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CHAPTER
XIX
LOANS, OVERDRAFTS AND GUARANTEES
Part A – Rupee Loans
Regulations governing Loans and Guarantees.
Extension of loans, overdrafts and credit facilities to companies (other than
Banking Companies) which are by any means controlled directly or indirectly by persons
resident outside Pakistan and to residents against guarantees or collaterals lodged
outside Pakistan, obtaining of loans and overdrafts in foreign currencies and giving of
guarantees on behalf of residents of Pakistan in favour of non-residents or on behalf of
non-residents in favour of residents, are regulated under sub-section (2) of Section 18
and Sections 4 and 5 of the Act. This chapter contains the general regulations covering
grant of such loans, overdrafts, credit facilities and guarantees.
2. Definition of Foreign Controlled Companies.
Section 18(2) of the Act imposes restrictions on lendings to any company, not
being a banking company, which is by any means controlled, whether directly or indirectly,
by persons resident outside Pakistan. For the purposes of this section a company, which
term includes a firm, branch or office of a company or firm, is deemed to be controlled
directly or indirectly by persons resident outside Pakistan, if
(i) it is a branch office of a company incorporated outside Pakistan, or
(ii) in the case of partnerships, if
(a) 50% or more of the capital of the partnership is owned by foreign nationals, or
(b) the majority of the partners are foreign nationals, and
(iii) in the case of companies incorporated in Pakistan, if
(a) 50% of the shares or more are subscribed by foreign nationals, or
(b) 50% of the Directors on the Board of Directors or more, are foreign nationals. In the
case of equal share-holding, a company is deemed to be a Pakistani controlled company, if
its Chief Executive is a Pakistan National.
3. General permission for lending to Foreign Controlled Companies for
working capital.
Authorised Dealers are authorised to grant rupee loans and credits to foreign
controlled companies for meeting their working capital requirements subject to observance
of Prudential Regulations prescribed under the Banking Companies Ordinance.
4. Local Borrowings for Capital Expenditure.
Foreign Controlled Companies are normally required to meet their requirements of
capital expenditure out of their Rupee resources or from loans raised abroad with the
permission of the Federal Government/State Bank. In special circumstances such companies
are allowed to raise Rupee resources through medium and long term local borrowings. As an
exception, foreign controlled companies engaged in manufacturing are permitted to meet
their requirements of capital expenditure by taking loans from banks, Development
Financial Institutions and other financial institutions or by issuing Participation Term
Certificates etc.
5. Borrowings by Individual Foreign Nationals.
Authorised Dealers have general
permission to grant Rupee loans/overdrafts to foreign nationals upto the extent
of their requirement subject to the observance of relevant Prudential
Regulations.
6. Loans and Overdrafts to Non-Residents including Loans for Purchase of
Residential Plots/Houses/Flats by Overseas Pakistanis.
(i) Authorised Dealers may grant purely short term Rupee loans or overdrafts
to their overseas branches and correspondents, in the normal course of their business,
without reference to the State Bank, provided such loans or overdrafts are created as a
result of negotiations under Rupee Letters of Credit, established by the overseas banks to
finance exports from Pakistan, and are liquidated within a period not exceeding two weeks.
(ii) Authorised Dealers may grant Rupee loans to those Pakistan nationals resident
outside Pakistan, who are maintaining Foreign Currency Accounts with them, against the
security of the balances held in such accounts.
(iii) Authorised Dealers/Development Financial Institutions/Housing Finance
Institutions may grant rupee loans to those Pakistan nationals who are working outside
Pakistan, for purchase of residential flats/plots/houses in Pakistan up to 90% of the
cost/price of the flat/plot/house subject to the condition that the loan will be
liquidated by the borrowers through remittances from abroad in foreign exchange through
normal banking channel or by debit to their Foreign Currency Accounts. The initial down
payment of the purchase price of the flat/plot/house up to 10% of the total price can be
financed by the purchaser/borrower from his savings in Pak rupees.
