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920107

STATE BANK OF PAKISTAN BANKING CONTROL DEPARTMENT CENTRAL DIRECTORATE KARACHI

BCD Circular No. l.
7th July, 1992

To All Commercial Banks,

Dear Sirs,

PRUDENTIAL REGULATIONS FOR BANKS.

The existing prudential regulations in respect of various aspects of operations of commercial banks have been reviewed In the light of the on-going process of changes in the financial sector. Now, therefore, with a view to providing for the continued health and viability of the financial system, the following prudential regulations are being issued to all banks, which will come into force with effect from 1st January, 1992. The transformation and conformity of the existing operation of banks shall be completed in accordance with the time frame specified in the regulations. 'The Prudential Regulations do not supersede margin restrictions and other directives issued by the State Bank from time to time in respect of areas not covered by these Regulations:

REGULATION - I

LIMIT OF BANK’S EXPOSURE TO A TO A SINGLE PERSON.

1). The total outstanding financing facilities by a banking company to any single person shall not at any point of time exceed 30 percent of the Bank's unimpaired capital and reserves subject to the condition that the maximum outstanding against fund based financing facilities do not exceed 20% of the unimpaired capital & reserves. In the case of branches of foreign banks operating in Pakistan, the maximum exposure limit of 30% shall be calculated on the basis of their assigned capital maintained under section 13(3) of the Banking Companies Ordinance, 1962 free of all losses and provisions, provided that maximum exposure on the basis of fund-based facilities shall be 20% of the capital maintained under section 13(3) of the Banking Companies Ordinance, 1962, or Rs. 12 million whichever is higher.

2). No bank shall provide any accommodation fund based or otherwise to any member of its Board of Directors, its Chief Executive and its shareholders holding 5(five) percent or more of the share capital of the bank, including their spouses, parents, and children or to firms and companies in which they are interested as partners, directors or shareholders holding 5(five) per cent or more of the share capital of that concern.

3). The term "person" shall include any individual, or association or body of individuals, firm, or company whether incorporated or not and any other juridical person.

4). For the purposes of para 1 & 2 above accommodation shall mean and include:

a) any form of loans and advances or credit facilities including bills purchased and discounted;

b) any loans and advances, or bills purchased or discounted extended to another person on the guarantee of the person;

c) subscription to or investment in shares, Participation term Certificates, Term Finance Certificates or any other commercial paper by whatever name called (at book value) issued or guaranteed by the person;

d) any financing obligation undertaken on behalf of the person under a letter of credit including a stand by letter of credit, or similar instrument;

e) loan repayment guarantees issued on behalf of the person;

f) any obligations undertaken on behalf of the person under any other guarantee;

g) acceptance/endorsements made on account; and

h) any other liability assumed on behalf of the client to advance funds pursuant to a contractual commitment.

BUT SHALL NOT INCLUDE

i) Loans and advances given to the Federal or Provincial Government or any of their agencies under the commodity operations programme of the government.

ii) Loans and advances (including bills purchased and discounted) given to Federal/Provincial Government, or guaranteed by the Federal Government.

iii) Pre-shipment/post-shipment credit provided to finance exports of goods covered by confirmed irrevocable letters of credit upto the amount for which such credit has been established.

iv) Letters of credit established for the import of plant and machinery for setting up of new industrial projects in the rural areas.

v) Obligations under Letters of Credit and Letters of guarantee to the extent of the cash margin retained by the bank.

vi) Letters of credit, which does not create any obligation on the part of the bank to make payments on account of imports.

5) Banks are directed to complete the regularization of their port-folios in accordance with the above regulations latest by 30-6-1993.

REGULATION - II.

LIMIT ON BANK’S EXPOSURE AGAINST CONTINGENT LIABILITIES.

Contingent liabilities of a bank shall not exceed at any point of time 10 times of its paid up capital and general reserves free of losses. In case of branches of foreign banks operating in Pakistan, capital will mean capital maintained under Section 13(3) of the banking Companies Ordinance, 1962.

Exposure limit on contingent liabilities shall come into effect on 1st July, 1993.

REGULATION – III

LIMIT ON BANK’S EXPOSURE AGAINST UNSECURED ADVANCES.

1) Banks may grant financing facilities on unsecured basis upto a maximum of Rs. 50,000/- to any one borrower for agricultural, commercial and industrial purposes, provided the aggregate exposure of the bank against all its unsecured assets does not any point in time exceed the amount of the bank's capital (free of all losses)
anti general reserves.

2) Banks shall regularize their existing exposure against unsecured advance late by 30-6-1993

REGULATION - IV.

LINKAGE BETWEEN A BORROWER'S EQUITY & TOTAL BORROWING FROM BANKS

1) While granting any accommodation, banks shall ensure that the total accommodation availed by any borrower from banks/financial institutions does not exceed 10 times the capital and reserves (free of losses) of the borrower as disclosed in its audited accounts. Every bank shall, as a matter of rule, obtain copy of accounts relating to the business of each of its borrower for analysis and record in the following manner: (For the purposes of this regulation, accommodation shall make the same meaning as in Regulation l above),

a) Where the bank's exposure does not exceed Rs. 2 million.

