer Financing.

State Bank of Pakistan shall continue to exercise its powers for

fixation/reinstatement of margin requirements on consumer facilities being
provided by banks/DFIs for various purposes, as and when required.

REGULATION R-8
MAXIMUM CLEAN LIMIT FOR CREDIT CARD AND PERSONAL
LOAN/FINANCING FROM ALL BANKS/DFIs

Banks/DFIs may take total clean exposure on a customer under Credit Card and
Personal loan/financing up to Rs 2,000,000 in aggregate from all banks/DFIs.
Further, banks/DFIs shall also ensure that overall credit card and personal
loan/financing limits, both on secured as well as on unsecured basis, availed by one
person from all banks/DFIs in aggregate should not exceed Rs 5,000,000, at any
point in time.

Banks/DFIs may assign clean credit card and personal loan/financing limits up to
Rs. 5,000,000 (aggregate from all banks/DFIs) to their prime customers subject to the
condition that the aggregate clean limit assigned to one prime customer on account
of personal loan/financing should not exceed Rs. 2,000,000. The banks/DFIs shall
put in place comprehensive criteria defining “Prime Customer” on the basis of,
interalia, track record, credit worthiness and financial position, duly approved by
19
their Board of Directors. The banks/DFIs are also encouraged to set internal limits
for such clean financing to prime customers keeping in view their risk appetite and
other factors. However, aggregate exposure on prime customers should not exceed
20% of the total exposure of the respective portfolio i.e. 80% exposure on account of
credit cards and personal loans (separately) should comply with the limits
prescribed for regular customers. Further, robust mechanism for risk profiling and
risk mitigation should also be adopted for this purpose1.

The credit cards secured against liquid securities shall be exempt from the above
limits. However, any personal financing facilities, in excess of above limits, secured
against liquid securities and allowed to entrepreneurs for commercial purposes shall
be classified under relevant Prudential Regulations for Small & Medium Enterprise
Financing or Corporate/Commercial Financing etc2.

The financing facilities against the securities issued by Central Directorate of

National Savings (CDNS) shall be subject to such limits as are prescribed by
CDNS/Federal Government/State Bank of Pakistan from time to time. However,
Banks/DFIs should take reasonable measures to ensure that these financing facilities
are for personal consumption purposes.

For Charge Cards, pre-set spending limits generated by the standardized systems, as
is the global practice, shall be allowed.

1 Inserted vide BPRD Circular Letter No. 12 of 2012 dated June 20, 2012
2 Currently outstanding such personal finance facilities should either be transferred to relevant Prudential Regulations for
Small & Medium Enterprise Financing or Corporate / Commercial Financing or amortized as per terms & conditions of the
facility.
20
 REGULATIONS FOR CREDIT CARDS

REGULATION O-1

The banks/DFIs should take reasonable steps to satisfy themselves that cardholders
have received the cards, whether personally or by mail. The banks/DFIs should
advise the card holders of the need to take reasonable steps to keep the card safe and
the PIN secret so that frauds are avoided.

REGULATION O-2

Banks/DFIs shall be liable for all transactions not authorized by the credit card
holders after they have been properly served with a notice that the card has been lost
/ stolen. However, the bank’s/DFI’s liability shall be limited to those amounts
wrongly charged to the credit card holder’s account. In order to mitigate the risks in
this respect, the banks/DFIs are encouraged to take insurance / takaful cover
against wrongly charged amounts, frauds, etc.

The bank/DFI shall, however, not charge the borrowers’ account with any amount
for value added services without obtaining consent of each existing & prospective
customer in writing. In addition to obtaining consent in writing, the banks/DFIs
may also use the following modes for obtaining prior consent of their customers
provided proper record is maintained by banks/DFIs:-

i) Customer’s consent on recorded lines via out bound/in bound call center
(after due verification)
ii) ATM screens – screen pop up before conducting transaction and after
inputting pin code
iii) Signed consent acquired with credit card application or as separate form
iv) IVR (Integrated Voice Recording)

REGULATION O-3
Due date for payment must be specifically mentioned on the accounts statement. If
fine/penalty is agreed to be charged in case the payment is not made by the due
date, it should be clearly mentioned in the agreement

REGULATION O-4
FOREIGN CURRENCY TRANSACTIONS:

Banks/DFIs shall convert the foreign currency denominated transactions, carried out
by customers, based on the foreign exchange conversion rate as per their approved
policy which should be consistently followed. The Banks/DFIs shall not charge any
such additional fee/spread, over and above the conversion rate, which is not
disclosed to customer.

Banks/DFIs shall disclose in monthly bill statement total value of transaction in

foreign currency, exchange rate applied (inclusive of foreign exchange conversion
fee) and total transaction amount in Pak Rupees.

21
Banks/DFIs shall also disclose foreign currency conversion fee in Key Fact Sheet and
Account Application.

REGULATION R-9
CLASSIFICATION AND PROVISIONING

The credit card advances shall be classified and provided for in the following
manner:

CLASSIFICATION DETERMINANT TREATMENT OF PROVISION TO

INCOME BE MADE*
(1) (2) (3) (4)

Loss. Where mark- Unrealized mark- Provision of 100% of the

up/interest/profit up/interest/profit to be difference resulting from
or principal is put in Suspense the outstanding balance of
overdue by 180 Account and not to be principal less the amount
days or more from credited to Income of liquid securities with
the due date. Account except when the bank/DFI.
realized in cash.

It is clarified that the lenders are allowed to follow more conservative policies.
Further, provisioning may be created and maintained by the bank/DFI on a
portfolio basis provided that the provision maintained by the bank/DFI shall not be
less than the level required under this Regulation.

22
 REGULATIONS FOR AUTO LOANS/FINANCING

REGULATION R-10

The vehicles to be utilized for commercial purposes shall not be covered under the
Prudential Regulations for Consumer Financing. Any such financing shall ensure
compliance with Prudential Regulations for Corporate/Commercial Banking or
Prudential Regulations for Small & Medium Enterprise Financing. These regulations
shall only apply for financing vehicles for personal use including Light Commercial
Vehicles (LCVs) also used for personal purposes. The LCVs may be registered as per
applicable rules of respective Provincial Excise & Taxation Departments.

REGULATION R-11

The maximum tenure of the auto finance facility shall not exceed seven years.

REGULATION R-12

While allowing auto loans/financing, the banks/DFIs shall ensure that the
minimum down payment does not fall below 15% of the value of vehicle. Further,
banks/DFIs shall extend auto financing only for the ex-factory tax paid price fixed
by the car manufacturers and the cost of ancillary item(s) e.g. (CNG kits, vehicle
tracking device i.e. Global Positioning System commonly known as ‘Tracker’ etc.)
desired by the borrower to be installed in the car/vehicle. In other words,
banks/DFIs shall not finance the premium charged by the dealers and/or investors
over and above the ex-factory tax paid price of cars/vehicles, fixed by the
manufacturers1.

REGULATION R-13

In addition to any other security arrangement on the discretion of the banks/ DFIs,
the vehicles financed by the banks/DFIs shall be properly secured by way of
hypothecation. Payments against the sale orders issued by the manufacturers are
allowed till the time of delivery of the vehicle subject to the condition that payment
will directly be made to the manufacturer/authorized dealer by the bank/ DFI and
upon delivery, the vehicle will immediately be hypothecated to the bank/ DFI.

REGULATION R-14

The banks/DFIs shall ensure that the vehicle remains properly insured at all times
during the tenure of the financing facility. However, where the bank/DFI holds
100% provision against such facility, bank/DFI, if deemed appropriate, may not
obtain insurance / takaful cover for the vehicle for remaining tenure of the facility2.

REGULATION O-5

The clause of repossession in case of default should be clearly stated in the

loan/financing agreement mentioning specific default period after which the
repossession can be initiated. The repossession expenses charged to the borrower

1 Substituted vide BPRD Circular No. 6 of 2011 dated April 27, 2011
2 Substituted vide BPRD Circular Letter No. 32 of 2009 dated October 12, 2009.

23
shall not be more than actual incurred by the bank/DFI. However, the maximum
amount of repossession charges shall be listed in the schedule of charges provided to
customers. The banks/DFIs shall develop an appropriate procedure for repossession
and subsequent disposal of vehicles/ return to borrower; and shall ensure that the
procedure is strictly in accordance with law.

REGULATION O-6

After repayment/adjustment/settlement of the financing facility by the borrower as

per the agreed terms & conditions, Bank/DFI shall return the vehicle registration file
and issue a No Objection Certificate within the shortest possible time.

REGULATION O-7

The banks/DFIs desirous of financing the purchase of used cars shall prepare
uniform guidelines for determining the value of the used vehicles. In no case the
bank/DFI shall finance the cars older than nine years. However, cars older than five
years and up to nine year can only be financed subject to the condition that complete
repayment of financing is restricted within 12 years of such car age1.

REGULATION O-8

The banks/DFIs should ensure that a good number of authorized auto dealers are
placed at their panel to eliminate the chances of collusion or other unethical
practices.

REGULATION R-15

The auto loans shall be classified and provided for in the following manner:

CLASSIFICATION DETERMINANT TREATMENT OF PROVISIONS TO

INCOME BE MADE*
(1) (2) (3) (4)

1. Substandard. Where mark-up/ Unrealized mark- Provision of 25% of the

interest/profit or up/interest/profit to be difference resulting
principal is kept in Memorandum from the outstanding
overdue by 90 Account and not to be balance of principal
days or more credited to Income less the amount of
from the due date. Account except when liquid assets.
realized in cash.
Unrealized mark
up/interest already taken
to income account to be
reversed and kept in
Memorandum Account.
2. Doubtful. Where mark-up/ As above. Provision of 50% of the
interest/profit or difference resulting
principal is from the outstanding
overdue by 180 balance of principal

1
Substituted vide BPRD Circular No. 7 of 2014 dated July 23, 2014.
24
 days or more less the amount of
from the due date. liquid assets.

3. Loss. Where mark-up/ As above. Provision of 100% of

interest/profit or the difference resulting
principal is from the outstanding
overdue by one balance of principal
year or more from less the amount of
the due date liquid assets.

25
 REGULATIONS FOR PERSONAL LOANS/FINANCING INCLUDING
LOANS/FINANCING FOR THE PURCHASE OF CONSUMER DURABLES

REGULATION R-16

In cases, where the financing facility has been extended to purchase some durable
goods/items, including personal computers and accessories thereof, the same will be
hypothecated with the bank/DFI besides other securities, which the bank/DFI may
require on its own.

REGULATION R-17

The maximum tenure of the loan financing facility shall not exceed 5 years.
However, this period may be extended to 7 years for loans/advances/financing
given for educational purposes, provided that disbursement of such loans shall
directly be made by the bank/DFI to the educational institution and the borrower
shall not be allowed to utilize/withdraw cash directly from the bank/DFI under this
head for any other purpose.

REGULATION R-18

In case of Running Finance/Revolving Finance, it shall be ensured that at least 15%

of the maximum utilization of the financing facility during the year is cleaned up by
the borrower for a minimum period of one week. In case the clean-up is not made
by the borrower, the financing facility will be appropriately classified. However,
banks/DFIs who require their customers to repay a minimum amount each month,
will be considered compliant with this regulation subject to the condition that the
aggregate cumulative monthly installments exceed the 15% clean up requirement
and accordingly the financing facilities where the specified minimum repayments
are being made by the borrowers regularly, will not require classification under this
regulation.

REGULATION R-19

In Revolving / facilities of similar nature, banks/DFIs may renew the facility

annually as per international industry best practices and based on credit &
behavioral score, determined on factors including but not limited to income profile,
repayment behavior, living areas, credit line usage & bureau based behavior, using
the loan documents obtained at loan initiation, provided:

• During every three years period cycle, once a complete assessment of the
borrower will be carried out afresh and necessary documentation will be
obtained.

• ECIB/bureau report(s) will be obtained at annual review date and due

weightage should be given to any overdue as reported in the ECIB/bureau
report(s).

• Legal opinion (Internal & External) is placed on record stating that existing
legal documents secure the interest of the Bank/DFI.

26
 • Bank/DFI’s annual renewal fee for the facility should be duly adjusted to take
into account the lesser requirements and costs involved in desktop annual
review.

Further, considering the industry practices, banks may determine the requirement of
obtaining fresh documents upon renewal of credit card facilities.

REGULATION R-20
Excess amount deposited/repaid by the customer in revolving credit account shall
be adjusted towards the loan account on the date of deposit of such amount.

REGULATION R-21

The personal loans shall be classified and provided for in the following manner:
CLASSIFICATION DETERMINANT TREATMENT OF PROVISIONS TO
INCOME BE MADE*
(1) (2) (3) (4)

1. Substandard. Where mark- Unrealized mark-up Provision of 25% of the

up/ interest / / interest / profit to difference resulting from
profit or be kept in the outstanding balance of
principal is Memorandum principal less the amount
overdue by 90 Account and not to of liquid assets.
days or more be credited to Income
from the due Account except when
date. realized in cash.
Unrealized mark
up/interest already
taken to income
account to be
reversed and kept in
Memorandum
Account.
2. Loss. Where mark- As above. Provision of 100% of the
up/ interest / difference resulting from
profit or the outstanding balance of
principal is principal less the amount
overdue by of liquid assets.
180 days or
more from the
due date.

* These specific provisions will be in addition to general reserves maintained under Regulation R-4

27
 ANNEXURE – CF-I 1

UNDERTAKING

I ----------------------------- S/O, D/O, W/O ------------------------------- holder of CNIC ---------------

----------, undertake that the detail of my existing exposure from the “Entire Banking Sector”
as on---------- is as under:

Details of Credit Cards (Clean) limits being availed from other banks/DFIs:
Sr. # Name of the Bank/DFI Approved Limit

Details of Credit Cards (Secured) limits being availed from other banks/DFIs:
Sr. # Name of the Bank/DFI Approved Limit

Details of Personal Loan (Clean) limits being availed from other banks/DFIs:
Sr. # Name of the Bank/DFI Approved Limit Amount Outstanding On
Application date

Details of Personal Loan (Secured) limits being availed from other banks/DFIs:
Sr. # Name of the Bank/DFI Approved Limit Amount Outstanding On
Application date

Details of other facilities if any (Clean & Secured) being availed from other banks/DFIs:
Sr. # Name of the Bank/DFI Approved Nature Current
Limit (Clean/Secured) Outstanding

Applied Limits (Including the application in process):

Sr. # Name of the Bank/DFI Facility under Process Nature of Facility
(Clean/Secured)

Signature:____________________________

Name of Applicant: ____________________

CNIC # _____________________________

1
Inserted vide BPRD Circular No. 4 of 2009 dated February 11, 2009.

28
 ANNEXURE – CF-II

Data Requirement for Banks with Consumer Loan Portfolio In Excess of Rs. 5 billion

1. Product wise gross loan disbursements

2. Product wise & year wise defaults out of total disbursement
3. Product wise & year wise recoveries against the total defaults
4. Total allocated direct costs incurred in recovery of defaulted consumer loans

Example:

Loan Disbursements

Disbursement
Name of
Current Year
Product 2017 2018 2019 2020
(2016)
Product-A
Product-B
Product-C

Loan Defaults

Defaults in Default in Default in Default in Default in

2016, out of 2017 out of 2018 out of 2019 out of 2020 out of
Name of
total loans total loans total Loans total loans total loans
Product
disbursed in disbursed in disbursed disbursed in disbursed in
2016 2016 2016 2016 2016
Product-A
Product-B
Product-C
Likewise, bank/DFI shall maintain default data for loans disbursed in each
subsequent year i.e. 2017, 2018 onwards.

Recoveries against Defaulted Loans

Recoveries in Recoveries in Recoveries in Recoveries in Recoveries in

2016 from the 2017 from the 2018 from the 2019 from the 2020 from the
loans which loans which loans which loans which loans which
Name of
defaulted in defaulted in defaulted in defaulted in defaulted in
Product
2016 and were 2016 and were 2016 and were 2016 and were 2016 and were
disbursed in disbursed in disbursed in disbursed in disbursed in
2016 2016 2016 2016 2016
Product-A
Product-B
Product-C
Likewise, bank/DFI shall maintain recoveries data for loans defaulted in each
subsequent year i.e. 2017, 2018 onwards.

29
 Prudential Regulations for
Infrastructure Project Financing (IPF)

Infrastructure, Housing & SME Finance Department

STATE BANK OF PAKISTAN
 IPF Prudential Regulations Team

Name Designation

Syed Samar Hasnain Executive Director

[Link]@[Link]

Syed Basit Aly Director

[Link]@[Link]

Dr. Muhammad Saleem Additional Director

[Link]@[Link]

Mr. Zahir Saeed Sakhi Assistant Director

[Link]@[Link]

Website address: [Link]

UAN: 111 727 111

 CONTENTS

PART-A DEFINITIONS 1-5

PART-B REGULATIONS 6-13
IPF.1 CREDIT APPRAISAL 6
IPF.1.1 Analysis of Financial Models 6
IPF.1.2 Requisite Expertise for Appraisal 6
IPF.1.3 Minimum Information Requirements 6
IPF.1.4 Assessment of Infrastructure Projects 6
IPF.1.5 Monitoring of Infrastructure Projects 8
IPF.2 COLLATERAL ARRANGEMENTS, SECURITY 10
PACKAGE AND PROJECT INSURANCE
IPF.2.1 Acceptance of Concession/License as Collateral 10
IPF.2.2 Security Package 10
IPF.2.3 Project Insurance/Takaful 11
IPF.3 REGULATORY COMPLIANCE 12
IPF.3.1 Exposure Limit 12
IPF.3.2 Debt-Equity 12
IPF.3.3 Funding of Infrastructure Projects 12
IPF.3.4 Classification and Provisioning Requirements 13
IPF.3.5 Reporting of Infrastructure Finance Data 13
PART-C ANNEXURES 14-19
Annex A IPF: Checklist for Minimum Information Requirements 14
Annex B IPF: Provisioning Requirements 16
Annex C List of Abbreviations 17
Annex D IPF Data Formats 18
 PREFACE

Infrastructure is the backbone for economic growth and development in a country. Availability
of infrastructure improves investment climate leading to job creation, export competitiveness and
uplifting of living standards. Pakistan faces acute lack of infrastructure facilities; energy,
communication networks, water & sanitation, educational institutions and recreational facilities
are some major infrastructure areas requiring urgent attention.

Government of Pakistan is making all out efforts to provide state of the art infrastructure
facilities across the country. A number of renewable energy projects are being set up by the
Federal as well as the Provincial Governments. Similarly a number of highways and motorways
are being built, which include both CPEC related and non CPEC related projects. Financial
resources in infrastructure projects constitute a major component of the whole resource envelope.
This is true universally including developed as well as developing nations.

State Bank of Pakistan recognizing the importance of infrastructure financing in the country,
issued Infrastructure Project Financing (IPF) Guidelines in 2005. These guidelines were then
updated in 2010. In order to promote infrastructure financing in Pakistan, the SBP is now issuing
Prudential Regulations (PRs) for Infrastructure Project Financing. These regulations have been
developed on the basis of broad based internal as well as external stakeholders’ consultations.
These PRs for IPF draw strength from financial sector’s experiences and SBP’s forward looking
approach in this area.

These Prudential Regulations place emphasis on important features of infrastructure project

finance which will facilitate the banks and DFIs to assess the cash flow generating capacity of
the projects like the requirement of technical feasibility, comprehensive risk assessment, project
insurance, technical monitoring of the project during loan tenure and requirement of supply and
off-take agreements. It is hoped that these features of the Regulations will help banks and DFIs
to develop expertise for financing of infrastructure projects, essentially by evaluating the
intrinsic cash flow generating ability of these projects.

It is also pertinent to mention here that these Regulations do take in to account environmental
impact of infrastructure projects. The banks/DFIs are advised to consider environmental
externalities in infrastructure projects along with other technical, legal and regulatory aspects.
Banks/DFIs are encouraged to prepare their own structured lending schemes for the development
of IPF. For this purpose, banks/DFIs may commission their own studies to determine the
potential in specific infrastructure projects. Besides conventional infrastructure financing,
banks/DFIs are also encouraged to adopt Islamic mode of banking to develop infrastructure
products as it is very conducive to infrastructure financing. In developing Islamic financing
products for infrastructure, the banks/DFIs should refer to relevant instructions issued by Islamic
Banking Department of SBP. Furthermore, Islamic Banking Institutions may convert
conventional IPF terms in context of Islamic banking practices wherever deemed necessary.

The IPF Prudential Regulations do not supersede other directives and instructions issued by SBP
from time to time in respect of areas not covered here. The IPF Prudential Regulations cover
issues relating to risk management of infrastructure project financing only. However, the relevant
sections covering categories viz. corporate governance (G), anti money laundering (M), and
operations (O), as mentioned in Prudential Regulations for Corporate/Commercial Banking shall
be applied, wherever applicable. Any deviation or non-compliance shall attract punitive action
under the relevant provisions of the Banking Companies Ordinance, 1962.

Director
Infrastructure, Housing & SME Finance Department
30 December 2016
 Prudential Regulations
for Infrastructure Project Financing
PART- A
DEFINITIONS

1. Asset Securitization means a process whereby any Special Purpose Vehicle raises
funds through the issue of Term Finance Certificates or any other instruments
with the approval of Securities and Exchange Commission of Pakistan (SECP).
The funds so received are used to make payment to the Originator, for acquiring
from the Originator the title, property or right in the receivables or other assets in
the form of actionable claims. Originator in this context has the same meaning as
explained in BPD Circular No. 31 of November 14, 2002
[Link]

2. Bank as defined in Prudential Regulations for Corporate/Commercial Banking.

3. Borrower means Concessionaire/Licensee/Project Company of an Infrastructure

Project, including a public sector entity, on whom the bank(s)/DFI(s) has/have
taken exposure during the course of business, including their successor(s).

4. Concession Agreement means an agreement, usually with the government authority,

to operate the project or to provide the specified services for a certain period of
time on certain predetermined terms.

5. Concessionaire/Licensee means a legal entity, incorporated by sponsors of an

Infrastructure Project, to whom a Concession/License is awarded by a
government agency, including their successor(s) in the titles and assignments.

6. Contractor(s) means the entities which may be awarded the contract for
construction, supply of materials, operation, maintenance and other allied works of
an Infrastructure Project by the Concessionaire/Licensee/Project Company.

7. Debt Payment Account means an account created for the period of financing
provided by the Lenders that shall be funded by the
Concessionaire/Licensee/Project Company as per the Financing Agreement(s)
from the Project Account(s) and/or the Project Collection Account to amortize debt.

8. DFI as defined in Prudential Regulations for Corporate/Commercial Banking.

9. Equity of the Bank/DFI as defined in Prudential Regulations for

Corporate/Commercial Banking.

1
10. Exposure as defined in Prudential Regulations for Corporate/Commercial
Banking.

11. Financing Agreement(s) mean(s) the agreement(s) entered into between the
Concessionaire/Licensee/Project Company/Sponsors and the Lenders, for the purpose
of providing the fund-based and non-fund based facilities necessary to carry out the
Infrastructure Project, and will also include all other agreements/documents providing
security for such financing.

12. Financial Close means the stage at which financing agreement(s) has/have been
executed and conditions precedent in them have been satisfied/waived/deferred.
Subsequently, funding becomes available to the project and facilities are ready to be
disbursed on agreed terms and conditions.

13. Financial Completion means fulfillment of any one or more of the conditions listed
below:
a. The project’s ability to produce below a certain unit cost that is
agreed beforehand by the concerned parties.
b. Produce a minimum volume, output or level of performance above a
certain level.
c. Show compliance with any similar conditionality for a specified
period of time.
d. Have a minimum level of working capital and a certain current ratio.
e. Achieve a minimum debt-service coverage ratio and debt-to-equity
ratio for a certain period and any other conditions set as per the
Financing Agreement(s).

14. Financial Covenants mean legal undertakings of the borrower to adhere to certain
limits in its operations and financial performance as specified in the Financing
Agreement(s). For example, not to allow certain balance sheet items or ratios ( the
debt-service coverage ratio etc.) to fall below or go over an agreed-upon limit.

15. Government Agency means:

(a) A division, department, attached department, bureau, section,
commission, board, office or unit of the Federal Government or a
Provincial Government or a Local Government;
(b) A development or a local authority, company or corporation
established or controlled by the Federal Government or Provincial
Government.

16. Islamic Banking Institutions mean Islamic commercial banks, Islamic banking
subsidiaries and Islamic banking branches of conventional banks, licensed by State
Bank of Pakistan.

2
17. Infrastructure Project Financing (IPF) means either limited recourse or non-
recourse financing for an Infrastructure Project as mentioned in table below, which
includes both fund-based and non fund-based facilities. Projects being financed under
modes of financing other than project finance shall not be governed under Prudential
Regulations for IPF.

S. Infrastructure Sectors Infrastructure Projects

No.
A. Transport i. Roads, Flyovers and Bridges
ii. Mass Transit, Urban Bus, Urban Rail
iii. Rail-Bed, Stations System, Rail Freight, Passenger
Services, Tunnels, Bridges etc
iv. Ports, Channel Dredging, Shipping, Container
Terminals
v. Inland Waterways
vi. Airports
B. Power i. Power Generation
ii. Power Transmission
iii. Power Distribution
C. Energy i. Natural Gas Exploration and Distribution
ii. LPG Extraction, Terminal, Distribution and Marketing
iii. LNG Terminal, Distribution and Marketing
iv. Petroleum Extraction, Refinery and Pipeline
v. Oil/Gas/LNG Storage Facility
vi. Energy Efficiency and Conservation
vii. Coal Mining
D. Telecommunication A Telecommunication Local Services, Long Distance and
Towers
E. Water & Sanitation i. Dams, Barrages and Canals
ii. Water Supply Pipelines
iii. Irrigation System & Network
iv. Water Treatment System
v. Sewage Collection, Disposal & Treatment System
vi. Solid Waste Management
F. Social, Cultural & i. Educational & Training Institutes
Commercial ii. Hospitals, Training Institutes, Diagnostic Centers
Infrastructure iii. Public Parks, Recreational Facilities
iv. Tourism related Facilities like Hotels
v. Industrial Parks and Special Economic Zones (SEZ)
vi. Warehouses, Cold Storage
vii. Housing Projects
G. Any Other Any other infrastructure project in consultation with SBP

3
18. Lender means a bank/DFI taking exposure on the Concessionaire/Licensee/Project
Company and their successors. The term ‘Lender’ shall also include a consortium of
lenders, a trustee, or a security agent appointed by the lenders.

19. License means a permission granted by a government or private entity to a company

sponsor for undertaking an Infrastructure Project.

20. Limited-Recourse Financing means a form of financing in which the lenders base
their credit decision primarily on the cash flows of the borrower/project company. In
addition, the security package may give lenders legal recourse against the sponsor
and/or its assets.

21. Liquid Assets as defined in Prudential Regulations for Corporate/Commercial

Banking.