The above permission is, however, subject to the following terms and conditions:-
a. The rupee loan shall be extended to those non-resident Pakistanis only who
are working abroad and do not own immovable property outside Pakistan, for the purpose of
purchasing a residential plot or house/flat and not for any commercial purposes.
b. Loans will be extended by the banks/DFIs/Housing Finance Institutions subject to
observation of the normal rules and Prudential Regulations.
c. Sale proceeds of the residential plot/flat/house on dis-investment shall not be
eligible for repatriation in foreign exchange or for credit to a Foreign Currency
Account/Convertible Rupee Account of the purchaser/owner.
7. Loans and Overdrafts against Guarantees of Non-Residents or against
Collateral held outside Pakistan.
Authorised Dealers are given general permission under the Foreign Exchange
Regulation Act, 1947 to grant rupee loans to their clients (including foreign controlled
companies) against guarantees of non-residents/guarantees received from banks functioning
abroad, subject to compliance with the credit restrictions imposed by the Banking
Supervision Department, State Bank of Pakistan.
Part B- Foreign Private Loans
8. Private Foreign
Currency Loans.
In terms of section 4(1) of the Foreign Exchange Regulation Act, borrowing from
abroad without the previous general or special permission of the State Bank is prohibited.
The State Bank has given general permission to Private Sector entrepreneurs to obtain
foreign currency loans from banks/financial institutions abroad, parent companies of the
multinationals and as suppliers credit including credits under PAYE Scheme, not involving
government guarantee, for financing foreign currency cost of the projects covered by the
government’s Industrial/Investment Policy and the instructions issued by SBP from
time to time. The loans should be contracted on the best possible terms. The repayment
period of such loans/credits, however, should not be less than five years.
9. Pay-As-You-Earn (PAYE) Scheme.
Since February, 1973 the Government has instituted a scheme of Suppliers Credit
called PAY-AS-YOU-EARN (PAYE) Scheme under which entrepreneurs in the private sector can
negotiate foreign currency loans for import of plant and equipment for export oriented
industries either for establishment of new industrial units or for balancing,
modernization, replacement and expansion of the existing export oriented units. The
industries covered by the Scheme are:
(i) Export oriented industries which include:
(a) Industries such as fish processing and modern rice milling, the bulk of whose
production is exported, and
(b) Industrial units set up for export market within industrial sub-sectors which serve
both the local market and the export market, such as textiles, carpets, leather, fruits
and vegetables. Units, to qualify under this category, must give a guarantee to export 50%
or more of their total output. In special cases such as engineering goods, the limit may
be reduced to 25% in the first three years and 33% thereafter.
(ii) Sub-contracting arrangements for exports under which manufacturing units are
established in response to specific orders, which are received from the foreign
non-resident firms by local manufacturers as a sub-contractor, and
(iii) Service industry like hotels etc.
10. Features of the Scheme.
The main features of the PAYE Scheme, 1973 are as under:
(a) Advance payment upto 15% of the C & F value of the machinery may be allowed
provided the sponsors give an undertaking that in case machinery is not imported by the
stipulated date, they will repatriate the foreign exchange to Pakistan or pay to the
Government penalty amounting to 27% of the advance payment or any portion thereof which
remains unrepatriated plus interest on it at the rate of 9% from the date of the
remittance.
(b) Projects established under the PAYE Scheme will be allowed a maximum of 50% of
the F.O.B. value of their foreign exchange earnings in respect of goods manufactured and
exported by the concerned units established or expanded under the Scheme for meeting their
debt liability and other foreign exchange payments on account of royalty, technical fee
and incidental charges.
(c) If in any financial year, the debt servicing liability cannot be met out of the
prescribed percentage of earnings in that year, the sponsors will have to pay to the
Government penalty to the extent of 27% of the Rupee equivalent of the short-fall.
