PRUDENTIAL REGULATIONS

FOR CORPORATE /
COMMERCIAL BANKING

(First Edition – 2003)

BANKING POLICY DEPARTMENT

STATE BANK OF PAKISTAN
 PRUDENTIAL REGULATIONS
TEAM

NAME DESIGNATION TELEPHONE NO. & E-MAIL

Mr. Muhammad Kamran Director 9212512

Shehzad kamran.shehzad@sbp.org.pk

Mr. Muhammad Ashraf Sr. Joint Director 9212431

Khan ashraf.khan@sbp.org.pk

Mr. Shaukat Zaman Sr. Joint Director 9212513

shaukat.zaman@sbp.org.pk

Mr. Inayat Hussain Joint Director 9212511

inayat.hussain@sbp.org.pk

Mr. Ali Hussain Jr. Joint Director 244503519

ali.hussain@sbp.org.pk

Mr. Allauddin Achakzai Assistant Director 244503519

allauddin.achakzai@sbp.org.pk

Mr. Muhammad Asad Asst. Policy Officer 244503519

Akbar asad.akbar@sbp.org.pk

Website Address: www.sbp.org.pk

 CONTENTS

PART-A Definitions. 1

PART-B Regulations. 5

RISK MANAGEMENT (R)

Regulation R-1 Limit on exposure to a single person. 5

Regulation R-2 Limit on exposure against contingent 5

liabilities.

Regulation R-3 Minimum conditions for taking exposure. 6

Regulation R-4 Limit on exposure against unsecured 6

financing facilities.

Regulation R-5 Linkage between financial indicators of 7

the borrower and total exposure from
financial institutions.

Regulation R-6 Exposure against shares / TFCs and 8

acquisition of shares.

Regulation R-7 Guarantees. 9

Regulation R-8 Classification and provisioning for assets. 9

Regulation R-9 Assuming obligations on behalf of NBFCs. 13

Regulation R-10 Facilities to private limited company. 13

Regulation R-11 Payment of dividend. 14

Regulation R-12 Monitoring. 14

Regulation R-13 Margin requirements. 14

CORPORATE GOVERNANCE (G)

Regulation G-1 Corporate governance / board of directors 15

& management.

Regulation G-2 Dealing with directors, major 18

shareholders and employees of the banks
/ DFIs.
Regulation G-3 Contributions and donations for 19
charitable, social, educational and public
welfare purposes.
Regulation G-4 Credit Rating. 19

KYC AND ANTI MONEY LAUNDERING (M)

Regulation M-1 Know your customer (KYC). 20

Regulation M-2 Anti-money laundering measures. 22

OPERATIONS (O)

Regulation O-1 Undertaking of cash payments outside 22

the bank’s authorized place of business.

Regulation O-2 Window dressing. 23

Regulation O-3 Reconciliation of inter-branch accounts 23

and settlement of suspense account
entries.

Regulation O-4 Maintenance of assets in Pakistan. 23

Regulation O-5 Foreign currency deposits under FE-25 - 24

1998.

Annexures 25-47

* * * * * * * * * *
 PREFACE

The existing Prudential Regulations for banks have been thoroughly reviewed in the
light of changes & developments in the financial market and international best
practices, with a view to provide greater flexibility and authority to the banks / DFIs.
Accordingly, a new set of Prudential Regulations covering the areas of Corporate /
Commercial Banking, i.e. other than SMEs Financing and Consumer Financing, for
which State Bank of Pakistan is issuing separate Prudential Regulations, is being
issued herewith. The Prudential Regulations for Corporate / Commercial Banking
have been divided into four categories viz. Risk Management (R), Corporate
Governance (G), KYC and Anti Money Laundering (M) and Operations (O). The
separate Prudential Regulations for SMEs Financing and Consumer Financing shall
only cover the Risk Management category (R). For the remaining three categories
[i.e. Corporate Governance (G), Anti Money Laundering (M) and Operations (O)],
the relevant sections contained in the accompanying Prudential Regulations for
Corporate / Commercial Banking shall be applicable.

For the purpose of Prudential Regulations for SMEs Financing, SME means an
entity, ideally not a public limited company, which does not employ more than 250
persons (if it is manufacturing concern) and 50 persons (if it is trading / service
concern) and also fulfills the following criteria of either ‘a’ and ‘c’ or ‘b’ and ‘c’ as
relevant:
(a) A trading / service concern with total assets at cost excluding land and building
upto Rs 50 million.
(b) A manufacturing concern with total assets at cost excluding land and building
upto Rs 100 million.
(c) Any concern (trading, service or manufacturing) with net sales not exceeding
Rs 300 million as per latest financial statements.

For the purposes of Consumer Financing Prudential Regulations, Consumer

Financing means any financing allowed to individuals for meeting their personal,
family or household needs. The facilities categorized as Consumer Financing are
given as under:

(i) Credit Cards mean cards, which allow a customer to make payments on
credit. Supplementary credit cards shall be considered part of the principal
borrower for the purposes of these regulations. Corporate Card will not fall
under this category and shall be regulated by Prudential Regulations for
Corporate / Commercial Banking or Prudential Regulations for SMEs
Financing as the case may be. The regulations for credit cards shall also be
applicable on charge cards, debit cards stored value cards and BTF (Balance
Transfer Facility).

(i) Auto Loans mean the loans to purchase the vehicle for personal use.

(iii) Housing Finance means loan provided to individuals for the purchase of
residential house / apartment / land. The loans availed for the purpose of
making improvements in house / apartment / land shall also fall under this
category.
(iv) Personal loans mean the loans to individuals for the payment of goods,
services and expenses and include Running Finance / Revolving Credit to
individuals.

It may be noted that any financing facility, other than SMEs Financing and
Consumer Financing as stipulated above, shall be governed by the Prudential
Regulations for Corporate / Commercial Banking. However, in case of international
operations, the Prudential Regulations of host country shall prevail.

The Prudential Regulations for Corporate / Commercial Banking do not supercede

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.

With the improvement in Corporate Governance standards and employment of

better risk management techniques, systems and internal controls by the banking
sector, it is anticipated that present regulatory regime by way of Prudential
Regulations will gradually recede and risk management policy guidelines issued by
State Bank of Pakistan will replace them, as per announcements from State Bank of
Pakistan, to be issued from time to time.

MUHAMMAD KAMRAN SHEHZAD

Director
Banking Policy Department
 PART – A
DEFINITIONS

For the purpose of these regulations: -

1. Account Holder means a person who has opened any account with a bank or
is a holder of deposit / deposit certificate or any instrument representing
deposit / placing of money with a bank / DFI or has borrowed money from the
bank / DFI.

2. Bank means a banking company as defined in the Banking Companies

Ordinance, 1962.

3. Borrower means a person on whom a bank / DFI has taken any exposure
during the course of business.

4. Contingent liability means:

(a) a possible obligation that arises from past events and whose existence will
be confirmed only by the occurrence or non- occurrence of one or more
uncertain future events not wholly within the control of the enterprise; or
(b) a present obligation that arises from past events but is not recognized
because:
(i) it is not probable that an outflow of resources embodying economic
benefits will be required to settle the obligation; or
(ii) the amount of the obligation cannot be measured with sufficient
reliability;
and includes letters of credit, letters of guarantee, bid bonds / performance
bonds, advance payment guarantees and underwriting commitments.