22. Local Authority means any agency set up or designated by Federal Government or
Provincial Government, by notification in the official Gazette, to be a Local Authority.

23. Non-recourse Financing means a form of project financing in which the lenders
base their credit decisions solely on the cash flows of the project for repayment of the
project debt. Such recourse is opted where the project is fully capable of generating
sufficient cash flows to repay the project debt, even under adverse conditions.

24. Physical Completion means the project’s ability to sustain production/services at a

certain capacity for a specified period of time, such as one month or one quarter
of an operating year. Before this, the project may also be certified as technically
complete, i.e. meeting all technical design specification.

25. Project Account(s) mean(s) one or more account(s) for the purpose of depositing
contributions towards the equity of the Concessionaire/Licensee/Project Company
and the disbursement of loans by the Lenders through a ‘cash waterfall’ mechanism
under the Financing Agreement(s). The Project Account(s) can also be utilized for
depositing surplus receipts after appropriations for debt servicing, project
maintenance and any other appropriations as per the Financing Agreement(s) from
the Project Collection Account. Moreover, all receipts and expenditure made with
respect to the due performance of its obligation by the
Concessionaire/Licensee/Project Company shall be through such Project Account(s).

26. Project Capital Cost means the total construction/completion costs of a project on
an un-leveraged (all-equity) basis, which includes project development cost, land,
owners’ costs of construction, and initial working capital.

27. Project Collection Account means an account opened for the exclusive collection
of all revenue receipt of an Infrastructure Project that shall be operated by the

4
 Concessionaire/Licensee/Project Company in accordance with Financing
Agreement(s) with the lenders.

28. Project Company means the legal entity, registered with SECP under relevant laws,
which owns and/or operates a project.

29. Project Finance means a form of ‘Non-recourse’ or ‘Limited Recourse’ financing,

where the lenders base their credit decision solely or primarily on the cash flows of
the project, with respect to repayment of the project debts.

30. Project Cost means the total financing (debt and equity) required to complete
construction of a project. It includes development cost, advisory fee, insurance fee,
capital costs, financing fee, interest that accumulates during the construction period,
and any amounts (financing plan contingencies) set aside to pay for cost overruns or
debt servicing in case of any delays, lower than anticipated project revenues including
possible force majeure event.

31. Project Funds Agreement (PFA) means an agreement, usually by sponsors, to

provide additional funds as needed until completion of the project, or at any other
agreed date. However, burden of additional funds may be shared amongst
sponsors, creditors and suppliers as per their mutual consent under a PFA.

32. Project Sponsor(s) mean(s) the primary developer(s) and proponent(s) of a project, or
a party providing the major owner’s equity financing.

33. Public Utilities mean water supply, electricity supply, telecommunication system,
sewerage system, petroleum, gas supply and other utilities and amenities for the
benefit of the public.

34. Right of Way means the existing corridor already available with a government
agency and any additional land which may have to be acquired by a government
agency for the purpose of the Infrastructure Project.

35. Special Purpose Vehicle means a special purpose vehicle registered with the SECP
for the purpose of Securitization.

36. Subordinated Loan means an unsecured loan extended to the borrower, generally
by its sponsors, subordinate to the claim of the bank/DFI taking exposure on the
borrower, and documented by a formal sub-ordination agreement between
provider of the loan and the bank/DFI. The loan shall be disclosed in the annual
audited financial statements of the borrower as subordinated loan.

37. Term Sheet means a document that outlines the terms and conditions of the
financing facility. A term sheet is issued by a bank/syndicate prior to formal
signing of Financing Agreement(s).

5
 PART - B
REGULATIONS
IPF.1 -- CREDIT APPRAISAL
A thorough credit appraisal of an IPF shall be carried out in order to identify and
mitigate the project risks, and to ascertain that the project will function as per plans.
Assessment of the technical, financial and economic viability of the project shall also be
carried out to determine adequacy of the project cash flows. Furthermore, banks/DFIs
shall thoroughly review and assess the validity of assumptions on which cash flow
projections have been made to repay project debt and meet its obligations under the
Financing Agreement(s)

IPF.1.1 -- Analysis of Financial Model(s)

Banks/DFIs shall comprehensively evaluate the financial model(s), prepared in-
house or provided by financial advisor/Project Company, at the time of due
diligence to create project forecasts and conduct scenarios & sensitivity analysis.
Banks/DFIs shall use this model(s) after financial close to update for changes in
various assumptions so as to look for early warning signals with respect to any
overruns that may be expected in the project cost.

IPF.1.2 -- Requisite Expertise for Appraisal

Banks/DFIs, which are involved in IPF, shall develop the requisite expertise (human
resources, IT system etc.) to conduct a thorough appraisal of the proposed project in
consultation with the technical, legal, insurance, financial and environment advisors (as
the case may be).

IPF.1.3 -- Minimum Information Requirements

Banks/DFIs, shall obtain and evaluate detailed due diligence of the proposed project which
may include reports from financial, technical, legal, insurance and environment advisors.
The financial feasibility, if required, may be endorsed by an auditing firm on the approved
panel of SBP. The banks/DFIs shall get the technical feasibility report independently
reviewed by their technical advisor, which can be an engineering firm of repute registered
with concerned authority in Pakistan or internationally.

Moreover, banks/DFIs shall also obtain minimum information to their satisfaction regarding
the proposed Infrastructure Project in accordance with Annex-A (IPF: Checklist for
Minimum Information Requirements). Banks/DFIs should get the project documents, as
specified in section 6 of Annexure A, vetted by a legal counsel or syndicate legal counsel.

IPF.1.4 -- Assessment of Infrastructure Projects

Infrastructure Projects usually go through development, construction, start-up, and
operation stages. Banks/DFIs shall, therefore, assess these stages separately for risk
mitigation purpose. While some of the Regulations in this regard are given as under;
however, banks/DFIs may put in place additional safeguard measures as per their own

6
credit and risk framework.

IPF.1.4.1 Development Phase: The funding needs during this phase should be met
primarily through capital from the sponsor(s). However, at the stage of financial
closure, the Financing Agreement(s) should have a clause where Project
Company/borrower is covered that lenders will perform as per Financing
Agreement(s) as long as all covenants are being met by the Project
Company/borrower.

IPF.1.4.2 Construction and Start-up Phase: Banks/DFIs shall adequately

safeguard their interests from major risks arising from, but not limited to,
construction delays, cost overruns, technical design flaws, changes in
government regulations etc and stress upon the provision of risk assessment and
allocation matrix/report. Banks/DFIs shall also hedge identified and potential
risks by opting for fixed-price (where applicable), date certain construction
contracts (including turnkey contracts), and built-in provisions for liquidated
damages if the contractor fails to perform, along with obtaining insurance cover
for certain areas of the project or any other measure necessary to mitigate the
following risks:

a. Responsibility of Assuming Completion Risk: Banks/DFIs shall properly

assess and negotiate risks arising during completion phase of the project with
the sponsors. All such risks shall be the responsibility of the project company,
its sponsors, contractors, suppliers and insurers (as the case may be).

b. Physical and Financial Completion of Infrastructure Projects: To protect

against the risk of physical and financial non-completion of the Infrastructure
Project, banks/DFIs are advised to closely observe following issues for risk
mitigation:
i. Project Funds Agreement (PFA): To ensure that unexpected costs do not
jeopardize the project’s completion, creditors and sponsors may have a
commitment for standby financing as part of the initial financial package. This
may be provided by sponsors through a contractual agreement, i.e. Project
Funds Agreement (PFA), which is a standby subordinated loan or equity,
wherein sponsors may either provide or arrange the requisite funds.
ii. Financial Completion Agreement (FCA): It is pertinent to emphasize that a
new project may reach physical completion but may not become self-sustaining
for a number of reasons, such as supply problems, weak market demand or other
adverse changes in micro or macroeconomic conditions. If financial completion is
not achieved, profitability will suffer, and the project is likely to encounter debt-
servicing difficulties. Project documentations, therefore, may include a Financial
Completion Agreement (FCA), which specifies, in contract form, the initial
financial projections of the project against which creditors and investors are

7
 willing to invest funds. Under FCA, the sponsors typically commit to provide
subordinated loans or additional equity to the project until the agreed
financial performance is achieved. By requiring sponsors to ensure project
financial completion, lenders greatly reduce the default risk of the project. The
lenders may, at their own discretion, require the sponsors to arrange suitable
insurance cover, if available, for covering such risk.
iii. Exposure without Financial Closure: No bank/DFI should take any exposure
until satisfying themselves that financial close has been achieved.
iv. Insurance: To ensure fulfillment of obligations by the sponsors, their obligations
under PFA/FCA may be backed-up by a letter of credit, bond or guarantee from a
creditworthy third party. However, for mitigating force majeure that cannot be
contractually allocated, banks/DFIs are advised to call for purchase of insurance
cover, wherever possible, by the sponsors, so as to mitigate both direct and
indirect types of force majeure.

IPF.1.4.3 Operation Phase: Financing for infrastructure project is long term in

nature, therefore, banks/ DFIs shall assess all risk associated with the operation phase
of the project like smooth availability of working capital, availability & cost of inputs
and market demand for the project’s products/services etc.

a. Banks/DFIs may stress upon the sponsors to undertake long-term purchase

contracts for important inputs and long term off-take contracts for project
outputs (where applicable) so that the impact of price volatility and adverse
market demand is minimized.
b. Banks/DFIs may require the Project Company to obtain performance
guarantees on technical components and other necessary inputs from its
contractors/suppliers.
c. Banks/DFIs may encourage the Project Company to enter into operation and
maintenance agreement (wherever appropriate) for initial years of operation.
d. During operation phase, banks/DFIs may also encourage the Project Company
to get their infrastructure project rated by a credit rating agency on the approved
panel of State Bank of Pakistan.

IPF.1.5 -- Monitoring of Infrastructure Projects

Banks/DFIs shall establish a mechanism for continuous monitoring of project
implementation to ensure proper utilization of the credit disbursed to the company. For
this purpose, proper scrutiny/audit shall be undertaken of the Project Account(s),
Project Collection Account, Debt Payment Account, and any other accounts deemed
necessary for the operation of the project. Moreover, compliance with financial covenants
and periodical technical inspection of the project during construction phase shall also be
ensured.

8
IPF.1.5.1 Monitoring for Assignment of Project Receivables and Payments for
Damages: In infrastructure project financing, the primary source of repayment is
project cash flows, therefore, lenders need to secure the loan by obtaining an
assignment of project receivables. For this purpose, lenders may also opt for
registering a charge on receivables and seeking acknowledged assignment of
project receivables from the employers/sponsors, depending on advice from
their/syndicate’s legal advisor. To mitigate adverse impact from premature
termination of important agreements such as government concession, management,
O&M, supply contracts etc, banks/DFIs shall institute necessary monitoring measure
so as to ensure that the assignment of project receivables and payments on account
of damages are made in their favor.

IPF.1.5.2 Monitoring for Ensuring Enforcement of Security: To ensure the

protection of bank’s charge on assets of the Project Company, banks/DFIs will
register their charge with the Registrar of Companies, so that the security is not
mortgaged with any other lending institution for further financing.

IPF.1.5.3 Project Account(s) for Monitoring Repayment of Debt: Banks/DFIs

shall institute a mechanism for repayment of project debts through Project
Account(s), which shall be assigned in favor of the lenders without any conflicting
interests.

IPF.1.5.4 Financial Covenants for Repayment of Debt: In order to ensure that

dividend payments to project investors and/or other discretionary payments, not
including payments necessary for operation of the Project Company, do not restrict
or curtail the ability of Project Company to meet its debt service obligations,
banks/DFIs shall require the Project Company to observe financial covenants
including debt service coverage ratio, loan life coverage ratio etc during
construction and operation phase of the project.

IPF.1.5.5 Technical monitoring during Construction and Operation Phase:

During construction phase, banks/ DFIs shall monitor project’s progress through
periodical review by technical consultant. The scope of technical consultant should
include assessment of actual progress of the project against the scheduled progress
and agreed milestones, review of status of engineering, procurement, construction
and commissioning activities and identification of bottlenecks arising or likely to
arise in the project completion. All draw downs pertaining to EPC/non-EPC
contracts may be linked with certification by technical consultant.
To safeguard their interests, banks/DFIs may have periodic technical inspection of
the project from the technical advisor on need basis to monitor the technical health
of project during the loan tenure.

9
IPF.2 -- COLLATERAL ARRANGEMENTS, SECURITY PACKAGE
AND PROJECT INSURANCE

IPF.2.1 -- Acceptance of Concession/License as Collateral

In order to promote Infrastructure Project Financing, banks/DFIs are encouraged to accept
a ‘Concession Agreement/License’ issued by a Government Agency as collateral, as part
of the overall collateral arrangements, subject to the following stipulations:
a. The Concession Agreement/License is free of all encumbrances, is irrevocable, and
does not contain any terms or conditions which may be detrimental to the interest of
the lenders;
b. The Concession Agreement/License should be assignable to lenders in the event of
default (where applicable);
c. The Government Agency that has issued the Concession Agreement/License
undertakes to facilitate lenders in the transfer of Concession Agreement/License
in case of default;
d. Public utilities are provided appropriately in the area (where applicable) by
the Government or by the concerned authorities;
e. Banks/DFIs have satisfied themselves about the secured nature of Concession
Agreement/License, the expected source of repayment and the overall collateral
arrangements.

IPF.2.2 -- Security Package

In order to observe prudence, while undertaking Infrastructure Project Financing,
banks/DFIs shall secure their interest by Primary Security/Collateral, besides either
one or a combination of the Secondary Securities/Collateral (as applicable), the details of
which are as under:

IPF.2.2.1 Primary Security/Collateral: First charge on all the receivables and

Project Account(s), Project Collection Account, Debt Payment Account, Bank
Accounts, including offshore accounts maintained by the Project Company.

IPF.2.2.2 Secondary Securities/Collateral

a. First Charge over all the immovable and movable assets of the project
company and that of the contractors if deemed necessary by the
lender;
b. First assignment of all insurance policies to cover major and minor
risks, including force-majeure (if applicable);
c. First pledge of sponsors’ share in the company, besides ensuring that
sponsor’s holding does not fall below 51% of equity capital without
prior approval of the lender(s);
d. First assignment by way of security of all government approvals and
agreements, the implementation agreement and the government
undertaking;

10
 e. First assignment by way of security of the company’s rights under
project agreements, such as project funds agreements, retention account
agreement, shareholders agreement, supply agreement and off-take
agreement, EPC and O&M contracts where applicable.
f. First charge/assignment of corporate/bank guarantees furnished by the
contractors to the project company for claiming liquidated damages.
g. Any other security as deemed appropriate by the bank/DFI for financing.

IPF.2.3 -- Project Insurance/Takaful:

Banks/ DFIs, while taking an exposure on infrastructure projects, shall ensure that the
Project Company has obtained, or made arrangement to obtain, valid and enforceable
insurance coverage/takaful for potential risks associated with infrastructure projects
including, where applicable, but not limited to, physical loss or damage to project’s assets
during construction- CAR (Contractor’s All Risks), liability to third parties (public liability),
loss or damage to assets during transportation (marine), machinery breakdown, loss of profit
and terrorism etc. Lenders may also seek advice from their insurance advisors, where
applicable, to determine the risks for which insurance/ takaful will be required.

11
IPF.3 -- REGULATORY COMPLIANCE

Banks/DFIs shall adhere to the following regulatory measures for financing to

Infrastructure Projects. However, those regulatory issues that are not covered in these
Regulations will continue to be governed by the Prudential Regulations for
Corporate/Commercial Banking.

IPF.3.1 -- Exposure Limits

IPF.3.1.1 Per Party Exposure Limits

Exposure limits for a single obligor and obligor group shall be calculated in the manner
as described in Regulation R-1 and Annexure I of Prudential Regulations for
Corporate/Commercial Banking. However, Board of banks/DFIs may allow for an
additional 5 percent exposure of the bank/DFI’s equity (for single obligor and obligor
group) in case of financing for Infrastructure Projects as defined at para 17 above.
Banks/DFIs shall lay down a Board approved policy in this regard.

IPF.3.1.2 Sectoral Exposure

Banks/DFIs are encouraged to diversify their exposure to different Infrastructure
Sectors to ensure risk diversification and equitable development of other sectors.

IPF.3.2 -- Debt-Equity
Banks/DFIs shall prescribe a maximum ratio between borrower’s equity and its total
financing facilities from all financial institutions. This debt-equity ratio shall be part of
a bank/DFI’s credit policy approved by their Board of Directors. The credit policy shall
emphasize upon higher credit standards and provide full guidance to the management
about the above requirements for various categories of clients and corresponding risk
mitigates etc. acceptable to the bank/DFI. The policy shall also have explicit provisions
for circumstances or conditions under which the bank/DFI may extend financing
facilities that are in breach of these limits, should the bank/DFI decide to do so. The
policy shall clearly provide approving authorities that would be responsible to allow
exemptions in accordance with the policy. All such exceptions allowed shall be
reported to the Board of Directors at least on quarterly basis.

IPF.3.3 -- Funding of Infrastructure Projects

IPF.3.3.1 Maximum Duration of Loan: Banks/DFIs may extend loans for IPF up to
a maximum period of 20 years, excluding grace period, if any.

IPF.3.3.2 Asset Liability Management: Banks/DFIs, following Basel III

requirements are encouraged to develop an in-house system for prudently managing
interest rate risk and liquidity risk arising from locking their assets in long term
IPF undertakings. Banks/DFIs may either enter into a refinancing/sell-down
financing arrangement with other banks/DFIs or arrange consortium/syndicate to
effectively match their assets and liabilities.

12
 IPF.3.3.3 Long Term Funding: As a measure of Asset Liability Management
(ALM), banks/DFIs are also encouraged to float Infrastructure Bonds/Green
Bonds/Sukuk to match the tenure of infrastructure loans, besides securitization/sell
down/refinancing. Banks/DFIs are allowed to securitize their assets pertaining to
Infrastructure Projects defined at para 17, Part A of these Regulations.

IPF.3.4 -- Classification and Provisioning Requirements

The banks/DFIs shall classify and make provisioning for IPF as per provision
requirements illustrated at Annex B. In addition to the time-based criteria prescribed
at Annex B, subjective evaluation of performing and non-performing credit portfolio
shall be made for risk assessment. However, if deemed necessary, any account
including the performing account will be classified, and the category of
classification determined on the basis of time based criteria shall be further
downgraded. Such evaluation shall be carried out on the basis of credit worthiness
of the borrower, cash flows, operation in the account, adequacy of the security,
inclusive of its realizable value and documentation covering the advances.

IPF.3.4.1 Banks/DFIs shall refer to the relevant clauses of Prudential Regulations

for Corporate/Commercial Banking for the purpose of calculations for forced
sale value benefits, restructuring and rescheduling and timing of creating
provisions and reversal of provision.

IPF.3.5 -- Reporting of Infrastructure Finance Data

Banks/DFIs shall continue to report data on infrastructure financing, on quarterly basis, as
per existing practice. However, distinction should be made between infrastructure financing
provided through project finance mode or other modes (e.g. corporate finance etc). Data
format sheets for IPF reporting are placed at Annex D.

13
 ANNEX A

IPF: CHECKLIST FOR MINIMUM INFORMATION REQUIREMENTS

1. PROJECT DESCRIPTION
i) Description of Product/ Service
ii) Capacity of Project (as applicable)
iii) Proposed ownership structure and sponsor(s) information
iv) Legal status of project and status of government approvals, exemptions/advantages
to be availed by the Project, licenses and permissions required and proposed
measures/actions that could affect the Project.
v) Consultant due diligence reports (construction arrangements, market survey etc)
vi) Project’s anticipated economic contributions (e.g. in the generation of foreign
exchange, employment, technology transfer etc.)

2. CAPITAL INVESTMENT
i) Project site (related legal agreements for land use rights/ownership etc)
ii) Project development costs
iii) Civil works and buildings costs
iv) Major and auxiliary equipments
v) Project management mechanism
vi) Pre-operating requirements and costs
vii) Contingencies (physical) and escalations (financial)
viii) Initial working capital requirements
ix) Contracting and purchasing procedures to be used
x) Local/foreign manpower and technical expertise required at the planning stage

3. PROJECT SCHEDULES
i) Construction, startup, operations
ii) Expenditures
iii) Funding (including timing of funds needed during project implementation)
iv) Regulatory compliance

4. ENVIRONMENT IMPACT
i) Description of environment impact
ii) Health and safety issues
iii) IEE and EIA as required under Environmental Laws
iv) NOC from respective Federal/Provincial Environment Protection Agency.

5. FINANCING
i) Total cost of project (including details on major items of fixed assets and working
capital)

14
 ii) Brief profile of sponsor(s) and participant(s), showing their nature of current business
interests, financial capacity or other interest in the project construction,
operations, and marketing
iii) Capital structure
a. Proposed debt/equity structure
b. Equity
o Shareholder structure
o Long term plans (stay private/go public)
o Quasi-equity (subordinated debt)
c. Debt
o Long-term debt/working capital loan
o Domestic/foreign
o Desired terms and conditions
o Funding sources already identified
d. Contingencies: overrun/standby arrangements
iv) Financial Projections
a. Projected financial statements including cash flows
b. Clear statement of all assumptions
c. Sensitivity analyses under different scenarios like completion delay, low
demand volume, low tariff, interest rate risk etc.
d. Debt Service Coverage Ratio (DSCR, annual and loan-life), Net Present
Value (NPV), Internal Rate of Return (IRR) and Payback Period of the
project, Return on Equity (ROE) etc.

6. LEGAL DOCUMENTATION
i) Joint venture agreements (if applicable)
ii) Articles of association
iii) Government approval documents/concession/business license
iv) Land certificate/red line map
v) Mortgages, if any
vi) Loan agreements
vii) Major contracts including (as the case may be)
a. EPC/ Non-EPC Contract
b. Off-take agreements
c. Supply agreements
d. Technical assistance agreement on need basis
e. Operation and Maintenance agreement
f. Insurance Policies

15
 ANNEX B
IPF: PROVISIONING REQUIREMENTS

Classifica Determinant Treatment of Income Provisioning to be made

tion
OAEM Where mark-up/ No provisioning Required.
interest or principal
is overdue by 90 Default notices to be issued to
days or more from borrower/sponsors.
the due date.
Substanda Where mark-up/ Unrealized mark-up/ Provision of 25% of the difference
rd interest or principal interest to be kept in resulting from the outstanding balance of
is overdue by 180 Memorandum Account principal less the amount of liquid assets
days or more from and not to be credited to realizable without recourse to a Court of
the due date. Income Account except Law and Forced Sale Value (FSV) of
when realized in cash. pledged stocks, plant & machinery under
Unrealized mark-up/ charge, and mortgaged residential,
interest already taken to commercial & industrial properties (land
income account to be & building only) to the extent allowed in
reversed and kept in Regulation R-8 of Prudential
Memorandum Account. Regulations for Corporate/Commercial
Banking.
Doubtful Where mark-up or As above Provision of 50% of the difference
principal is overdue resulting from the outstanding balance of
by one year or more principal less the amount of liquid assets
from the due date. realizable without recourse to a Court of
Law and FSV of pledged stocks, plant &
machinery under charge, and
mortgaged residential, commercial &
industrial properties (land & building
only) to the extent allowed in the
Regulation R-8 of Prudential
Regulations for Corporate/ Commercial
Banking
Loss Where mark-up or As above Provision of 100% of the difference
principal is overdue resulting from the outstanding balance of
by two years or principal less the amount of liquid assets
more from the due realizable without
date recourse to a Court of Law and FSV of
pledged stocks, plant & machinery under
charge, and
mortgaged residential, commercial &
industrial properties (land & building
only) to the extent allowed in the
Regulation R-8 of Prudential
Regulations for Corporate/ Commercial
Banking

16
 ANNEX C

List of Abbreviations

ALM Asset Liability Management

BPD Banking Policy Department, State Bank of Pakistan now Banking
Policy and Regulations Department
CAR Contractor’s All Risk
COI Certificate of Investment
DFI Development Finance Institution
EPC Engineering, Procurement and Construction
EIA Environment Impact Assessment
FCA Financial Completion Agreement
IEE Initial Environment Examination
IPF Infrastructure Project Finance/ing
LPG Liquefied Petroleum Gas
LNG Liquefied Natural Gas
NBFC Non-Banking Financial Company
NIT National Investment Trust
NOC No Objection Certificate
NPV Net Present Value
OAEM Other Assets Especially Mentioned
O&M Operation and Maintenance
PFA Project Funds Agreement
SPV Special Purpose Vehicle
SECP Securities & Exchange Commission of Pakistan
SBP State Bank of Pakistan
TFC Term Finance Certificate

17
 ANNEX D
Infrastructure Project Finance Data Format

IPF-I
Name of the Bank:

Quarterly Report on Infrastructure Project Financing (IPF) for the Quarter Ended :
(Amount in Million)

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Amount Sanctioned

Amount Disbursed Cumulative Amount Amount Amount

Name of Project (Please **Mode of Sanctioned in During Quarter Disbursed Outstanding Outstanding Initial Service Interest
[Link]. * Category Exposure*** Loan Tenure Current Status
Specify) Financing the Year Funded Non - Funded Total (Excluding Running (Excluding Running (Excluding against Running Charges Rate****
Finance) Finance) Running Finance Finance

Total
* Category of the Project as per para 18 part A of the Prudential Regulations for Infrastructure Project Financing
**Please specify whether it is Project Finance/Corporate Finanace/Bonds/TFC other etc
*** Please indicate exposure as percentage of bank/DFI equity. Refer to Regulation IPF.3.1.1 of Prudential Regulations for Infrastructure Project Financing
**** If floating please state applicable base rate + margins

18
IPF-II

Name of the Bank/DFI :

Any New Project for the Quarter End

Capacity (If Estimated Detail of Financing Debt/Equity ** Mode of Security against *** Interest
[Link]. Name of Project Description of Project * Category Loan Tenure
applicable) Project Cost Syndicate Structure Ratio Financing Loan rate

1
2
3

Total

* Category of the Project as per para 18 part A of the Prudential Regulations for Infrastructure Project Financing
** Please specify whether it Project Finance/Corporate Finanace/Bonds/TFC other etc
*** If floating please state applicable base rate + margins

IPF-III

Name of the Bank/DFI:

Infrastructure Financing Profile

Total Amount Cummulative Amount

[Link]. Sectors/Category No of Projects No of new Projects Amount Disbursed Amount Outstanding Amount of NPLs
Sanctioned Disbursed

1 Transport

2 Power

3 Energy

4 Telecommunication

5 Water & Sanitation

Social, Cultural & Commercial
6 Infrastructure

7 Any Other

Total

19
 Housing Finance
Prudential Regulations

(Updated on April 18, 2017)

Infrastructure, Housing & SME Finance Department

State Bank of Pakistan
Disclaimer:

State Bank of Pakistan compiles a booklet of Prudential Regulations from time to time for convenience
of users. Updated version of such a booklet containing amendments in the regulations made through
Circulars/Circular letters to date is being issued. Due care has been taken while incorporating
amendments, however, errors and omission may be expected. In case of any ambiguity, users are
advised to refer to the original circulars/circular letters on the relevant subject(s), which are available on
SBP’s website ([Link]).
 THE TEAM

NAME DESIGNATION Contact Details

(+92-21) 99221606
Syed Samar Hasnain Executive Director-DFG
[Link]@[Link]
(+92-21) 99221749
Syed Basit Aly Director-IH&SMEFD
[Link]@[Link]
(+92-21) 99221358
Dr. Muhammad Saleem Additional Director-IH&SMEFD
[Link]@[Link]
(+92-21) 32453595
Wasif Hussain Deputy Director-IH&SMEFD
[Link]@[Link]

Website Address: [Link]

 Preface
Housing and construction sector is an important driver of economic growth, as it employs large
labour force worldwide. It also has significant implications for the development of the country’s
financial markets, and it influences (and is influenced by) fiscal policy. Last but not least, a
vibrant housing sector has important positive socio-economic implications, with greater
participation of the populous economically, politically and socially1.