(d) If a project has been established against a loan in convertible currency, it will
be required to meet its obligations in convertible currency. Where a project has been set
up on the basis of a loan repayable in commodities, export of commodities to the lending
country will count towards repayment of the loan. Export against convertible currency made
by the units concerned from the new capacity created under the Scheme to countries other
than the lending country, will also count towards repayment of the loan.
11. Procedure for import of machinery and registration of repayment schedule.
(i) Foreign currency private loan agreements and suppliers credit agreements
including credit agreements under PAYE Scheme as permitted under para 8 ibid will be
submitted to the State Bank for registration through the Authorised Dealer designated for
the purpose within 30 days of the date of Agreement.
(ii) The Authorised Dealer will furnish the original loan/credit agreement alongwith five
copies, a list of the company's Directors, project report showing the details of the
project including its cost (broken into local cost and foreign exchange cost), location of
the project and copy of Certificate of Incorporation of the company to the Investment
Division, Exchange Policy Department, State Bank of Pakistan, Central Directorate,
Karachi. In the case of Buyer's Credit, three copies of the purchase contract will also be
furnished.
(iii) Approval of the Government of Pakistan will also be furnished where the loan/credit
is provided at concessional rates by the banks/financial institutions under the
instructions or policy of the foreign Governments.
(iv) A copy of the loan/credit Agreement registered by the State Bank will be returned to
the Authorised Dealer.
(v) The loan amount from foreign banks/financial institutions can be deposited in a
foreign currency account to be opened under the general permission given vide paragraph 8
of Chapter VI.
(vi) After registration of the agreement with the State Bank, remittance of down payment
may be made by the Authorised Dealers to the extent provided in the agreement. Such
remittances shall be reported to the concerned area office of Exchange Policy Department,
State Bank of Pakistan, on Form 'I' which, for statistical purpose is to be coded by them
with appropriate commodity code on Schedule E-2 with Department code as 750.
(vii) Alternatively, the sponsors may arrange a loan for financing down-payment to the
suppliers of plant and machinery. Such a loan will be subject to registration in
accordance with the above procedure.
(viii) In order to establish the value of plant and machinery imported under the
loan/Supplier's Credit, including credits obtained under PAYE Scheme, the sponsors will,
immediately on receipt of the consignment, submit to the area office of Exchange Policy
Department through the designated Authorised Dealer, the relative import documents viz.
Exchange Control copy of Bill of Entry, original invoice and a copy of letter of credit.
(ix) After the liability to the foreign lender/supplier of plant and machinery as
mentioned in sub-paragraph (viii) has been established, the repayment schedule as per
specimen given at Appendix V- 83 should be submitted for registration to the Investment
Division, Exchange Policy Department, at Karachi in sextuplicate through the Authorised
Dealer which has submitted the loan agreement.
12. Repayment under Pay-As-You-Earn Scheme.
(i) After the repayment schedule has been registered by the State Bank, the
remittances on account of principal and interest will be allowed by the Authorised Dealer
subject to compliance with the requirements set out herein and after deduction of tax if
payable. In case of exemption from income tax, a copy of the exemption certificate should
be attached with the relative 'M' form. The application for remittance towards repayment
of cost of plant and machinery and interest accrued thereon (instalment) will be submitted
on the prescribed form (Appendix V- 84) to the Authorised Dealer whose name appears on the
related repayment schedule. The application should be signed by the applicant and
certified by the bankers and must be accompanied by Export Realisation Certificate in the
prescribed form (Appendix V- 85). The application will be accompanied by two forms 'M'
i.e. one for the amount of principal and the other for the amount of interest. Remittances
on account of repayment of principal and payment of interest should be coded by the
Authorised Dealers as 1830 and 1220 respectively, on Schedule E-4 with Departmental Code
as 775 in each case. Where the amount of 50% of the FOB value of export earnings of an
industrial unit or enterprise in any financial year, upto the date on which the instalment
has fallen due, is not sufficient to cover the debt liability and other liabilities as
laid down in Clause 7 of the Scheme, the remittance may be allowed by the Authorised
Dealer concerned on submission of an undertaking by the applicant to the effect that he
will submit evidence of having repatriated sufficient export earnings during the financial
year concerned, to cover the remittance and that in case there is any shortfall, a penalty
amounting to 27% of Rupee equivalent of the excess remittance plus interest thereon @ 9%
per annum from the date of remittance, shall be paid to the State Bank on account of the
Federal Government by the 8th July of the next financial year. This undertaking should be
countersigned by the Authorised Dealer concerned, who should assume responsibility for the
payment of the penalty and interest and forward the undertaking to the State Bank
alongwith the form 'M' covering the remittance.
