Mirza Ahmed BaigMirza Ahmed Baig2432 – 110 – 0142432 – 110 – 014

SubjectSubject

‘‘Banking Operations’Banking Operations’

Submitted toSubmitted to

Mr. Muhamad FahadMr. Muhamad Fahad

Prudential RegulationPrudential Regulation

w.e.f.w.e.f.July 1,1992July 1,1992

Purpose of Prudential Purpose of Prudential RegulationRegulation

Prudential Regulations have been issued by State Bank of Pakistan to put in place a prudent regulatory framework for ensuring safety and soundness of the financial system besides protecting the interests of users of financial services

Purpose of Prudential Purpose of Prudential RegulationRegulation

Contin…Contin…

To strengthen and regulate the To strengthen and regulate the banking business by bringing banking business by bringing advancements in Governing bodies advancements in Governing bodies and banks.and banks.

Creating an efficient system for credit Creating an efficient system for credit risks as well as rule abiding by the risks as well as rule abiding by the banking facilities.banking facilities.

How Many Areas PR are How Many Areas PR are AvailableAvailable

SBP has so far issued Prudential Regulations on the following areas:

Corporate / Commercial Banking (issued by Banking Policy & Regulation Department)

Small and Medium Enterprises Financing

Consumer Financing

Micro Finance Institutions (issued by SME & Micro Finance Department)

Agricultural Financing

Consumer FinancingConsumer Financing

Consumer Banks provide financing for Consumer Banks provide financing for purchasing consumption goods for purchasing consumption goods for the use of the borrowers.the use of the borrowers.

Consumer finance companies, sales Consumer finance companies, sales finance companies and credit unions finance companies and credit unions are the some of the popular forms of are the some of the popular forms of consumer banks.consumer banks.

Charactertics of Consumer Charactertics of Consumer FinancingFinancing

Safety: The banker must be careful Safety: The banker must be careful and ensure that his depositors and ensure that his depositors money is advanced to safe hands money is advanced to safe hands where the risk of loss does not exist.where the risk of loss does not exist.

Character: Which goes to the Character: Which goes to the honesty and sincerity of the borrower honesty and sincerity of the borrower and whether the loan is for a good and whether the loan is for a good purpose. purpose.

CharacterticsCharactertics (Contin..)(Contin..)

Capacity: whether the borrower has a Capacity: whether the borrower has a legal standing necessary to sign a vaild legal standing necessary to sign a vaild loan contract.loan contract.

Cash: which focuses on the borrower Cash: which focuses on the borrower estimated capacity to generate estimated capacity to generate sufficient income or cash flow to repay sufficient income or cash flow to repay the loan.the loan.

Collateral: whether the borrower has Collateral: whether the borrower has assets or other items of value that can assets or other items of value that can be pledged to help secure the loan.be pledged to help secure the loan.

Charactertics (Contin..)Charactertics (Contin..)

Conditions: or the broader environment Conditions: or the broader environment of the industry and the economy in of the industry and the economy in which the borrower operates that could which the borrower operates that could adversely affect loan repayment.adversely affect loan repayment.

Control: Which refers to wether or not Control: Which refers to wether or not the borrower’s application meets the the borrower’s application meets the loan quality standard imposed by the loan quality standard imposed by the PR authorities.PR authorities.

What Makes a Good Loan?What Makes a Good Loan?

Is the borrower creditworthy?Is the borrower creditworthy?Can the loan agreement be properly Can the loan agreement be properly

structured and documented .structured and documented .Can the bank perfect its claim Can the bank perfect its claim

against the asset or earnings of the against the asset or earnings of the customers so that in the event of customers so that in the event of default, bank funds can be recovered default, bank funds can be recovered rapidly at low cost and with low risk?rapidly at low cost and with low risk?

Outside Sources of Information Outside Sources of Information Used in Loan AnalysisUsed in Loan Analysis

Local or regional BureausLocal or regional BureausCustomer financial statementsCustomer financial statementsExperience of other lenders with this customers Experience of other lenders with this customers

Prudential Regulation For Prudential Regulation For consumer Financingconsumer Financing

Facilities to related PersonFacilities to related PersonThe Banks/DFIs shall ensure that the The Banks/DFIs shall ensure that the

araisal standard are not araisal standard are not compromised in sch case and market compromised in sch case and market rated are used for these persons. The rated are used for these persons. The facilities extended to the employees facilities extended to the employees of the banks/DFIs as a part of their of the banks/DFIs as a part of their compensation package under compensation package under Employees Service Rules shall not Employees Service Rules shall not fall in this category. fall in this category.

