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1 Bonds

Debt markets are often just called "bond markets." When you buy a bond,you're lending money to an organization such as a corporation or a

goernment. !he bond is a ritten promise from the institution borroingthe money to repay the loan on a certain date, called the maturity date.#sually, a bond also includes a promise to pay interest in regularinstallments $$ in most cases, eery si% months or once a year.

& otes

otes and bonds are pretty much to (aors of the same thing. Bothpromise to repay borroed money, and both ill usually pay interest. !hedistinction is that a note has a shorter maturity than a bond. )o muchshorter depends on the issuer. *or municipal securities $$ those issued bycities and states $$ "notes" are generally de+ned as those that mature in ayear or less. !he #.. !reasury de+nes a !reasury note as a security ith amaturity of to to 1- years anything longer than that is a !reasury bond,and anything shorter is a !reasury bill, or "!$bill." /orporate notes mayhae maturities up to 1- or 1& years, but they're categorized into short$term notes, ith maturities up to +e years, and long$term notes, ithmaturities longer than +e years.

0 Debentures

o no you'e got a bond or note that says you're going to get moneyfrom the issuer. erhaps you're ondering here the money ill comefrom. 2ood 3uestion. ometimes, the bonds are "reenue bonds,"meaning the money ill come out of reenue generated by the eryproject the bonds paid for. With "asset$backed" securities, the moneymight come from payments on consumer loans. But in many cases, debtsecurities aren't actually backed by anything e%cept the issuer's promiseto pay. !hey are unsecured debt, meaning there's no collateral behindthem. #nsecured bonds and notes are called "debentures."

4 /ommercial aper

/ompanies issue bonds and notes to pay for speci+c projects, such as bigcapital inestments or debt restructurings. But sometimes companiesneed a short$term infusion of cash to buy inentory or coer regular(uctuations in cash (o, and they'd prefer not to hae to jump throughthe hoops that banks and bond$market regulations re3uire. !hat's here"commercial paper" comes in. !hese are e%tremely short$term notes ithmaturities of nine months or less $$ often much less. 5f your inestmentsinclude "money market" funds, you may ell hae some money tied up incommercial paper.

6 7isks and 7eturns

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 !he returns you can reasonably e%pect to get from inestments in debtsecurities ary according to the risk you take. !he more risk, the morereturn you should e%pect to get. /redit ratings agencies assess ho likelyissuers are to default on their obligations, and assign them credit ratingsthat range from triple$8, the best, don to "junk" ratings. 7isk also

increases ith maturity. !he longer the ait till maturity, the higher therisk $$ not only because something could happen that causes the issuer todefault, but also because you'e got your money tied up and you can'tseize other opportunities. /ommercial paper o9ers a loer return thanto$year notes, hich pay less than long$term bonds. But een "risk$free"#.. !reasury securities hae to compensate inestors for tying up theirmoney.

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Question : Why does SBP require the banks toclassify their loans?

 A) Why does SBP require the banks to classify their loans?

B) What are different catagories of Classification?C) Differentiate between timebased and sub!ecti"e classification#which would you $referfor your bank?

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&hose who are working in banks es$ecially credits de$artment are well aware of the term'classification'#(n common words a classified loan is a loan which is not regular and is e$eriencing any$roblem#

Prudential *egulations of SBP com$rehensi"ely co"ers this to$ic and SBP ha"e $ro"idedguidelines for banks to re$ort their loans when they are not beha"ing regular# *egulation*++ of P*s deals with the C,ASS(-(CA&(./ A/D P*.0(S(./(/1 -.* ASS2&S#

&here are two ty$es of classification3 &imebased and sub!ecti"e#

(n time based its ob"ious that we ha"e to consider the time $eriod in order to classifythe loan3

 Anneure ((( of S42 P*s gi"es the following time based criteria for classification ofloans3

Sub-Standard : 4raku$5(nterest or Princi$al o"erdue 90 days or more from duedateDoubtful : 4raku$5(nterest or Princi$al o"erdue !0 day s or more from duedate"oss: 4raku$5(nterest or Princi$al o"erdue #$% days or more from duedate

(Time Based classification is different in different sectors, i.e. Agriculture, Consumer.Check PRs of those sectors for further details)

on the basis of this classification the SBP has $ro"ided the guidelines to make $ro$er$ro"isioning of income3 details of which are a"ailable in P*s#

Sub&ecti'e (lassification

(n addition to the timebased criteria $rescribed in Anneure(((3 sub!ecti"e e"aluationof $erforming and non$erforming credit $ortfolio shall be made for risk assessmentand3 where considered necessary3 any account including the $erforming account will beclassified3 and the category of classification determined on the basisof time based criteria shall be further downgraded# Such e"aluation shall be carried outon the basis of credit worthiness of the borrower3 its cash flow3 o$eration in the account3

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