Prudential Regualtions

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Prudential Regulations Module Trainee Officers

PRUDENTIAL REGULATIONS


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Prudential Regulations Module Trainee Officers Batch 38

REGULATORY FRAMEWORK

State Bank of Pakistan

(SBP)

Securities & ExchangeCommission of Pakistan

(SECP)

Commercial Banks Brokerage Houses

Development FinancialInstitutions (DFIs)

Investment Banks

Leasing Companies

Mutual FundsDiscount House


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Prudential RegulationsCategories:

1. Risk Management (R)

2. Corporate Governance (G)

3. KYC & Anti Money Laundering (M)

4. Operations (O)


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Key Definitions Account Holder: Means a person who has opened an account/ holder of

deposit/borrowed money from the bank.

Bank: A banking company as defined in the Banking Companies Ordinance,1962

Borrower: A person on whom bank has taken exposure. Contingent Liability: A possible obligation that arises from past events and

whose existence will be confirmed only by the occurrence or non-occurrence ofone more uncertain future events not wholly within the control of the bank.

DFI: Development Financial Institution

Substantial Ownership: shareholding of more than 25% by a person and/orby his dependent family members, will include his/her spouse.

Equity of the Bank: Tier-1 Capital or Core Capital and includes paid-upcapital, general reserves, balance in share premium account, reserve forissuance of bonus shares, retained earnings/accumulated losses.

Equity of Borrower: includes paid-up capital, general reserves, balance inshare premium account, reserve for issuance of bonus shares, retainedearnings/ accumulated losses, revaluation reserves on account of fixed assetsand subordinated loans.


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Key Definitions Exposure: Financing whether fund based and/or non-fund based.

Forced Sale Value (FSV): Value which fully reflects the possibilityof price fluctuation and can currently be obtained by selling themortgaged/pledged assets in distressed conditions.

Group: means persons, whether natural or juridical, if one of themor his dependent family members or its subsidiary have control orhold substantial ownership interest over the other. For the purposeof this:

a) Subsidiary: company or a body corporate directly or indirectly

controls, beneficially owns or holds more than 50% of its votingsecurities, or otherwise has power to elect and appoint more than50% of the directors.

b) Substantial Ownership: means beneficial shareholding of more than25% by a person and/or by his dependent family members, whichwill include his/her spouse.


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Key Definitions Liquid Assets: are the assets which are readily convertible into cash without

recourse to a court of law and mean encashment/realizable value of governmentsecurities, bank deposits, COIs, shares of listed companies, NIT Units, withperfected lien.

Medium & Long Term Facilities: mean facilities with tenor of more than 1year and short term facilities with tenor of up to a year.

Readily Realizable Assets: mean and include liquid assets and stockspledged to the banks in possession, with perfected lien, duly supported withcomplete documentation.

Secured: means exposure backed by tangible security and any other form ofsecurity with appropriate margins. Exposure without any collateral is defined asCLEAN.

Subordinated Loans: an unsecured loan, extended by the borrower for aminimum original maturity period of 5 years, subordinate to the claim of thebank and documented by a formal sub-ordination agreement between providerof the loan and bank. The loan shall be disclosed in the annual audited accountsof the borrower as subordinated.


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Risk ManagementRI Limit on Exposure to a Single Person1. Exposure to any single person shall not exceed 30% of banks equity.

Subject to funded exposure not exceeding 20% of bankss equity.

2. Exposure to any Group shall not exceed 50% of banks equity, subject to

funded exposure not exceeding 35% of banks equity.R2- Limit on Exposure Against Contingent Liabilities

1. Not to exceed 10 times of banks equity.

R3- Minimum Conditions for taking Exposure

1. Obtain CIB report.

2. Financial statements duly audited by a practicing CA, where the borrower isa limited company or exposure exceeds Rs. 10 M .

3. BBFS / Loan Application Form.

R4- Limit on Unsecured Financing.

1. Not to exceed Rs. 500,000/-. Aggregate of clean facilities not to exceedequity of the bank at any point of time.


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Risk ManagementR5- Linkage Ratios1. Total exposure not to exceed 10 times of equity, subject to funded

exposure not to exceed 4 times of equity.