5. Corporate Card means credit card issued to the employees of an entity

where the repayment is to be made by the said entity.

6. DFI means Development Financial Institution and includes the Pakistan

Industrial Credit and Investment Corporation (PICIC), the Saudi Pak Industrial
and Agricultural Investment Company Limited, the Pak Kuwait Investment
Company Limited, the Pak Libya Holding Company Limited, the Pak Oman
Investment Company (Pvt.) Limited and any other financial institution notified
under Section 3A of the Banking Companies Ordinance, 1962.

7. Documents include vouchers, cheques, bills, pay-orders, promissory notes,

securities for leases / advances and claims by or against the bank / DFI or
other papers supporting entries in the books of a bank / DFI.

8. Equity of the Bank / DFI means Tier-I Capital or Core Capital and includes
paid-up capital, general reserves, balance in share premium account, reserve
for issue of bonus shares and retained earnings / accumulated losses as
disclosed in latest annual audited financial statements. In case of branches of
foreign banks operating in Pakistan, equity will mean capital maintained, free
of losses and provisions, under Section 13 of the Banking Companies
Ordinance, 1962.

1
 For the purpose of Regulation R-1, reserve shall also include revaluation
reserves on account of fixed assets to the extent of 50% of their value.
However, for this purpose assets must be prudently valued by valuers on the
panel of Pakistan Bank Association (PBA), fully taking into account the
possibility of price fluctuations and forced sale value. Revaluation reserves
reflecting the difference between the book value and the market value will be
eligible up to 50%.

9. Equity of the Borrower includes paid-up capital, general reserves, balance in

share premium account, reserve for issue of bonus shares and retained
earnings / accumulated losses, revaluation reserves on account of fixed
assets and subordinated loans.

Revaluation reserves will remain part of the equity for first three years only,
from the date of asset revaluation, during which time the borrower will
strengthen its equity base to enable it to avail facilities without the benefit of
revaluation reserves.

10. Exposure means financing facilities whether fund based and / or non-fund
based and include:

(i) Any form of financing facility extended or bills purchased/ discounted

except ones drawn against the L/Cs of banks / DFIs rated at least ‘A’ by
Standard & Poor, Moody’s, and Fitch-Ibca or credit rating agency on the
approved panel of State Bank of Pakistan and duly accepted by such
L/C issuing banks / DFIs
(ii) Any financing facility extended or bills purchased/discounted on the
guarantee of the person.
(iii) Subscription to or investment in shares, Participation Term Certificates,
Term Finance Certificates or any other Commercial Paper by whatever
name called (at book value) issued or guaranteed by the persons.
(iv) Credit facilities extended through corporate cards.
(v) Any financing obligation undertaken on behalf of the person under a
letter of credit including a stand-by letter of credit, or similar instrument.
(vi) Loan repayment financial guarantees issued on behalf of the person.
(vii) Any obligations undertaken on behalf of the person under any other
guarantees including underwriting commitments.
(viii) Acceptance/endorsements made on account.
(ix) Any other liability assumed on behalf of the client to advance funds
pursuant to a contractual commitment.

11. Financial Institutions mean banks, Development Financial Institutions (DFIs)

and NBFCs.

12. Forced Sale Value (FSV) means the value which fully reflects the possibility of
price fluctuations and can currently be obtained by selling the mortgaged /
pledged assets in a forced / distressed sale conditions.

13. Government Securities shall include such types of Pak. Rupee obligations of
the Federal Government or a Provincial Government or of a Corporation
wholly owned or controlled, directly or indirectly, by the Federal Government or

2
 a Provincial Government and guaranteed by the Federal Government as the
Federal Government may, by notification in the Official Gazette, declare, to the
extent determined from time to time, to be Government Securities.

14. Group means persons, whether natural or juridical, if one of them or his
dependent family members or its subsidiary, have control or hold substantial
ownership interest or have power to exercise significant influence over the
other or are financially interdependent on each other. For the purpose of this:

(a) Subsidiary will have the same meaning as defined in sub-section 3(2) of
the Companies Ordinance, 1984 i.e. a company or a body corporate
shall deemed to be a subsidiary of another company if that other
company or body corporate directly or indirectly controls, beneficially
owns or holds more than 50% of its voting securities or otherwise has
power to elect and appoint more than 50% of its directors.
(b) Control refers to an ownership directly or indirectly through subsidiaries,
of more than one half of voting power of an enterprise.
(c) Substantial ownership / affiliation means beneficial share holding of
10% (5% for banking companies / DFIs) by a person and/or by his
dependent family members.
(d) Significant influence refers to the management control of the company,
to participate in financial and operating policies, either exercised by
representation in the Board of Directors, partnership or by statute /
agreement in the policy making process or affiliation or material inter-
company transactions.
(e) Financially interdependent mean the persons have financial liability
with the other in excess of 10% of the equity of the either, or either has
guaranteed repayment of loan towards financial institutions.

15. Liquid Assets are the assets which are readily convertible into cash without
recourse to a court of law and mean encashment / realizable value of
government securities, bank deposits, certificates of deposit, shares of listed
companies which are actively traded on the stock exchange, NIT Units,
certificates of mutual funds, Certificates of Investment (COIs) issued by DFIs /
NBFCs rated at least ‘A’ by a credit rating agency on the approved panel of
State Bank of Pakistan, listed TFCs rated at least ‘A’ by a credit rating agency
on the approved panel of State Bank of Pakistan and certificates of asset
management companies for which there is a book maker quoting daily offer
and bid rates and there is active secondary market trading. These assets with
appropriate margins should be in possession of the banks / DFIs with
perfected lien.

16. Major Shareholder of a bank / DFI means any person holding 5% or more of
the share capital of a bank / DFI either individually or in concert with family
members. Family members have the same meaning as defined in the Banking
Companies Ordinance, 1962.

17. Medium and Long Term Facilities mean facilities with maturities of more than
one year and Short Term Facilities mean facilities with maturities up to one
year

3
18. NBFC means Non-Banking Finance Company and includes a Modaraba,
Leasing Company, Housing Finance Company, Investment Bank, Discount
House, Asset Management Company and a Venture Capital Company.

19. Other Form of Security means hypothecation of stock (inventory), assignment

of receivables, lease rentals, contract receivables, etc.

20. PBA means Pakistan Banks Association.

21. Person means and includes an individual, a Hindu undivided family, a firm, an
association or body of individuals whether incorporated or not, a company and
every other juridical person.

22. Readily Realizable Assets mean and include liquid assets and stocks pledged
to the banks / DFIs in possession, with ‘perfected lien’ duly supported with
complete documentation.

20. Secured means exposure backed by tangible security and any other form of
security with appropriate margins (in cases where margin has been prescribed
by State Bank, appropriate margin shall at least be equal to the prescribed
margin). Exposure without any security or collateral is defined as clean.