In Pakistan, housing sector can be very instrumental in poverty reduction and economic growth
as it is labour intensive and has forward and backward linkages with more than forty
industries2. Investment in the housing sector leads to creation of more jobs in a number of
allied sectors.

Presently, State Bank of Pakistan is working on few initiatives to create an enabling environment for
banks/DFIs to increase outreach of housing finance. It involves relatively greater sums of financing
compared to other consumer finance products and is extended for longer period of time.
Keeping in view the peculiar nature of housing finance, and to facilitate banks/DFIs in
enhancing housing finance portfolio, SBP in consultation with different stakeholders, has issued
separate set of Prudential Regulations specifically for Housing Finance.

It is vital that the banks/DFIs develop a comprehensive understanding of the full spectrum of
risks inherited in housing finance business. The risk assessment and risk management systems
of the banks/DFIs should have in-built ability to prompt early warning signals to keep their
balance sheets safe from any adverse effects. Having adequate safeguards put in place, they
are encouraged to facilitate housing sector growth through enhanced outreach of financing
services and innovative products. The banks/DFIs need to ensure that their internal policy
framework guiding housing finance practices calls for broad scrutiny and due diligence and is
adequately risk-aligned and resilient to cyclical developments to bolster soundness of the
economy.

The Prudential Regulations for Housing Finance do not supersede other directives issued by
State Bank of Pakistan in respect of areas not covered here. Any violation or circumvention of
these regulations shall render the bank/DFI/officer(s) concerned liable for penalties under the
Banking Companies Ordinance, 1962.

SYED BASIT ALY

Director
Infrastructure, Housing & SME Finance Department

1
Expanding housing finance to the underserved in South Asia by Tatiana Nenova- The World Bank (2010)
2
Expanding housing finance to the underserved in South Asia by Tatiana Nenova- The World Bank (2010)
“HOUSING FINANCE PRUDENTIAL REGULATIONS”
DEFINITIONS

1. Bank means a banking company as defined in the Banking Companies Ordinance, 1962.
2. Borrower means an individual to whom a bank/DFI has allowed any Housing Finance during
the course of business.
3. DFI as defined in Banking Companies Ordinance, 1962.
4. Documents include vouchers, cheques, bills, pay-orders, promissory notes, securities for
leases/advances and claims by or against the bank/DFI or other papers supporting entries in
the books of a bank/DFI.
5. Housing Finance means financing provided to individuals for the construction, purchase of
residential house/apartment and for purchase of plot and construction thereupon. The
finance availed for the purpose of making improvements in house/apartment shall also fall
under this category.
6. Mortgage is the transfer of an interest in specific immovable property for the purpose of
securing the payment of money advanced or to be advanced by way of loan or finance.
7. Secured means housing finance backed by tangible security with appropriate margins (in cases
where margin has been prescribed by State Bank of Pakistan, appropriate margin shall at least
be equal to the prescribed margin).
8. Tangible Security under these PRs means liquid assets (as defined in the Prudential
Regulations for Corporate/Commercial Banking), mortgage of land and building.

Page 1 of 10
“HOUSING FINANCE PRUDENTIAL REGULATIONS”
Regulation HF 1: Minimum Requirements
Before embarking upon or undertaking housing finance, the banks/DFIs shall implement/follow
the Prudential Regulations contained in this document.

1. House Financing Policy

Banks/DFIs shall have a comprehensive house financing policy, separate or as a part of overall
credit policy, duly approved by their Board of Directors (in case of foreign banks, Country
Head and by Executive/Management Committee; however, if Country Head is also member of
Executive/Management Committee then no separate approval of his/her is required). The
policy shall explicitly specify the functions, responsibilities and various staff positions’
powers/authority relating to approval/sanction of housing financing facility.

For every type of housing finance activity, the banks/DFIs shall develop a specific program that
shall include the objective/quantitative parameters for the eligibility of the borrower and
determining the maximum permissible limit per borrower. Banks/DFIs shall determine the
housing finance limits, both in urban and rural areas, in accordance with their internal credit
policy, credit worthiness and repayment capacity of the borrowers. Banks/DFIs should keep in
consideration that this facility should not be used for speculative purposes and banks’/DFIs’
policies and other procedures should be so designed to discourage, to the extent possible, any
speculative intent.

2. Promotion and Development of Housing Finance

Banks/DFIs are encouraged to develop floating, fixed and hybrid rate products for extending
housing finance, suiting to varied needs of borrowers. Switching over from one type of rate to
another unilaterally by the banks/DFIs to the disadvantage of customer should not be done.
They are also encouraged to enhance housing finance outreach through increasing the areas
and the number of branches offering housing finance particularly at small towns and cities of
the county. Banks/DFIs shall explore the ways and means of broadening their product base
beyond the prevalent housing finance products. For effective house financing, banks/DFIs
shall develop strategies that will elaborate measures on improving delivery channels
(branchless banking, tele-marketing etc.), adoption of credit scoring technology, improved
understanding of the target market through field work and research, and putting in place
strong marketing and sales culture.

3. Risk Management and Internal Control Systems

Banks/DFIs shall ensure strict compliance with laid down policies and procedures developed
internally by them as well as those promulgated by SBP from time to time. The management
of the banks/DFIs, under the guidance of Board of Directors, is required to establish systems,
policies, procedures and practices to define and manage risks, stipulate responsibilities,
specify security requirements, and design and implement internal controls. Risk management
framework of banks/DFIs should appropriately cover housing finance.

Page 2 of 10
“HOUSING FINANCE PRUDENTIAL REGULATIONS”
4. Development of Financing Documentation
The banks/DFIs shall prepare standardized set of borrowing/financing and recourse
documents (duly cleared by their legal counsels) comprising of financing agreement,
application form and the other requisite supplementary financing documents. Banks/DFIs
should obtain the thumb impression(s) along with borrower’s signature(s) on these
documents. Further, these documents should clearly spell out all the terms and conditions of
housing finance. Banks/DFIs should provide the copies of these documents to customers. The
banks/DFIs are also encouraged to provide the terms and condition in Urdu language for
better understanding of the customers and read out the same to the customers before
finalizing the documentation process.

5. Title Documents
Banks/DFIs shall obtain all title and ownership related property documents from customers
and shall get these documents vetted by their legal department/advisor(s). Banks/DFIs shall
provide a signed copy of the list of all title and property documents to the borrower.

6. Management Information System (MIS) and Reporting

Banks/DFIs shall ensure adequate hardware, software, logistics support and strong IT
infrastructure for effective and efficient monitoring of housing finance portfolio.

For effective monitoring and reporting purposes, banks/DFIs shall maintain, with respect to
each financing transaction, necessary information/data which may include financing ID,
original financing term, remaining term to maturity, CNIC/NTN number of the borrower, age
of borrower, original financing balance & remaining financing balance, monthly principal &
mark-up, benchmark, credit spread, payment frequency, mark-up rate type (fixed or floating),
frequency of revision of mark-up rate, financing to value ratio, geographic region, appraisal
value, appraisal date, appraiser name, property type, purpose of housing finance etc.

In addition to above, the MIS is expected to generate the following periodical reports:

1. Delinquency reports (for 30, 60, 90, 180 days, one year and two years and above) on
monthly basis.
2. Reports interrelating delinquencies with various types of customers or various
attributes of the customers to enable the management to take important policy
decisions and make appropriate modifications in the financing program.

The banks/DFIs shall ensure that their accounting and computer systems are well equipped to
avoid charging of mark-up on mark-up. For this purpose, it should be ensured that the mark-
up charged on the outstanding amount is kept separate from the principal. The banks/DFIs
shall ensure that any repayment made by the borrowers is accounted for before applying
mark-up on the outstanding amount.

Page 3 of 10
“HOUSING FINANCE PRUDENTIAL REGULATIONS”
7. Information to Borrowers
Banks/DFIs shall ensure that the applications for house financing are processed expeditiously
and shall provide following information to borrowers:
1. A true copy of the signed finance agreement(s).
2. Written notification of any change in repayment schedule in line with terms of the
agreement.
3. Statement of accounts, on annual basis, detailing the principal repayments, principal
outstanding, mark up/profit payments, and penalties (if any) during the year (may be
made available on-line as well).

All the components of fees/costs shall be explicit and transparent and shall be disclosed
before the transaction is initiated. There should be no hidden charges. For ease of reference
and guidance of their customers, banks/DFIs shall publish brochures on frequently asked
questions.

Banks/DFIs are, inter alia, encouraged to provide basic information on-line and through
marketing material of housing finance facilities to the borrowers and regularly upgrade the
housing finance section of their websites by providing necessary information for various stake-
holders.

Banks/DFIs shall also provide, if requested by the borrower, additional statement(s), charges
for which may not exceed the amount as advised by SBP from time to time for provision of
duplicate/additional Statement of Account (SOA) to account holders.

8. Information Disclosure
Banks/DFIs shall clearly disclose, all the important terms, conditions, fees, charges and
penalties, which inter-alia include annualized percentage rate, pre-payment penalties and the
conditions under which they apply. For the purposes of this regulation, Annualized Percentage
Rate means as follows:

Mark-up for the period 365

X x 100
Average Outstanding Principal Amount during the period No. of Days

9. Confidentiality of Information
All information of a customer provided by him/her shall be kept confidential (even when the
borrowers have settled their financings and no longer have relationship with the bank/DFI).
Information of borrower can be shared with credit information provider under the relevant
provisions of the Banking Companies Ordinance, 1962.

10. Credit Information

The financing profile of all intended borrowers shall be supplemented with credit report from
the consumer credit information bureau of State Bank of Pakistan. In addition, the banks/DFIs
may also obtain report from any other reliable bureau. At the time of granting facility under
various modes of housing finance, banks/DFIs shall obtain a written declaration from the
borrower divulging details of various facilities already obtained from other banks/DFIs.
Page 4 of 10
“HOUSING FINANCE PRUDENTIAL REGULATIONS”
11. Facilities to Related Persons
The housing finance facilities extended by banks/DFIs to their Directors, major shareholders,
employees and family members of these persons shall be at arm’s length basis and on normal
terms & conditions applicable for routine customers of the banks/DFIs. The banks/DFIs shall
ensure that the appraisal standards are not compromised in such cases. However, this
condition shall not apply to the house financing allowed by the banks/DFIs to their employees
as part of compensation package provided the detailed terms and conditions of the benefits
which the banks/DFIs want to give to their employees are specifically mentioned in the
Employees Service Rules/HR Policy, approved by the Board of Directors. Further, such
consumer financing to the employees should be treated as staff financing and not as general
consumer financing. In case of resignation/separation/termination, staff housing finance
should be monitored and serviced as commercial housing finance.

12. Asset Liability Mismatches

Banks/DFIs shall prudently manage the maturity mismatches arising out of their housing
finance portfolios. Banks/DFIs are encouraged to explore avenues to generate long-term funds
to finance the long-term housing finance products and develop in-house system to stress test
their housing finance portfolios against adverse movements in mark-up/profit rates and asset-
liability maturity mismatches.

13. Capacity Building

Capacity building programs/initiatives for all the officials attached with housing finance shall
be held regularly to acquaint them with the systems, procedures, developments and best
housing finance practices, prevalent within and outside Pakistan.

14. Monitoring of Housing Finance Market

The management of banks/DFIs shall put in place a mechanism to monitor conditions in
housing finance market at least on half-yearly basis to ensure that their policies are aligned
with current market conditions.

15. Verification of Property-related Documents

Banks/DFIs shall verify necessary information provided in the application form. In addition, all
title and other legal documents provided with application form shall be verified directly from
the relevant issuing authorities to establish their genuineness and authenticity as per banks’
internal policy. Property documents shall be clear and free from all encumbrances and legal
charges. Title documents shall explicitly contain details of ownership as per relevant
registration authorities, area and demarcation etc. All the documents should be kept in safe
custody and meet all procedures/requirements relating to the completion of house finance.

16. Permission from Relevant Authorities

The banks/DFIs shall not disburse housing finance unless ensured that prior
permission/clearance for construction and/or approved map of house has been obtained by
the borrower from the relevant authorities, wherever required. In case of financing for
purchase of a house/flat, it shall be ensured that the house/flat was constructed with prior
permission/clearance from relevant authorities.
Page 5 of 10
“HOUSING FINANCE PRUDENTIAL REGULATIONS”
17. Insurance/Takaful
Banks/DFIs shall obtain comprehensive insurance/takaful coverage of the housing unit
financed through a reputable insurance/takaful company. Banks/DFIs shall obtain insurance
upto full value in case of apartment and upto construction cost in case of house. Further,
banks/DFIs are allowed to obtain group insurance, life insurance or key-man insurance to
minimize insurance cost. Further, banks/DFIs are advised to explicitly disclose the nature &
type of insurance/takaful being obtained and rate of commission and other charges.

18. Recovery Procedures

Banks/DFIs should ensure that adequate procedures, systems and manpower are in place to
efficiently handle the recovery process of default amount and successful execution and
accomplishment of the auction proceedings wherever necessary, in accordance with the
procedures and articles laid down in the Financial Institutions (Recovery of Finances)
Ordinance, 2001 (FIRO-2001) and other provisions/clauses, amendments in FIRO-2001 or any
law/regulations in force and SBP instructions issued from time to time.

Regulation HF 2: Types of Housing Finance

Banks/DFIs may provide following types of housing finance to borrowers:

a) Purchase, construction, renovation or extension of residential units to individuals, co-

borrowers including non-resident Pakistanis.
b) Financing for residential plots plus construction.
c) Balance transfer of existing finance facility of borrower from other banks/DFIs, subject to
the condition that the bank/DFI where facility is transferred would not extend financing
higher than the balance amount in the transferring bank/DFI. Further, borrower cannot
transfer housing finance to other banks/DFIs before completion of eighteen (18) months
with a bank/DFI as a mortgagee.
d) For Solar Energy Solutions to be installed for residential use, banks/DFIs are allowed to
extend financing for a maximum period of ten years against any security arrangement as per
their credit and risk management policies in addition to hypothecation of asset. Such
financing shall be treated as home improvement/renovation financing for reporting
purposes.

Banks/DFIs shall not allow housing finance purely for the purchase of land/plots; rather, such
financing would be extended for the purchase of land/plot and construction on it. Accordingly, the
sanctioned financing limit, assessed on the basis of repayment capacity of the borrower, value of
land/plot and cost of construction on it etc., shall be disbursed in tranches, i.e. upto a maximum of
50% of the financing limit can be disbursed for the purchase of land/plot (however the amount
disbursed for purchase of plot must not exceed the 85% of the market value/cost of land/plot),
and the remaining amount be disbursed for construction there-upon. Further, the bank/DFI will
take a realistic construction schedule from the borrower before allowing disbursement of the
initial financing for construction. For construction-only cases, the sanctioned financing shall also
be released in tranches commensurate with the stage of construction. Moreover, if an individual
gets construction finance and there is cost overrun due to which property remains incomplete,

Page 6 of 10
“HOUSING FINANCE PRUDENTIAL REGULATIONS”
banks/DFIs may entertain the customer for additional finance for completion of house, keeping in
view the DBR and cushion in overall Loan-to-Value (LTV) ratio.

Further, if there is sufficient cushion available as per valid valuation/revaluation, banks/DFIs may
consider providing additional finance for renovation or extension but not before two (02) years of
the last finance availed by the borrower for the same house. However, financing for Solar Energy
Solutions only can be extended before the completion of two (02) years from the date of last
finance availed by the borrower for the same house. The requirements regarding debt burden
ratio and LTV ratio shall be duly observed while allowing such financing.

Regulation HF 3: Debt Burden Ratio

Total monthly amortization payments, including the housing finance under consideration and
repayment obligations against all other consumer financings, should not exceed 50% of the net
disposable income of the prospective borrower. In case any financing of the borrower requires
quarterly, bi-annual or annual payments, the debt burden ratio shall be calculated by assuming
that the financing is repaid in substantially equal monthly payments during its term. While
calculating net disposable income, verifiable income of the borrower and repayment capacity
should be taken into account. The income of co-borrower can be clubbed after his/her written
consent.

The above measures would be in addition to banks’/DFIs’ usual evaluations of each proposal
concerning credit worthiness of the borrowers to ensure that the banks’/DFIs’ portfolio under
housing finance fulfills the prudential norms and instructions issued by the State Bank of Pakistan
and does not impair the soundness and safety of the bank/DFI itself. They shall maintain record
evidencing assessment of repayment capacity of the borrower.

Regulation HF 4: Loan to Value Ratio

The housing finance shall be provided at a maximum Loan to Value ratio of 85:15.

Regulation HF 5: Limit on Exposure against Real Estate Sector

1) The banks/DFIs shall not take exposure on the real estate sector exceeding 10% of the
aggregate of their advances and investments (excluding investments in Government securities) at
any point in time.

2) For the purpose of this regulation, Real Estate Sector shall include:
a) Individual/family owned houses for the purpose of self-occupation or renting out
(non-commercial usage).

b) Builders, developers, contractors, corporations, property dealers and any other

person dealing in residential, commercial and industrial real estate, e.g., undeveloped
land, housing societies/residential buildings, office buildings, multi-purpose commercial
premises, hotels, shopping malls, retail space, retail store buildings, industrial space,
factories, warehouses.

c) Subsidiaries of (b)

Page 7 of 10
“HOUSING FINANCE PRUDENTIAL REGULATIONS”
d) Debt instruments and shares issued by (b) and (c) above and units of Real Estate
Investment Trusts (REIT) issued by a REIT Management Company.

3) In case of 2) b), such exposure shall be counted towards the above limit of 10% where the
prospects for repayment and recovery in the event of default depend primarily on the cash flows
generated by real estate.

4) Infrastructure Project Financing (IPF), as defined in the SBP’s guidelines for Infrastructure
Project Financing as amended form time to time, shall not be included for calculating the above
limit.

5) With a view to promote the low cost/ low income/affordable housing, financings under
Government Housing Scheme and initiatives shall also be not included for calculating above limit.

The above criterion is, however, not applicable to the specialized housing finance companies like
House Building Finance Company Limited as their core business is extending housing finance to
the borrowers.

Regulation HF 6: Financing Tenor

The banks/DFIs shall not extend housing finance for a tenor exceeding 25 years. The duly
approved financing policy of the banks/DFIs shall define the maximum tenor keeping in view
maturity profile of their assets and liabilities. In case the financing is rescheduled/restructured, it
should not result in extension in total tenor beyond 25 years.

Regulation HF 7: Property Assessment

Banks/DFIs shall ensure that a proper property valuation is done by a valuer on approved panel of
Pakistan Banks Association and valuation report provides banks/DFIs with an in-depth assessment
of the property that is being offered as security.

The housing finance upto Rs. 10 million should be subject to assessment of the property by at
least one valuator listed on PBA approved panel and the housing finance above Rs. 10 million
should be subject to assessment of the property by at least two valuators listed on PBA approved
panel.

However, the properties valuing upto Rs. 3.0 million should not be subject to assessment by
valuator. Banks/DFIs can use their internal resources to assess the properties having market value
upto Rs. 3.0 million.

Regulation HF 8: Creation of Mortgage

The house/plot (for construction of house) financed by the bank/DFI shall be mortgaged in
bank’s/DFI’s favour by way of equitable or registered mortgage.

Page 8 of 10
“HOUSING FINANCE PRUDENTIAL REGULATIONS”
Regulation HF 9: General Reserve against Housing Finance
Banks/DFIs shall maintain a general reserve in the following manner:

Percentage of Classified Housing Finance General Reserve (percent of Active/

to Total Housing Finance Performing Housing Finance Portfolio)
Below 5% 0.5
Below 10% 1.0
Upto and above 10% 1.5
Regulation HF 10: Classification and Provisioning
The housing finance shall be classified and provided for in the following manner:
Classification Determinant Treatment of Income Provisioning to be made
OAEM Where mark-up or No provisioning Required.
principal is
overdue by 90 Default notices to be issued to borrower.
days or more from
the due date.
Substandard Where mark-up or Unrealized mark-up to be Provision of 25% of the difference resulting
principal is kept in Memorandum from the outstanding balance of principal
overdue by 180 Account and not to be less the amount of liquid assets realizable
days or more from credited to Income Account without recourse to a Court of Law and
the due date. except when realized in cash. Forced Sale Value (FSV) of mortgaged
Unrealized mark-up already properties to the extent of 75% of such
taken to income account to FSV.
be reversed and kept in
Memorandum Account.
Doubtful Where mark-up or As above Provision of 50% of the difference resulting
principal is from the outstanding balance of principal
overdue by one less the amount of liquid assets realizable
year or more from without recourse to a Court of Law and
the due date. Forced Sale Value (FSV) of mortgaged
properties to the extent of 75% of such
FSV.
Loss Where mark-up or As above Provision of 100% of the difference
principal is resulting from the outstanding balance of
overdue by two principal less the amount of liquid assets
years or more realizable without recourse to a Court of
from the due date Law and Forced Sale Value (FSV) of
mortgaged properties to the extent of 75%
of such FSV for first and second year, 50%
for third and fourth year and 30% of FSV for
fifth year from the date of Classification.
Benefit of FSV against NPLs shall not be
available after 05 years from the date of
classification of financing.

Page 9 of 10
“HOUSING FINANCE PRUDENTIAL REGULATIONS”
Banks/DFIs may avail the benefit of FSV for provisioning with the condition that the profit arising
from availing the benefit shall not be available for the payment of cash or stock dividend.

The heads of credit of respective banks/DFIs shall ensure that FSV used for taking benefit of
provisioning is determined accurately and is reflective of market conditions under forced sale
situation. Any misuse of FSV benefit detected during regular/special inspection of SBP shall attract
strict punitive action under the relevant provisions of Banking Companies Ordinance, 1962.
Furthermore, SBP may also withdraw the benefit of FSV from banks/DFIs found involved in its
misuse.

Regulation HF 11: 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 installments 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 installments 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.

************************************

Page 10 of 10
 PRUDENTIAL REGULATIONS
FOR AGRICULTURE FINANCING

(Updated on 29th January, 2014)

AGRICULTURAL CREDIT &

MICROFINANCEDEPARTMENT

STATE BANK OF PAKISTAN

I. I. CHUNDRIGAR ROAD KARACHI
This page is intentionally left blank.
 TEAM
TELEPHONE NO.
NAME DESIGNATION
& E-MAIL

(92-21) 99217216
Muhammad Ashraf Khan Executive Director
[Link]@[Link]

(92-21) 99212557
Dr. Saeed Ahmed Director
[Link]@[Link]

(92-21) 99221241
Kamran Akram Bakhshi Senior Joint Director
[Link]@[Link]

(92-21) 99212590
Muhammad Imaduddin Senior Joint Director
[Link]@[Link]

(92-21) 99221182
Ikramullah Qadri Joint Director
[Link]@[Link]

(92-21) 32453570
Hasan Murtaza Deputy Director
[Link]@[Link]

Website Address: [Link]

 CONTENTS

Preface i

PART-A : DEFINITIONS 1-5

PART-B : GENERAL REGULATIONS

Comprehensive Agriculture Financing
Regulation R-1 6
Policy
Expeditious Processing and
Regulation R-2 6
Communication of Decision to Borrower
Regulation R-3 Exposure Limits 7

Regulation R-4 Maximum Unsecured Financing 8

Repayment Schedule and Relaxation to
Regulation R-5 8
Agricultural Borrowers

Regulation R-6 Proper Utilization of Loan 9

Regulation R-7 Credit Analysis and Other Conditions 9

Cash Recovery Outside the Bank‟s
Regulation R-8 9
Authorized Place of Business
Bar on Adjustment Lending to Avoid
Regulation R-9 10
Classification or Meet Indicative Targets
Regulation R-10 Guarantees 10
Classification and Provisioning of Loans
Regulation R-11 10
& Advances
PART-C : SPECIFIC REGULATIONS

I. Farm Credit for Inputs:

Regulation R-12 Tenure, Classification and Provisioning 13

II. Farm Development Finance and Loans for the Purchase of
Machinery/Equipment
Regulation R-13 Tenure, Classification and Provisioning 13

Regulation R-14 Insurance 14

 III. Financing for Livestock:

Regulation R-15 Tenure 14

Regulation R-16 Security 14

Regulation R-17 Periodic Inspection and Verification 14

Regulation R-18 Classification and Provisioning 15

IV. Corporate Farming:

Linkage Between Financial Indicators of
Regulation R-19 the Borrower and Total Exposure from 15
Financial Institution
Copy of Audited Accounts where
Regulation R-20 15
Exposure Exceed Rs 10 million
Annexure 16-21
 PREFACE

Mainstreaming agriculture and rural finance sector in the country‟s financial system as a
commercially viable and attractive business line through sector friendly policies has always
been a top priority at State Bank of Pakistan. In line with this mission, SBP earlier issued
detailed Prudential Regulations (PRs) for Agriculture Financing in 2005.

Since then, various changes have been taken place in terms of; issuance of new instruction &
guidelines; enhanced focus on risk management and due diligence; departure from directed
credit regime, provision of agri. credit through Islamic banks and microfinance banks in
addition to conventional lenders; introduction of mandatory crop loan insurance; changes in
market dynamics and requirements of agri. financing. To envisage these changes and to further
strengthen and align the agricultural framework with the best practices and challenging local
business environment, SBP has issued these Revised Prudential Regulations for Agriculture
Financing.

The revised Prudential Regulations for Agricultural Financing covers; (i) General Regulations
related to comprehensive agri. financing policy, exposure limits, secured/unsecured financing
limits, guarantees, classification of loans, and other general requirements; and (ii) Specific
Regulations for farm credit for input, farm development finance, loans for purchase of
machinery/ equipment, livestock financing, and corporate farming. The Prudential Regulations
for Agricultural Financing do not supersede other directives issued by State Bank of Pakistan in
respect of areas not covered here.

