Why Banks are so heavily regulated

To protect the safety of Publics savings.

To control the supply of money and credit in order to achieve a nations broad
economic goals such as high employment and low inflation.
To ensure equal opportunity and fairness in the public access to credit and
other vital financial services.
To promote public confidence in the financial system, so that saving flow
smoothly into productive investment.

Prudential Regulations
Prudent means to avoid risks and uncertainties. State Bank of Pakistan
introduced first set of Prudential regulations in the year 1992 comprising of
16 Regulations. These regulations are in the process of continuous revision
and update to meet fresh challenges and changing financial system within
the country. The main objectives of these regulations can be summarized as
under;
 To determine the maximum size of finance which can be extended by a bank
either to single customer or group and the amount of finance a customer
can avail under clean and other secured arrangements from banking
institutions.
It lays down other various standard for sound advances.
It places great importance on Know your Customer.
It covers various other issue including Good governance and impress the
significance of high ethical standard in banking practices.

Regulation governing commercial and other finance are identified with word (R)
Regulation governing with management related issues are grouped and
identified with word (G).
Regulation with money laundering and good banking practices are grouped and
identified with the word (M) and
Regulation which provide other guidelines are grouped and identified with the
word (O).
Prudential Regulation

Regulation R-1
Limit on exposure to a single person
1. Banks exposure fund based and non fund based to an individual shall not exceed 20% of the Banks equity.
2. In case of group, total exposure i.e. fund based and non fund based shall not exceed 25% of the Banks
equity.

Regulation R-2

Limit on exposure against contingent liabilities

Contingent liabilities of a Bank shall not exceed at any point in time 10 times of its equity.

Exemptions:

a. Bills of Collection
b. Letter of Credit / Guarantees where payment is guaranteed by the Government.
c. Non fund based exposure to the extend covered by the cash / liquid assets.

Regulation R-3
Minimum conditions for taking exposure:
a. Banks prescribed loan application form.
b. Borrowers basic fact sheet under SBP format.
c. ECIB report
d. Financial statements duly audited by a practicing Chartered Accountant in case of a
limited company or where the exposure to the Bank exceeds Rs 10 Mn.

If a finance is extended to a defaulter, proper record of reasons and justification for such
accommodation must be recorded which shall be made available for inspection to the
SBP Inspection Team.

Regulation R-4
Security and Margin Requirement

All exposure should be properly secured, however Banks may provide clean financing
facility in any form upto Rs 2 Mn to any single customer.
a. Clean financing means finance extended without securities or exclusively against
personal guarantees.
b. Borrower is required to give an undertaking that no finance has been obtained from
other Banks
c. Banks 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 statement

Exemptions
d. Facilities provided to finance the export of commodities eligible under Export Finance
Scheme.
e. Loan and advances extended to Banks staff under staff loan policy
Linkage between financial indicators of the borrowers and total exposure from
financial institutions;

1. 10 times of borrowers equity as disclosed in its financial statement with the condition
that fund based exposure should not exceed 4 times of its equity.
2. In case of negative equity , 3 times of the freshly injected equity provided by the
borrower and shall plough back atleast 80% of the net profit each year until such time
that it is able to borrower without this relaxation.
3. In case of seasonal financing for a maximum period of 6 months, 12 times of
borrowers equity with the condition that fund based exposure not to exceed 8 times of
the borrowers equity.
4. Current assets to current liabilities ratio of the borrower shall not lower than 1:1
however in exceptional cases, such ratio may be relaxed to 0.75 :1
5. Subordinated loans shall be counted as equity of the borrower. The borrower should
undertake that subordinate loan will be repaid only after the Banks prior approval.
Regulation R5
Collateral Management
Bank shall have place collateral management policy duly approved from BOD. Bank shall
proper monitor that the loan is used for intended purpose and it is not for the speculation
and hoarding activities
Joint Inspection of Pledge Stock
All the banks financing particular customer will conduct joint inspection of pledge stock on every
quarter where aggregate exposure against stock exceed the below mentioned amount.

Sr. No Commodity Aggregate Exposure

1. Cotton PKR 500 Mn
2. Sugar PKR 500 Mn
3. Wheat PKR 250 Mn
4. Rice PKR 150 Mn
5. Oil PKR 150 Mn
Regulation R6
Exposure against Shares / TFC and acquisition of Shares;
Total investment of Bank in share shall not exceed 30% of its own equity.
Exposure against share of listed companies shall be subject to minimum margin of 30%
Bank shall not take exposure against Shares / TFCs:

1. Issued by the Bank itself i.e. Banks own share

2. Shares of companies not listed on stock exchange
3. Shares of the borrowers own company or its subsidiary companies.
4. Against sponsor directors shares of the Bank
5. Bank shall not invest in shares of any company in excess of 5% of its own equity.
6. Bank shall not hold shares in any company whether as pledgee or absolute owner, of an amount of
35% of its own paid up capital and reserves
7. Bank should obtain margin 10% against A rating TFCs and 20% against BBB rating TFCs
Regulation R7