21. Subordinated Loan means an unsecured loan extended to the borrower by its
sponsors, subordinate to the claim of the bank / DFI taking exposure on the
borrower and documented by a formal sub-ordination agreement between
provider of the loan and the bank / DFI. The loan shall be disclosed in the
annual audited financial statements of the borrower as subordinated loan.

22. Tangible Security means readily realizable assets (as defined in these
Prudential Regulations), mortgage of land, plant, building, machinery and any
other fixed assets.

23. Underwriting Commitments mean commitments given by commercial banks /

DFIs to the limited companies at the time of new issue of equity / debt
instrument, that in case the proposed issue of equity/debt instrument is not
fully subscribed, the un-subscribed portion will be taken up by them
(commercial banks / DFIs).

4
 PART - B
REGULATIONS

REGULATION R-1
LIMIT ON EXPOSURE TO A SINGLE PERSON

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.

2. 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.

3. For the purpose of this regulation banks / DFIs are required to follow the
guidelines given at Annexure-I.

REGULATION R-2
LIMIT ON EXPOSURE AGAINST CONTINGENT LIABILITIES

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:

(a) Bills for collection.

(b) Obligations under Letters of Credit and Letters of Guarantee to the

extent of cash margin retained by the bank / DFI.

(c) 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 & Poors, Moody’s or Fitch-Ibca.

(d) Non-fund based exposure to the extent covered by liquid assets.

(e) 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.

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.

5
REGULATION R-3
MINIMUM CONDITIONS FOR TAKING EXPOSURE

While considering proposals for any exposure (including renewal,

enhancement and rescheduling / restructuring) exceeding such limit as may be
prescribed by State Bank of Pakistan from time to time (presently at Rs 500,000/-),
banks / DFIs should give due weightage to the credit report relating to the borrower
and his group obtained from Credit Information Bureau (CIB) of State Bank of
Pakistan. However, banks / DFIs may take exposure on defaulters keeping in view
their risk management policies and criteria, provided they properly record reasons
and justifications in the approval form. The condition of obtaining CIB report will
apply to exposure exceeding Rs 500,000/- after netting-off the liquid assets held as
security.

2. Banks / DFIs shall, as a matter of rule, obtain a copy of financial statements

duly audited by a practicing Chartered Accountant, relating to the business of every
borrower who is a limited company or where the exposure of a bank / DFI exceeds
Rs 10 million, for analysis and record. However, financial statements signed by the
borrower will suffice where the exposure is fully secured by liquid assets.

3. Banks / DFIs shall not approve and / or provide any exposure (including
renewal, enhancement and rescheduling / restructuring) until and unless the Loan
Application Form (LAF) prescribed by the banks / DFIs is accompanied by a
‘Borrower’s Basic Fact Sheet’ under the seal and signature of the borrower as per
approved format of the State Bank of Pakistan (Annexure II-A for corporate
borrowers and Annexure II-B for individual borrowers).

REGULATION R-4
LIMIT ON EXPOSURE AGAINST
UNSECURED FINANCING FACILITIES

Banks / DFIs shall not provide unsecured / clean financing facility in any
form of a sum exceeding Rs 500,000/- (Rupees five hundred thousand only) to any
one person. Financing facilities granted without securities including those granted
against personal guarantees shall be deemed as ‘clean’ for the purpose of this
regulation. Provided further that at the time of granting a clean facility, banks / DFIs
shall obtain a written declaration to the effect that the borrower in his own name or in
the name of his family members, has not availed of such facilities from other banks /
DFIs so as to exceed the prescribed limit of Rs 500,000/- in aggregate.

2. For the purpose of this regulation, following shall be excluded / exempted

from the per party limit of Rs 500,000/- on the clean facilities:

a) Facilities provided to finance the export of commodities eligible under

Export Finance Scheme.

b) Financing covered by the guarantee of Pakistan Export Finance

Guarantee Agency.

c) Loans / advances given to the employees of the banks / DFIs in

accordance with their entitlement / staff loan policy.

6
3. Banks / DFIs shall ensure that the aggregate exposure against all their clean
facilities shall not, at any point in time, exceed the amount of their equity.

REGULATION R-5
LINKAGE BETWEEN FINANCIAL INDICATORS OF
THE BORROWER AND TOTAL EXPOSURE
FROM FINANCIAL INSTITUTIONS

While taking any exposure, banks / DFIs shall ensure that the total exposure
(fund-based and non-fund based) availed by any borrower from financial institutions
does not exceed 10 times of borrower’s equity as disclosed in its financial
statements (obtained in accordance with para 2 of Regulation R-3), subject to the
condition that the fund based exposure does not exceed 4 times of its equity as
disclosed in its financial statements. However, where the equity of a borrower is
negative and the borrower has injected fresh equity during its current accounting
year, it is eligible to obtain finance not exceeding 3 times of the fresh injected equity
provided the borrower shall plough back at least 80% of the net profit each year until
such time that it is able to borrow without this relaxation. In exceptional cases,
banks / DFIs may allow seasonal financing to borrowers, for a maximum period of
six months, not meeting the criteria of 4 times of fund based exposure and 10 times
total exposure, subject to the condition that fund based exposure does not exceed 8
times and total exposure does not exceed 12 times of borrower’s equity.

2. It is expected that at the time of allowing fresh exposure / enhancement /

renewal, the current assets to current liabilities ratio of the borrower shall not be
lower than 1:1. However, in exceptional cases, banks / DFIs may relax this ratio
upto 0.75:1 if they are satisfied that appropriate risk mitigants have been put in place
or the ratio has been adversely impacted due to the nature of the business of the
borrower.

3 For the purpose of this regulation, subordinated loans shall be counted as

equity of the borrower. Banks / DFIs should specifically include the condition of
subordinated loan in their Offer Letter. The subordination agreement to be signed by
the provider of the subordinated loan, should confirm that the subordinated loan will
be repaid after that bank’s / DFI’s prior approval.

4. This regulation shall not apply in case of exposure fully secured against
liquid assets held as collateral. Export finance and finance provided to ginning and
rice husking factories shall also be excluded from the borrowings (exposure) for the
purpose of this regulation.

5. Where the banks / DFIs have taken exposure on exceptional basis as

provided in para 1 & 2 above, they shall record in writing the reasons and
justifications for doing so in the approval form and maintain a file in their central
credit office containing all such approvals. The Exceptions Approval file shall be
made available to the inspection team of State Bank during the inspection.

7
REGULATION R-6
EXPOSURE AGAINST SHARES / TFCs
AND ACQUISITION OF SHARES

1. A) EXPOSURE AGAINST SHARES/TFCS:

Banks / DFIs shall not:

a) take exposure against the security of shares / TFCs issued by them.

b) provide unsecured credit to finance subscription towards floatation of
share capital and issue of TFCs.
c) take exposure against the non-listed TFCs or the shares of companies
not listed on the Stock Exchange(s).
d) take exposure on any limited company against the shares/TFCs of that
company or its group companies.
e) take exposure against ‘sponsor director’s shares’ (issued in their own
name or in the name of their family members) of banks / DFIs.
f) take exposure on any one person (whether singly or together with other
family members or companies owned and controlled by him or his family
members) against shares of any commercial bank / DFI in excess of 5%
of paid-up capital of the share issuing bank / DFI.
g) take exposure against the shares/TFCs of listed companies that are not
members of the Central Depository System.
h) take exposure against unsecured TFCs or non-rated TFCs or TFCs
rated below ‘BBB’ or equivalent.