These Revised PRs will bring more clarity and ease for doing business without compromising
on financial stability and risk mitigation. State Bank of Pakistan will, as always, keep a close
liaison with all the stakeholders and will modify and update these Prudential Regulations,
whenever necessary.

Dr. Saeed Ahmed

Director
Agricultural Credit & Microfinance Department

i|Page
 Part –A
DEFINITIONS
PART – A: DEFINITIONS

1. Agricultural Financing means the following:

(i) Farm Credit, which includes:

(a) Production Loans for inputs like seeds, fertilizers, pesticides, etc. Production
Loans also include working capital finance to meet expenses of various nature
attributable to farming.

(b) Farm Development Finance (including finance for improvement of agricultural

land, orchards, etc.) and construction of godowns, etc. for storage of seed, raw
agriculture/farm produce.

(c) Finance for the purchase of agricultural machinery and equipment like tractors,
threshers, etc.

(d) Credit/Debit Card holders can use their cards for purchase of agricultural inputs/
machinery under agri. financing schemes.

(e) Non-fund based facility (Letter of Guarantee/SBLC & Letter of Credit etc.) for
procurement/import of agricultural supplies etc. by corporate & non corporate
farmers.

(ii) Non-farm credit, which includes financing for fisheries and Livestock viz. dairy,
poultry.

(iii) Agriculture financing shall also cover those items eligible under “Methodology
Report for Estimation of Agriculture Credit” or any other item approved by
SBP/ACAC (Agricultural Credit Advisory Committee) from time to time.

(iv) Agriculture financing shall not include loans to traders and intermediaries engaged
in trading/processing of agricultural commodities. Such lending would be covered
under Prudential Regulations for Corporate/Commercial Banking or SME
Financing. However, agricultural financing can be extended to entities (including
corporate farms, partnerships and individuals) engaged in farming activity as well
as processing, packaging and marketing of agricultural produce.

2. Agriculture Pass Book means a document which confirms land ownership of the
farmers and it is issued by the concerned official from Revenue Records of the
Provincial Governments/District/City Governments. It contains all revenue records and
gives details of ownership of land with address, exact location of the land, Khewat,
Khatooni & Khasra Number, Produce Index Units (PIU), Value & Market Value of the
land, mutation / transferred, loan obtained/repaid, the name of mortgagee etc. All entries
in the said Pass-book are made and authenticated as per provisions contained in
“Agricultural, Commercial and Industrial Purposes Act 1973” by the competent
authority of the Revenue Department.
1|Page
PART – A: DEFINITIONS

3. Agency Banking to be defined such as, “banks can do business acquisition in rural areas
by partnering with intermediaries through a pre-defined criteria in terms of key
performance benchmarks against a market based arrangement.”

4. Bank means a banking company as defined in the Banking Companies Ordinance, 1962
and includes Punjab Provincial Cooperatives Bank Limited.

5. Borrower means a person including corporate farm to whom, any agricultural financing
has been extended by bank/DFI/MFB.

6. Charge-off means extinguishing the loans through provisions, if the loan has been
provided 100% of the outstanding loan amount. However, in case of shortfall in
provisions, due to weightage already allowed for land and building, such shortfall may
be written-off from the bank‟s/DFI‟s profitability. The charge-off of a certain loan,
however, does not mean cessation of bank‟s/ DFI‟s right to recover its money from the
borrower through litigation or any other way. While charging-off the loss-classified
loans, the eligible assets held with the bank/DFI, or re-possessed by it, may be disposed-
off, and amount appropriated accordingly. However, the security in the form of land and
building may take time to be taken by the bank/DFI in its possession and disposed later-
on; as such, the requirement of charging-off will not be postponed due to such factors.

7. Corporate Farm means a legal entity separate from its owner(s) and carry out farming
activity at a large scale. The entity exclusively engaged in processing, packaging and
marketing of agricultural produce shall not fall under this category.

8. DFI means Development Financial Institution and includes all the institutions as per the
approved list of SBP and notified under Section 3-A of the Banking Companies
Ordinance, 1962.

9. Equity of the Bank/DFI includes paid-up capital, general reserves, balance in share
premium account, reserve for issue of bonus shares, statutory reserves and retained
earnings/accumulated losses as disclosed in latest annual audited financial statements. In
case of branches of foreign banks operating in Pakistan, equity will mean capital
maintained, free of losses and provisions, under Section 13 of the Banking Companies
Ordinance, 1962.

10. Exposure shall include:

Financing facilities whether fund based or non-fund based extended by a bank/DFI and
include:
i.) Any form of financing facility extended or Bills purchased/discounted, except ones
drawn against the L/Cs of banks/DFIs meeting the criteria mentioned in BPRD
Circular No. 03 of [Link] purchased/discounted on the guarantee of the person.
ii.) Credit facilities extended through credit cards or other like cards etc.
iii.) Any financing obligation undertaken on behalf of the person under a letter of credit
including a stand-by letter of credit, or similar instrument.
iv.) Loan repayment financial guarantees issued on behalf of the person.

2|Page
PART – A: DEFINITIONS

v.) Any obligations undertaken on behalf of the person under any other guarantees
including underwriting commitments.
vi.) Acceptance/endorsements made on account.
vii.) Any other liability assumed on behalf of the client to advance funds pursuant to a
contractual commitment.

11. Financial Institution means banks, Development Financial Institutions (DFIs), Micro
Finance Banks (MFBs) and NBFCs.

12. Forced Sale Value (FSV) means the value which can currently be obtained by selling
the mortgaged/pledged assets under forced/distressed sale conditions.

13. Government Securities shall include such types of Pak. Rupee obligations of the
Federal Government or a Provincial Government or of a Corporation wholly owned or
controlled, directly or indirectly, by the Federal Government or a Provincial
Government and guaranteed by the Federal Government as the Federal Government
may, by notification in the Official Gazette, declare, to the extent determined from time
to time, to be Government Securities.

14. Group means persons, whether natural or juridical, if one of them or his dependent
family members or its subsidiary have control or hold substantial ownership interest
over the other. For the purpose of this:

(i) Subsidiary will have the same meaning as defined in sub-section 3(2) of the
Companies Ordinance, 1984 i.e. a company or a body corporate shall deemed to be
a subsidiary of another company if that other company or body corporate directly
or indirectly controls, beneficially owns or holds more than 50% of its voting
securities or otherwise has power to elect and appoint more than 50% of its
directors.

(ii) Control refers to an ownership directly or indirectly through subsidiaries, of more

than one half of voting power of an enterprise.

(iii) Substantial ownership/affiliation means beneficial shareholding of more than 20%

by a person and/or by his dependent family members, which will include his/her
spouse, dependent lineal ascendants and descendants and dependent brothers and
sisters. However, shareholding in or by the Government owned entities and
financial institutions will not constitute substantial ownership/affiliation, for the
purpose of these regulations.

15. Islamic Agri. Finance means any form of financing extended for agricultural sector
activities under Islamic modes of financing.

16. Liquid Assets are the assets which are readily convertible into cash without recourse to
a court of law and mean encashment/realizable value of government securities, bank
deposits, certificates of deposit, gold/silver ornaments, certificates of National Saving

3|Page
PART – A: DEFINITIONS

Schemes, shares of listed companies which are actively traded on the stock exchange,
NIT Units, Certificates of Mutual Funds, Certificates of Investment (COIs) issued by
DFIs/NBFCs rated at least „A‟ by a credit rating agency on the approved panel of State
Bank of Pakistan, listed TFCs rated at least „A‟ by a credit rating agency on the
approved panel of State Bank of Pakistan and certificates of asset management
companies for which there is a book maker quoting daily offer and bid rates and there is
active secondary market trading. These assets with appropriate margins should be in
possession of the banks/DFIs with perfected lien.

Guarantees issued by domestic banks/DFIs when received as collateral by banks/DFIs

will be treated at par with liquid assets whereas, for guarantees issued by foreign banks,
the issuing banks‟ rating, assigned either by Standard & Poors, Moody‟s or Fitch-Ibca,
Japan Credit Rating Agency (JCRA) should be „A‟ and above or equivalent.

The Inter-branch Indemnity/Guarantee issued by the bank‟s overseas branch in favor of

its sister branch in Pakistan, would also be treated at par with liquid assets, provided the
bank is rated „A‟ and above or equivalent either by Standard & Poors, Moody‟s or
Fitch-Ibca or JCRA . The indemnity for this purpose, should be similar to a guarantee
i.e. unconditional and demand in nature.

17. Market / Average Sales Value means value assigned by the revenue authorities on the
basis of three years average market sale price per acre of the area, OR valuation carried
out by PBA approved evaluator.

18. NBFC means Non-Banking Finance Company as defined in Section 282A of

Companies Ordinance 1984 and includes Leasing Company, Housing Finance
Company, Investment Bank, Discount House, Asset Management Company and a
Venture Capital Company. For the purpose of these regulations Modaraba Company will
also be considered as NBFC.

19. PIU Value means value of the agriculture land determined by the federal government on
the basis of produce index units.

20. Secured means exposure backed by tangible security and any other form of security
with appropriate margins (in cases where margin has been prescribed by State Bank,
appropriate margin shall at least be equal to the prescribed margin). Exposure without
any security or collateral or backed solely by personal guarantees would be considered
as clean. The banks/DFIs may also take exposure against Trust Receipt. They are,
however, free to take collateral/securities, to secure their risks/exposure, in addition to
the Trust Receipt.

Banks/DFIs will be free to decide about obtaining security/collaterals against the L/C
facilities for the interim period, i.e. from the date of opening of L/C till the receipt of
title documents to the goods.

4|Page
PART – A: DEFINITIONS

(i) Tangible Security means liquid assets (as defined in these Prudential Regulations)
and mortgage of land, both urban and rural property (equitable as well as registered),
building and any other fixed asset. Mortgage of land created by way of bank's charge
on passbook and registration of charge in the books of the revenue authority would
also be considered valid tangible security.

(ii) Other Form of Security means hypothecation of movable agricultural machinery,

pledge/ hypothecation of agriculture produce on the farm or in godown, and charge
on livestock on the farm. In case of pledge/ hypothecation of agriculture produce
lying in godown, the title/ownership of the produce in the name of the borrower shall
be determined on the basis of appropriate documents.

21. Subordinated Loan means an unsecured loan extended to the borrower by its sponsors,
subordinate to the claim of the bank / DFI taking exposure on the borrower and
documented by a formal sub-ordination agreement between provider of the loan and the
bank / DFI. The loan shall be disclosed in the annual audited financial statements of the
borrower as subordinated loan.

5|Page
 Part –B
GENERAL REGULATIONS
PART – B: GENERAL REGULATIONS

REGULATION R- 1

COMPREHENSIVE AGRICULTURE FINANCING POLICY

Banks/DFIs would prepare a comprehensive agriculture financing policy duly approved by their
Board of Directors. The agricultural policy may be part of the overall credit policy of a
bank/DFI. The policy should, interalia cover:
(i) Loan administration, disbursement and appropriate monitoring mechanism.
(ii) Set up and maintenance of fully dedicated agri finance department/division/ unit
equipped with qualified agri. financing experts and officers.
(iii) Delegation of powers/authority relating to approval / sanction of financing limits at
appropriate level.
(iv) Development of an overall annual regional agricultural portfolio plan and assign targets
for disbursement, growth in outstanding portfolio & number of borrowers to respective
agri. designated branches. The concerned Regional Business Chiefs or Area Heads to be
made responsible for the achievement of the targets.
(v) Significant increase in number of agri. designated branches and Agricultural Credit
Officers in a phased manner, in proportion to the overall credit portfolio of the area and
potential of agricultural activities.
(vi) Mechanism for implementation of Crop Loan Insurance Scheme 2008, introduced by
Ministry of Finance, Government of Pakistan vide SRO No. 1(13)-[Link]/2008 dated 13th
August, 2008.
(vii) Usage of standardized documents circulated vide ACD Circular No. 02 of August 11,
2010 and updated from time to time.

Management of the bank/DFI may also approve a certain loan product, provided the Board,
through a resolution, has delegated authority/empowered the management for the same. It is
clarified that the comprehensive agriculture financing policy to be approved by the Board of
Directors would cover only broad areas of strategic importance.

Banks/DFIs are encouraged to adopt program based lending approach, which will base the
decision making on objective parameters and help in reducing the subjectivity of the dealing
officers. Banks/DFIs are also encouraged to prepare comprehensive recovery procedures, which
should interalia specify certain triggers for taking specified actions while requiring reasons to be
recorded in writing in exceptional cases where specified actions are not being taken.

REGULATION R- 2

EXPEDITIOUS PROCESSING AND COMMUNICATION OF DECISION TO

BORROWER

Banks/DFIs will ensure that the applications for agriculture financing are processed
expeditiously in accordance with the Agricultural, Commercial and Industrial Purposes Act
1973. The decision for grant/ decline of credit must be conveyed to the borrower in writing
within 10 working days of receiving of application.

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PART – B: GENERAL REGULATIONS

For disbursement of all kinds of agri. loans, banks are advised to comply with instructions
regarding standardization of turnaround time for loan processing contained in ACD Circular No.
02 of August 11, 2010.

REGULATION R- 3

EXPOSURE LIMITS

(i) Single Person/Group Limit

Exposure Limits -for a single person and group effective from 31-12-2012 and onward would
be as under:

Exposure Limit as a % of Bank’s/DFI’s Equity

(as disclosed in the latest audited financial statements)
For single person For group
Effective date Total outstanding Total outstanding
(fund and non- Fund based (fund and non- Fund based
fund based) outstanding limit fund based) outstanding limit
exposure limit exposure limit
31-12-2012 30 20 30 25

31-12-2013 25 25 25 25

31-12-2014 20 20 25 25

31-12-2015 15 15 20 20

The group will cover both corporate entities as well as SMEs, in cases where such entities are
owned by the same group.

(ii) Related Party Exposure Limit:

Exposure of a bank / DFI to its related party/group shall be as per following table:

Total Exposure Limit as a % of Bank’s/DFI’s Equity to its Related Party

Effective Date (as disclosed in the latest audited financial statements)
For Single Related Party For Related Group
31-12-2013 7.5% 15%
31-12-2014 5% 10%

7|Page
PART – B: GENERAL REGULATIONS

REGULATION R- 4

MAXIMUM UNSECURED FINANCING

Banks/DFIs shall not provide unsecured/clean financing facility in any form of a sum exceeding
Rs 1.0 million (Rupees one million only) to any one person. Financing facilities granted without
securities including those granted against personal guarantees shall be deemed as „clean‟ for the
purpose of this regulation. Further, at the time of granting a clean facility, banks/DFIs shall
obtain a written declaration to the effect that the borrower in his own name or in the name of his
family members, has not availed of such facilities from other banks/DFIs so as to exceed the
prescribed limit of Rs 1.0 million in aggregate. All exposures in excess of Rs 1.0 million should
be properly secured as defined in these Prudential Regulations.

The lending secured under Credit Guarantee Scheme managed & approved by SBP shall be
treated as secured to the extent of guaranteed amount and the remaining portion shall be treated
as clean exposure.

REGULATION R- 5

REPAYMENT SCHEDULE AND

RELAXATION TO AGRICULTURAL BORROWERS

The banks/DFIs are allowed to grant relaxation up to one year in repayment schedule, to their
borrowers who have been adversely affected due to certain unforeseen and unexpected factors
like weather, availability of water, etc. which are not under the control of the farmers. Such
relaxation may be granted on case-to-case basis or en-block to the borrowers in the affected
area.

Further, to prevent loan classification due to natural calamities, banks are encouraged to
immediately stop recovery, suspend/defer mark-up accruals, and may issue instructions for
waiving off outstanding markup or principal where the chances of recovery are not possible due
to heavy natural calamities like earthquake, floods, heavy rains, epidemic diseases, etc. Banks
may also formulate internal policies for creation of general reserves to cover any losses in the
calamity hit areas. The policy in this regard should be duly approved by the board of directors
of the concerned bank/DFI.

Wherever a relaxation under the above arrangements has been granted by banks/DFIs, the
relaxation period would not be counted towards default period and non-payment in the
relaxation period would not affect the category of classification. However, mark-up accrued
during the relaxation period would not be credited to income account but kept in memorandum
account. The loans already classified, without taking into account non-payment during the
relaxation period, would remain classified in the same category and the income would remain in
the memorandum account as advised vide BSD Circular No. 9 dated 12th November 2003.

8|Page
PART – B: GENERAL REGULATIONS

REGULATION R- 6

PROPER UTILIZATION OF LOAN

Where the agricultural loans have been extended for specified purposes, the banks/DFIs are
encouraged to ensure that the loans have been utilized for the same purposes for which they
were obtained. For this purpose, the banks/DFIs may consider it prudent to make payments
directly to the suppliers wherever appropriate. However, this regulation will not apply on
farmers who are provided loans under Revolving Credit Scheme.

REGULATION R- 7

CREDIT ANALYSIS AND OTHER CONDITIONS

(i) Credit Report

While considering proposals for any exposure (including renewal, enhancement and
rescheduling/restructuring), Banks/DFIs should give due weightage to the credit report relating
to the borrower and his group obtained from Credit Information Bureau (CIB) of State Bank of
Pakistan. If the banks/DFIs decide to take exposure on defaulters, they should strictly follow
their risk management policies and credit approval criteria and properly record reasons and
justifications in the approval form. Banks/DFIs shall ensure that CIB report is not older than
three months at the time of approval of credit limits.
(ii) Borrower Basic Fact Sheet (BBFS)

Before extending any financing facility, banks/DFIs would obtain information from the
borrower as outlined in the BBFS (Annexure I-A for corporate borrowers and Annexure I-B for
individual borrowers). For the convenience of the borrowers, banks/DFIs are also required to
make the BBFS a part of their loan application form. The banks/DFIs do not need to obtain
separate BBFS if the information required in it is a part of the Loan Application Form.

(iii) Repayment Capacity of the Borrower

While extending agricultural financing, the banks/DFIs should take into account the total
indebtedness of the borrower and his disposable income. The banks/DFIs should ensure that the
total financing to a borrower, in relation to his repayment capacity, does not exceed the
reasonable limits as laid down in approved policies of the banks/DFIs.

REGULATION R- 8

CASH RECOVERY OUTSIDE THE BANK’S AUTHORIZED PLACE OF BUSINESS

In order to facilitate the recovery efforts, banks/DFIs are allowed to undertake cash
collection/recovery at places other than their authorized places of business. However,
banks/DFIs would devise appropriate procedures including strict controls to manage security
risks and avoid frauds and misappropriation.

9|Page
PART – B: GENERAL REGULATIONS

REGULATION R- 9

BAR ON ADJUSTMENT LENDING TO AVOID CLASSIFICATION OR MEET

INDICATIVE TARGETS

Banks/DFIs are strictly prohibited to undertake any sort of adjustment lending (adjusting the
existing loan with a fresh loan) to avoid classification or meet allocated targets for agriculture
financing.

In case of running finance, where the outstanding mark-up has been received by the banks/DFIs,
the principal may be rolled over/renewed and this rollover/renewal shall not be considered
adjustment lending for the purpose of this regulation.

In case of Revolving Credit Scheme, based on their cropping cycle, banks may segregate the
repayments in two stages i.e. at least 50% of the utilized credit during the year after harvest of
each Rabi and Kharif crop. Total repayments in the loan account during the year equals to the
maximum amount availed/ outstanding during the year shall also be treated as clean up of the
account.

REGULATION R- 10

GUARANTEES

All guarantees issued by the banks/DFIs shall be fully secured and the bank must be satisfied
with regards to the underlying transaction and the collaterals.

In case of back to back letter of credit issued by the banks/DFIs for export oriented goods and
services, banks/DFIs are free to decide the security arrangements at their own discretion subject
to the condition that the original L/C has been established by branches of guarantee issuing
bank or a bank rated at least „A‟ by Standard & Poors or Moody‟s or Fitch-Ibca or JCRA.

The guarantees shall be for a specific amount and expiry date and shall contain claim lodgment
date. However, banks/DFIs are allowed to issue open-ended guarantees without clearance from
State Bank of Pakistan provided banks/DFIs have secured their interest by adequate collateral or
other arrangements acceptable to the bank/DFI for issuance of such guarantees in favour of
Government departments, corporations/ autonomous bodies owned/controlled by the
Government and guarantees required by the courts.

REGULATION R- 11

CLASSIFICATION AND PROVISIONING OF LOANS & ADVANCES

While time based criteria for the classification of each category of agriculture loans is given
under the respective head, banks/DFIs should evaluate performing and non-performing portfolio
for risk assessment and where considered necessary, any loan account including performing
account, should be classified and the category of classification determined on the basis of time
based criteria should be further downgraded. Such evaluation should be carried out on the basis

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PART – B: GENERAL REGULATIONS

of credit worthiness of the borrower, cash flow, operation in the account, adequacy of the
security inclusive of its realizable value and documentation covering the advances. Banks/DFIs
shall observe the Prudential Guidelines given at Annexure-II in the matter of classification of
their asset portfolio and provisioning there-against.

The rescheduling/restructuring of non-performing loans shall not change the status of

classification of a loan/advance etc. unless the terms and conditions of rescheduling/
restructuring are fully met for a period of at least one year (excluding grace period, if any) from
the date of such rescheduling/restructuring and at least 10% of the outstanding amount is
recovered in cash. Further, the unrealized mark-up on such loans (declassified after
rescheduling/restructuring) shall not be taken to income account unless at least 50% of the
amount is realized in cash. However, this will not impact the de-classification of this account if
all other criteria (i.e. the terms and conditions for at least for one year and payment of at least
10% of outstanding amount by the borrower) are met. Accordingly, banks / DFIs are directed to
ensure that status of classification, as well as provisioning, is not changed in relevant reports to
the State Bank of Pakistan merely because a loan has been rescheduled or restructured.
However, while reporting to the Credit Information Bureau (CIB) of State Bank of Pakistan,
such loans / advances may be shown as „Rescheduled / Restructured‟ instead of „Default‟.

Where a borrower subsequently defaults (either principal or mark-up) after the rescheduled /
restructured loan has been declassified by the bank/DFI as per above guidelines, the loan will
again be classified in the same category it was in at the time of rescheduling/restructuring and
the unrealized markup on such loans taken to income account shall also be reversed. However,
banks/DFIs at their discretion may further downgrade the classification, taking into account the
subjective criteria.

At the time of rescheduling/restructuring, banks/DFIs shall consider and examine the requests
for working capital strictly on merit, keeping in view the viability of the project/ business and
appropriately securing their interest etc.

All fresh loans granted by the banks/DFIs to a party after rescheduling/ restructuring of its
existing facilities may be monitored separately, and will be subject to classification under this
Regulation on the strength of their own specific terms and conditions.

Banks/DFIs shall classify their loans and advances portfolio and make provisions in accordance
with the criteria prescribed above, keeping in view the following:

(i) Banks/DFIs may avail the benefit of FSV subject to compliance with the following
conditions:

a) The additional impact on profitability arising from availing the benefit of FSV
against the pledged stocks and mortgaged agricultural land, residential, commercial
properties shall not be available for payment of cash or stock dividend.
b) Heads of Credit of respective banks/DFIs shall ensure that FSV used for taking
benefit of provisioning is determined accurately as per guidelines contained in PRs
and is reflective of market conditions under forced sale situations; and

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PART – B: GENERAL REGULATIONS

c) Party-wise details of all such cases where banks/DFIs have availed the benefit of
FSV shall be maintained for verification by State Bank‟s inspection teams during
regular/special inspection.

(ii) Any misuse of FSV benefit detected during regular/special inspection of State Bank shall
attract strict punitive action under the relevant provisions of the Banking Companies
Ordinance, 1962. Furthermore, State Bank may also withdraw the benefit of FSV from
banks/DFIs found involved in its misuse.

Banks/DFIs shall review, at least on a quarterly basis, the collectability of their loans/advances
portfolio and shall properly document the evaluations so made. Shortfall in provisioning, if any,
determined, as a result of quarterly assessment shall be provided for immediately in their books
of accounts by the banks/DFIs on quarterly basis.

In case of cash recovery, other than rescheduling/restructuring, banks/DFIs may reverse specific
provision held against classified assets, subject to the following:

(i) In case of Loss account, reversal may be made to the extent that the remaining outstanding
amount of the classified asset is covered by minimum 100% provision.
(ii) In case of Doubtful account, reversal may be made to the extent that the remaining
outstanding amount of the classified asset is covered by minimum 50% provision.
(iii) In case of substandard account, reversal may be made to the extent that the remaining
outstanding amount of the classified asset is covered by minimum 20% provision.

While calculating the remaining provision required to be held after cash recovery and reversal
of provision there-against, the banks/DFIs will enjoy the benefit of netting-off the amount of
liquid from the outstanding amount, in the light of guidelines given in this regulation. Further,
the provision made on the advice of State Bank of Pakistan will not be reversed without prior
approval of State Bank of Pakistan.

The external auditors as a part of their annual audits of banks/DFIs shall verify that all
requirements of Regulation R-14 for classification and provisioning for assets have been
complied with. The State Bank of Pakistan shall also check the adequacy of provisioning during
on-site inspection.

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 Part –C
SPECIFIC REGULATIONS
PART – C: SPECIFIC REGULATIONS

I. FARM CREDIT FOR INPUTS

The finance provided by banks/DFIs to purchase inputs like seeds, fertilizers, pesticides, etc. as
well as working capital finance provided to meet various sort of expenses attributable to
farming like wages, etc. will be categorized as Farm Credit for Inputs. Such loans are self
liquidating, with repayment occurring shortly after harvest from sale of the crop for which the
loan was made.

REGULATION R- 12

TENURE AND CLASSIFICATION/ PROVISIONING

Since such loans are self-liquidating at the end of the growing cycle from the proceeds of the
product sale, therefore, the maturities of these loans shall coincide with the production cycle for
the product being financed. The tenure of this sort of financing will generally be less than one
year. However, for certain crops requiring longer periods (from sowing to sale of the produce),
banks/DFIs at their own discretion may extend financing for periods longer than one year.
Further, banks/DFIs, at their own discretion, may sanction running finance limits to the
borrowers, automatically renewable on annual basis. Such arrangement/ facility would eliminate
the need to process the loan case on periodical basis and facilitate both the borrowers and
banks/DFIs. Loans for farm input/ working capital would be classified as per Annexure-II.
However, the relaxations allowed under Regulation R-5 are applicable.

II. LOANS FOR FARM DEVELOPMENT AND MACHINERY/ EQUIPMENT

Farm Development Finance is a medium to long-term loan extended by the banks/DFIs for
making different types of improvements/ developmental work at the farm including
construction of godown, and development of orchards, nurseries, etc. While the Machinery/
Equipment loan is the financing by the banks/DFIs for purchase of machinery and equipment to
be used for agricultural purposes; like tractors, threshers, reapers/ harvesters, tube wells, etc.
All above loans i.e. for farm development & mechanization tools are of medium to long-term in
nature i.e. 1 to 5 years.