Utilization of clean loan for Initial Utilization of clean loan for Initial Public OfferingsPublic Offerings

At the time of sanction of a claean At the time of sanction of a claean consumer loan/credit line , the bank/DFIs consumer loan/credit line , the bank/DFIs should be obtain an undertaking from the should be obtain an undertaking from the client, that the drawings from the loan client, that the drawings from the loan account will not be used for subscription in account will not be used for subscription in an IPO.an IPO.

The bank/DFIs should introduce an internal The bank/DFIs should introduce an internal system. whereby no cheque,draft or system. whereby no cheque,draft or payment instruction will be made for an IPO payment instruction will be made for an IPO subscription account from a clean personal subscription account from a clean personal loan/ credit line accountloan/ credit line account

Limit On Exposure Against total Limit On Exposure Against total Consumer FinancingConsumer Financing

Banks/DFIs shall ensure that the Banks/DFIs shall ensure that the aggregate exposure under all aggregate exposure under all consumer financing facilities at the consumer financing facilities at the end of 1end of 1stst year of the start of their year of the start of their consumer financing does not exceed consumer financing does not exceed 2 times and 4 times of their equity 2 times and 4 times of their equity respectivelyrespectively

Percentage of Percentage of classified Consumer classified Consumer Financing to total Financing to total consumer financingconsumer financing

Maximum LimitsMaximum Limits

a) Below 3% a) Below 3%

B )Below 5%B )Below 5%

c) Below 10%c) Below 10%

d) Below and avove d) Below and avove 10%10%

10 times of the equity10 times of the equity

6 times of the equity6 times of the equity

4 times of the equity4 times of the equity

2 times of the equity2 times of the equity

Total Financing Facilities To Be Total Financing Facilities To Be Commensurate With The IncomeCommensurate With The Income Extending financing facilities to their Extending financing facilities to their

customers the banks DFIs shoulf be ensure customers the banks DFIs shoulf be ensure that the total installemenet of the loans that the total installemenet of the loans extended by the financial istitute is extended by the financial istitute is commensurate with the monthly income commensurate with the monthly income and repayement capacity fo the borrower.and repayement capacity fo the borrower.

This measure will be helpful to bank/DFIs This measure will be helpful to bank/DFIs the borrower evaluations oif credit the borrower evaluations oif credit worthiniess to ensure the banks portfolio worthiniess to ensure the banks portfolio under consumer finance fulfill the under consumer finance fulfill the prudential regulation issued by the SBPprudential regulation issued by the SBP

General Reserve Against General Reserve Against Consumer FinanceConsumer Finance

The bank/DFIs shall maintain a The bank/DFIs shall maintain a general reserve at least equivalent to general reserve at least equivalent to 1.5% of the consumer portfolio which 1.5% of the consumer portfolio which is fullu secured and 5% of the is fullu secured and 5% of the consumer portfolio which is consumer portfolio which is unsecured to protect them the risk unsecured to protect them the risk associated with the economic cyclical associated with the economic cyclical nature of the businessnature of the business

Not transfer Loan From One Not transfer Loan From One Category to Another CategoryCategory to Another Category

The Bank/DFIs Shall not transfer any The Bank/DFIs Shall not transfer any loan or facility to be classified, from loan or facility to be classified, from one category of consumer finance to one category of consumer finance to another, to avoid classification.another, to avoid classification.

Margin RequirementsMargin Requirements

Banks/DFI are free to determine the Banks/DFI are free to determine the margin requirement on consumer margin requirement on consumer facilities provided by then to their facilities provided by then to their clients taking into account the risk clients taking into account the risk profile of the borrower in order to profile of the borrower in order to secure their interest.secure their interest.

However, the relaxation shall not be However, the relaxation shall not be apply in case of items, import of apply in case of items, import of which are banned by the Government.which are banned by the Government.

ConclusionConclusion

Consumer Banks provide financing for purchasing Consumer Banks provide financing for purchasing consumption goods for the use of the borrowers.consumption goods for the use of the borrowers.

When the Bank sanction the loan.they should be When the Bank sanction the loan.they should be used CAMELS Rating ka matlab hota hai used CAMELS Rating ka matlab hota hai

Capital AdequacyCapital Adequacy Asset QualityAsset Quality Management QualityManagement Quality Earning recordEarning record Liquidity position Liquidity position Sensitivity to market risk (If Bank only analyze Sensitivity to market risk (If Bank only analyze

this only then the risk gets real Low)this only then the risk gets real Low)

ConclusionConclusion

Also check the borrower character or Also check the borrower character or worthinessworthiness

Check Financial RecordCheck Financial RecordCheck CIB reportCheck CIB reportFollows the SBP Prudential Follows the SBP Prudential

Regulation Regulation

Support that helped me make Support that helped me make thisthis

Thanking in Anticipation. .