1. B) ACQUISITION OF SHARES:

Banks / DFIs shall not own shares of any company / scrips in excess of 5%
of their own equity provided their total investments in shares should not exceed 20%
of their own equity. For this purpose, shares will be valued in accordance with State
Bank of Pakistan guidelines for valuation of marketable securities. The investments
of the bank / DFI in its subsidiary companies (listed as well as non-listed) and
strategic investments of the bank / DFI (marked as such at the time of investment
and to be disposed off only with the prior approval of State Bank of Pakistan) shall
not be included in these limits. The shares acquired in excess of 5% limit due to the
underwriting commitments will be sold off/off loaded within a period of three months.

The above condition shall also be applicable on Islamic banks to the extent of 35%
of their equity. The banks / DFIs breaching the limit under clause 1 (B) of this
regulation shall regularize their position within one year from the date of issuance of
these regulations.

2. Banks / DFIs shall not hold shares in any company whether as pledgee,
mortgagee, or absolute owner, of an amount exceeding 30% of the paid-up share
capital of that company or 30% of their own paid-up share capital and reserves,
whichever is less.

8
3. Exposure against the shares of listed companies shall be subject to
minimum margin of 30% of their current market value, though the banks / DFIs may,
if they wish, set higher margin requirements keeping in view other factors. The
banks / DFIs will monitor the margin on at least weekly basis and will take
appropriate action for top-up and sell-out on the basis of their Board of Directors’
approved credit policy and pre-fact written authorization from the borrower enabling
the bank / DFI to do this.

4. Exposure against TFCs rated ‘A’ (or equivalent) and above by a credit rating
agency on the approved panel of State Bank of Pakistan shall be subject to a
minimum margin of 10% while the exposure against TFCs rated ‘A-‘ and ‘BBB’ shall
be subject to a minimum margin of 20%.

REGULATION R-7
GUARANTEES

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. The requirement of security can also be waived by the banks / DFIs in cases
of guarantees issued to Pakistani firms and companies functioning in Pakistan
against the back to back / counter guarantees of branches of guarantee issuing
bank / DFI or banks / DFIs rated at least ‘A’ or equivalent by a credit rating agency
on the approved panel of State Bank of Pakistan or Standard & Poor, Moody’s and
Fitch-Ibca. The banks / DFIs are encouraged to set limits for acceptance of
guarantees issued by other banks / DFIs.

3. 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 or Fitch-Ibca.

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

REGULATION R-8
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.

9
2. In addition to the time-based criteria prescribed in Annexure-IV, subjective
evaluation of performing and non-performing credit portfolio shall be made for risk
assessment and, where considered necessary, any account including the
performing account will be classified, and the category of classification determined
on the basis of time based criteria shall be further downgraded. Such evaluation
shall be carried out on the basis of credit worthiness of the borrower, its cash flow,
operation in the account, adequacy of the security, inclusive of its realizable value
and documentation covering the advances.

3. The rescheduling / restructuring of non-performing loans shall not change

the status of classification of a loan / advance etc. unless the terms and conditions
of rescheduling / restructuring are fully met for a period of at least one year
(excluding grace period, if any) from the date of such rescheduling / restructuring
and at least 10% of the outstanding amount is recovered in cash. Further, the
unrealized mark-up on such loans (declassified after rescheduling / restructuring)
shall not be taken to income account unless at least 50% of the amount is realized
in cash. However, this will not impact the de-classification of this account if all other
criteria (meeting the terms and conditions for at least for one year and payment of at
least 10% of outstanding amount by the borrower) are met. Accordingly, banks /
DFIs are directed to ensure that status of classification, as well as provisioning, is
not changed in relevant reports to the State Bank of Pakistan merely because a loan
has been rescheduled or restructured. However, while reporting to the Credit
Information Bureau (CIB) of State Bank of Pakistan, such loans / advances may be
shown as ‘rescheduled / restructured’ instead of ‘default’.

Where a borrower subsequently defaults (either principal or mark-up) after the

rescheduled / restructured loan has been declassified by the bank / DFI as per
above guidelines, the loan will again be classified in the same category it was in at
the time of rescheduling / restructuring and the unrealized markup on such loans
taken to income account shall also be reversed. However, banks / DFIs at their
discretion may further downgrade the classification, taking into account the
subjective criteria.

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.

4. Banks / DFIs shall classify their loans / advances portfolio and make
provisions in accordance with the criteria prescribed above. Moreover, where banks
/ DFIs wish to avail the benefit of collateral held against loans / advances, they can
consider the value, determined in accordance with the guidelines laid down in
Annexure-V, of assets mortgaged / pledged with them, for deduction from the
outstanding principal amount of loan / advance against which such assets are
mortgaged / pledged, before making any provision. The value of the mortgaged /
pledged assets, other than liquid assets, to be considered for this purpose shall be
the forced sale value. Further, Forced Sale Value (FSV) once determined, shall
remain valid for three years from the date of valuation during which period the
underlying collateral will not be revalued for provisioning purpose. The adjustment
factors of 80%, 70% and 50% shall be applied on the value so determined for the
purpose of determining provisioning requirement in 1st, 2nd and 3rd year of valuation,
respectively. Thereafter, the assets shall be revalued and the adjustment factor of

10
50% shall be applied for all subsequent years. However, the FSV of the collateral
shall be restricted to fresh revaluation or previous value, whichever is less. All
valuations conducted during the years 2002 & 2003 shall also be considered 1st
year valuations only for the application of adjustment factors referred to above.
However, after completion of three years, from the date of last valuation, such
assets will also have to be revalued.

For loans which are classified after the issuance of these Prudential Regulations,
the benefit will be available for a period of three years going forward up to 80%, 70%
& 50% of the FSV for the years 1, 2 & 3 respectively. From year 4, the benefit for
provisioning purposes will then remain at 50% of either the previous FSV or the
fresh valuation whichever is less. As for loans which are already classified as of the
date of issuance of these Prudential Regulation, the banks / DFIs may take benefit
of FSV of collateral for the year ended 2003, in accordance with the previous
guidelines on the subject. From year 2004, FSVs will be subject to the adjustment
factors of 80%, 70% & 50% in 1, 2 & 3 years respectively and then remain at 50% in
subsequent years.

To illustrate this new requirement, two scenarios are presented below. Scenario-1
shows the treatment of an existing classified loan and Scenario-2 shows the
treatment for an existing satisfactory category loan which becomes classified after
the issuance of these Prudential Regulations.

Scenario-1: The collateral has been evaluated in the year 2003 and FSV has been
worked out as Rs 300 million. FSV of the collateral has been revalued in the years
2006 & 2009 at Rs 400 million and Rs 450 million respectively, when revaluation is
required to be done after completion of three years, if a bank / DFI wishes to avail
the benefit of FSV for the purposes of provisioning.