REGULATION R- 13

TENURE, CLASSIFICATION AND PROVISIONING

Loans for farm development can be extended for 1 to 5 years. Whereas the tenure of financing
for machinery/equipment should not be allowed for more than the useful life of machinery/tool.
However, all such loans should be allowed for a maximum period of 5 years. These loans i.e.
for farm development and for purchase of machinery/ equipment would be classified as per
Annexure-II. However, any relaxations given under Regulation R-5 would be applicable.

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PART – C: SPECIFIC REGULATIONS

REGULATION R- 14

INSURANCE

The banks/DFIs would ensure that the tractors financed by them remain insured at all times
during the tenure of the loan. Banks/DFIs are also encouraged to arrange insurance of all other
machinery and equipment financed by them to protect their interest.

III. FINANCING FOR LIVESTOCK

The loans extended for goat/sheep farming, breeding of animals, dairy farming, fishing farms,
poultry farms, etc. by banks/DFIs would fall under this category. Livestock financing can be
made for working capital as well as for development purposes. As such, these loans are usually
short to long term in nature.

REGULATION R- 15

TENURE

The maximum tenure for livestock financing would be five years (including grace period).

REGULATION R- 16

SECURITY

Besides all familiar and generally acceptable securities, the banks/DFIs at their own discretion
can accept livestock as an exclusive or partial security for livestock financing. However, as the
values of livestock may fluctuate substantially depending upon factors such as the animal's age,
health, breed, sex, and reproductive capacity, the individuals performing livestock evaluation
should be capable of recognizing these issues, making appropriate adjustments, and
documenting the results.

REGULATION R- 17

PERIODIC INSPECTION AND VERIFICATION

Due to the relative ease with which livestock can be moved, lack of formal mechanism for
transfer of title and ownership and volatility of livestock values, banks/DFIs shall, in all cases
where livestock has been accepted as primary/sole security, conduct periodic inspections, at-
least twice a year. Such inspections should be carried out by a qualified and appropriately
trained person, who may be an official from the bank or an independent person.

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PART – C: SPECIFIC REGULATIONS

REGULATION R- 18

CLASSIFICATION AND PROVISIONING

Since the financing requirement of livestock sector is of both short-term (working capital) as
well as of long term loans, therefore, the loans to this sector are categorized under both the
working capital and the development or long term loans. Thus, the loans for livestock shall be
classified as per their loan category in accordance with Annexure II.

IV. CORPORATE FARMING

In case of Corporate Farming, in addition to the regulations prescribed above and all other
applicable rules/ regulation of Commercial Banking and SME Financing etc, following
regulations shall also apply.

REGULATION R- 19

LINKAGE BETWEEN FINANCIAL INDICATORS OF THE BORROWER AND

TOTAL EXPOSURE FROM FINANCIAL INSTITUTIONS

The Board of Directors of the bank/DFI shall approve a credit policy prescribing a minimum
current ratio and linkage between borrower‟s equity and its total financing facilities from all
financial institutions. The Credit Policy shall emphasize upon higher credit standards and
provide full guidance to the management about the above requirements for various categories of
clients and corresponding risk mitigants etc. acceptable to the bank/DFI. The policy shall also
have explicit provisions for circumstances or conditions under which the bank/DFI may extend
financing facilities to the borrower with negative equity, should the bank decide to do so.

This regulation shall not apply in case of exposure fully secured against liquid assets held as
collateral.

REGULATION R- 20

COPY OF AUDITED ACCOUNTS WHERE EXPOSURE EXCEEDS RS. 10 MILLION

Banks / DFIs shall, as a matter of rule, obtain a copy of financial statements duly audited by a
practicing Chartered Accountant, relating to the business of every borrower who is a limited
company or where the exposure of a bank / DFI exceeds Rs.10 million, for analysis and record.
The banks / DFIs may also accept a copy of financial statements duly audited by a practicing
Cost and Management Accountant in case of a borrower other than a public company or a
private company which is a subsidiary of a public company. However, banks / DFIs may waive
the requirement of obtaining copy of financial statements when the exposure net of liquid assets
does not exceed the limit of Rs.10 million. Further, financial statements signed by the borrower
will suffice where the exposure is fully secured by liquid assets.

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ANNEXURE

Annexure I – A
BORROWERS BASIC FACT SHEET – FOR CORPORATE
PRESCRIBED UNDER PRUDENTIAL REGULATION R-7

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ANNEXURE

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ANNEXURE

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ANNEXURE

Annexure I – B
BORROWERS BASIC FACT SHEET – FOR INDIVIDUALS
PRESCRIBED UNDER PRUDENTIAL REGULATION R-7

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 ANNEXURE

Annexure II
Guidelines in the Matter of Classification
and Provisioning for Assets (Regulation R-11)

CLASSIFICATION DETERMINANT TREATMENT OF PROVISIONS TO

INCOME BE MADE
(1) (2) (3) (4)
1. OAEM Where mark-up/interest or Unrealized mark- No Provision is
(Other Assets Especially principal is overdue (past up/ interest to be required.
Mentioned). due) by 90 days from the due put in
date. Memorandum
Account and not to
be credited to
Income Account
except when
realized in cash.
2. Substandard Where mark-up/ interest or As above. Provision of 20% of
principal is overdue by one the difference
year or more from the due resulting from the
date. outstanding balance
of principal less the
amount of liquid
assets realizable
without recourse to a
Court of Law and
50% of the value of
mortgaged land and
building as valued at
the time of
sanctioning of loan.
3. Doubtful Production/Working As above. Provision of 50% of
Capital Loan the difference
Where mark-up/ interest or resulting from the
principal is overdue by one outstanding balance
year and a half or more from of principal less the
the due date. amount of liquid
assets realizable
Development/Term Finance
without recourse to a
Where mark-up/ interest or Court of Law and
principal is overdue by two 25% of the value of
year or more from the due mortgaged land and
date. building as valued at
the time of sanction
of loan.

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 ANNEXURE

CLASSIFICATION DETERMINANT TREATMENT OF PROVISIONS TO

INCOME BE MADE
(1) (2) (3) (4)
4. Loss Production/Working As above. Provision of 100% of
Capital Loan the difference
Where mark-up/ interest or resulting from the
principal is overdue beyond outstanding balance
two years or more from the of principal less the
due date. amount of liquid
assets realizable
Development/Term Finance without recourse to a
Where mark-up/ interest or Court of Law and
principal is overdue beyond 25% of the value of
three years or more from the mortgaged land and
due date. building as valued at
the time of sanction
of loan. However, in
any case, the loan
account shall be fully
charged off after
three years from the
date of default.

Note: Charge-off means extinguishing the loans through provisions, if the loan has been provided 100%
of the outstanding loan amount. However, in case of shortfall in provisions, due to weightage already
allowed for land and building, such shortfall may be written-off from the bank‟s/DFI‟s profitability. The
charge-off of a certain loan, however, does not mean cessation of bank‟s/ DFI‟s right to recover its
money from the borrower through litigation or any other way. While charging-off the loss-classified
loans, the eligible assets held with the bank/DFI, or re-possessed by it, may be disposed-off, and amount
appropriated accordingly. However, the security in the form of land and building may take time to be
taken by the bank/DFI in its possession and disposed later-on; as such, the requirement of charging-off
will not be postponed due to such factors.

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Housing Finance Prudential Regulations
Frequently Asked Questions
1. What is the effective date to implement new Housing Finance PRs?
Newly issued Housing Finance PRs (HF PRs) are effective from the date of issuance i.e. May 06, 2014.
However, six month period is available, for the banks/DFIs to design and implement mechanism to
realign their existing housing finance criteria with respect to newly issued HF PRs.

2. Do banks/DFIs need to implement these PRs on the old portfolio i.e. portfolio of housing
finance before May 06, 2014?
Six months time period up to November 06, 2014 is available with the bank to classify old portfolio
as per new PRs. And also for the implementation of mechanism such as property takaful etc.

HF-1: Minimum Requirements

3. Is it mandatory for banks/DFIs to determine housing finance limits in rural areas?

It is not mandatory for the banks/DFIs to determine housing finance limits in rural areas; however,
banks/DFIs have been encouraged, in new HFPRs, to extend housing finance into small towns and
villages. Further, banks/DFIs may finance in urban areas only according to available resources,
strategy and risk appetite

4. What is the hybrid markup rate?

Hybrid rate is the mix of fixed and floating markup rate. Banks/DFIs have been encouraged to adopt
hybrid rates to facilitate the housing finance customers in making housing finance affordable.
Further, banks/DFIs will clearly mention the mix of fixed and floating markup rates along with their
respective tenures in the financing agreements. Moreover, fixed markup rate will remain fixed
during the agreed tenure between borrower and bank/DFI. And, in case of floating markup rate,
margin over the benchmark (KIBOR or any other rate) will remain aligned during the respective
financing terms as agreed between borrower and bank/DFI. This means the Banks under hybrid rates
would be able to offer home loans with varying but agreed margins with applicable ages/tenures in
finance documents according to customers’ affordability.

5. What shall be the frequency for sharing “Statement of Accounts” with borrower?
For housing finance, the “Statement of Accounts”, detailing the principal repayments, principal
outstanding, mark up/profit payments, and penalties (if any) during the year, has to be shared with
borrowers on annual basis (may be made available on-line as well).

6. Is any time duration permissible to banks/DFIs for converting staff housing finance into
commercial housing finance in case of employee resignation/separation/termination?
Staff housing finance should be converted into commercial housing finance immediately after the
lapse of grace period (required to complete all clearance formalities) as per banks’/DFIs’ approved
HR policy. Further, conversion of staff housing finance to commercial housing finance means its
reporting under commercial financing to SBP.

Page 1 of 4
7. Should Housing Finance PRs be complied while extending Staff housing finance?
Housing Finance PRs are actually meant to be observed for extending housing finance to the
customers on commercial basis. However, there is no compulsion in following these PRs for
extending housing finance to banks’/DFIs’ own staff. The banks’/DFIs’ management has to decide
whether or not to follow these PRs along with its own HR policies for allowing housing finance
facilities to their employees.

8. What type of mechanism is required to put in place to monitor the housing finance market?
The banks/DFIs may conduct housing market survey of the residential properties in major cities of
financing through their own in-house department/resources/staff or through PBA approved
valuators and maintain detailed Housing Prices. Such surveys can also be arranged through any
representative body for common use by member banks/DFIs.

9. What is meant by verification of all title documents of property?

Verification of all title documents means verification of maximum possible trail of related documents
related to property title to the satisfaction of bank’s/DFI’s legal advisor.

10. In certain cases, approved building plan is not available with the customer. However, valid and
proper lease/ sub-lease from concerned authority has been issued. Can the bank extend housing
finance, in the absence of approved building plan if all title documents are intact and valid
mortgage of bank can be created over property through registration of charge?
To disburse housing finance to purchase constructed house, approved building plan is necessary.
This requirement doesn't apply for individual apartments where the builders get approval of drawing
of whole building. However, housing finance for plot plus construction, finance shall be disbursed for
the purchase of plots as per PRs. Further, approved map is necessary before disbursement of
tranches for construction of building/ house.

HF-1: Insurance Takaful

11. Is it mandatory to obtain Insurance/Takaful on the old housing finance portfolio i.e. portfolio
before May 06, 2014?
No, it is not mandatory to obtain Insurance/Takaful on the old housing finance portfolio. However, it
is mandatory, as per HF PRs, for fresh house financing i.e. financing made after May 06, 2014 with
implementation period of six months i.e. November 06, 2014.

12. Is it mandatory to obtain Insurance/Takaful on the cases of Balance Transfer Facility (BTF) after
May 06, 2014?
Yes, it is mandatory to obtain Insurance/Takaful on BTF cases after November 06, 2014.

13. Can banks/DFIs obtain insurance/Takaful coverage of the mortgaged property equal to
financing amount?
Banks may obtain Insurance/Takaful coverage of the mortgaged property at least equal to the
financing amount or upto full value in case of apartment and upto construction cost in case of
house.

Page 2 of 4
14. What risks are considered to be covered in an insurance/Takaful arrangement that it could be
called ‘comprehensive insurance’?
The following minimum risks should have been covered in an insurance/takaful arrangement to term
it a comprehensive cover:
i. Fire
ii. Lightning
iii. Earthquake
iv. Flood

HF-2: Types of Housing Finance

15. Is the condition of BTF after completion of three years applicable to the entire existing
portfolio?
Yes, the condition of completion of three years with same institution to avail BTF is applicable to the
entire existing portfolio.

16. If any customer of conventional bank desires to switch to Islamic banking before the
completion of three years, is he allowed?
Yes, he may switch from conventional to Islamic banking prior to completion of three years.

17. Does three years’ restriction of BTF apply on the bank staff switching job from one financial
institution to another and transfers his staff house loan obligations?
These PRs are not applicable for the staff home finance governed under bank’s approved policy.
Further, the bank’s staff that has to transfer his staff house finance obligations purely owing to
switching job, these BTF regulations shall not apply on such loans converted into commercial house
finance as well.

18. There are instances when a customer purchases a home (needing repair/renovation) and
applies for “home renovation facility” after utilizing the purchase facility. Do banks/DFIs need to
follow three year restriction of disbursing loan for renovation after purchase financing facility?
In case the borrower approaches a bank/DFI with the intention to purchase the old house and
renovate/construction of additional unit and the same shall be agreed at the time of financing
agreement between the bank/DFI and the borrower, banks/DFIs can entertain the requests of that
customer, as PRs do not restrict in this case. However, if the borrower availed financing for purchase
of house and then after disbursement he intends to avail another facility i.e. renovation, then the
facility cannot be extended to him/her before three years from the date of first disbursement.

HF-7: Property Assessment

19. Can banks/DFIs get the evaluation done by PBA approved valuator for the properties valuing
upto Rs. 3.0 million?
Yes, banks/DFIs can get evaluation done by PBA approved valuator for the properties valuing upto
Rs. 3.0 million, provided it does not delay the approval process. However, it is not mandatory as per
HF PRs.

Page 3 of 4
20. What would be the mode of valuations?
Mode of valuation depends on banks/DFIs internal risk management policies.

21. How can the valuation be done in case of land purchase plus construction where value of
property exceeds Rs. 10 Million?
In such case, only first time two valuations will be conducted to assess the land value. Later on Bill of
Quantities (BOQs), appraisal should be conducted by any one valuator.

22. What would be the frequency and mode of revaluation of mortgaged property?
It is at banks’/DFIs’ discretion to decide frequency and mode of revaluation of mortgaged property
as per their internal requirement and get it approved form the top management.

HF-10: Classification & Provisioning

23. Is the change in provisioning requirement applicable to old housing finance portfolio?
Six months time period from issuance of new PRs is available with the bank to re-classify the old
portfolio as per new PRs.

24. Can banks/DFIs adopt conservative approach for classification & provisioning of NPLs?
Yes, banks/DFIs may adopt conservative approach as per their approved internal risk management
policy. Further, HF PRs lay down only minimum requirements to be observed by the banks/DFIs to
avoid risks.

25. What will be the new Risk Rating Categories for housing finance due to introduction of Other
Assets Especially Mentioned (OAEM) category of classification?
For reporting purpose to SBP, OAEM category of classification may be reported in Internal Credit
Risk Rating Grade number 10. However, in order to effectively manage their credit portfolios,
banks/DFIs may have as many credit grades as they wish.

26. What would be the treatment of unrealized markup on housing finance accounts categorized
as OAEM?
Banks/DFIs may credit unrealized markup on housing finance accounts in OAEM category into
income account.

HF-11: Rescheduling/ Restructuring of Non-Performing Housing Finance

27. Would it be sufficient if banks’/DFIs’ Credit/Financing policy approved by Board of Directors

(BoD) covers the chapter of Rescheduling/Restructuring of non-performing financing of all type
(not specifically housing finance).
Incase banks’/DFIs’ internal Credit/Financing policy, approved by BoD, covers the chapter of
Rescheduling/Restructuring of non-performing financing of all typesof financing, then the banks/DFIs
should also make the Regulation HF-11 for Rescheduling/Restructuring of non-performing Housing
Finance as part of that policy.

Page 4 of 4
PRUDENTIAL REGULATIONS FOR
MICROFINANCE BANKS

Updated on June 10, 2014

AGRICULTURAL CREDIT & MICROFINANCE DEPARTMENT

STATE BANK OF PAKISTAN

MicrofinanceRegulations@[Link]
 CONTENTS

PREFACE 1

DEFINITIONS 2
Part 1: General 2

Part-2: Customer Due Diligence and Anti Money Laundering (M) 5

RISK MANAGEMENT (R) 7

Regulation R – 1: Minimum Capital Requirements 7

Regulation R – 2: Exposure against Contingent Liabilities 7

Regulation R – 3: Maintenance of Cash Reserve and Liquidity 7

Regulation R – 4: Statutory Reserve 8

Regulation R – 5: Maximum Loan Size and Eligibility of Borrowers 8

Regulation R – 6: Maximum Exposure of a Borrower from MFBs / MFIs / Other Financial Institutions 9

Regulation R – 7: Credit Report Check 9

Regulation R – 8: Classification of Assets and Provisioning Requirements 9

Regulation R – 9: Rescheduling/Restructuring of Loans 10

Regulation R – 10: Charging-off Non-Performing Loans (NPLs) 11

Regulation R – 11: Classification of Investments and Other Assets 11

Regulation R – 12: Investments of Funds 12

Regulation R – 13: Payment of Dividends 13

CORPORATE GOVERNANCE (G) 14

Regulation G – 1: Size and Composition of the Board 14

Regulation G – 2: Remuneration to Directors 14

Regulation G – 3: Responsibilities of the Board of Directors 14

i
Regulation G – 4: Fit and Proper Test 16

Regulation G – 5: Restriction on Certain Types of Transactions 16

Regulation G – 6: Internal Audit 17

Regulation G – 7: Policy Frameworks 17

Regulation G – 8: Guidelines on Internal Controls and Risk Management 17

Regulation G – 9: Credit Rating 17

Regulation G – 10: Declaration of Fidelity and Secrecy 18

Regulation G – 11: Contributions and Donations for Charitable, Social, Educational and Public Welfare Purposes 18

MONEY LAUNDERING, TERRORIST FINANCING AND OTHER UNLAWFUL

ACTIVITIES (M) 19
Regulation M - 1: Customer Due Diligence (CDD) 19

Regulation M - 2: Record Retention 23

Regulation M - 3: Reporting of Currency/Cash Transactions (CTR) 23

Regulation M - 4: Reporting of Suspicious Transactions (STR) 24

Regulation M - 5: Implementation of obligations under UNSC Resolutions 24

OPERATIONS (O) 25
Regulation O – 1: Cash Payments Outside the Authorized Place of Business 25

Regulation O – 2: Reconciliation/Settlement of Account Entries 25

Regulation O – 3: Deposits 26

Regulation O – 4: Consumer Protection 27

Regulation O – 5: Submission of Quarterly Returns 28

Regulation O – 6: Window Dressing 28

Regulation O – 7: Permission Regarding Receipt of Grants 28

Regulation O – 8: Reporting to Credit Information Bureau (CIB) 29

ii
ANNEXURES 30
Annexure – A 31

Annexure – B 34

Annexure – B - 1 36

Annexure – B - 2 37

Annexure – C 38

Annexure – D 39

Annexure – E 42

Annexure – E - 1 44

Annexure – E - 2 46

Annexure – E - 3 47

Annexure – F 48

Annexure – G 53

Annexure – H 54

iii
Preface
Cognizant of peculiar dynamics and evolution of microfinance sector, SBP maintains a ‘proportional’ regulatory
approach to promote innovation and stability. The underlying principle has always been to keep balance
between inclusion and prudence. Specifically, prudence relates to i) stability (Capital / managing credit /
operations / liquidity risks) ii) financial integrity (AML/CFT) and iii) consumer protection.

In view of business growth and technological innovations in the sector, SBP has further strengthened
the regulations in areas of governance, AML/CFT, consumer protection, and operations to help MFBs to manage
the expected higher level of growth in future.

To add clarity, the PRs have been segregated in four categories viz. Risk Management (R), Corporate Governance
(G), Customer Due Diligence and Anti Money Laundering (M), and Operations (O). In addition, few instructions in
the prudential regulations which have already been covered under MFI Ordinance 2001, have been removed
from regulations to avoid repetition. Nevertheless, the omitted clauses remain enforceable on MFBs as part of
law.

These Prudential Regulations for Microfinance Banks do not supersede other directives issued by State Bank of
Pakistan in respect of areas not covered here. Any violation or circumvention of MFI Ordinance 2001 and SBP
regulations/directives for MFBs may render the concerned MFB or its concerned officer(s) liable for penalties as
determined by SBP from time to time.

Further, State Bank of Pakistan will continue to oversee the sector-related developments with strategic
perspective. For this purpose, SBP will remain open to review any of the existing regulations, while enacting new
regulations where prudence is warranted.

Syed Samar Hasnain

Executive Director
(Development Finance Group)

1
Definitions
For the purpose of these regulations, unless there is anything repugnant in the subject or context:

Part 1: General

a. “Approved securities” shall mean registered Pakistani rupee obligations of the Federal
Government including, but not restricted to, Pakistan Investment Bonds (PIBs), Market Treasury
Bills (MTBs) and Government of Pakistan Sukuk Bonds.

b. “Branchless Banking” or “BB” means conduct of banking activities by authorized financial

institutions for customers having a branchless banking account. It does not include the
information services already being provided by various FIs to their existing customers using
channels like, phone, internet, SMS etc.

c. “Contingent liabilities” mean and include inland letters of credit, letters of guarantee, bid
bonds/performance bonds, and advance payment guarantees.

d. “Deposit” means the deposit of money, repayable on demand or otherwise, accepted by a MFB
from the public for the purpose of providing microfinance services.

e. “Documents” include vouchers, bills, promissory notes, bills of exchange, securities for
advances, claims by or against microfinance bank (MFB) and other record supporting entries in
the books of the MFB.

f. “Equity” means and includes paid-up capital, share premium, general reserves and un-
appropriated profits of the MFB.

g. “Exposure” means investments and financing facilities provided by the MFB including both fund
based and non-fund based.

h. “Family member” of a person means his/her spouse, dependent, lineal ascendants and
descendants and dependent brothers and sisters.

i. “Independent Director” means such a person who is not linked directly or indirectly with the
MFB or its sponsor. For the purpose of such determination, an "independent director" is a
director who:

i. Has not been employed by MFB within the last five years;
ii. Has not been an employee or affiliate of any present or former external
auditor/consultant/legal advisor of MFB within the last three years;
iii. Has not been an executive officer or employee of parent, subsidiary or associate

2
 company of the MFB or where Directors of the MFB have substantial beneficial interest
(20% or more shareholding of director’s own or combined with family members);
iv. Has not been employed by a company of which an executive officer of the MFB has
been a director within the last three years;
v. Has/had no material business relationship with the MFB either directly, or as a partner,
shareholder, director or key executive of a body that has/had such a relationship with
the MFB within the last three years;
vi. Does not hold cross-directorships or have significant links with other directors such as
association as partner or common director/major shareholder in other companies or
entities;
vii. Has not served on the Board for more than six years from the date of his first election or
appointment provided that such person shall be deemed “independent director” if re-
elected after a lapse of three years.

j. “Key Executive” includes the officials responsible for overseeing following functional
responsibilities:

i. Any executive, acting as second to CEO including Chief Operating Officer, Deputy
Managing Director or by whatever name called;
ii. Chief Financial Officer/Head of Finance/Head of Accounts;
iii. Internal Audit;
iv. Risk Management;
v. Compliance;
vi. Credit;
vii. Operations;
viii. Human Resource;
ix. Information Technology;

The condition for hiring all key executives will become mandatory whenever deposit base or
gross loan portfolio of an MFB exceeds Rs. 3 billion, or the MFB completes three years in
operations whichever is earlier. Further, if a person is performing more than one of the above-
mentioned functions, it shall be ensured that there is no conflict of interest. The same shall also
be notified to State Bank of Pakistan.

k. “Microfinance Banks - MFBs” shall mean companies incorporated in Pakistan and licensed by
the State Bank of Pakistan as microfinance banks for the purpose of providing microfinance
services, especially mobilizing deposits from the public and providing credit to poor persons and
micro-enterprises.

l. “Microenterprises” shall mean projects or businesses in trading, manufacturing, services, or

agriculture that lead to livelihood improvement and income generation. Moreover, these
projects/businesses are undertaken by micro entrepreneurs who are either self-employed or

3
 employ few individuals not exceeding 10 (excluding seasonal labor).

Microenterprises may include carpentry, electrical works, food stalls, farms (crops & non-crops),
lathe machine workshops etc; which have traditionally lacked access to formal financial services.

m. “Poor Person” means an individual who has meager means of subsistence but is involved in a
livelihood activity and has an ability to repay debt from an annual income (net of business
expenses) up to Rs. 500,000/-.

n. “Records” include ledgers, daybooks, cash books, supporting documents and all other manual or
magnetic/electronic records used in the business of the MFBs;

o. “Specified area” means the district, region (comprising up to five adjacent districts within the
same Province or any other area where Microfinance Institutions Ordinance 2001 is applicable),
province or the whole country for which an MFB is licensed to operate;

p. “Sponsor Shares” mean 5% or more paid-up shares of a MFB, acquired by a person(s)

individually or in concert with his family members, group companies, subsidiaries, and
affiliates/associates.

q. “Sponsor Shareholders” mean all those shareholders of a MFB holding sponsor shares.

r. “Sponsor Director” means the member of the Board of Directors of a MFB holding sponsor
shares.

s. “State Bank” means State Bank of Pakistan established under The State Bank of Pakistan Act,
1956.