(ii) In respect of remittances made under the PAYE Scheme, the Authorised Dealers will
send to the State Bank every month statements in triplicate in the prescribed forms
(Appendices V- 86 & V- 87).
(iii) In case any discrepancy is found in the information contained in an application (V-
84 ) or export realisation certificate (V- 85) on the basis of which an Authorised
Dealer has allowed remittance of principal and interest, the applicant will be required to
arrange for repatriation to Pakistan of the amount, if any, remitted in excess or
alternatively on demand by the State Bank, pay to it on account of the Federal Government
penalty amounting to 27% of Rupee equivalent of the excess remittance plus interest
thereon @ 9% per annum from the date of remittance. The Authorised Dealer who has allowed
the remittance shall be responsible for compliance with the above requirements including
payment of penalty and interest.
13. Payment of Penalty-Head of Account.
The penalty of 27% recoverable from the applicants under the above Scheme should
be deposited with the State Bank by the concerned project or its bankers on challans
filled in quadruplicate for credit to Federal Government's account with the State Bank
under the head "1000 Non-Tax Receipts1300 Miscellaneous Receipts-1390 others-Fees,
Fines and Forfeitures".
14. Repayments under loans/credits other than PAYE Loans.
(i) After the repayment schedule has been registered by the State Bank, the remittance on
account of principal, interest and other charges will be allowed by the Authorised Dealers
strictly in accordance with the approved schedule. Remittance of interest will be effected
after deduction of tax, if payable. In case of exemption from income tax, a copy of the
exemption certificate should be attached with the relative 'M' form. Remittances on
account of repayment of principal and interest shall be reported separately on forms 'M'
and coded as 1952 and 1212 respectively with Department code 121. Such 'M' forms should be
prominently marked at the top as under:
"Remittance of Principal/Interest under Loan/Supplier's Credit vide Repayment
Schedule Registered with the State Bank under Registration No
…………………………"
(ii) In some cases of Loans/Supplier's Credits, interest is payable at a varying rate
linked with LIBOR. In such cases, it would not be possible for the borrowers to show in
advance the exact amount of interest payable with future instalments. It would be in order
for the Authorised Dealers in such cases to remit the actual amount of interest calculated
on the basis of the formula appearing in the approved contract. They should, however, show
the number of days, the applicable rate and the principal amount on which interest has
been paid in the 'M' form.
15. Repatriable Foreign Currency Loans by Foreign Controlled Companies.
(i) Foreign controlled companies are permitted to contract foreign currency loans
from banks/financial institutions abroad or from their Head Offices/or from other
overseas branches/associates for meeting their working capital requirements. The repayment
period should not exceed twelve months and the rate of interest should not exceed 1%
over LIBOR. Such loans can however be rolled over for further periods not exceeding twelve
months each.
(ii) Foreign controlled companies, as defined in paragraph 2 ibid, desirous of
availing this facility may approach their bankers (Authorised Dealers), who will satisfy
themselves that the applicant is a foreign controlled company. Once such a confirmation is
obtained, the concerned company may contract the loan and repatriate the amount for credit
to their Rupee account with the Authorised Dealer.