YEAR 2003 2004 2005 2006 2007 2008 2009

FSV (in Million) 300 300 300
Adjustment Factors None * 80% ** 70%
Benefit for Provisioning 300 240 210
FSV (Revalued) 400
Value taken *** 300 300 300
Adjustment Factors 50% 50% 50%
Benefit for Provisioning 150 150 150
FSV (Revalued) 450
Value taken *** 300
Adjustment Factors 50%
Benefit for Provisioning 150
* In accordance with the previous guidelines on the subject.
*** Valuations conducted during the year 2002 and 2003 will be considered 1st
year valuations for the purposes of application of adjustment factors.
** Fresh FSV after three years or previous FSV, which ever is lower.

11
Scenario-2: When the property has been evaluated after the year 2004, say in year
2005 and FSV is Rs 200 million and revalued FSV in year 2008 is Rs 250 million.
The benefit of the provisioning would be available in the following manner:

YEAR 2004 2005 2006 2007 2008 2009 2010

FSV (in Million) 200 200 200
Adjustment Factors 80% 70% 50%
Benefit for Provisioning 160 140 100
FSV – Revalued 250
Value taken * 200 200 200
Adjustment Factors 50% 50% 50%
Benefit for Provisioning 100 100 100

* Fresh FSV after three years or previous FSV, which ever is lower.

5. Banks / DFIs are allowed transition period upto December 31, 2004 to
regularize their provisioning position in accordance with the incremental provisioning
requirement given at para 4 above

INVESTMENTS AND OTHER ASSETS:

6. Investment portfolio / 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:

(i) Quoted Securities

• Government Securities will be valued at PKRV (Reuter Page) and
diminution, if any, will be subject to provision.
• TFCs, PTCs and shares will be valued at their market value and
provided for to the extent of difference in their market value and
book value.

(ii) 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. The shares will be
classified on the basis of break-up value. Where break-up value is less
than the book value, the difference of book value and break-up value will
be classified as loss.

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

TIMING OF CREATING PROVISIONS:

8. Banks / DFIs shall review, at least on a quarterly basis, the collectibility of
their loans / advances portfolio and shall properly document the evaluations so
made. Shortfall in provisioning, if any, determined, as a result of quarterly

12
assessment shall be provided for immediately in their books of accounts by the
banks / DFIs on quarterly basis.

REVERSAL OF PROVISION:
9. The provision held against classified assets will only be released when cash
realization starts exceeding:
(i) in case of loss category, the net book value of the assets;
(ii) in case of doubtful category, 50% of the net book value of the assets;
and
(iii) in case of sub-standard category, 25% of the net book value of the
assets.
Further, the provision made on the advice of State Bank of Pakistan will not be
reversed without prior approval of State Bank of Pakistan.

VERIFICATION BY THE AUDITORS:

10. The external auditors as a part of their annual audits of banks / DFIs shall
verify that all requirements of Regulation R-8 for classification and provisioning for
assets have been complied with. The State Bank of Pakistan shall also check the
adequacy of provisioning during on-site inspection.

REGULATION R-9
ASSUMING OBLIGATIONS ON BEHALF OF NBFCs

Banks / DFIs shall not issue any guarantee or letter of comfort nor assume
any obligation whatsoever in respect of deposits, sale of investment certificates,
issue of commercial papers, or borrowings of any non-banking finance company.
Banks / DFIs may, however, allow exposure to any of their client against the
guarantee of an NBFC which is rated at least ‘A’ or equivalent by a credit rating
agency on the approved panel of State Bank of Pakistan. The total amount of
guarantees issued by an NBFC, and accepted by the banks, on the strength of
which the exposure will be allowed by the commercial bank / DFI, will not exceed
per party limit of the bank / DFI as mentioned in Regulation R-1. Before taking
exposure against the guarantee of NBFC, banks / DFIs shall ensure that total
guarantees issued by an NBFC in favour of banks / DFIs do not exceed 2.5 times of
capital of the NBFC as evidenced by the latest available audited financial
statements of the NBFC and such other means as the banks / DFIs may deem
appropriate.

REGULATION R-10
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.

13
REGULATION R-11
PAYMENT OF DIVIDEND

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

(a) they meet the minimum capital requirements as laid down by the State
Bank of Pakistan from time to time;

(b) 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

(c) all the requirements laid down in Banking Companies Ordinance, 1962
relating to payment of dividend are fully complied.

REGULATION R-12
MONITORING

While extending fund based facilities to borrowers against hypothecation of

stock and / or receivables on pari-passu basis, banks / DFIs shall obtain monthly
statements from borrowers that contain a bank-wise break-up of outstanding
amounts with the total value of stocks and receivables there-against.

REGULATION R-13
MARGIN REQUIREMENTS

Banks / DFIs shall adhere to the margin requirements as prescribed by State

Bank of Pakistan from time to time. The current margin requirements are placed at
Annexure-IX.

14
REGULATION G-1
CORPORATE GOVERNANCE / BOARD
OF DIRECTORS AND MANAGEMENT

The following guidelines are required to be followed by banks / DFIs

incorporated in Pakistan. They will also follow ‘Code of Corporate Governance’
issued by the Securities & Exchange Commission of Pakistan (SECP) so long as
any provision thereof does not conflict with any provision of the Banking Companies
Ordinance, 1962, Prudential Regulations and the instructions / guidelines issued by
the State Bank of Pakistan. Foreign banks are required to adhere to these
guidelines wherever feasible and applicable. However, they need not necessarily
seek approval of their Board of Directors, as stipulated below in the case of local
banks / DFIs:

A. FIT AND PROPER TEST:

The banks / DFIs will provide information about the appointment of proposed
President / Chief Executive and Director on the Board on proforma (Annexure VI-A)
for obtaining necessary clearance. Besides, the candidates for the post of President
/ Chief Executive and directors of Board will be required to meet the Fit and Proper
Test (FPT) laid down in Annexure VII-A.

B. RESPONSIBILITIES OF THE BOARD OF DIRECTORS:

The Board of Directors shall assume its role independent of the influence of
the Management and should know their responsibilities and powers in clear terms. It
should be ensured that the Board of Directors focus on policy making and general
direction, oversight and supervision of the affairs and business of the bank / DFI and
does not play any role in the day-to-day operations, as that is the role of the
Management.

2. The Board shall approve and monitor the objectives, strategies and overall
business plans of the institution and shall oversee that the affairs of the institution
are carried out prudently within the framework of existing laws and regulations and
high business ethics.

3. All the members of the Board should undertake and fulfill their duties and
responsibilities keeping in view their legal obligations under all the applicable laws
and regulations.

4. The Board shall clearly define the authorities and key responsibilities of both
the Directors and the Senior Management without delegating its policymaking
powers to the Management and shall ensure that the Management is in the hands of
qualified personnel.

5. The Board shall approve and ensure implementation of policies, including

but not limited to, in areas of Internal Audit & Control, Compliance, Risk
Management, Human Resources, Credit, Write-offs, Recovery,
Rescheduling/Restructuring of debt, Treasury Management, Investments,
Acquisition/Disposal of fixed assets, Donations/Charities, Prevention of Frauds &
Forgeries and any other operational area which the Board and / or the Management

15
may deem appropriate from time to time. The Board shall also be responsible to
review and update existing policies periodically and whenever circumstances justify.