4
Part-2: Customer Due Diligence and Anti Money Laundering (M)

a. “Beneficial Owner” refers to the natural person(s) who ultimately owns or controls a customer
and /or the natural person on whose behalf a transaction is being conducted.

b. “Beneficiary” means the person to whom or for whose benefit the funds are sent or deposited
in bank.

c. “Correspondent Bank” means the MFB in Pakistan which provides correspondent banking
services to bank or financial institution situated abroad and vice versa.

d. “Correspondent Banking” means provision of banking services by one bank (correspondent) to

another bank (respondent) including but not limited to opening and maintaining accounts, fund
transfers, cheque clearing, payable through accounts, permissible foreign exchange services or
similar other banking services.

e. “Currency Transaction Report” means as defined under AML Act 2010.

f. “Customer” means a person having relationship with the MFB which includes but not limited to
holding of deposit/deposit certificate/ or any instrument representing deposit/placing of money
with a MFB, availing other financial services, locker facility, safe deposit facility, or custodial
services from the MFB.

g. “Customer Due Diligence or CDD” in broader terms includes;

i. Identifying the customer and verifying the customer’s identity on the basis of
documents, data or information obtained from customer or through reliable and
independent source.
ii. Identifying, where there is a beneficial owner who is not the customer, the beneficial
owner and taking adequate measures to verify his identity so that the MFB is satisfied
that it knows who the beneficial owner is, including, in the case of a legal person, trust
or similar legal arrangement, measures to understand the ownership and control
structure of the person, trust or arrangement.
iii. Understanding and, as appropriate, obtaining information on the purpose and intended
nature of the business relationship; and
iv. Monitoring of accounts/transactions on ongoing basis to ensure that the transactions
being conducted are consistent with the MFB’s knowledge of the customers, their
business and risk profile, including, where necessary, the source of funds and, updating
records and data/ information to take prompt action when there is material departure
from usual and expected activity through regular matching with information already
available with MFB.

h. “FATF Recommendations” means the Recommendations of Financial Action Task Force as

5
 amended from time to time.

i. “FMU” means the Financial Monitoring Unit established under the AML Act 2010.

j. “Money Laundering and Financing of Terrorism or ML/TF” has the same meaning as ascribed to
them in AML Act 2010.

k. “Online transaction” means deposit or withdrawal of cash using different branches of a MFB
through electronic means.

l. “Person” has the same meaning as ascribed to it under the AML Act 2010.

m. “Politically Exposed Persons or PEPs” are individuals who are entrusted with prominent public
functions either domestically or by a foreign country, or in an international organization, for
example Heads of State or of government, senior politicians, senior government, judicial or
military officials, senior executives of state owned corporations/departments/autonomous
bodies. This does not intend to cover middle ranking or more junior individuals in the foregoing
categories.

n. “Risk” refers to risk associated with money laundering and financing of terrorism.

o. “Suspicious Transaction Report or STR’’ as ascribed in AML Act 2010.

p. “Walk-in-customer” means the person conducting occasional transactions and is not a customer
having relationship with the MFB.

6
Risk Management (R)
Regulation R – 1: Minimum Capital Requirements

Microfinance Banks (MFBs) shall maintain a minimum paid up capital (free of losses) of not less than:

i. One billion rupees if licensed to operate at national level.

ii. Five hundred million rupees if licensed to operate in a specified province;
iii. Four hundred million rupees if licensed to operate in a specified region; and
iv. Three hundred million rupees if licensed to operate in a specified district;

The MFBs shall also maintain Capital Adequacy Ratio (CAR) equivalent to at least 15% of their risk weighted
assets. Instructions on calculation of CAR based on risk weighted assets are provided in Annexure - A. For the
purpose of maintaining minimum CAR, MFBs are also allowed to raise sub-ordinate debt in local currency,
subject to obtaining prior written approval from the SBP. The terms and conditions for raising sub-ordinate debt
are provided in Annexure - A.

Regulation R – 2: Exposure against Contingent Liabilities

The contingent liabilities of the MFB for the first three years of its operations shall not exceed three times of its
equity and thereafter shall not exceed 5 times of the MFB’s equity.

Regulation R – 3: Maintenance of Cash Reserve and Liquidity

A. Cash Reserve Requirement:

i. The MFB shall maintain a cash reserve equivalent to not less than 5% of its deposits (including
demand deposits and time deposits with tenor of less than 1 year) in a current account opened with
the State Bank or its agent.

ii. Time deposits with tenor of 1 year and above will not require any cash reserve.

B. Statutory Liquidity Requirement:

i. The MFB shall maintain statutory liquidity reserve equivalent to at least 10% of its total demand
liabilities and time liabilities with tenor of less than 1 year, in the form of liquid assets i.e. cash, gold,
unencumbered Treasury Bills, Pakistan Investment Bonds and Government of Pakistan Sukuk Bonds.
The MFB shall, however, not account for the Treasury Bills and Pakistan Investment Bonds held

7
 under depositor protection fund for the purpose of calculating statutory liquidity reserve.

ii. Time liabilities with tenor of 1 year and above will not require any SLR.

MFBs shall submit their CRR and SLR statements along with bi-weekly (fortnightly) statement of affairs to ‘Off-
Site Supervision & Enforcement Department (OSED) – State Bank’ within seven days of the close of the period to
which it relates. The format of bi-weekly statement of affairs, statement of CRR, and statement of SLR are
prescribed at Annexure - B, B1 and B2 respectively.

Regulation R – 4: Statutory Reserve

The MFB shall create a reserve fund to which shall be credited:

i. An amount equal to at least 20% of its annual profits after taxes till such time the reserve fund equals
the paid-up capital of the MFB.

ii. Thereafter, a sum not less than 5% of its annual profit after taxes.

Regulation R – 5: Maximum Loan Size and Eligibility of Borrowers

A. Housing Loans:
Maximum Loan size is up to Rs. 500,000/- to a single borrower with annual income (net of business expenses)
up to Rs. 600,000/-. However, at least 60% of housing loan portfolio of a MFB should be within the loan limit of
Rs. 250,000/- or below.

B. General Loans (Other than housing loans):

The maximum Loan size for general loans is up to Rs. 150,000/- to a poor person with annual income (net of
business expenses) up to Rs. 500,000/-

C. Loans to Microenterprises:
Loans to microenterprises shall be up to a maximum of Rs. 500,000/-. The MFB shall extend the enterprise loan
only in the name of micro entrepreneur to ensure traceability and reduce the incidence of multiple borrowing.
The aggregate exposure against the enterprise loans in excess of Rs. 150,000/- shall not exceed 40% of the
MFB’s gross loan portfolio. MFBs shall ensure to have in place appropriate mechanism for monitoring the
aggregate exposure limits on enterprise lending.

Only those MFBs that are fully compliant with Minimum Capital Requirement (MCR) and Capital Adequacy Ratio
(CAR) shall be eligible to undertake microenterprise lending. The interested MFBs shall develop related
institutional capacity (products, credit risk management and monitoring system, trainings etc.) and submit its

8
 detailed business plan of microenterprise lending to SBP for seeking necessary approval for a pilot program. The
SBP shall evaluate the plan along with operational/financial performance, funding plan, supervisory assessment,
and credit rating of the MFB, and accordingly grant permission for launching pilot program to the applicant MFB.
The final approval for enterprise lending shall be granted subject to satisfactory evaluation of pilot program.

Regulation R – 6: Maximum Exposure of a Borrower from MFBs / MFIs / Other

Financial Institutions

The maximum limits of the borrowers’ aggregate exposure shall not exceed Rs. 150,000/- for general loans, Rs.
500,000/- for housing loans, and Rs. 500,000/- for microenterprise loans. The aggregate exposure of the
borrowers who are eligible to avail both general and microenterprise loan shall not exceed Rs. 500,000/-.

The MFBs shall develop an internal mechanism to monitor the overall exposure of their borrowers so as to
manage credit risk and also minimize the borrowers’ over indebtedness risk. At the time of granting facility,
MFBs shall obtain a written declaration on the prescribed format attached as Annexure – C from the borrower
divulging details of various facilities already obtained from other MFBs / MFIs / Banks / other Financial
Institutions. The MFBs shall ensure that total exposure of their clients does not exceed their total repayment
capacity as determined under the criteria laid–out in the MFBs’ credit policy.

Regulation R – 7: Credit Report Check

Before allowing any credit facility, the MFBs shall obtain a credit report from the Credit Information Bureau (CIB)
of State Bank of Pakistan, or from any other appropriate Credit Information Bureau of which they are a member.
However, if credit facility exceeds Rs. 30,000, it will be mandatory for MFBs to obtain credit report from Credit
Information Bureau of State Bank of Pakistan.

MFBs shall assign due weightage to the CIB reports in addition to their approved criteria while undertaking
credit appraisal of the prospective borrower. Credit applications, however, may not be turned down solely on
the basis of overdue amount reported in the CIB report.

Regulation R – 8: Classification of Assets and Provisioning Requirements

A. Specific Provisioning

The outstanding principal and mark-up of the loans and advances, payments against which are overdue for 30
days or more, shall be classified as Non- Performing Loans (NPLs). The unrealized interest / profit / mark-up /
service charges on NPLs shall be suspended and credited to interest suspense account. Further the NPLs shall be
divided into following categories:

9
 Category Determinant Provisioning Requirement

Other Assets Especially Loans (principal/mark-up) is overdue

Mentioned for 30 days or more but less than 60 NIL
(OAEM) days
25% of outstanding principal net of
Loans (principal/mark-up) is overdue
Cash collaterals and Gold (ornaments
Substandard for 60 days or more but less than 90
and bullion) realizable without
days
recourse to a Court of Law
50% of outstanding principal net of
Loans (principal/mark-up) is overdue
Cash collaterals and Gold (ornaments
Doubtful for 90 days or more but less than 180
and bullion) realizable without
days
recourse to a Court of Law
100% of outstanding principal net of
Loans (principal/mark-up) is overdue Cash collaterals and Gold (ornaments
Loss
for 180 days or more and bullion) realizable without
recourse to a Court of Law

In addition, MFBs shall maintain a watch list of all accounts overdue for 5 – 29 days. However, such accounts
may not be treated as NPL for the purpose of Classification / Provisioning.

B. General Provisioning

The MFB shall maintain a General Provision equivalent to 1.0% of the net outstanding advances (advances net of
specific provisions). However, general provision shall not be required in cases where loans have been secured
against gold or other cash collateral with appropriate margin.

Regulation R – 9: Rescheduling/Restructuring of Loans

In order to restructure/ reschedule NPLs, MFBs shall have in place a policy duly approved by their Board of
Directors (BOD). The policy shall take following into account:

i. Rescheduling/restructuring is not done to break timeframe or allow un-warranted improvement in

classified category of loans/advances.

ii. A mechanism is in place, to identify and verify the genuineness of circumstances of the concerned
borrowers before rescheduling/ restructuring.

iii. The rescheduled/restructured loans shall remain classified unless serviced regularly for 6 months
excluding grace period (if any) or at least 40% of the outstanding amount principal along with accrued
mark-up is recovered in cash.

10
 iv. In cases where rescheduled / restructured loans are not recovered on revised maturity date, they shall
be classified directly as ‘losses’.

v. Envisage steps to provide relief to borrowers adversely affected by natural calamities. MFBs may grant
appropriate relaxation either on case-to-case basis or en-block to the borrowers in the affected area.
Further, MFBs are encouraged to develop risk mitigation strategies such as availing crop loan insurance,
for eligible crops, so as to reduce vulnerability in such situations.

Regulation R – 10: Charging-off Non-Performing Loans (NPLs)

All NPLs shall be charged off, one month after the loan is classified as “Loss”. The intent of ‘charge-off’ is to clear
the balance sheet of MFBs, and this shall in no way extinguish the MFBs’ right of recovery of such loans.

Note: Charge-off means reducing the value of the loans in ‘loss’ category to zero through offsetting the
provisions, thus, removing such loans from the balance sheet.

Regulation R – 11: Classification of Investments and Other Assets

The MFBs shall categorize their investments into three categories viz. ‘Held for Trading’, ‘Available for Sale’ and
‘Held to Maturity’. The securities should be categorized at the time of their acquisition and the decision to this
effect shall be recorded in the deal ticket.

The MFB shall classify a security as Held-To-Maturity (HTM) if it has intent and ability to hold such investments
till their maturity. Securities categorized as HTM shall be valued at amortized cost. However, in case of
impairment, they will be subject to revaluation and the impaired amount shall be charged to Profit and Loss
Account.

The investments once categorized will not be shifted to or from ‘HTM’. The investments in ‘Held for Trading’
may be shifted to ‘Available for Sale’ category only under exceptional circumstances and after approval of MFB’s
Asset and Liabilities Committee (ALCO) with the reasons recorded in writing. While shifting the securities, the
same will have to be valued at lower of cost/book or market value at that date and any diminution shall be fully
provided for through profit and loss account.

The securities categorized as ‘Held for Trading’ shall be disposed off within 90 days from the date of their
acquisition.

Investment portfolio in ‘Held for Trading’ and ‘Available for Sale’ shall be evaluated for the purpose of their
valuation and classification keeping in view various subjective and objective factors given as under:

11
a) Quoted Securities:

Government Securities will be valued at PKRV (Reuter Page). Debt securities such as TFC and mutual funds shall
be valued at their market value. The difference between the market value and book value will be treated as
surplus/deficit.

b) Un-quoted Securities:

TFCs and mutual funds shall be carried at amortized costs. These securities will be tested for any impairment
and classification on the evaluation date on the basis of both objective and subjective criteria (aging of default,
future payment capacity, project/company’s financial condition, business conditions etc;).

c) Treatment of Surplus/Deficit:

The measurement of surplus/deficit shall be done on portfolio basis. The surplus/deficit arising as a result of
revaluation of ‘Held for Trading’ securities shall be taken into Profit & Loss Account. The surplus/deficit on
revaluation of ‘Available for Sale’ category shall be taken to “Surplus/Deficit on Revaluation of Securities”
through statement of comprehensive income. Impairment in the value of ‘Available for Sale’ securities will be
provided for by charging it to the Profit and Loss Account.

Classification of ‘Other Assets’ and provision required there-against shall be determined keeping in view the risk
involved and the requirements of the International Financial Reporting Standards (IFS).

MFBs are required to take appropriate measures to comply with the above conditions within six months of the
issuance of these regulations.

Regulation R – 12: Investments of Funds

MFBs may invest their surplus funds in Government Securities, ‘A’ rated debt securities like TFCs and units of
those mutual funds which maintain their investment portfolio in fixed income securities or money market
instruments.

In addition, MFBs may acquire or hold shares of any corporate body, the objective of which is to provide
microfinance services, technical, vocational, educational, business development and allied services to the poor
and micro enterprises. The maximum investment in such a company or security shall not exceed 10% of paid-up
share capital of that company or 5% of MFBs’ own equity free of losses, whichever is less. For making
investment in excess of the 5% limit, prior permission from SBP shall be obtained. The aggregate investments in
such corporate bodies shall not exceed 10% of MFBs’ equity, free of losses.

12
Regulation R – 13: Payment of Dividends

MFBs shall not pay any dividends on their shares until:

i. They meet the MCR and CAR as laid down by the State Bank from time to time;

ii. All the provisions/appropriations laid down in MFI Ordinance 2001 and the Prudential Regulations for
Microfinance Banks have been made.

13
CORPORATE GOVERNANCE (G)

Regulation G – 1: Size and Composition of the Board

MFBs shall ensure that the skill mix of the Board is compatible with the objectives, plans and functions of the
MFB and that the board is in a position to give direction to the executive management and steer the MFB in the
desired direction. The board shall have:

i. Minimum of seven members.

ii. Not more than 25% of the members from the same family.
iii. At least 2 independent members.
iv. No more than 25% of the members as paid executives of the MFB.
v. Chairman who is not the CEO of the MFB.

Further, MFBs are encouraged to have adequate female representation on their Board of Directors. MFBs are
required to comply with the above conditions within six months of the issuance of these regulations.
MFBs shall also ensure that no member of the Board of Directors of a MFB holding 5% or more of the paid-up
capital of the MFB either individually or in concert with his/her family members or concerns / companies in
which he / she has the controlling interest, shall be appointed in the MFB in any capacity save as the Chief
Executive of the MFB.

Regulation G – 2: Remuneration to Directors

No payment shall be made or perquisites provided to the non-executive directors and chairman other than
reasonable fees, in addition to traveling and lodging expenses (on actual basis), for attending meetings of the
Board of Directors or its Committees. MFBs may determine a ‘reasonable fee’ but not exceeding Rs. 25,000 per
meeting. If meetings of the Board of Directors and its Committees are scheduled on the same day, the MFB shall
not pay a separate fee for each meeting. Further, the scale of fee shall be approved by the shareholders on pre
or post facto basis in the Annual General Meeting (AGM). However, if a MFB intends to pay above the
prescribed ceiling of Rs. 25,000, it would require prior permission from SBP. The executive directors will only be
paid usual TA/DA as per MFB’s standard rules and regulations.

Regulation G – 3: Responsibilities of the Board of Directors

The Board of Directors of MFBs shall:

i. Define vision & mission and set strategic goals & objectives.
ii. Approve annual business plan, and monitor its progress on regular basis.

14
 iii. Undertake and fulfill their duties & responsibilities keeping in view their obligations under the applicable
laws and regulations.
iv. Ensure that the MFB maintains high standards of disclosure, transparency, fair treatment with
consumers, and compliance with rules and regulations.
v. Attend training program(s) on corporate governance preferably at least 1 week within first year of their
directorship to be able to play effective role as a director on the board of MFB. However, those Directors
who have already attended such programs or have served on the board of any foreign corporate body
shall be exempted from such training programs.
vi. Induct appropriately qualified and experienced CEO and management, and assess their performance.
Recommend re-appointment of Chief Executive Officer/President and members of the board on the
basis of their performance, and ensure appropriate skill-mix in the board composition.
vii. Ensure that succession policy is in place for key management positions.
viii. Clearly define the authorities and key responsibilities of both the Directors and the Senior Management
without delegating its policy-making powers to the Management and shall ensure that the Management
is in the hands of qualified personnel.
ix. Approve and ensure implementation & compliance of internal policies relating to business and
operations. Moreover, existing policies shall be reviewed and updated periodically or whenever
circumstances justify.
x. Hold frequent/regular meetings (not less than once every quarter). The individual directors of an MFB
shall attend at least half of the meetings held in a financial year. The board should ensure appropriate
MIS for receiving sufficient information from management on the agenda items well in advance of each
meeting to be able to effectively participate in and contribute to each meeting.
xi. Form specialized committees with well-defined objectives, authorities and tenure. These committees,
preferably comprising of ‘Non-Executive’ Board members, shall oversee areas like audit, risk
management, compensation etc. The Audit Committee of the board shall be chaired by the Independent
Director. These committees of the board shall not indulge in day-to-day affairs/operations of the MFB
and shall apprise the board of their activities, findings, and recommendations on regular basis.
xii. Ensure that permanent committees of the board have charters approved by the board as a whole.
xiii. Ensure that the audit committee of the board shall not include membership from the management. The
audit committee must include an expert on accounting and financial analysis. It must meet with the
external auditors in the absence of management.
xiv. Inform State Bank of Pakistan (SBP) at least two months ahead of implementing its decision to remove
its President/Chief Executive Officer (CEO) before the expiration of his/her term of office, through the
defined statutory process along with reasons recorded in writing for the same. The Chairman of the
Board of Directors of the MFB shall be responsible for submission of the requisite information to SBP.
xv. The President/CEO, whenever, decides to tender resignation before completion of his/her term in office,
he/she must inform SBP at least two months before tendering resignation.

15
Board of Directors is required to undertake measures, within six months of the issuance of these regulations, to
meet its newly prescribed responsibilities.

Regulation G – 4: Fit and Proper Test

The Board Members and President/Chief Executive are custodians of public savings deposited with the MFBs.
Thus, they should not only be persons of established integrity and track record, but should also have necessary
capacity, qualification and experience to effectively undertake their respective responsibilities and functions in
order to lead and steer the MFB as a commercially viable and socially responsible financial institution.

State Bank of Pakistan has, formulated “Fit & Proper Test” for selection/appointment, re-appointment/renewal,
and interim appointment of the Board Members and President/Chief Executive of Microfinance banks, which
prescribes the minimum qualifications, experience and integrity standards, etc. for the MFBs’ Board Members
and President/Chief Executive. The criterion is given at Annexure - D.

For appointment of key executives, SBP’s prior approval is not required; however, MFBs shall furnish information
of their key executives to SBP. MFBs shall provide FPT particulars of all key executives within six months of
issuance of these regulations. The MFBs shall submit information about the Board Members and/or
President/Chief Executive Officer and key executives to State Bank as per Annexure - E, E – 1, E – 2 and E – 3,
respectively.

Fit & Proper Test prescribed in these regulations is continuous in nature. Therefore, all persons subject to FPT
shall immediately submit any change in the information already submitted (at the time of clearance) either
through their Company Secretary or Human Resources Department to Banking Policy and Regulations
Department and copy to Agricultural Credit and Microfinance Department of State Bank. Violation of the
instructions, circumvention, concealment, misreporting and delay in submission of information to SBP may
result in withdrawal of SBP approval.

Regulation G – 5: Restriction on Certain Types of Transactions

The MFBs shall not:

i. Allow any facility for speculative purposes.
ii. Take any exposure on its sponsors, directors or employees including their spouses, parents, and
children. The rule shall not apply on deposit services offered by the MFB and loans given to employees
under staff loan policy of the MFB.
iii. Offer preferable treatment to the deposit accounts of its sponsors, directors or employees including
their spouses, parents, and children.
iv. Enter into leasing, renting and sale/purchase of any kind with their directors, officers, employees or
such persons who either individually or in concert with family members beneficially owns 5% or more

16
 of the equity of the MFB. This restriction does not apply in case of purchase of vehicles, laptops,
mobile phone devices and iPads by the paid directors, officers or employees of the MFBs which
remained in their own use, provided such sale is covered under the employees service rules duly
approved by the Board of Directors of the MFB and is effected by the MFB at least at book value at the
date of such transaction.
v. Hold, deal or trade in real estate except for use of MFB itself.

Regulation G – 6: Internal Audit

The MFBs shall have an Internal Audit Department manned preferably by professionals/persons having prior
audit experience in MFBs/Banks/Financial Institutions. The Head of the Department shall report directly to the
Board of Directors or to an Audit Committee of the Board which shall inter alia evaluate his/her performance
annually. However, Head of Internal Audit may report administratively to the President/CEO.

Regulation G – 7: Policy Frameworks

The MFBs shall formulate policies for all functional areas of operations including but not restricted to risk
management, micro-credit, deposit operations, investments, internal audit, human resources, and rescheduling
/ restructuring / write-off of loans / advances etc. These policies shall be duly approved by the Board of
Directors. The Board shall also be responsible to review and update existing policies periodically and whenever
circumstances justify it. The Board shall develop and implement newly prescribed policies within six months of
issuance of these regulations.

Regulation G – 8: Guidelines on Internal Controls and Risk Management

The MFBs shall follow at minimum the instructions and standards given in the guidelines on i) Risk Management
ii) Internal Controls iii) IT Security and iv) Business Continuity Management. The guidelines are given at Annexure
- F. MFBs shall ensure implementation of these guidelines within six months from the date of issuance of these
regulations.

Regulation G – 9: Credit Rating

The MFBs shall get themselves rated by any of the rating agencies on the approved panel of State Bank of
Pakistan or any international microfinance rating agency, with prior approval of SBP, within three years of grant
of license by State Bank of Pakistan to operate as MFB or within one year of commencement of deposit

17
mobilization services whichever is earlier.

The credit rating shall be an ongoing process and updated on a regular basis from year to year within four
months of the close of financial year after the first rating as stated in the first paragraph. The rating report shall
be submitted to Agricultural Credit & Microfinance Department, and Offsite Surveillance and Enforcement
Departments of State Bank of Pakistan within 7 days of notification of the latest rating. The rating shall also be
disclosed to the public within 15 days of the notification of the latest rating by the rating agency.

Regulation G – 10: Declaration of Fidelity and Secrecy

Every member, director, auditor and staff member of the microfinance bank shall, before entering upon his
office and performance of duties, make a declaration of fidelity and secrecy in the form as prescribed in
Annexure - G.

Regulation G – 11: Contributions and Donations for Charitable, Social,

Educational and Public Welfare Purposes

MFBs shall strictly observe the following rules in the matter of making any donation/contribution for charitable,
social, educational or public welfare purposes:

i. The MFBs shall develop policy/guidelines duly approved by their Board of Directors for making
donations/contributions.

ii. The total donations/contributions made by the MFBs during the year shall not exceed such amount as
approved by their Board of Directors. MFBs making these donations/contributions shall already have
met provisioning and capital adequacy requirements.

iii. All donations or contributions to be made during the year must be specifically approved by the Board of
Directors on pre or post facto basis.

iv. MFBs shall expressly disclose in their annual audited financial statements the total
donation/contribution made during the year along with names of donees, to whom total donations/
contributions during the year were made in excess of Rs 100,000/. In case of donations where any
director or his family members have interest in the donee, the names of such directors, their interest in
the donee and the names and addresses of all donees, shall also be given.

18
MONEY LAUNDERING, TERRORIST FINANCING AND OTHER UNLAWFUL ACTIVITIES (M)
To safeguard Microfinance Banks (MFBs) from the threat of Money Laundering, Terrorist Financing and other
related unlawful activities, the following minimum standards are required to be followed by all the MFBs.
Microfinance banks are free to take additional measures as per risk involved in line with Financial Action Task
Force (FATF) recommendations. MFBs shall ensure to develop and implement following policies within six
months of issuance of these regulations.

Regulation M - 1: Customer Due Diligence (CDD)

1) Know Your Customer/ Customer Due Diligence Policy: All MFBs shall formulate a comprehensive
KYC/CDD policy duly approved by their Board of Directors. The policy shall be communicated down the
line to relevant officers / staff. Copies of the KYC/CDD policy shall be submitted to the Agricultural Credit
and Microfinance Department (AC&MFD) of the State Bank of Pakistan. Any change in policy shall also
be conveyed to SBP within seven (07) days of its approval from the Board of Directors.

MFBs shall apply customer due diligence measures including identification and verification of customers
before opening a new account or extending any credit facility or establishing new business relationships.
MFBs shall take all reasonable measures to perform due diligence of their existing and prospective
customers to establish their identity and to confirm that the customer is not exploiting microfinance
banking channel for any criminal activity, money laundering or terrorist financing.

2) Systems, Controls and Procedures: MFBs shall put in place systems, controls and procedures for
combating money laundering and terrorist financing which may include but not limited to;

i. Compliance setup under the supervision of a well qualified, senior and independent official
who shall be responsible to ensure compliance with AML/CFT policies and procedures.
ii. Adequate screening procedures to ensure high standards when hiring employees.
iii. An ongoing employee training program for relevant staff/officers.
iv. Audit function to assess the adequacy of the policies & procedures and to evaluate the
effectiveness of risk management process.
v. Appropriate policies and procedures on internal controls.

3) Identity of Individual Customers: Identity of all the prospective customers shall be established with all
reasonable efforts. Before establishing any banking relationship with the client, MFBs shall inter alia
obtain copy of Computerized National Identity Card (CNIC), Passport, National Identity Card for Overseas
Pakistanis (NICOP), Pakistan Origin Card (POC) or National Alien Registration Authority (NARA) Card of
the prospective customer. The copy of identity document so obtained shall be stamped as “original
seen” after comparing it with the original document.

19
 In case of a salaried person, MFBs shall obtain copy of his/her service card, or any other acceptable
evidence of service in addition to the attested copy of CNIC.

In case of an illiterate person, MFBs shall take additional measures such as recent photograph of the
new account holder besides taking his/her right and left thumb impression on the specimen signature
card.

In case of joint account, CDD measures on all the joint account holders shall be performed as if each of
them were individual customers of the MFB.