(iii) The concerned Authorised Dealer will issue a proceeds realisation certificate,
and record the particulars of the loan. On maturity, the Authorised Dealer having received
the inward remittance, will allow payment of interest minus taxes and repayment of
principal. While reporting remittance of interest, a certificate confirming the applicable
LIBOR and a certificate confirming payment of income tax will be attached with the Form
‘M’. If tax is not payable, a copy of the exemption certificate issued by the
Revenue authorities will be submitted. While reporting repayment of the principal, a copy
of the proceeds realisation certificate will be attached with the Form ‘M’.
(iv) Branches in Pakistan of foreign companies are not allowed to pay interest on
such loans.
(v) Foreign contractors are not allowed to pay interest on such loans, and they can
repay the loans only after they have completed the contracted work/project and have
submitted clearance certificate from the tax authorities, which should be attached with
the Form ‘M’.
16. Foreign Currency Loans for Financing Exports.
(i) Those exporters who have valid firm commitments with the overseas buyers for
export of goods from Pakistan, may obtain short term loans in foreign currencies form
abroad or through an Authorised Dealer, to the extent of the value of such firm
commitment, to enable them to finance the export of goods from Pakistan. It is permissible
to obtain one consolidated loan for all LCs/contracts received in a month or covering
shipment required to be made during a month. The Authorised Dealers may issue guarantees
to the lenders subject to compliance with Prudential Regulations in force.
(ii) The Authorised Dealers and borrowers will be free to negotiate the interest rates on
such loans. The maximum tenure of such loans will be the period generally fixed for
repatriation of export proceeds plus a further period of sixty days. The exchange risk
will be borne by the borrower.
(iii) The foreign currency amount of loan will be required to be repatriated to
Pakistan and encashed with an Authorised Dealer. Such inward remittances will be reported
on form ‘R’ Schedule ‘J’ with Code No. 9711.
(iv) In case an exporter utilizes this facility, he will not be eligible to obtain
export finance in local currency from a bank in Pakistan and the facility under the
‘Foreign Currency Export Finance Scheme’ for the same export commitment.
(v) The foreign currency loan will be required to be repaid, along with interest, out
of the related export proceeds. Where an exporter is unable to export goods against a firm
contract/letter of credit against which a foreign currency loan was obtained, he may repay
the loan from the proceeds of export of the same or other commodity to the same or a
different buyer in any country against another firm contract/letter of credit provided no
foreign currency loan has been obtained against the substituted contract/letter of credit.
The exporter will instruct the Authorised Dealer, through which the loan was received, and
which is negotiating/handling the export documents, to arrange to repay the foreign
currency loan and interest accrued thereon, less tax if payable, to the lending
institution out of the proceeds of the bill. It is not necessary to repatriate the
proceeds of the export bills to Pakistan first and then to arrange remittance in repayment
of the debt. The amounts of the export bills realised abroad can straight-away be used for
repayment of the amount of the relative debt and net interest. The concerned Authorised
Dealer will however, report the realisation of foreign exchange proceeds of the exports as
a ‘purchase’ on Schedule A-1 and the amount of loan and interest paid as
‘sale’. At the time of reporting sale, the Authorised Dealer will attach with
the relative form ‘M’:
(a) Proceeds Realisation Certificate.
(b) Income Tax Officer’s/Auditor’s certificate indicating the amount of tax
due on the interest accrued on the foreign currency loan.
It will be the responsibility of the Authorised Dealer to ensure while arranging
payment/remittance of interest that the payment is made after deduction of tax leviable
thereon.
(vi) In case the loan matures after the export proceeds have been realised, the
export proceeds to the extent required for repayment of the loan and net interest on the
due date, may be retained in a foreign currency account temporarily opened for this
purpose, repayment made on the due date and the account closed.
(vii) Notwithstanding the utilization of export proceeds for repayment of the loan,
the Authorised Dealers will continue to be liable to deduct income tax as required by the
Tax laws.
(viii) In case the exporter fails to fulfil the export obligations or there is a
delay in realisation of export proceeds, repayment of loan and interest accruing thereon
less taxes, will be made by him from his own resources or from a foreign currency account.