6. As regards Internal Audit or Internal Control, a separate department shall be

created which will be manned preferably by professionals responsible to conduct
audit of the bank’s / DFI’s various Divisions, Offices, Units, Branches etc. in
accordance with the guidelines of the Audit Manual duly approved by the Broad of
Directors. The Head of this department will report directly to the Board of Directors
or Board Committee on Internal Audit.

7. The markets are ever changing and so are their requirements. The Board,
therefore, is required to ensure existence of an effective ‘Management Information
System’ to remain fully informed of the activities, operating performance and
financial condition of the institution, the environment in which it operates, the various
risks it is exposed to and to evaluate performance of the Management at regular
intervals.

8. The Board should meet frequently (preferably on monthly basis, but in any
event, not less than once every quarter) and the individual directors of an institution
should attend at least half of the meetings held in a financial year. The Board should
ensure that it receives sufficient information from Management on the agenda items
well in advance of each meeting to enable it to effectively participate in and
contribute to each meeting. The Board should carry out its responsibilities in such a
way that the external auditors and supervisors can see and form judgment on the
quality of Board’s work and its contributions through proper and detailed minutes of
the deliberations held and decisions taken during the Board meetings.

9. To share the load of activities, the Board may form specialized committees
with well-defined objectives, authorities and tenure. These committees, preferably
comprising of ‘Non-Executive’ board members, shall oversee areas like audit, risk
management, recruitment, compensation, credit, etc. without indulging in day-to-day
operations in these areas. These committees should apprise the full board of their
activities and achievements on regular basis.

10. The Board should ensure that it receives management letter from the
external auditors without delay. It should also be ensured that appropriate action is
taken in consultation with the Audit Committee of the Board to deal with control or
other weaknesses identified in the management letter. A copy of that letter should
be submitted to the State Bank of Pakistan so that it can monitor follow-up actions.

C. MANAGEMENT:

No member of the Board of Directors of a bank / DFI holding 5% or more of

the paid-up capital of the bank / DFI either individually or in concert with family
members or concerns / companies in which he / she has the controlling interest,
shall be appointed in the bank / DFI in any capacity save as the Chief Executive of
the bank / DFI (which should not exceed one in any case) and that no payment shall
be made or perquisites provided to any such directors other than traveling and daily
allowances for attending meetings of the Board of Directors or its Committees.
Provided further that not more than 25% of the total directors can be paid executives
of the bank / DFI. These instructions shall apply to all banks / DFIs other than those
owned, controlled and managed by the Government.

16
D. COMPLIANCE OFFICER:

Banks / DFIs shall put in place a Compliance Programme to ensure that all
relevant laws are complied with, in letter and spirit, and, thus, minimize legal and
regulatory risks. For this purpose, the Board of Directors, or Country Manager in
case of foreign banks, shall appoint / designate a suitably qualified and experienced
person as Compliance Officer on a countrywide basis, who may be assisted by
other Compliance Officers down the line. The Compliance Officers will primarily be
responsible for bank’s / DFI’s effective compliance relating to:
(a) SBP Prudential Regulations.
(b) Relevant provisions of existing laws and regulations.
(c) Guidelines for KYC.
(d) Anti money laundering laws and regulations.
(e) Timely submission of accurate data / returns to regulator and other
agencies.
(f) Monitor and report suspicious transactions to President / Chief
Executive Officer of the bank / DFI and other related agencies.

2. Banks / DFIs are, however, free to add other areas of compliance under the
responsibilities of Compliance Officer and consider setting up a compliance
committee under him, as they deem fit to protect the interest of the institution.

3. The Compliance Officers will (i) serve as a contact point between President
/Chief Executive Officer and senior management, with regard to functioning of the
compliance programme, (ii) provide assistance in this area to branches and other
departments of the bank / DFI, and (iii) act as liaison with State Bank of Pakistan
concerning the issues related to compliance.

4. Banks / DFIs are, therefore, advised to put in place, in writing, a complete

programme of compliance down the line under the supervision of a Compliance
Officer. A compliance report in this regard alongwith name, contact and address of
the Compliance Officer and a copy of that bank’s / DFI’s compliance programme
may be furnished to State Bank latest by 31st October 2003.

E. FITNESS AND PROPRIETY OF KEY EXECUTIVES:

Banks / DFIs shall strictly follow the guidelines contained in the ‘Fit and
Proper Test’ (FPT) at Annexure VII-B during the course of appointment of key
executives particularly those having the following functional responsibilities:
(a) Chief Financial Officer / Head of Finance / Head of Accounts.
(b) Head of Internal Audit.
(c) Country Treasurer.
(d) Head of Credit/ Risk Management.
(e) Head of Operations.
(f) Head of Compliance.
(g) Head of Human Resource.

2. No prior approval is required from the State Bank of Pakistan for

aforementioned appointments and each bank / DFI shall report only brief information
of such appointments, as and when made, as per format given at Annexure VI-B to
the Director Banking Policy Department for information and record within 7 days
from the date of joining of these executives.

17
3. In case it is found at subsequent stage/during the course of inspection that
guidelines of FPT have not been followed or the incumbent is not a fit and proper
person, strict punitive action will be taken under the relevant provisions of Banking
Companies Ordinance 1962, in addition to directing the banks / DFIs to dispense
with the services of concerned officer if recruited afresh; and in case of existing
employee, the same to be transferred from the post immediately.

REGULATION G-2
DEALING WITH DIRECTORS, MAJOR SHARE-HOLDERS
AND EMPLOYEES OF THE BANKS / DFIs

Banks / DFIs shall not enter into leasing, renting and sale / purchase of any
kind with their directors, officers, employees or such persons who either individually
or in concert with family members beneficially own 5% or more of the equity of the
bank / DFI. This restriction does not apply in case of purchase of vehicles by the
paid directors, officers or employees of the banks / DFIs which remained in their
own use, provided such sale is covered under the employees service rules duly
approved by the Board of Directors of the banks / DFIs and is effected by the banks
/ DFIs at least at book value at the date of such transaction.

2. Banks / DFIs shall not:

(a) take unsecured exposure on, or take exposure against the guarantee
of:
(i) any of their directors;
(ii) any of the family members of any of their directors;
(iii) any firm or private company in which the bank / DFI or any of
the persons referred to in (i) or (ii) are interested as director,
proprietor or partner; or
(iv) any public limited company in which the bank / DFI or any of the
persons as aforesaid are substantially interested; and
(v) their Chief Executive and shareholders holding 5% or more of
the share capital of the bank / DFI, including their spouses,
parents, and children or to firms and companies in which they
are interested as partners, directors or shareholders holding 5%
or more of the share capital of that concern.

(b) take any exposure on any of their directors or to individuals, firms or

companies in which they or any of their directors is interested as
partner, director or guarantor, as the case may be, their Chief
Executives and shareholders holding 5% or more of the share capital
of the bank / DFI, including their spouses, parents, and children or to
firms and companies in which they are interested as partners,
directors or shareholders holding 5% or more of the share capital of
that concern, without the approval of the majority of the directors of
that bank / DFI excluding the director concerned. The facilities to the
persons mentioned above shall be extended at market terms and
conditions and be dealt with at arm length basis.