MFBs may open account on the basis of attested copy of NADRA receipt/token for new CNIC, provided
all other requirements of account opening under Prudential Regulations for Customer Due Diligence are
complied with. MFBs shall, however, obtain copies of CNICs of such customers within three months of
the opening of account.

4) Documents Required for Other than Individual Accounts: For all accounts other than individuals’
accounts, list of the required documents is given in Annexure – H.

5) Verification of the Identity: Before opening of accounts or starting operation in the accounts, MFBs
shall verify CNIC /NICOP/ POC from the Verisys of NADRA. Where the identity documents are other than
CNIC/NICOP/ POC, MFBs shall make all efforts to verify the identity document from the concerned
issuing authority /from reliable, independent source documents, database or information.

MFBs are allowed to provisionally open accounts (restricting debits) during the verification process of
CNIC subject to;

i. Completion of verification within five (05) working days from the date of application of
account opening, and
ii. Management of related risks effectively during the period.

Where it is difficult to establish identity of the prospective customer or verification of their identity,
MFBs should not operate the account.

6) Micro-Saving Accounts: These are privileged savings accounts offered only to low income and poor
persons who are traditionally excluded from formal financial system. These accounts can be opened
after establishing identity of customer only, and upon approval of the branch manager. Balance limits
for such accounts shall, however, not exceed Rs. 100,000.

MFBs shall ensure proper systems and controls to avoid misuse of this relaxation. MFBs shall also
conduct regular internal audit to review and assess effectiveness of the relevant controls. If there arise
any doubt on the identity of the micro-saving account holder or a suspicion of money laundering and/or
terrorist financing, MFB shall verify identity document of such account holders from NADRA.

MFBs shall also encourage women in remote areas to open accounts for saving and other purposes. If
women in remote areas do not possess identity cards, MFB shall guide them for obtaining their own

20
 Computerized National identity Cards (CNIC). Meanwhile, MFBs may open their micro-saving accounts,
on the basis of attested copy of CNIC of her father/husband, for six months only. MFBs shall also obtain
any document related to account holder e.g., Nikah Nama, Birth Certificate, Driving License, Educational
Degree/ Certificate, Pension Book or Insurance Certificate.

7) Identification and Verification of Beneficial Owner: MFBs are required to identify the beneficial owner
and take all reasonable measures to verify the identity of the beneficial owner during the course of
establishing a business relationship or conducting transaction.

8) Anonymous Accounts: MFBs shall not allow opening of anonymous or numbered accounts or accounts
in the names of fictitious persons.

9) Purpose of Account / Relationship: MFBs shall obtain from the customer intended purpose of account
and likely sources of fund before starting any business relationship or opening of an account. Personal /
individual accounts shall not be allowed to be used for charity purpose / collection of donation.

10) On-Going Customer Due Diligence: Ongoing Customer Due Diligence is an essential aspect of effective
KYC/CDD procedures and applies to all customers to whom the MFB is offering any type of service(s).
Ongoing due diligence includes monitoring and scrutiny of transactions undertaken throughout the
course of business relationship to ensure that the transactions being conducted are consistent with the
institution’s knowledge of the customer, purpose of account, their business and risk profile, and where
necessary, the source of funds. MFBs shall keep on conducting customer due diligence at reasonable
periodic intervals or on significant occasions throughout the business relationship, e.g.;

i. Nature of product and services requested by the customer changes.

ii. Significant transaction or series of transactions take places.
iii. Significant change occurs in the way customer operates his account.

MFBs shall ensure that the documents, data or information collected under CDD process is kept up-to-
date and relevant by undertaking reviews of existing records.

11) Enhanced Due Diligence: It is possible that certain customers/transactions may pose high risk to MFBs.
The high risk factors must be defined in the KYC/CDD policy which may include the description of such
customers, products, transaction channels and geographic elements. In particular, following shall also be
considered for enhanced due diligence;

i. Having suspicion of money laundering or terrorist financing.

ii. Customers belong to countries where KYC and money laundering regulations are lax,or
those with links to offshore tax haven.
iii. Customers are in cash based businesses and deal in high-value items and where customers
have high net worth with no clearly identifiable source of income, etc.
iv. MFBs have reason to believe that the customer has been refused banking facilities by
another bank / DFI / MFB.

21
 v. While establishing business relationship with politically exposed persons (PEPs), their family
members and close associates.
vi. While establishing business with Non-Governmental Organizations (NGOs) / Not-for-Profit
Organizations (NPOs) and Charities.
vii. Opening of correspondent banks’ accounts, and taking appropriate measures to obtain all
relevant information about the correspondent bank.
viii. The customer resides in a country which does not comply with FATF Recommendations.

In case of PEPs and correspondent banking, MFBs are required to obtain senior management approval
for establishing or continuing business relationship.

12) Walk in Customer:

i. MFBs shall obtain copy of CNIC (regardless of threshold) for online deposits/fund transfers
conducted by walk-in-customer.
ii. MFBs shall obtain CNIC from walk-in customers conducting cash transactions above Rupees one
million whether carried out in a single operation or in multiple operations that appears to be
linked.
iii. For rest of transactions, identification requirements may be defined above an appropriate limit
by MFBs themselves in their KYC/CDD policies.

13) Government Accounts: MFBs shall not allow opening of Government accounts in personal names of
individuals. The Government account shall be opened on production of special resolution/authority
from the concerned department duly endorsed by the Ministry of Finance (MoF) or Finance Department
of the concerned (Provincial, Federal etc.) Government. This requirement is not applicable on
institutions which do not fall under the purview of MoF. Further, Government accounts shall be
operated by the designated officer(s) only.

14) Public Awareness Campaign on Requirement of CNIC: MFBs shall encourage customer services
officers/tellers and other MFB staff, directly in touch with the customer, to create awareness on
requirement of CNIC and shall facilitate/guide them to obtain CNIC.

15) New Technology: MFBs shall pay special attention to any money laundering threat that may arise from
new technologies that might favor anonymity and take measures, if required, to prevent their use in
money laundering schemes. Measures for managing risks should include specific and effective CDD
procedures that apply to non-face-to-face customers. In particular, MFBs should have policies and
procedures in place to address anonymity risk associated with non-face-to-face customers/business
relations/transactions. These policies and procedures should apply when establishing customer
relationship and when conducting ongoing due diligence.

16) Non-Satisfactory KYC / CDD: In case, MFB is not able to satisfactorily complete the required CDD
measures, account shall not be opened or any service provided and consideration should be given if the
circumstances are suspicious so as to file an STR. If CDD of an existing customer is found unsatisfactory,

22
 the relationship should be treated as high risk and reporting of suspicious transaction be considered as
per law, and circumstances of the case.

Regulation M - 2: Record Retention

The records of transactions and identification data should be maintained by MFBs in systematic manner with
exactness of period of preservation. For the purpose, following minimum requirements shall apply;

i. Identification Record: MFBs shall keep record on the identification data obtained through the
Customer Due Diligence (CDD) process, account files and business correspondence for at least
Ten (10) years following the termination of the business relationship.

ii. Transactions Record: MFBs shall maintain all necessary records on transactions, both domestic
and International, for at least Ten years following completion of the transaction. Such record
must be sufficient for reconstruction of individual transactions so as to provide, if necessary,
evidence for investigation or prosecution of criminal activity.

The examples of the necessary components of transaction record may include: customer’s name
(beneficiary’s name), address, nature and date of transaction, type and amount of transaction, currency
involved, type and identification of any account involved in the transaction.

The identification and transactions record shall be made available to SBP or other domestic authorities that are
competent, under law, to obtain this information and record.

MFBs shall, however, retain records for longer period where transactions and / or relationship relate to any
investigation, litigation or required by the court of law or by any other competent authority.

Moreover, the transactions record may be maintained in paper or electronic form or on micro film, being
admissible as evidence in a court of law.

Regulation M - 3: Reporting of Currency/Cash Transactions (CTR)

All MFBs shall adhere to the provision of Currency/Cash Transactions Report under the Anti-Money Laundering
Act, 2010 and report currency/cash transactions to the Director General of the Financial Monitoring Unit (FMU).
The Currency/Cash Transactions Guidance Notes and Reporting Form are available on the official website of
FMU.

23
Regulation M - 4: Reporting of Suspicious Transactions (STR)

If an MFB suspects or have reasonable grounds to suspect that funds are the proceeds of a criminal activity, or
are related to terrorist financing, it shall report within seven days its suspicions to the Director General, Financial
Monitoring Unit (FMU). The report should be on the format prescribed by FMU.

MFBs, their Directors, Officers and Employees are strictly prohibited from disclosing (tipping-off) the fact that an
STR or related information is being filled with the FMU.

The red flag indicators are available in AML/CFT Regulations for Banks / DFIs at
[Link]

Regulation M - 5: Implementation of obligations under UNSC Resolutions

MFBs shall ensure strict compliance of legal and regulatory requirements including freezing actions and
prohibition of dealing with designated persons and entities as per the Statutory Notifications issued by Federal
Government from time to time under United Nations (Security Council) Act, 1948 to apply certain measures for
giving effect to the decisions of the relevant United Nations Security Council resolutions, and, notifications
issued under Anti Terrorism Act, 1997.

24
OPERATIONS (O)

Regulation O – 1: Cash Payments Outside the Authorized Place of Business

The MFBs shall not undertake any business of cash payments at any place other than the authorized place of
business. However, this rule shall not apply in case of mobile banking and branchless banking where
permission has been obtained from the State Bank.

Regulation O – 2: Reconciliation/Settlement of Account Entries

The entries booked in the Inter-Branch Accounts and/or Suspense Account must be reconciled/cleared and
taken to the proper heads of accounts within a period of 30 days from the date entry is made in the
aforementioned accounts.

The above instruction shall not apply on the entries related to outstanding amount of the following, which
may either be recorded in their respective head of accounts (1-7) or classified in other assets (8-9);

i. Entries made on account of tax at source.

ii. Advance tax paid.
iii. Tax recoverable.
iv. Advance expense on new branches.
v. Advance rent paid.
vi. Legal expenses.
vii. Mark-up/service charge recoverable.
viii. Premium on Crop Loan Insurance Scheme (CLIS) receivable from Government of Pakistan (GoP). The
outstanding amount shall, however, be reconciled/cleared immediately on reimbursement of
premium amount from the GoP.
ix. Frauds and forgeries, cash theft and looted, payments against equity, and contributory payments of
capital nature to be capitalized at a later stage. The exclusion of entries relating to frauds and
forgeries, cash theft and looted will, however, be subject to the condition that the same are cleared
immediately on receipt of insurance claims.

MFBs shall institute an effective internal control system for the operations of Inter-Branch and Suspense
Accounts, which ensures reconciliation/clearing of the entries in shortest possible time and also clearly fixes
the responsibilities on the official(s) for neglecting the timely reconciliation and clearance.

25
Regulation O – 3: Deposits

MFBs shall develop appropriate products for attracting deposits and encouraging savings, especially small
savings from low-income groups. They shall facilitate both existing depositors for convenient/smooth
operations of their accounts and potential depositors at the time of account opening. MFBs shall also ensure
adequate training of their concerned staff to improve the quality of their deposit services. MFBs shall ensure
to meet requirements stipulated for deposit operations within six months of issuance of these regulations.

A. Basic /Micro Savings Account

In order to mobilize savings especially from low income individuals, all MFBs shall offer a basic or micro
savings account.

B. Opening of Deposit Accounts

i. MFBs shall entertain all requests to open deposit accounts by persons who meet the
requirements laid out in these Prudential Regulations, other instructions issued by the State
Bank, and MFBs' own policies.

ii. MFBs must apprise potential depositors with the different types of accounts and options
available to them.

C. Service Charges and Minimum Balance Requirements

For all types of profit and loss deposit accounts (except those with added services):

i. MFBs shall not levy service charges for their deposit services.

ii. There shall be no minimum balance requirements. However, MFBs may require an initial balance not
exceeding Rs. 100/- to open an account.

D. Statement of Account
MFBs shall provide at least half yearly statements of account for all accounts having an average daily balance
of Rs. 10,000/- and above. MFBs may issue statements of account either through surface mail (registered or
courier) or other appropriate means. For accounts below average daily balance of Rs. 10,000/-, MFBs shall
develop an appropriate policy for issuing statements of account to the concerned depositors.

MFBs shall make all reasonable efforts to update the customers’ records including CNIC of their account
holders if statements of account are returned / undelivered.

26
Regulation O – 4: Consumer Protection

MFBs are required to implement following provisions within six months of issuance of these regulations.

A. Financial Literacy

Since the customers of MFBs often lack awareness about their rights and obligations, each MFB shall
therefore develop a mandatory basic financial literacy program for them. The program at minimum shall
cover charges/fees, interest rate calculation, repayment schedules, customers’ obligations and other terms
and conditions of all financial services (loan, deposit, insurance, payments etc.) that MFB offers. In addition,
the program will also educate customers about how to lodge a complaint and track the resolution of
complaints.

B. Transparency and Disclosure

While extending any service to a customer, the MFBs shall lay out detailed terms and conditions which must:

i. Encompass the repayment schedule, if establishing a lending relationship, which discloses

the period and amounts to be paid as principal, mark-up, and fees. The schedule must clearly
disclose the Annualized Percentage Rate (APR).
ii. Be drawn up in English and Urdu or any other regional language considered to be
appropriate in view of clients’ ability to understand.
iii. Be displayed at a prominent place such as the entrances or windows of branches.
iv. Include details of potential factors that may induce changes in fees and service charges.
v. Be read-out, copied and provided to customers after they are signed.
vi. Not be discriminatory on the basis of gender.
In addition, MFBs shall regularly disclose the expected APR on deposits to their customers.
C. Complaint Redressal Cell

Each MFB shall establish a customer complaint cell with effective internal processes for logging,
acknowledging, assessing, and taking timely action in response to complaints received from customers. While
defining the scope and activities of the cell, the MFB shall give due consideration to factors such as the
complexity of its business, its range of products, the nature and size of its operations, the profile of its
customers, and so forth.

MFBs shall define timelines for the resolution of complaints. Moreover, management shall make a quarterly
review of the complaints processed (outstanding and settled) by the cell. If a complaint remains unresolved
beyond the standard time, the MFB shall periodically report to its CEO about the nature of the unresolved
complaint along with reasons for the delay. Furthermore, MFBs shall identify complaints of a recurring nature
for immediate corrective action.

27
To facilitate the customers in lodging complaints, MFBs shall place a complaint box in each branch that is
located at place which is easily identifiable and accessible to all customers, e.g. on a main customer service
counter.

D. Collection Practices

Each MFB shall develop a code for debt collection practices duly approved by its BoD. The code shall be
inclusive of at least the following:

i. Customers must be pre-informed in writing about the consequences of non-repayment including

legal remedies available to the MFB.

ii. Only lawful and acceptable business language and professional attitude should be adopted in
establishing contact with clients.

iii. MFBs should not harass customers’ family members. However, necessary information could be
obtained from family, friends, or third parties if the customer is not in contact.

Regulation O – 5: Submission of Quarterly Returns

The MFBs shall submit their quarterly data online on prescribed Quarterly Data File Structure (DFS) under
Reporting Chart of Accounts (RCOA) through Data Acquisition (DAP) Portal maintained at State Bank of
Pakistan as per laid down instructions.

Regulation O – 6: Window Dressing

MFBs shall refrain from adopting any measures or practices whereby they would either artificially or
temporarily show an ostensibly different position of MFBs’ accounts as given in their financial statements.
Particular care shall be taken in disclosing their deposits, minimum capital requirement, non-performing
loans/assets, provisioning, profit, inter-branch and inter-bank accounts, etc.

Regulation O – 7: Permission Regarding Receipt of Grants

MFBs shall ensure obtaining prior permission from SBP before receiving any type of grants. Any such
requests and /or clarifications shall be addressed to Director, Agricultural Credit and Microfinance
Department, State Bank of Pakistan, Karachi.

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Regulation O – 8: Reporting to Credit Information Bureau (CIB)

MFBs shall:

i. Provide factual and accurate data to SBP on the format prescribed from time to time. The said data
/information shall be submitted to SBP on a monthly basis but not later than 10th of every month
following the month to which the CIB data relates.

ii. Sign an agreement with SBP on the prescribed format, in order to avail online facility to obtain credit
worthiness reports, the specimen of which can be obtained from concerned SBP department, MFBs
shall be required to. The applicant MFB will be connected online after signing of the agreement and
payment of prescribed joining fee to SBP. After completion of above formalities, SBP shall inter alia
provide necessary guidelines, software, user IDs for authorized persons to the MFBs. The State Bank
does not entertain manual requests for issuance of credit reports.

iii. Submit CIB data of their borrowers on the prescribed formats online through their authorized
persons.

iv. Invariably report in writing to CIB the subsequent clearance of overdues/defaults within three
working days from the date of such repayment/settlement.

v. Reflect the detail of re-payment/settlement of overdues/defaults made subsequent to the reporting

date in the CIB report by way of following notes in the remarks column of the CIB report on the basis
of a written letter from the concerned MFB confirming that the overdues/defaults amount has been
cleared by the borrower on a specific date: “The “MFB’s Name” has subsequently reported clearance
of overdues/defaults of Rs. …… on …… (date).”

vi. Share their customers’ data with private CIB(s) subject to development of comprehensive customer
protection and confidentiality guidelines duly approved by their Board of Directors. Further, express
customer consent is mandatory for sharing customer data with other institutions/ CIB and the duty
of maintaining confidentiality will remain with the Microfinance Bank.

29
ANNEXURES

30
 Annexure – A

Instructions on Calculation of Capital Adequacy Ratio (CAR)

1. Requirements as to calculation of CAR:

1.1. MFBs shall categorize their capital as Core Capital and Supplementary Capital. The components of
core & supplementary capital and the risk weights are provided in the annexed Table A and B
respectively.

1.2. The inclusion of supplementary capital for calculating Capital Adequacy Ratio shall be limited to 50%
of the Core Capital.

2. Computation of Supplementary Capital

2.1. General Provisions or General Reserves for loan losses shall include only such provisions which are
not created against identified losses and are as such freely available to meet unidentified losses.
These provisions or reserves will be limited to maximum of 1.25% of total Risk Weighted Assets.

2.2. Revaluation Reserves shall be the Reserves created by revaluation of fixed assets and equity
instruments held by the MFB. The assets and investments must be prudently valued fully taking into
account the possibility of price fluctuations and forced sale. Revaluation reserves reflecting the
difference between the book value and the market value will be eligible up to 50% for treatment
under Supplementary Capital subject to the condition that the reasonableness of the revalued
amount is duly certified by the external auditors of the MFB.

2.3. Sub-ordinate debt shall qualify for inclusion in the Supplementary Capital after obtaining prior
written approval from the SBP. Such approval will be granted by SBP on case to case basis subject to
fulfillment of the following conditions:

a) Sub-ordinate debt can be raised from any person or entity, preferably from the sponsors, in
local currency only.
b) Rate of profit will be decided by the MFBs, subject to SBP’s clearance.
c) The loan should be un-secured, plain vanilla and sub-ordinate as to payment of principal and
profit to all other indebtedness of the MFB including deposits.
d) The loan should have original fixed term to maturity of minimum 5 years. The loan should
not be repayable before the agreed repayment date without approval of the SBP. Neither the
interest nor the principal may be paid even at maturity if such payments mean that the MFB
falls below or remain below the capital adequacy ratio.
e) Any other restrictions imposed by the State Bank of Pakistan.

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 MICROFINANCE BANK

CAPITAL ADEQUACY RATIO AS ON [Link] Table-A

Sr. No. ITEMS AMOUNT

1 Core Capital
1.1 Fully Paid-up Capital xxx
1.2 Balance in Share Premium Account xxx
1.3 Reserve for Bonus Shares xxx
1.4 General Reserves xxx
1.5 Un-appropriated Profit/(Loss) xxx
1.6 Sub-Total (1.1 to 1.5) xxxxxx
Less:
1.7 Intangible Assets xxx
1.8 Shortfall in Provision required against Classified Assets. xxx
1.9 Sub-Total (1.7 to 1.8) (xxxx)
1.10 Eligible Core Capital (1.6-1.9)

2 Supplementary Capital
2.1 Freely available General Provisions or reserves for loan losses –
up-to maximum of 1.25% of Risk Weighted Assets
2.2 Revaluation reserves – eligible up-to 50%
2.3 Sub-ordinated debt (up-to 50% of core capital)
2.4 Sub-Total (2.1 to 2.3)

3 Total Capital (1.10 + 2.4)

4 Capital Adequacy Ratio
4.1 Risk Weighted Assets (as per Table B) xxxx
4.2 Minimum Capital Requirement (15% of Total Risk Weighted xxx
Assets as per item 4.1)
4.3 Total Capital Held (As At Item 3 Above) xxx
4.4 Capital Surplus/(Shortfall) – (4.3 - 4.2) xxx
4.5 Capital Adequacy Ratio (4.3 / 4.1x 100) xxx

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RISK-WEIGHTED ASSETS ON-BALANCE SHEET ITEMS Table-B
BOOK RISK ADJUSTED
[Link]. ITEMS
VALUE WEIGHT% VALUE
1 Cash 0%

2 Balances with Central Banks:

2.1 With State Bank of Pakistan 0%

3 Balances with Banks

3.1 With Scheduled Banks in Pakistan 20%

4 Investments in:
4.1 Treasury Bills 0%
4.2 Federal / Pakistan Investment Bonds 0%
4.3 Other securities of Federal Government 0%
4.4 Marketable Securities (TFCs / Mutual Funds) 100%
4.5 Other Investments (TDRs of Banks/MFBs) 20%

5 Loans & Advances

(Less Cash margin and Govt. Securities held)

5.1 Loans guaranteed by Federal Govt./ SBP 0%

5.2 Microcredit 100%
5.3 Loans fully secured by mortgage of
50%
residential or commercial property
5.4 Staff loans 0%

6 Fixed Assets (net of accumulated depreciation) 100%

7 Assets deducted from capital:

7.1 Intangible assets 0%

7.2 Unconsolidated investment in subsidiary
0%
companies engaged in micro financing activities

8 Other Assets
8.1 Advance tax 0%
8.2 Deposits & prepayments 100%
8.3 Accrued income on Advances 100%
8.4 Accrued income on deposits accounts 100%
8.5 Accrued income on investments - PIBs/T-Bills 0%
8.6 Accrued income on investments – Others 100%
8.7 Other receivable 100%
TOTAL

33
 Annexure – B

MICROFINANCE BANK
*Bi-Weekly Statement of Affairs as at Close of Business on -----

Rupees in ‘000

LIABILITIES: AMOUNT

1) Demand Liabilities

a) Deposits (General) xxxx

b) Deposits From Banks & Financial Institutions xxxx
c) Borrowings From Banks And Financial Institutions xxxx
(Other Than Call Money)
d) Other Demand Liabilities xxxx xxxx

2) Time Liabilities

a) Deposits (General) xxxx

b) Deposits From Banks And Financial Institutions xxxx
c) Borrowings From Banks And Financial Institutions xxxx
d) Other Time Liabilities xxxx xxxx

3) Borrowings From The State Bank Of Pakistan

a) Against Promissory Notes xxxx

b) Against Approved Securities xxxx
c) Other Borrowings xxxx xxxx
4) Money At Call And Short Notice xxxx
5) Borrowing from Banks Abroad xxxx
6) Borrowings From Government of Pakistan xxxx
7) Capital (Paid Up)/Capital Fund And Reserves xxxx
8) Other Liabilities (Excluding Contra Items) xxxx Xxxx
9) Total Liabilities Xxxx

Assets:

1) Cash xxxx
2) Balance With
a) State Bank of Pakistan xxxx
b) National Bank Of Pakistan xxxx
c) Other Financial Institutions xxxx xxxx

3) Money At Call And Short Notice xxxx

4) Advances xxxx

34
5) Bills Purchased And Discounted xxxx
6) Investment In Securities And Shares xxxx
a. PIBs xxxx
b. T-Bills xxxx
c. Other Approved Securities xxxx
d. Shares xxxx
e. Others (Specify) xxxx

7) Other Assets (Excluding Contra Items) xxxx

8) Total Assets xxxx

Note: The Unencumbered approved securities held for liquidity purposes were:

a. PIBs xxxx
b. TBs xxxx
c. Others (specify) xxxx
d. Total xxxx

Authorized Signature
Name and Designation

* To be prepared once in every two weeks as at close of business on alternate Friday/Saturdays (close of
week)

35
 Annexure – B - 1

Bi-weekly (Fortnightly) Statement of Cash Reserve Requirement(CRR)

as at Close of Business on ------

Rs. In '000'

1. Demand Deposits, and Time Deposits of Less than One Year Amount

1.1 All current deposits including customers, banks and other financial xxx
institutions
All savings deposits including customers, banks and other financial
1.2 xxx
institutions
Special notice/call deposits including customers, banks and other financial
1.3 xxx
institutions
Fixed deposits including customers, banks and other financial institutions
1.4 xxx
with tenor of less than one year
Overdue fixed deposits including those of customers, banks, other financial
1.5 xxx
institutions

1.6 All other deposits payable to public on demand xxx

1.7 Mark- up/ Interest accrued on all above accounts xxx

2. Total Deposits (1.1 to 1.7) xxxx

3. Required CRR (5% of Total Deposits as per item # 2) xxx

4. Actual Cash Reserve as of ----- xxx

5. Surplus / (Deficit) xxx

36
 Annexure – B - 2

Bi-weekly (Fortnightly) Statement of Statutory Liquidity Requirement (SLR)

as at Close of Business on -----
Rs. In '000'

1. Demand Liabilities, and Time Liabilities of Less than One Year Amount

All current deposits including customers, banks and other financial xxx
1.1
institutions
All savings deposits including customers, banks and other financial xxx
1.2
institutions
Special notice/call deposits including customers, banks and other financial xxx
1.3
institutions
Fixed deposits including customers, banks and other financial institutions xxx
1.4
with tenor of less than one year
Overdue fixed deposits including those of customers, banks, other financial xxx
1.5
institutions
xxx
1.7 All other deposits payable to public on demand

All loans and borrowings with tenor of less than one year (except money at xxx
1.8 call & short notice, other interbank borrowings, and the loans exempted
under section 18 of the Microfinance Institutions Ordinance, 2001)
xxx
1.9 Mark- up/ Interest accrued on all above accounts

1.10' Other Liabilities:

i Unclaimed dividend/dividend payable xxx

ii Sundry deposit accounts xxx
iii Bills payable xxx
iv Any other miscellaneous liabilities payable on demand xxx

Sub Total (i to iv) xxx

xxxx
2. Total Liabilities (1.1 to 1.10)
xxx
3. Required SLR (10% of total liabilities as per item # 2)
xxx
4. Actual Liquidity Reserve as of ----
xxx
5. Surplus / (Deficit)

37
 Annexure – C

UNDERTAKING

I ----------------------------- S/O, D/O, W/O ------------------------------- holder of CNIC ------------------------, undertake that

the detail of my existing exposure from the “Entire Banking & Microfinance Sector” as on--------------- is as

under:

Details of Loans:

Name of the MFB/MFI/Bank /other

Sr. # Type of Loan Outstanding Amount
financial Institutions

Total Exposure

Signature:____________________________

Name of Applicant: ____________________

CNIC # _____________________________

Date: _______________________________

38
 Annexure – D

Fit & Proper Criteria for Members of Board of Directors, President / Chief Executive
Officer and other Key Executives of Microfinance Banks (MFBs)
The competence of the Board Members and President/CEO is critically important for success of any
corporate entity generally and financial institutions, being highly leveraged outfits, particularly. The Board
Members and the President/CEO of banks and financial institutions are custodians of not only the
shareholders’ money but also the public funds placed with them as deposits. The Microfinance Banks are
formal financial institutions eligible to extend a variety of financial services to the poor including savings and
deposits. The MFBs’ Board Members and the President/CEO should therefore, be persons of established
integrity and track record and have the necessary capacity, experience and exposure to manage the bank and
public funds. The following criteria has therefore, been developed for MFBs’ Board Members and the
President/CEO to ensure that the skill mix of the Board is compatible with the mission, vision and objectives
of the MFBs and that the President/CEO has requisite background/expertise and relevant experience to run
and manage the MFBs:

1. Integrity, Honesty and Reputation

The MFBs while selecting/recommending a person as Board Member shall ensure that he/she:

i) Has not been convicted of any criminal offence, involved in any fraud/forgery, financial crime etc.
ii) Has not been associated with any illegal activity especially relating to banking business.
iii) Has not been in default of payment of dues owed to any financial institution and / or default in
payment of any taxes in an individual capacity or as Proprietor of a firm, Partner in a partnership
firm, Director, President or Chief Executive in any private or public limited company which has
defaulted in payment of its dues to financial institutions/tax authorities.
iv) Has not been subject to any adverse findings or any settlement in civil/criminal proceedings
particularly with regard to investments, financial/business misconduct, fraud, formation or
management of a corporate body etc.
v) Has not contravened any of the requirements and standards of regulatory system or the equivalent
standards or requirements of other regulatory authorities.
vi) Has not been involved with a company/firm whose registration/license has been revoked or
cancelled or that has gone into liquidation.
vii) Has not been debarred from being the Chief Executive, Chairman or Director of a company.