(ix) In the case of exports to ACU member countries where export proceeds are not
realised in convertible currencies, Authorised Dealers may remit the amounts of
principal/interest from their Nostro balances at the current exchange rate subject to
compliance of the drill laid down in preceding sub-para (v).
17. Foreign Currency Loans for Working Capital and other purposes.
(i) Pakistani firms and companies functioning in Pakistan excluding banks
may obtain foreign private loans on non-repatriable or repatriable basis for their working
capital subject to the following terms and conditions:
(A) NON-REPATRIABLE BASIS:
The loans are contracted on non-repatriable basis on the clear understanding that
such loans would be treated as rupee loans to the extent of rupees generated out of the
inward remittance, neither the principal nor interest/profit would be remittable abroad at
any time and repayment of the loan and payment of interest/profit would be made in
Pakistan.
(B) REPATRIABLE BASIS:
(a) The loan is interest free and for a period not less than one year.
(b) No bank guarantee for securing such loans would be provided from Pakistan.
(c) No forward cover shall be provided.
(d) The Government of Pakistan will not provide the facility of absorption of exchange
risk in such cases.
Agreement for foreign private loans on repatriable basis should be submitted to the State
Bank for registration. After the State Bank has registered the agreement and the loan
amount has been remitted to Pakistan, the repayment schedule (Appendix V- 83 ) should be
submitted to the State Bank for registration alongwith proceeds realisation certificate.
After the repayment schedule has been registered, the Authorised Dealers would be free to
remit the instalments of principal on the due dates quoting reference of the repayment
schedule, in accordance with the procedure laid down in paragraph 14 ibid. No
pre-payments would be permissible.
(ii) Individuals/firms/companies resident in Pakistan, including foreign
controlled companies and branches of foreign companies operating in Pakistan, but
excluding banks are also permitted to obtain loans from abroad in foreign currencies on
repatriable basis for any purpose on the following terms and conditions:-
(a) There shall be no ceiling on the amount of loan. The repayment period should not,
however, be less than five years, and the repayments should be made in equal instalments.
(b) Interest will be payable in arrears on half yearly/yearly basis at a rate
not exceeding the relevant LIBOR + 1.5% and will be subject to deduction of Pakistan taxes
as may be leviable under the law. The borrowers shall be free to pay interest according to
the above formula at a fixed or floating rate.
(c) Exchange rate fluctuation risk will be borne by the borrowers and no
forward cover would be provided by the Authorised Dealers in Pakistan.
(d) No bank guarantee for securing such loans would be provided from Pakistan.
(e) The borrower will get the agreement with foreign lenders registered with an
Authorised Dealer who will handle all transactions thereunder and intimate the details
after completion of the disbursements, to the Investment Division at Karachi in the
prescribed proforma (Appendix V- 88) in triplicate alongwith Proceeds Realisation
Certificate(s) in original showing encashment of the loan amount into Pak Rupees.
Thereafter the Authorised Dealer would be free to remit the instalment(s) of principal and
interest, as the case may be, on due dates strictly in accordance with the terms of
repayment intimated to the State Bank. Prepayments would not be permissible. Remittance of
interest will be effected after deduction of tax, if leviable thereon.
(f) (A) The inward remittances on account of loan disbursement from foreign
lenders may be reported under Code-9821.
(B) Likewise the outward remittance on account of repayment of principal shall be
reported on Form ‘M’ and Coded as 1821.
(C) Remittance of interest will be reported under Code- 1224.
18. Short term Borrowings in Foreign Currency by Authorised Dealers.
Authorised Dealers may, if it becomes necessary in the normal course of their
business but not for the purpose of carrying speculative exchange position etc., obtain
short-term loans and overdrafts from overseas branches and correspondents for periods not
exceeding seven days at a time. If such loans or overdrafts are required to be secured by
collateral to be lodged in Pakistan or else where, full details of the proposed
arrangements should be furnished to the State Bank for prior approval.