Accounts duly signed by the borrower.

2) Where the exposure exceeds Rs. 2 million but does not exceed Rs. 10 million.

Accounts duly signed by the borrower and countersigned by the internal auditor of the bank or a Chartered Accountant.

c) Where the exposure exceeds Rs. 10 million.

Accounts duly audited by the practicing Chartered Accountant.


2) Banks shall strictly observe the regulation in respect of credit facilities that bank may sanction or renew on or after the date of the issue of these Prudential Regulations.

3) The position of existing facilities may be regularized latest by 30-6-1993.

REGUIATION – V

MAINTENANCE OF DEBT-EQUITY RATIO.

1) Banks shall ensure that:

a) current liabilities of the borrower do not exceed his current assets.

b) The total long term equity ratio of the borrower a different debt equity ration has been specified by the Government/State Bank of Pakistan.

2) Banks shall regularize the existing portfolio in accordance with the prescribed debt equity ration latest by 30-6-1993.

REGULATION – VI

FINANCING FAILITIES AGAINST SHARES.

1) No bank shall provide unsecured credit to finance subscription towards floatation of share capital of public limited companies.

2) No bank shall allow financing facilities whether fund-based or non-fund based against the shares of companies not listed on the stock exchange.

3) Facilities against the shares of other listed companies shall be subject to the following margins:

a) where market value does not exceed the face value.

b) Where market value exceeds the face value but does not exceed the face value.

c) Where market value exceeds twice the face value.

4) The regulation will come into force with immediate effect. The prescribed margin requirement may be completed before the close of the financial year ending 31-12-1992.

REGULATION – VII

DEALING WITH DIRECTORS, MAJOR SHAREHOLDERS AND EMPLOYEES OF THE BANKS

1) Banks shall not without the prior approval in writing of the State Bank of Pakistan enter into leasing, renting and sale/purchase of any kind with their directors, officers, employees or persons who either individually or in concert with family members beneficially own 10 percent or more of the equity the bank.

2) The regulation will come into force with immediate effect.

VIII. CLASSIFICATION AND PROVISIONING FOR LOSS AND OTHER ASSETS

Every bank shall observe prudential guidelines given hereunder in the matter of classification of its assets and provisioning there against:

i) Guidelines for Classification of Short Term Facilities.

SPECIFICATION

1

DETERMINANT

2

TREATMENT OF INCOME

3

PROVISION TO BE MADE

4

1. OAEM (Other Assets Especially Mentioned)

Where mark-up/interest or principal is overdue (Past due) by 90 days from the due date

Un-realized mark-up/interest to be put in Suspense Account and not to be credited to Income Account.

Provision of 2% of the difference resulting from the outstanding balance of principal less the amount of liquid assets realizable without recourse to a Court of Law

2. Substandard

Where mark-up/interest or principal is overdue by 180 days or more from the due date.

As above

Provision of 25% of the difference resulting from the outstanding balance of principal less the amount of liquid assets realizable without recourse to a Court of Law

3. Doubtful

Where mark-up/interest or principal is overdue by one year or more from the due date.

As above

Provision of 50% of the difference resulting from the outstanding balance of principal less the amount of liquid assets realizable without recourse to a Court of Law

4. Loss

a) Where mark-up/interest or principal is overdue beyond two years from the due date.

As above

Provision of 100% of the difference resulting from the outstanding balance of principal

b) Where Trade Bills (import, export or inland bills) are not paid/adjusted within 180 days of the due date.

As above

As above

ii) Guidelines for Classification of Long term Facilities

1. OAEM (Other Assets Especially Mentioned)

Where installment of principal or interest/markup is overdue (past due) by 18 days or more form the due date.

Un-realized mark-up/interest to be put in Suspense Account and not to be credited to Income Account.

Provision of 2% of the difference resulting from the outstanding balance of principal less the amount of liquid assets realizable without recourse to a Court of Law

2. Substandard

Where installment of principal or interest/mark-up is overdue by one year or more

As above

Provision of 25% of the difference resulting from the outstanding balance of principal less the amount of liquid assets realizable without recourse to a Court of Law

3. Doubtful

Where installment of principal or interest/mark-up is overdue by two year or more

As above

Provision of 50% of the difference resulting from the outstanding balance of principal less the amount of liquid assets realizable without recourse to a Court of Law

4. Loss

Where installment of principal or interest/mark-up is overdue by three year or more

As above

Provisions of 100% of the outstanding balance of principal.

Regulation will come into force with effect from 30-12-1992.


REGULATION – IX

MANAGEMENT


1) No member of the Board of Directors of a banking company holding 5% or more of the paid-up capital of the banking company either individually or in concert with family members or concerns/companies in which he/she has the controlling interest, shall be appointed in the bank in any capacity save as the chief executives of the bank in any capacity save as the chief executives of the bank (which should not exceed one in any case) and that no payment shall be made or perquisites provided to any such directors other than travelling and daily allowances for attending meetings of the Board of Directors or its Committees. Provided further that not more than 25% of the total directors can be paid executives of the bank.