2. Experience & Qualification

This section shall apply separately for President/Chief Executive and Directors:

39
2.1. For President / Chief Executive of MFBs:

The President/Chief Executive shall be a person having at least 10 years experience as a senior micro-
finance practitioner or as a senior banker, preferably below 55 years of age at the time of his
appointment. The minimum qualification for President/Chief Executive shall be graduation. MFBs,
however, are encouraged to engage persons having professional and advanced qualifications in banking,
finance, economics, information technology etc.

2.2. For members of Board of Directors of MFBs:

While selecting/recommending the Board Members, the MFBs shall ensure that their Board Members
have necessary competence, qualification and experience to effectively undertake their responsibilities
as Board Members. The Boards shall comprise of persons having extensive experience in Microfinance,
Banking & Finance, Micro and Small Enterprises, Social Intermediation, Poverty Alleviation, Information
Technology etc. The appropriate skill mix may include:

a. Microfinance Practitioner(s) having at least 5 years experience in managing and administering

microfinance/ micro credit programs, social intermediation, women empowerment programs
etc. and; or

b. Senior banker(s) having at least 5 years experience at senior level in credit, operations, audit,
treasury etc and; or

c. Finance professional(s)/Business/Management Consultant(s) having at least 5 years post

qualification experience with reputed audit/business consulting firms etc. or

d. Development economist(s) having at least 5 years experience as an economist / program /

project officer in reputed national or international firms etc. and has managed/coordinated
different poverty alleviation programs/projects/research assignments and; or

e. Lawyer(s) with at least 10 years experience as an advocate in High Court or Supreme Court.
He/She shall not be associated with any microfinance bank as legal counsel/adviser or on the
payroll of a microfinance bank and; or

f. IT Professional(s) having at least 5 years experience with a reputed IT firm and /or experience of
developing/administering/managing IT systems in banks/microfinance banks/other financial
institutions and; or

g. Micro/small entrepreneur(s) having at least 10 years experience of successfully managing an

enterprise.

The above list, however, is not exhaustive and persons from other professions and fields, business and
industrial concerns, academia etc. may also be on MFB Board provided the overall skill mix of the Board
remains compatible with the objectives and functions of the MFB.

The minimum qualification for Board Members shall preferably be graduation or equivalent. However,
for persons having extensive and successful experience in microfinance, poverty alleviation, social

40
 mobilization and development, women development, micro entrepreneur, business and industrial
concerns etc. the minimum qualification limit may be relaxed.

3. Track Record

i) The person selected must have an impeccable track record in the companies he/she has served
either in the capacity of an employee or Director/Chief Executive or as Chairman
ii) Has not been terminated or dismissed in the capacity of employee or Director/Chairman of a
company.

4. Conflict of Interest

i) The Directors on the MFBs’ Board shall not be Director of any other Microfinance Bank. He/She shall
also not act as consultant, adviser or an employee of any other MFB.
ii) He/She shall avoid conflict of interest in his/her activities with, and commitments to, other
organizations.

5. Others

No member/office bearer of any political party or member of Senate, National/Provincial

assembly/assemblies, and local bodies shall be appointed / recommended for appointment as Member of
Board of Director and/or President/Chief Executive Officer of MFBs.

6. Prior Clearance

The MFBs shall submit information about the Board Members and/or President/Chief Executive Officer to
State Bank, as per the proforma enclosed as Annexure - C, C-1 and C-2, for clearance before
selection/appointment or re-appointment/renewal of term of Directors and President/Chief Executive
Officer.
The appointment of other key executives will not require prior clearance of SBP. However, the MFBs while
appointing key executives must themselves ensure that the incumbent(s) qualify on the basis of (i) Integrity,
Honesty & Reputation, and (ii) Track record as laid down in Fit & Proper Test criteria of these regulations for
President/CEO and Board Members in letter and spirit. The information on appointment of key executive is
required to be forwarded to SBP on prescribed format at Annexure – C-3 within seven days of assumption of
the charge of the post by the incumbent. The information submitted may be checked during inspection by
Onsite Inspection Department of SBP.

41
 Annexure – E

PROFORMA - FITNESS & PROPRIETARY OF CEO & BOARD MEMBERS

Photo

1 x 1½

1. Full Name ___________________________________________________________________________________

2. If you have changed your name, state previous name and reasons for change ___________________________
_____________________________________________________________________________________________
3. Parents and Spouse’s Names

Father’s Name:________________________________________________________________

Mother’s Name: _________________________________________________________________

Spouse’s Name: ___________________________________________________________________

4. Date & Place of Birth: ________________________________________________________________________

5. Religion: _________________________

6. N.I.C. Number-Old: _________________________

C.N.I.C Number-New: _____________________

Passport Number:
7. N.T.N.: ____________________

8. Education: ________________________________

9. Relationship with other Sponsor Directors: ___________________________________________________

10. Status of Directorship (shareholder or nominee): ___________________________________________________

11. Subscribed Amount: ________________________________

12. Personal Net Worth (Certified copy of Wealth Statement may be enclosed): ______________________________

13. Occupation / Profession / Trade: _________________________________________________________________

14. Present Designation, Department and official Address

______________________________________________________________________________________________

15. Telephone Numbers: Res.___ __________________ Off: __________________ Mobile: ____________________

42
16. Appointments held during the last five years (with dates):___________________________________________

17. List of Companies / firms and their bankers in which sponsor directors and their family members viz. spouses,
children and parents serve(d) as directors, chief executive, partner, proprietor or major shareholders holding 5% or
more shares as per following format:

Name of the Occupation/ National Tax NIC & Name of Name of the Financial Institution
Sponsors Profession/ Number Passport Associated along with the name of the
Director and Trade Number Company / branch (account number) with
his / her Firm position which firms / companies (as per
family held & % of column 5) have dealings with:
Members Shareholding
1 2 3 4 5 6
National Tax Nature of Asset Base Dividend
Number of Business as reflected declared in
the in the latest the
Corporate Audited immediately
Bodies Accounts of preceding
the three years
Corporate
Bodies
7 8 9 10

18. Declaration certificate pronouncing integrity, honesty, reputation and track record of the director as per guidelines
given in Annexure –B

19. Present Residential Address:

_________________________________________________________________________________________
_________________________________________________________________________________

20. Permanent Residential Address:

_________________________________________________________________________________________
_________________________________________________________________________________________

21. Names & Addresses of three respectable persons (not relatives) who have been closely acquainted with you during
last five years:________________________________________________________________

________________________________________________________________________________

Signature

43
 Annexure – E - 1

QUESTIONNAIRE FOR ASSESSING “FIT & PROPER TEST”

Please answer the following questions by entering a tick () in the appropriate box. If answer of any
of these questions is in YES and need explanation, use a separate sheet with proper reference to the
question.
Yes No
1. Have you ever been convicted/ involved in any fraud/forgery, financial crime etc,  
in Pakistan or elsewhere, or arebeing subject to any pending proceedings leading
to any conviction?
2. Have you ever been associated with any illegal activity concerning banking  
business, deposit taking, financial dealing and other business?
3. Have you ever been subject to any adverse findings or any settlement in  
civil/criminal proceedings particularly with regard to investments,
financial/business, misconduct, fraud, formation or management of a corporate
body etc by SBP, other regulators, professional bodies or government
bodies/agencies?
4. Have
4 you ever contravened any of the requirements and standards of regulatory  
system or the equivalent standards or requirements of other regulatory
authorities?
5. Have
4 you ever been involved with a company or firm or other organization that  
has been refused registration/license to carry out trade, business etc?
6. Have you ever been involved with a company/firm whose registration/license has  
been revoked or cancelled or gone into liquidation or other similar proceedings?
7. Have you ever been debarred for being Chief Executive, Chairman, Director or  
Sponsor shareholder of a company, especially financial institutions?
8. Have you ever been dismissed/ asked to resign/resigned in Pakistan or elsewhere  
in order to avoid legal or disciplinary action?
9. Have you ever resigned from a professional or regulatory body in Pakistan or  
elsewhere in order to avoid legal or disciplinary action?
10. Have you ever been disqualified/ removed by regulators/Government bodies/  
agencies?
11. Have you ever been in default of payment of dues owed to any financial  
institution in individual capacity or as proprietary concern or any partnership firm
or in any private unlisted/listed company?
12. Have you ever been in default of taxes in individual capacity or as proprietary  
concern or any partnership firm or in any private listed/unlisted company?

44
13. Have you ever been associated as director and/or chief executive with the  
corporate bodies whose corporate and tax record, including custom duties,
central excise and sales tax has been unsatisfactory?
14. Have you entered into any agreement with any other person (natural or legal)  
which will influence the way in which you exercise your voting rights or the way in
which you otherwise behave in your relationship with the authorized entity?
15. Are you a director on the Board of Directors of any other Financial  
Institution(s)/MFB (or its parent MFI, if any)?
16. Are you a Chairman, Chief Executive, Chief Financial Officer, Chief Internal  
Auditor, Research Analyst or Trader (by whatever name/designation called) of an
Exchange Company (firm or sole proprietorship), member of a Stock Exchange,
Corporate Brokerage House?
17. Are you owning/controlling any Exchange Company or Corporate Entity?  
18. Have you been or are you working as consultant or adviser of the MFB (or its  
parent MFI, if any) in which you intend to become a director?
19. Are you employee of the MFB (or its parent MFI, if any)?  
20. Are you employee of a company/entity/organization where sponsor shareholders  
of the MFB have substantial interest?
21. Are you a member/office bearer of any political party or member of  
Senate/National/Provincial Assembly/Local Body?
22. If independent director, have you enclosed declaration in this behalf?  
23. Any other information that is relevant for the purpose of SBP and needs to be  
mentioned?

Signature _____________________

Name _____________________

Position _____________________

Date _____________________

45
 Annexure – E - 2

AFFIDAVIT
(On Non-Judicial Stamp Paper)

I, ________________ son/daughter/wife of _______________________ adult, resident of

_______________________________________________________________________ and holding
CNIC/Passport No. ______________________________ do hereby state on solemn affirmation as under:-

a. that the deponent hereby confirm that the statement made and the information supplied in the
attached questionnaire and the Annexure-C1 and the answers thereof are correct and that there are
no other facts that are relevant for “Fit and Proper Test”

b. that the deponent undertake that the State Bank of Pakistan may seek additional information from
any third party it deems necessary in view of assessing “Fit and Proper Test”

c. that the deponent undertake to bring to the attention of the State Bank of Pakistan any matter which
may potentially affect my status as being someone fit and proper as and when it arise; and

d. that whatever is stated above is correct to the best of my knowledge and belief and nothing has been
concealed therefrom.

DEPONENT

The Deponent is identified by me

Signature _______________________

ADVOCATE

(Name and Seal)

Solemnly affirmed before me on this ______ day of _____________ at ______________ by the

Deponent above named who is identified to me by ________________, Advocate, who is known to me
personally.

Signature__________________________________________

OATH COMMISSIONER FOR TAKING AFFIDAVIT

(Name and Seal)

46
 Annexure – E - 3
PROFORMA – FITNESS & PROPRIETARY OF KEY EXECUTIVES

Position and Grade held by the Executive

Photo
Date of assumption of current position (dd/mm/yyyy)
1 x 1½
Full Name

Father’s Name

Date of Birth Place of Birth (City and Country)

Nationality (ies) NTN Number
C.N.I.C. No N.I.C. No (Old)
Passport No.
Telephone Number(s) Mobile Number
Academic Qualification
Name & Address of Degree
Qualification Date of Completion
Awarding Institution
Professional Qualification
Name & Address of Degree
Qualification Date of Completion
Awarding Institution

Training(s); if any
Previous Employment(s) (date-wise)
Designation Department
Official Address
Telephone Number (s)
Has ever been convicted of any offence? Yes No
If yes, nature of offence and penalty imposed
Has ever been censured or penalized by any financial regulator (local or Yes No
foreign)?
If yes, reasons for adverse findings and amount of penalty imposed (if any)
Has ever been dismissed from employment? Yes No
If yes, name of the employer and reason for dismissal

(Signature of the concerned official) (Signature and Stamp of Employer)

47
 Annexure – F
Guidelines on Internal Control and Risk Management

MFBs are exposed to several types and degree of risks depending on factors such as their size, complexity of
business activities, scale etc. Like other financial institutions, MFBs face credit, market, liquidity, operational,
compliance / legal /regulatory and reputational risks. To strengthen MFBs and increase their resilience to
resist financial and economic shocks, they shall ensure to have in place appropriate mechanisms/frameworks
for Business Continuity Management, Internal control, Risk Management and IT Security which
commensurate with their needs.
A – INTERNAL CONTROLS
These Guidelines on Internal Controls provide a minimum set of best practices for establishing and
implementing effective internal controls in Microfinance Banks (MFBs).

Internal Control refers to policies, plans and processes which are approved by the board and performed on
continuous basis by the senior management and all levels of employees within the MFB. Internal controls are
used to provide reasonable assurance regarding the achievement of organizational objectives. Effective and
well-designed operations are prone to risk and even well trained personnel with the best of intentions can
become distracted and negligent. MFBs shall therefore design and review their internal control policies and
procedures taking into account the following;

 MFBs shall have in place an effective internal control system, duly approved by their board, clearly
laying out the control environment and structure, recognizing risks and assessment, control activities,
accounting, information & communication, and self-assessment or monitoring and correcting
deficiencies.

 MFBs shall ensure implementation of internal controls mechanism and its integration into daily
operations.

 MFBs shall ensure effective communication of their internal control processes and system among
their employees.

 Monitoring of key risks should be part of the daily activities of the MFBs as well as periodic
evaluations by the business lines and internal audit.

 MFBs shall conduct an effective and comprehensive internal audit of the internal control system.

The following ‘Controls Principles’ need to be applied by all MFBs, irrespective of size, nature and complexity
of their business, while developing framework of internal controls;

 Regular feature: Control activities should be an integral part of the daily activities of a MFB in such a
manner that it becomes ingrained in their ongoing processes rather than a year-end “fire drill” to
satisfy documentation requests from auditors and supervisors.

48
 Separation of Duties: Duties should be divided so that no one person has complete control over a
key function or activity.

 Authorization and Approval: All transactions should be authorized before recording and execution.

 Custodial and Security Arrangements: Responsibility for custody of assets needs to be separated
from the related record keeping.

 Review and Reconciliation: Records should be examined and reconciled to regularly determine that
transactions are properly processed, approved and booked.

 Physical Controls: Equipment, inventories, cash and other assets should be secured physically,
counted periodically and compared with amounts shown on control records.

 Training and Supervision: Qualified, well-trained and supervised employees always help ensure that
control processes function properly.

 Documentation: Documented policies and procedures promote employee understanding of duties

and help ensure continuity during employee absences or turnover. Therefore, policies and
procedures (in the form of operations manuals and desk instructions) should exist in all MFBs.

 Communication of importance of Internal Controls: Setting standards of professional integrity and

work ethics and ensuring that all levels of personnel in their organization know the importance of
internal controls and understand their role in the internal controls process and be fully engaged in
the process.

 Cost/Benefit: It is for the MFBs to assess that the costs associated with control processes
commensurate with the expected benefits.

49
B – RISK MANAGEMENT
These Guidelines on Risk Management provide a minimum set of best practices for establishing and
implementing effective risk management in Microfinance Banks (MFBs). MFBs, like other financial
institutions, are exposed to a spectrum of risks, which include credit risk, interest rate risk, liquidity risk,
operational risk, and legal and reputation risk. Managing these risks is essential for their survival and
sustainability. In this regard, MFBs shall design and review their risk management policies and procedures in
light of the following:

 The MFBs shall prepare a comprehensive Risk Management and Reporting Framework (RMRF)
covering all of their business activities and circumstances under which they operate and have
flexibility to accommodate any changes thereof. The RMRF shall be duly approved by the Board.
 The RMRF shall outline role and responsibilities of board and senior management to identify,
measure, monitor report and control relevant categories of risks especially credit, market, liquidity,
operational and reputational risks.
 The MFBs shall ensure establishing clear lines of authority and responsibility for managing
responsibilities for dissemination, implementation and compliance of the approved policies and
procedures.
 The MFBs shall develop a system for testing and analyzing their aggregate loan portfolio on
continuous basis. The MFBs in particular shall have in place mechanism to identify and correct
portfolio concentration in geographies, products, economic segments, branches, and loan officers.
The MFBs shall also record the risks identified through the portfolio testing and related corrective
actions, and report these to their senior management.
 The BOD shall review the effectiveness of the risk management activities periodically and make
appropriate changes as and when necessary. The risk review function shall be independent of those
who approve and take risk. The review may use stress tests exposing the portfolio to unanticipated
movements in key variables or major systemic shocks.
 The MFBs shall have in place an Asset-Liability Management Committee (ALCO) to undertake
following responsibilities;

 Oversee the structure /composition of MFB’s assets and liabilities and decide about product
pricing for deposits and advances.
 Decide on required maturity profile and mix of incremental assets and liabilities.
 Articulate interest rate view of the bank and deciding on the future business strategy.
 Review and articulate funding policy.
 Discuss strategies and risks in obtaining debt/loans from local and foreign lenders.

50
C – BUSINESS CONTINUITY MANAGEMENT (BCM)
These Guidelines on Business Continuity Management (BCM) provide a minimum set of best practices for
establishing a holistic management process to identify and respond to potential events regarding operating
disruptions that threatens MFBs. The quick recovery of business, after major operational disruption, is crucial
in maintaining confidence in MFBs and protecting the interest of key stakeholders.

MFBs shall therefore take following actions:

 MFBs shall have in place a comprehensive plan, for BCM, duly approved by their board to ensure its
ability to operate as going concerns and minimize losses in the event of severe business disruptions.

 The BCM plan shall clearly define/segregate responsibilities of board and senior management,
identify critical staff and senior management, critical and time sensitive functions, location &
suitability of operations back-up site and availability of necessary facilities, accessibility/movement
plan, and critical documents / data.

 The MFBs shall allocate sufficient resources and knowledgeable personnel to accomplish the tasks
contained in its BCM plan. MFBs shall provide training sessions and awareness programs for their
staff to familiarize them with their roles, accountabilities, responsibilities and authority in response
to a disruptive event.

 The MFBs shall carry out a thorough business impact analysis identifying the potential impact of
uncontrolled, non-specific events on MFBs’ business processes and their customers; consideration of
all departments and business functions, not just data processing; and estimation of maximum
allowable downtime and acceptable levels of data, operations, and financial losses.

 The MFBs shall carry out an assessment of potential business disruptions and critical business lines
based upon severity and likelihood of occurrence in order of priority; a gap analysis comparing the
MFBs’ existing BCM, if any, to what is necessary to achieve recovery time and point objectives; an
analysis of threats based upon their impact on MFBs and their customers and recovery time targets.

 The MFBs shall conduct an independent audit of their BCM plan.

 The MFBs shall make arrangements for review of their BCM plan, and are encouraged to conduct
mock exercises on periodic basis.

51
D – INFORMATION TECHNOLOGY (IT) EFFECTIVENESS/SECURITY

These Guidelines on IT security provide a minimum set of best practices for establishing and implementing
effective IT security in Microfinance Banks (MFBs). MFBs shall design and review their IT security policies and
procedures in light of the following:

 The MFBs shall prepare a comprehensive IT policy, duly approved by the Board. It shall entail the
process for reviewing current and future IT needs in terms of resources (hardware, software and
technical expertise), ensuring effective use of existing IT resources, identifying IT related risks and
adopting strategies to cope with these risks.

 The MFBs shall put in place a Disaster Recovery Plan and maintain a disaster recovery site. Disaster
recovery planning shall ensure availability of resources and required technological support to
businesses in an event of disaster. The plan must then be maintained, tested and audited by auditors
to ensure that it remains appropriate to the needs of the MFB.

 The MFBs shall maintain a team of experienced technical and business human resources with a
thorough understanding of IT Security issues. The team would streamline the IT security related
process and procedures, including incident response and management and should report to the
senior management / BoDs.

 The MFBs shall perform IT risk assessment on periodic basis to determine physical, environmental,
administrative, and technical vulnerability as well as the potential threats (and their consequences).
Risk re-assessment should be a continuing process.

 The MFBs shall conduct regular workshops/ training programs to create users’ awareness.

 The MFBs shall have in place a dashboard utility for accessing information frequently required by
auditors / SBP inspectors during their engagement. The requisite information includes statements of
account of (GL, deposit or loan accounts), branch / bank wise affair & profit & loss, review of
transactions etc.

 Those MFBs which are using alternative delivery channels (including ATMs, PoS machines, and
branchless banking agents) shall opt for a third party IT security audit to ensure the adequacy of the
adopted security plan and procedures and the effectiveness of the implemented controls.

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 Annexure – G

DECLARATION OF FIDELITY AND SECRECY

I, (insert name) on becoming (President/ Chairman of the Board/ Director on the Board/auditor/staff) of
the (insert name of Microfinance Bank) in terms of Section 26-A of the Microfinance Institutions Ordinance,
2001 do hereby solemnly & sincerely confirm/declare that I shall observe strict fidelity, secrecy and usage
customary among bankers and all matters relating thereto and in particular shall not divulge or communicate
any information relating to the affairs of its customers, which may come to my knowledge in discharging my
duties directly or indirectly, except in circumstances in which it is in accordance with law, practice and usage
customary among bankers.

Dated: Signature: _____________________ Designation:_____________________

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 Annexure – H

DOCUMENTS TO BE OBTAINED FROM VARIOUS TYPES OF CUSTOMERS/ACCOUNT HOLDERS

1 Sole-proprietor i). Attested copy of CNIC of the sole-proprietor

ii). Declaration of Sole Proprietorship (if available, on business letter
head)
iii). Account opening requisition letter (if available, on business letter
head)
2 Partnership i). Attested copies of CNICs of all partners.
ii). Attested copy of ‘Partnership Deed’ duly signed by all partners of
the firm.
iii). Attested copy of Registration Certificate with Registrar of Firms. In
case the partnership is unregistered, this fact should be clearly
mentioned on the Account Opening Form.
iv). Authority letter, in original, in favor of the person authorized to
operate on the account of the firm.
3 Joint Stock Certified copies of:
companies i). Resolution of Board of Directors for opening of account specifying
the person(s) authorized to operate the company account.
ii). Memorandum and Articles of Association.
iii). Certificate of Incorporation.
iv). Certificate of Commencement of Business.
v). Attested copies of identity cards / passports of all the directors.
vi). List of Directors on Form A/Form B as issued under Companies
Ordinance, 1984
4 Clubs, Societies Certified copies of:
and i) Certificate of Registration.
Associations ii) By-laws/Rules & Regulations.
iii) Resolution of the Governing Body/Executive Committee for
opening of account authorizing the person(s) to operate the
account and attested copy of the identity card of the authorized
person(s).
iv) An undertaking signed by all the authorized persons on behalf of
the institution mentioning that when any change takes place in the
persons authorized to operate on the account, the banker will be
informed immediately.
v) MFBs should obtain copies of CNICs of all the members of
Governing and Executive Bodies of DHA or ask for delegation of
power to Administrator under section (7) & (8) of the Pakistan
Defence Housing Authority Order, 1980 and accept copy of CNIC of

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 Administrator as well as authorized signatories for the purpose of
opening accounts of DHA or similar other authorities subject to the
condition that all other requirements laid down under relevant
regulations shall be complied with in letter and spirit.
5 Agents i). Certified copy of ‘Power of Attorney’.
Accounts ii). Attested copy of identity card of the agent.
6 Trust Account i). Attested copies of identity cards of the persons authorized to
operate the account along with their mandate as given by
Resolution of the Governing Body / Executive Committee for
opening of account and authorizing the said person(s) to operate
the account.
ii). Certified copy of ‘Instrument of Trust’ or Trust Deed.
7 Executors and i). Attested copies of identity cards of the Executor / Administrator.
Administrators ii). Certified copy of Letter of Administration or Probate.
8 NGOs/NPOs/Charities i). Certified copies of:
a. Registration documents / certificates
b. By-laws / Rules & Regulations
ii). Resolution of the Governing Body/Executive Committee, if it is the
ultimate governing body, for opening of account and authorizing
the person(s) to operate the account.
iii). Attested photocopies of valid CNICs of the authorized person(s)
and members of Governing Body/Executive Committee, if it is the
ultimate governing body.
iv). Any other documents as deemed necessary including its annual
accounts/ financial statements or disclosures in any form which
may help to ascertain the detail of its activities, sources and usage
of funds in order to assess the risk profile of the prospective
customer.
9 Minor Account i). Form B, Birth Certificate or Student ID Card (as Appropriate) of the
minor
ii). Photocopy of identity document of the guardian of the minor.

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