2. Current Ratio

3. Subordinated loans shall be counted as equity. (subordinationagreement to be in place/to be mentioned in audited fin. statement)

4. Regulation not to apply in case of exposure fully secured against liquidassets.

R6- Exposure against Shares/TFCs

1. No exposure against non-listed shares/TFCs.

2. Cannot take exposure against shares/TFCs of listed companies notmembers of CDC.

3. No exposure against unsecured TFCs or non-rated TFCs or TFCs ratedbelow BBB or equivalent.

4. Banks not to own shares of any company in excess of 5% of their ownequity. Further investment in shares not to exceed 20% of banks own

equity.


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Risk Management5. Exposure against the shares of listed companies shall be subject to minimum

margin of 30% of their current market value.

6. Exposure against TFCs rated A and above shall be subject to minimummargin of 10% while exposure against TFCs rated A- and BBB shall be

subject to minimum margin of 20%.R8- Classification & Provisioning for Assets.

Classification Determinant Provisioning

Substandard 90 days overdue 25% of Principal less liquidassets

Doubtful 180 days overdue 50% of Principal less liquid

assets

Loss Overdue by one year 100% of Principal less liquidassets

R10- Facilities to Private Limited Company

Banks to formulate a policy duly approved by their BOD about personal guaranteesof

directors of private limited companies


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Corporate Governance/ BOD &

Management G1(A) Fit & Proper Test

a) Integrity, Honesty, Reputation

b) Track Record

c) Solvency

d) Qualification & Experiencee) Conflict of Interest

(B)- Responsibilities of the BOD:

1. BOD to focus on policy making and general direction, oversight andsupervision of the affairs and business of the bank. BOD not to play any rolein the day-to-day operations, as this is the role of the management.

2. Approve business plans, monitor objectives , define authorities and keyresponsibilities of both directors and key senior management and ensure thatmanagement in the hands of qualified personnel.

3. Create separate department for Internal Control, head of which to reportdirectly to BOD.

4. To ensure existence of an effective Management Information System.


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Corporate Governance/ BOD &

ManagementC)- Management1. No member of the BOD holding 5% or more of the paid-up capital either

individually or with concert of family members shall be appointed in anycapacity except as CEO, further two members of the BOD including its CEOcan be Executive Directors.

(D)-Compliance OfficerBanks to put in place a compliance program to ensure that all relevant laws are

compliedwith in letter and spirit.G2-Dealing with Directors, Major Shareholders and Employees of the BankBanks shall not take exposure on, take exposure against guarantee of:i. Any of their directors

ii. Any of the family members of any of their directorsiii. Any firm/company in which the bank or any of its directors (family members

of directors) are interested as directors/proprietor or partner.G4-Credit Rating1. It shall be mandatory for all banks to have themselves credit rated by a credit

rating agency on the approved panel of SBP. The credit rating will be an ongoing process on a yearly basis.


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Know Your Customer (KYC)M1-Know Your CustomerIn order to prevent money laundering, terrorist financing, transfer

of illegal/ill gotten monies, the importance of KYC has increased.

The following minimum guidelines are required to be followed bybanks. However banks are free to obtain any further

information/documents as they deem fit.

1. KYC policy must be in place

2. All reasonable efforts shall be made to determine true identity

of every prospective customer.3. CNIC to be verified from NADRA.

4. Obtain Introduction

5. Banks to ensure the government accounts are not opened inpersonal names of government officials.


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Anti Money Laundering Measures

M2- Anti Money Laundering Measures

1. Ensure that business is conducted in conformity with high ethicalstandards

2. Banks are required to include accurate and meaningful originatorinformation (name, address, and account number) on funds transfers

M3- Record Retention

1. Banks shall maintain, for a minimum period of 7 years, all necessaryrecords on transactions, both domestic & international. In case wheretransactions relate to litigation or are required by the Court of Law or

any other authority, records to be maintained for longer durations.

2. The records related to suspicious transactions reported by the bankare to be retained till the bank gets permission from SBP to destroythe same.


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Anti Money Laundering MeasuresM5-Suspicious TransactionsI. If the bank suspects or has reasonable grounds to suspect that

funds are proceeds of a criminal activity or terrorist financing. Itshould report promptly, its suspicions, through Compilance

officer to Banking Policy Dept of SBP. The report shouldcontain:

II. Title, type and number of accounts

III. Amounts involved

IV. Details of transactions

V. Reasons for suspicion.

Prudential Regualtions

Documents

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