Explain different prudential regulations for corporate and commercial banks issued by SBP for reporting and to perform banking services.

Answer:

Regulations:

The rules or directives made and maintained by an authority to manage and run the activities of the corporation or entity. The Prudential Regulations for Corporate / Commercial Banking 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.

Prudential regulations for corporate and commercial banks:

GUARANTEES:

1.    All guarantees issued by the banks / DFIs shall be fully secured, except in the cases mentioned at Annexure-III 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.    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-Ibca or Japan Credit Rating Agency (JCRA).

3.    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 favor of Government departments, corporations / autonomous bodies owned/controlled by the Government and guarantees required by the courts.

CLASSIFICATION AND PROVISIONING FOR ASSETS LOANS / ADVANCES:

Banks / DFIs shall observe the prudential guidelines given at Annexure-IV in the matter of classification of their asset portfolio and provisioning there-against.

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 / advances portfolio and make provisions in accordance with the criteria prescribed above.

·         Banks are allowed to take the benefit of 30 percent of FSV of pledged stocks and mortgaged commercial and residential properties held as collateral against all NPLs for three years from the date of classification for calculating provisioning requirement i.e. 31–12–2008. For the purpose of determination of FSV, revised Annexure-V of PR for Corporate/Commercial Banking shall be followed.

·         Banks/DFIs may avail the above benefit of FSV subject to compliance with the following conditions:

·         he additional impact on profitability arising from availing the benefit of FSV against pledged stocks and mortgaged commercial and residential properties shall not be available for payment of cash or stock dividend.

·         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.

INVESTMENTS AND OTHER ASSETS:

1.      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 Accounting Standards as applicable in Pakistan and shall not be subject to mark to market.

2.      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

Quoted Securities:

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

Un-quoted Securities:

PTCs and TFCs will be classified on the evaluation / inspection 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.

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.” 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.

Other Assets:

Classification of Other Assets and provision required there-against shall be determined keeping in view the risk involved and the requirements of the International Accounting Standards.

Submission of returns:

Banks / DFIs shall submit the borrower-wise annual statements regarding classified loans /advances to the Banking Inspection Department.

Facilities to Private Limited Company:

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.

Payment of dividend:

Banks / DFIs shall not pay any dividend on their shares unless and until:

·         They meet the minimum capital requirements as laid down by the State Bank of Pakistan from time to time;

·         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

·         All the requirements laid down in Banking Companies Ordinance, 1962 relating to payment of dividend are fully complied.