18
REGULATION G-3
CONTRIBUTIONS AND DONATIONS FOR CHARITABLE, SOCIAL,
EDUCATIONAL, AND PUBLIC WELFARE PURPOSES

Banks / DFIs shall strictly observe the following rules in the matter of making
any donation / contribution for charitable, social, educational or public welfare
purposes:

(i) The total donations/contributions made by the bank / DFI during the year
shall not exceed such amount as approved by their Board of Directors. It
is expected that banks / DFIs making these donations / contributions
would have already met provisioning and capital adequacy
requirements.

(ii) The banks / DFIs shall develop policy / guidelines duly approved by the
Board of Directors for making donations/contributions.

2. All donations or contributions to be made during the year must be

specifically approved by the Board of Directors on pre or post facto basis as
convenient.

3. Banks / DFIs are further directed to expressly disclose in their annual

audited financial statements the total donation / contribution made during the year
alongwith names of donees, to whom total donations/ contributions during the year
were made in excess of Rs 100,000/. In the case of donations where any director or
his family members have interest in the donee, the names of such directors, their
interest in the donee and the names and addresses of all donees, shall also be
given.

REGULATION G-4
CREDIT RATING

With a view to safeguard the interest of prospective investors, depositors

and creditors, it shall be mandatory for all banks / DFIs to have themselves credit
rated by a credit rating agency on the approved panel of the State Bank of Pakistan.

2. Foreign banks which are credit rated by M/s. Standard & Poor, Moody’s and
Fitch-Ibca and are given a minimum rating of A3 / A- and above shall be exempt
from the application of this requirement. All other foreign banks have to go through
credit rating process in Pakistan.

3. The credit rating will be an ongoing process i.e. credit rating should be
updated on a continuous basis from year to year, within six months from the date of
close of each financial year and the rating report complete in all respects be
submitted to the State Bank of Pakistan and made public within a period of seven
days of the notification of rating by the credit rating agency. Further, the banks /
DFIs will disclose their credit rating prominently in their published annual and
quarterly financial statements.

19
REGULATION M-1
KNOW YOUR CUSTOMER (KYC)

In view of recent heightened global efforts to prevent the possible use of the
banking sector for money laundering, terrorist financing, transfer of illegal/ill-gotten
monies, and as conduit for white collar crime etc., the importance of ‘Know Your
Customer (KYC) / customer due diligence’ has increased. In line with the
international best practices, as also to ensure transparency/prudence in banking
transactions while starting relationship with a new customer and maintaining and
continuing relationship with existing customers, the following minimum guidelines
are required to be followed by banks / DFIs. However, banks / DFIs are free to
obtain any further information/documents from customers/other banks / DFIs as they
deem fit, provided the same are reasonable and applied across the board.

2. Each Bank / DFI shall formulate and keep in place, in writing, a

comprehensive Know-Your-Customer policy duly approved by their Board of
Directors and in case of branches of foreign banks, approved by their head office,
and cascade the same down the line to each and every branch/office/ concerned
officers for strict compliance.

3. All reasonable efforts shall be made to determine true identity of every

prospective customer. For this purpose, minimum set of documents given at
Annexure-VIII must be obtained from various types of customers/ account
holder(s).

4. Banks / DFIs shall obtain ‘Introduction’ on the new account to assess the
prospective customer’s/account holder’s integrity, respectability and the nature of
business etc. Any laxity in this regard may result in serious consequences for the
banker. The following guidelines are to be followed in this regard:

(i) Where the introducer is an existing account holder of the same

branch, his introduction should be accepted, after due verification of
signature by the official of the branch. In case the introducer is an
account holder of another branch of the same bank / DFI, the account
should only be opened after proper verification of the signature from
the concerned branch.
(ii) Where the introducer happens to be an account holder of another
bank / DFI, the introduction should be accepted after complete
verification of the signature and other particulars of the introducer from
that bank / DFI.
(iii) The introduction by the employees of the bank / DFI may also be
acceptable. However, he or she will have to establish that sufficient
information has been collected on the new account holder for making
the introduction and that they believe that ‘Introduction’ from a person
other than the bank’s / DFI’s employee is not necessary. (The
introduction of a person other than by the branch employee is being
stressed to ensure maximum authenticity on the status of the would-be
accountholder/customer, beside minimizing the chances of
undesirable accounts which may be opened on the introduction of the
bank / DFI employees in their pursuit to achieve targets of opening

20
 maximum number of accounts and treating the ‘Introduction’ a mere
formality in the process).

5. Bank / DFI and their branches shall obtain satisfactory evidence duly
verified / authenticated by the branch manager which shall be placed on record in
respect of (i) the true identity of the beneficial owners of all accounts opened by a
person, entity etc, (ii) the real party in interest or controlling person/entity of the
account(s) in case of nominee or minors account.

6. Banks / DFIs are also advised that KYC/customer due diligence is not a one
time exercise to be conducted at the time of entering into a formal relationship with
customer/account holder. KYC/customer due diligence is an on-going process for
prudent banking practices. To this end, banks / DFIs are required to:

(i) Set up a compliance unit with a full time Head.

(ii) Put in place a system to monitor the accounts and transactions on a
regular basis.
(iii) Update customer information and records, if any, at reasonable
intervals.
(iv) Install an effective MIS to monitor the activity of the customers’
accounts.
(v) Chalk out plan of imparting suitable training to the staff of bank / DFI
periodically.
(vi) Maintain proper records of customer identifications and clearly
indicate, in writing, if any exception is made in fulfilling the due
diligence procedure.

7. Banks / DFIs shall develop guidelines for customer due diligence, including
a description of the types of customers that are likely to pose a higher than average
risk to a bank / DFI. In preparing such policies, factors such as customers’
background, country of origin, public or high profile position, nature of business, etc.
should be considered. Enhanced due diligence shall be applied:

(i) To high-risk customers such as those belonging to countries where

KYC and money laundering regulations are lax, those with links to
offshore tax havens, customers in cash based businesses in high-
value items, and high net worth customers with no clearly identifiable
source of income etc.
(ii) Where they have reason to believe that the customer has been
refused banking facilities by another bank / DFI.
(iii) For opening of correspondent banks’ accounts, and taking appropriate
measures to obtain all relevant information about the respondent bank.
(iv) In dealing with non-face-to-face/ on-line customers. Adequate
measures in this regard should also be in place, e.g. independent
verification by a reliable third party, client report from the previous
bank / DFI of the customer etc.

8. State Bank of Pakistan, during the course of inspection, would particularly

check the efficacy of the KYC system put in place by the banks / DFIs and its
compliance by all the branches and the staff members. Appropriate action shall be
taken against the bank / DFI and the concerned staff members for non-compliance

21
and negligence in this area, under the provisions of Banking Companies Ordinance,
1962.

