This assignment is related for a bank (SBP)
- 1. Question no: 1 Importance of Prudential Regulation from regulators point of view: Prudential regulations are code of conduct or guide lines through which state bank supervise the institutions shows standard format for activities and to decrease their risk taking. It is important because it provide safety to depositor’s fund, keep financial stability and uniformity in the sector. To strengthen and regulate the banking business by bringing advancements in governing bodies and banks. Creating an efficient system for credit risks as well as rule abiding by the banking facilities. 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. Question no: 2 Types of Prudential Regulations provide by SBP: The Prudential Regulations for Consumer Financing covers Risk Management (R) and Operations (O) aspects. Regulations for Corporate/Commercial Banking may be referred to for areas concerning corporate governance and customer due to diligence and anti money laundering. However, in case of international operations, the Prudential Regulations of host country shall prevail. Further 7 sub types of these are given below: Regulations for credit card. Regulations for auto loan. Regulations for housing finance. Regulations for personal loans including loans for the purchase of consumer durables. Regulation for Exposure against shares / TFCs and acquisition of shares.
- 2. Regulation for Classification and provisioning for assets. Regulation for Payment of dividend. Question no: 3 Exposure limits for banks: The total outstanding exposure (fund based and non-fund based) by a bank / DFI to any single person shall not at any point in time exceed 30% of the bank’s / DFI’s equity as disclosed in the latest audited financial statements, subject to the condition that the maximum outstanding against fund based exposure does not exceed 20% of the bank’s / DFI’s equity. The total outstanding exposure (fund based and non-fund based) by a bank / DFI to any group shall not exceed 50% of the bank’s / DFI’s equity as disclosed in the latest audited financial statements, subject to the condition that the maximum outstanding against fund based exposure does not exceed 35% of the bank’s / DFI’s equity. 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. Following shall not constitute contingent liabilities for the purpose of this regulation: Bills for collection. Obligations under Letters of Credit and Letters of Guarantee to the extent of cash margin retained by the bank / DFI. 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 credit rating agency on the approved panel of State Bank of Pakistan or Standard &Poor’s, Moody’s, Fitch-Ibca or Japan Credit Rating Agency (JCRA). Non-fund based exposure to the extent covered by liquid assets. 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.
- 3. 2. 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. Minimum Requirement For DifferentTypes Of Consumer Finance: 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. General Reserves Against Consumer Finance: The banks/DFIs shall maintain a general reserve at least equivalent to 1.5% of the consumer portfolio which is fully secured and 5% of the consumer portfolio which is unsecured, to protect them from the risks associated with the economic cyclical nature of this business. The above reserve requirement will, however, be maintained for the performing portion only of consumer portfolio. 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, etc.
- 4. Margin Requirement: 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, imports of which are banned by the Government. 9 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 1.A 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. Maximum Card Limit: Bank/DFI may issue credit card to one person with a maximum unsecured limit not exceeding Rs 1,000,000, subject to mandatory credit check & prescribed debt burden and condition that total unsecured credit card limits availed by that person from all banks/DFIs does not exceed Rs. 1,000,000.1 Banks/DFIs may merge the clean limits to single person for Credit Cards and Personal Loans subject to the condition that total clean limit availed by him/her from all banks/DFIs does not exceed Rs. 2,000,000 at any point in time. It is reemphasized that the aggregate clean limit of the borrower should not exceed Rs. 2000,000 in any case.2 Banks/DFIs shall ensure that overall credit card and personal loan 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, subject to the condition that the overall unsecured/clean facilities on account of credit card and personal loan of that individual does not exceed Rs 2,000,000.3 The loan secured against liquid securities shall, however, be exempted from the above limit. The loans 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. For Charge Cards, pre-set spending limits generated by the standardized systems, as is the global practice, shall be allowed Maximum Consumer Loans Tenure: The maximum tenure of the loan shall not exceed 5 years. However, this period may be extended to 7 years for loans/advances given for educational purposes, provided that
- 5. 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 forany otherpurpose.