Interest on short-term loans and overdrafts taken under this para may be remitted by
Authorised Dealers without the prior approval of the State Bank.
19. Long Term Loans by Authorised Dealers.
It is not permissible for Authorised Dealers to obtain long-term loans in foreign
currencies without the prior approval of the State Bank. Application for this purpose
should be made to the State Bank, giving the terms of the proposed loan and the reasons
why it is considered necessary to contract such a loan.
20. Loans and Advances by Authorised Dealers in Foreign Currency.
Authorised Dealers will not grant any loans or overdrafts in foreign currencies,
whether secured or unsecured, without the prior approval of the State Bank. Applications
for this purpose should be made by letter, giving full details of the purpose for which
such loans or overdrafts are required as also the particulars of the guarantee or
collateral, if any, and the manner in which the loans or overdrafts are expected to be
liquidated.
Part C- Guarantees etc.
21. Guarantees on
behalf of Foreign Controlled companies.
For the purposes of Section 18(2) of the Act, guarantees that are issued in lieu
of earnest money, security or other cash deposits are treated as extension of credit to
the extent these are not backed by 100% cash deposit. Authorised Dealers may issue such
guarantees on behalf of foreign controlled companies only by adjustment of the amount from
their borrowing entitlement as per Prudential Regulations. This, however, would not be
necessary where guarantee required to be issued are not in lieu of cash deposit but are
either in the nature of performance bond etc., or are required to be given alongwith the
tender documents in lieu of earnest money deposit. In the latter case, the validity of the
guarantee would be restricted to the period upto which decision about acceptance or
rejection of the relative tender is taken. The State Bank's prior approval will become
necessary if the guarantee is to remain valid even after the decision on the tender has
been taken.
22. Guarantees on behalf of Residents of Pakistan in favour of Non-residents.
(i) Except in cases covered by paragraphs 24 and 26 ibid, prior approval of the
State Bank is required for giving any guarantee or undertaking or opening of a letter of
credit, the implementation of which may involve payment to a non-resident either in
foreign currency or Rupees. Applications seeking permission for giving such guarantee or
undertaking should be made by letter giving full particulars of the guarantee or
under-taking viz., the amount, the period and the purpose of the guarantee and the terms
of payment in the event of the guarantee being implemented. These restrictions also apply
to renewal of such guarantees, undertakings, letters of credit etc. While forwarding
applications for renewal to the State Bank, Authorised Dealers should state the extent
upto which the facilities covered by the guarantees were utilised during the previous
twelve months or during the validity of the guarantees etc., if the period involved is
less than 12 months.
(ii) Authorised Dealers may, however, issue guarantees in favour of foreign
suppliers/lenders to cover repayment of loan and payment of interest under Foreign Private
Loan/Suppliers Credit including credits under PAYE Scheme in accordance with the terms and
conditions of the agreement as registered by State Bank, under intimation to Investment
Division at Karachi.
23. Guarantees on behalf of Non-Residents in favour of Residents of Pakistan.
Prior approval of the State Bank is ruired for giving guarantees or undertakings
in favour of residents in Pakistan either on behalf of non-residents or against overseas
guarantees or collaterals lodged outside Pakistan. This restriction does not, however,
apply to cases covered under paras 27 and 28 or where the guarantee is being extended by
the Authorised Dealer on the basis of a back-to-back guarantee from its overseas branch or
correspondent. Applications for this purpose should be made by letter giving full
particulars including the amount, the period and the purpose of the guarantee and the
manner in which the Authorised Dealer will be reimbursed in the event of the guarantee
being implemented. Renewal of such guarantees also requires the prior permission of the
State Bank. While forwarding applications, Authorised Dealers should state the extent to
which the facilities covered by the guarantee or undertaking etc., have been utilized
during the previous 12 months or such shorter period for which the facilities have been
available.