2) The regulation shall come into force with immediate effect in respect of all banks other than banks owned controlled and managed by the government.

REGULATION – X

BANK CHARGES

1) All commercial banks shall be free to determine the rates of charges in respect of various services that they may provide to their constituents.

2) It shall be mandatory for each commercial bank to fix its rates of charges on half-yearly basis in advance for the half year January – June and July – December. Each bank shall get its schedule of charges printed and so notified as to be available to its constituents at least 7 days before the commencement of the half year during which the rates shall remain in force at all places of business. The bank shall be required to provide a copy of the printed schedule of charges to the Banking Control Department of the related half year.

3) The regulation shall come into force with immediate effect.

REGULATION – XI

OPENING OF ACCOUNTS

Banks shall make all reasonable efforts to determine the true identify of every would-be account holder. Towards this end, banks shall institute effective procedures and methods for obtaining proper identification from new customers.

REGULATION – XII

PREVENTION OF CRIMINAL USE OF BANKING CHANNELS FOR THE PURPOSE OF MONEY-LAUNDERING ACTIVITIES, AND OTHER UNLAWFUL TRADES.

1) The following guidelines are issued to safeguard banks against their involvement in money-laundering activities, and other unlawful trades. These will add to or reinforce the precautions, banks may have been taking in this regard:

a) Before extending banking services, bank shall make reasonable effort into determine the true identity of customer. Particular case should be taken to identify ownership of all accounts and those using safe-custody facilities. Effective procedures should be instituted for obtaining identification from new customers. An explicit policy should be devised to ensure that significant business transactions are not conducted with customers who fail to provide evidence of their identity.

b) Banks shall ensure that banking business is conducted in conformity with high ethical standards and that banking laws and regulations are adhered to. It is accepted that bands normally do not have effective means of knowing whether transaction stems from or forms part of wrongful activity. Similarly in an international context it may be difficult to ensure that cross border transactions on the behalf of customers are in compliance with the regulations of another country. Nevertheless banks should not set out to offer services or provide active assistance in transactions which in their opinion are associated with money derived from illegal activities.

c) Specific procedures be established for ascertaining customer status and his source of earnings, for monitoring of accounts on a regular basis, for checking identities and bonafides of remitters and beneficiaries, for retaining internal record of transactions for future reference. The transactions which are out of character with the normal operation of the account involving heavy deposits/withdrawal/transfers should be viewed with suspiction and properly investigated.

d) For an effective implementation of Banks’ policy and procedures, suitable training be imparted to members of staff and they be informed of their responsibility in this regard.

e) Banks make arrangements for setting up an internal audit system in order to establish an effective means of testing/checking compliance with the Bank Policy and procedures established by it.

2) Keeping in view the above principles, banks shall issue necessary instructions for guidance and implementation by staff members.

REGULATION – XIII

SERVICE CHARGE ON PLS DEPOSIT ACCOUNTS.

1) No bank shall levy any charge, in any form, on the credit balances held by it on PLS basis in customers’ deposit accounts.

2) The regulation shall come into force with immediate effect.

REGULATION – XIV

PAYMENT OF DIVIDEND

1) No bank shall pay any dividend on its shares unless and until:

a) All its capitalised expenses (including preliminary expenses, organization expenses, share selling commission/brokerage, amount of losses incurred and any other item of expenditure not represented by tangible assets) have been completely written off; and

b) All bad and doubtful debts and other classified assets have been fully and duly provided for in accordance with the prudential regulations of and to the satisfaction of the State Bank of Pakistan.

2) The regulation shall come into force with immediate effect.

REGULATION – XV

UNDERTAKING OF CASH PAYMENTS OUTSIDE THE BANK’S AUTHORIZED PLACE OF BUSINESS

1) The banks are prohibited from undertaking any business of cash payments at any place other than the authorized place of business except through the installation of Automated Teller Machines (ATM).

2) The regulation shall come into force with immediate effect.

REGULATION – XVI

WINDOW DRESSING

1) All banks are directed to refrain for adopting any measures or practices whereby they would wither artificially or temporarily show an ostensibly improve position of banks accounts as given in their Balance Sheets and Profit and Loss Accounts specially in relation to its deposits and profit. Particular care shall be taken in showing inter-branch and inter-bank accounts accurately and strictly according to their true nature.

2) The regulation shall come into force with immediate effect.

3) The above Prudential Regulations are issued under the powers vested in State Bank under the Banking Companies Ordinance, 1962. All banks are mandated to observe, in letter and spirit, the prudential regulations so issued by the State Bank failing which they shall render themselves liable to penalties in terms of the provisions of the Banking Companies Ordinance, 1962.

Please acknowledge receipt.

Yours faithfully,
(R.A. Chughtai)
Director

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