Guarantees;
a. All Guarantees issued by the bank shall be fully secured.
b. All Guarantees shall be for specific amount and expiry date and shall contain claim lodgment date.
Bank may issue open ended guarantee provided their interest has been adequately secured.
c. The requirement of security may be waived in case the guarantee issued to Pakistani firms and
companies against back to back counter guarantee of Banks rated at least A or equivalent.
Regulation R8
Classification and provisioning for assets

Banks asset portfolio will be classified and provisioning will be made on the following criteria
Classification Determinant Provisioning
Sub Standard Where markup/ principal is over due 25% of outstanding balance
by 90 days from the due date of principal amount
Doubt full --- by 180 days or more from due date 50% of outstanding balance of principal
amount
Loss --- by one year or more from the due date 100%

Forced sale value shall be determined of the value of mortgage / pledge assets other than liquid
assets. Forced sale value once determined shall remained valid till three years from the date of
valuation. The adjustment factors will be as under;
1st year 75%
2nd year 60%
3 year
rd
45%
4 year
th
30%
5th year 20%
Regulation R9
Assuming obligations on behalf of NBFCS;

Bank shall ensure the total exposure against NBFC do not exceed 2.5 times of capital of the NBFC as
evidenced from the latest available audited financial statement of NBFC

Regulation R10

Payment of Dividends
a. They complied minimum capital requirement laid down by SBP.
b. All their classified assets have been fully provided for as per SBP Prudential Regulations
c. All the requirement laid down by Banking Companies Ordinance relating to payment of dividend
are fully complied.
Prudential Regulation on Small Enterprises

Regulation R1- Definition of Small Enterprise

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

Number of Employees Upto 50

Annual Sale Turnover Upto 150 Mn

Regulation R2- Per Party Exposure Limit

Small Enterprise can avail exposure up to Rs 25 million from a single Bank or from all Bank

Regulation R3- 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.
Regulation R4- Repayment Capacity of the Borrower and Cash Flow Based Lending

Banks shall use cash flow estimation techniques to assess repayment capacity of SE borrower.
1. Sources of repayment and repayment capacity,
2. Borrowers asset conversion cycle
3. Future cash flows.

Regulation R5- 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 R6- 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.
Regulation R7-General Reserve against Small Enterprise Finance

Banks/DFIs shall maintain general reserve equivalent to 1% of the secured SE portfolio and 2%
of the unsecured SE portfolio, to protect them from the risks associated with the economic and
cyclical nature of this business.

Regulation R8-Classification and Provisioning for Loans/Advances

Banks asset portfolio will be classified and provisioning will be made on the following criteria

Classification Determinant Provisioning

Other Asset especially Where markup/ principal is over due 10% of outstanding balance
mentioned by 90 days from the due date of principal amount

Sub Standard --- by 180 days or more from due date 25% of outstanding balance of principal
amount
Doubt full --- by one year or more from the due date 50% of outstanding balance of principal
amount
Loss --- by 18 months or more from the due date 100%
Regulation R9- Restructuring/Rescheduling of Loans/Advances

The banks/DFIs may reschedule/restructure problem loans as per their own policy duly
approved
by their Board of Directors.
Note
Rescheduling shall not be 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.

Regulation R10- Minimizing Turn-Around-Time

Banks/DFIs shall not take more than 30 working days for the credit approval process i.e.
from the date of
receipt of complete information
Prudential Regulation on Medium Enterprises

Regulation R1- Definition of Medium Enterprise

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

Number of Employees 51 250 (Manufacturing) & 51-100 Trading

Annual Sale Turnover Above Rs150 Mn Rs800 Mn

Regulation R2- Repayment Capacity of the Borrower and Cash Flow Based Lending

Banks shall use cash flow estimation techniques to assess repayment capacity of ME borrower.
1. Sources of repayment and repayment capacity,
2. Borrowers asset conversion cycle
3. Future cash flows.
Regulation R3- Per Party Exposure Limit

Medium Enterprise can avail exposure up to Rs 200 million from a single Bank or from all Bank
Regulation R4- Requirement of Audited Accounts

Banks/DFIs are not required to obtain copy of audited accounts in case of lending to the medium
enterprises for exposure upto Rs 10 million.

Regulation R4- Classification and provisioning for assets

Banks asset portfolio will be classified and provisioning will be made on the following
criteria
Classification Determinant Provisioning
Sub Standard Where markup/ principal is over due 25% of outstanding balance
by 90 days from the due date of principal amount
Doubt full ---by 180 days or more from due date 50% of outstanding balance of
principal amount
Loss --- by one year or more from the due date 100%