24. Performance/Bid Bond Guarantees.
Authorised Dealers, National Insurance Company Limited, Pakistan Insurance
Corporation and those Insurance Companies whose exposure limits have been fixed by the
Controller of Insurance for the above purpose (particulars of Insurance Companies could be
obtained from the Controller of Insurance) may issue Performance or Bid Bond Guarantees on
behalf of exporters, members of recognized Consultancy/Construction Associations and
Companies approved by Pakistan Engineering Council (PEC) in Pakistan subject to the
following conditions:
a. Tenders specifically call for furnishing of such guarantees.
b. The beneficiary abroad is a foreign Government or a Government sponsored Organization
or private company or a firm.
c. The tenderer is a bonafide exporter or a manufacturer of the commodity which
is specified in the tender and there is no restriction on its export from Pakistan.
d. In case of Consultancy/Construction firms and Engineering firms recognized by
Pakistan Engineering Council, the organization issuing the performance or bid bond must
satisfy itself that the tenderer is a bonafide Consultancy/Engineering firm, having the
requisite financial and technical resources and there are reasonable prospects of their
being able to successfully execute the contract. Companies with poor track record will not
be eligible.
25. Remittances under Guarantees or Performance Bonds and their Reporting to
the State Bank.
Authorised Dealers may make remittances against the Performance Guarantees or
bonds issued by them or the Pakistan Insurance Corporation or National Insurance
Company Limited or those Insurance Companies whose exposure limits have been fixed by the
Controller of Insurance in terms of Para 24 ibid, if remittances become necessary for the
implementation of such Performance Guarantees or bonds. In these cases, Authorised Dealers
should minutely scrutinize the terms of the Performance Guarantees or bonds and satisfy
themselves that the amount has become payable to the beneficiaries due to the default of
the party in Pakistan. While reporting remittances made against such Performance
Guarantees/Bonds to the Exchange Policy Department in their monthly foreign exchange
returns, the Authorised Dealers will bunch Forms 'M' with the documents given below
alongwith the covering statement in duplicate as per Form (Appendix V- 89):
i) Photocopy of the Guarantee or Performance Bond.
ii) Photocopy of the claim received by the foreign bank from the concerned Government or
the Government institutions or a private company or a firm demanding such payment.
iii) Copies of correspondence, if any, exchanged between the foreign bank and foreign
government or Government Institution or a private company or a firm.
iv) Copies of correspondence exchanged by the firm in Pakistan on whose behalf
Guarantee/Bond was issued with the concerned foreign Government or Government Institution
or a private company or a firm about invoking of the Guarantee/Bond by the latter.
26. Opening of Letters of Credit and Advising of Negotiations under Export
Letters of Credit.
Restrictions imposed under para 22 of this chapter shall not apply to the
establishment of letters of credit or similar undertakings by the Authorised Dealers to
finance imports into Pakistan in accordance with the provisions of Chapter-XIII. Similarly
restrictions imposed under para 23 shall not apply to advising of export letters of credit
established by non-resident banks nor to negotiation of documents thereunder.
27. Guarantees which may be given without Prior Approval.
The restrictions in paragraphs 22 and 23 do not apply to guarantees given by
Authorised Dealers in favour of non-residents on behalf of their customers in the ordinary
course of their business in respect of missing documents, authentication of signatures,
release of goods on Trust Receipts and defects in documents negotiated by them under
letters of credit etc.
28. Guarantees and Collaterals in favour of Overseas Bank Branches and
Correspondents.
Authorised Dealers should not, without the prior approval of the State Bank,
furnish guarantees to the overseas bank branches or correspondents or hold collaterals on
their behalf in respect of any credit facilities or guarantees the latter may give or for
any other purpose. All applications for this purpose should be made to the State Bank by
letter giving full details of the guarantees or collaterals, as the case may be, and of
the transaction in cover of which guarantee is proposed to be given or collaterals
deposited.
29. Renewal of Loans and overdrafts.
In cases where the grant of any loans or overdrafts or issue of guarantees
requires the prior approval of the State Bank, the renewal of such loans, overdrafts or
guarantees shall also require the prior approval of the State Bank.
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