REGULATION M-2
ANTI-MONEY LAUNDERING MEASURES

Banks / DFIs are advised to follow the following guidelines to safeguard

themselves against their involvement in money-laundering activities, and other
unlawful trades. These will add to or reinforce the precautions, banks / DFIs may
have been taking on their own in this regard: -

(a) Banks / DFIs shall ensure that their business is conducted in

conformity with high ethical standards and that banking laws and
regulations are adhered to. It is accepted that banks / DFIs normally
do not have effective means of knowing whether a transaction stems
from or forms part of wrongful activity. Similarly, in an international
context, it may be difficult to ensure that cross border transactions on
behalf of customers are in compliance with the regulations of another
country. Nevertheless banks / DFIs should not set out to offer services
or provide active assistance in transactions, which in their opinion, are
associated with money derived from illegal activities.

(b) Specific procedures be established for ascertaining customer’s status

and his source of earnings, for monitoring of accounts on a regular
basis, for checking identities and bonafides of remitters and
beneficiaries, for retaining internal record of transactions for future
reference. The transactions, which are out of character/inconsistent
with the history, pattern, or normal operation of the account involving
heavy deposits / withdrawals / transfers, should be viewed with
suspicion and properly investigated.

(c) For an effective implementation of banks’ / DFIs’ policy and

procedures relating to anti money laundering / other unlawful trades,
suitable training be imparted to members of staff and they be informed
of their responsibility in this regard.

2. Keeping in view the above principles, banks / DFIs shall issue necessary
instructions for guidance and implementation by all concerned.

REGULATION O-1
UNDERTAKING OF CASH PAYMENTS OUTSIDE
THE BANK’S AUTHORIZED PLACE OF BUSINESS

Banks shall not undertake any business of cash payments, other than the
authorized place of business, except through the installation of Automated Teller
Machine (ATM). Banks desirous of providing the facility of withdrawal through
Authorized Merchant Establishments at various Points of Sale (POS) may do so
upto a maximum cash limit of Rs 10,000/- For this purpose, adequate and suitable
security measures should be put in place for cash feeding and safety of the
machines.

22
2. Banks may do collection and payment of cash for their prime customers
through cash carrying companies registered with concerned Government
department. This facility should, however, be provided through designated branches
of the banks and after the banks have devised procedures including necessary
security measures.

REGULATION O-2
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.

REGULATION O-3
RECONCILIATION OF INTER-BRANCH ACCOUNTS
AND SETTLEMENT OF SUSPENSE ACCOUNT ENTRIES

All entries outstanding in the Inter-Branch Accounts (by whatever name

called) and / or Suspense Account must be reconciled / cleared and taken to the
proper head of account within a maximum period of 30 days from the date the entry
is made in the above-named accounts.

2. Entries made in Suspense Account on account of tax at source, advance tax

paid, tax recoverable, advance expense on new branches, advance rent paid, legal
expenses, mark-up / service charge recoverable, Qarze Hasna for marriage, and
forward cover fee, may be classified as “Other Assets” and the above instructions
shall not be applicable to the foregoing items. Besides, entries relating to frauds and
forgeries, cash theft and looted, payments against equity, scrips / debt instruments
and contributory payments of capital nature to be capitalized at a later stage shall
also be excluded from the purview of the said regulation. The exclusion of entries
relating to frauds and forgeries, cash theft and looted will, however, be subject to the
condition that the same are cleared immediately on receipt of insurance claims.

3. Banks / DFIs shall institute an effective internal control system for the
operations of Inter-Branch and Suspense Accounts, which ensures reconciliation /
clearing of the entries in shortest possible time and also clearly fixes the
responsibilities on the official(s) for neglecting the timely reconciliation and
clearance.

REGULATION O-4
MAINTENANCE OF ASSETS IN PAKISTAN

Every bank / DFI shall maintain in Pakistan not less than 80% of the assets
created by it against such time and demand liabilities as specified in Part-A of Form
X (prescribed under Rule 17 of the Banking Companies Rules, 1963). Accordingly,
assets held abroad by any bank / DFI shall not, at any point in time, exceed 20% of
its time and demand liabilities specified in the said Form X. All other assets financed

23
from sources other than time and demand liabilities specified in the said Form X
shall be held within Pakistan.

REGULATION O-5
FOREIGN CURRENCY DEPOSITS UNDER FE 25-1998

Banks shall not invest FE 25 deposits in foreign currency / local currency

denominated instruments below investment grade. Neither, shall they invest / place
such deposits in fund management schemes of other banks / DFIs / NBFCs whether
in Pakistan or abroad.

2. Banks shall be required to maintain the prescribed ratio of Cash

Reserve/Special Cash Reserve against FE 25 deposits in US Dollars.

3. Placement of funds of FE-25 deposits with any one bank / financial institution,
whether in Pakistan or abroad, shall not exceed twenty percent of the equity (net of
accumulated losses) of the bank or of the institution with whom the funds are being
placed, whichever is lower. The limit shall, however, not be applicable on placement
of funds by the bank with its own branches overseas. Furthermore, compliance with
all other relevant Prudential Regulations shall be ensured.

4. Banks shall be free to decide the rate of return on deposits mobilized under
FE-25.

5. Banks shall be free to use such deposits for their trade-related activities
provided the exchange risks are adequately covered and a square position is
maintained.

6. Foreign currency deposits mobilized under FE 25 scheme, after netting-off

the deposits utilized to finance trade related activities such as financing against
Import and Export documents, should not at any point exceed twenty percent of the
local currency deposits of the banks at the close of business on the last working day
of the preceding quarter.

7. Banks will report the equivalent Pak Rupee amount (with a foot note on $
equivalent) of FE 25 deposits utilized for trade related activities under newly created
code No.80-05 of their Weekly Statement of Position submitted to the Banking
Supervision Department.

************************

24
 ANNEXURE-I

GUIDELINES REGARDING LIMIT ON EXPOURE

TO A SINGLE PERSON UNDER REGULATION R-1

In arriving at exposure under Regulation R-1:

A) 100% of the deposits placed with lending bank / DFI in the same
currency, as that of loan, shall be excluded.

B) 90% of the following shall be deducted;

(i) deposits with another bank / DFI under perfected lien;
(ii) encashment value of Federal Investment Bonds, Pakistan
Investment Bonds, Treasury Bills and National Saving Scheme
securities, lodged by the borrower as collateral; and
(iii) Pak. Rupee equivalent of face value of Special US Dollar Bonds
converted at inter-bank rate, lodged by the borrower as
collateral.

C) 85% of the unconditional financial guarantees accepted as collateral

and payable on demand by banks / DFIs, rated at least ‘A’ or
equivalent by a credit rating agency on the approved panel of State
Bank of Pakistan, Standard & Poors, Moody or Fitch ibca, shall be
deducted.

D) 50% of listed Term Finance Certificates held as security with duly

marked lien shall be deducted. The TFCs to qualify for this purpose
should have been rated at least ‘A’ or equivalent by a credit rating
agency on the approved panel of State Bank of Pakistan.

E) Weightage of 50% shall be given to;

(i) documentary credits opened by banks / DFIs;
(ii) guarantees / bonds other than financial guarantees;
(iii) underwriting commitments.

F) The following different weightages will be applicable to exposure

taken against commercial banks / DFIs in respect of placements;
(i) 10% weightage on exposure to banks / DFIs with ‘AAA’ rating.
(ii) 25% weightage on exposure to banks / DFIs rated ‘A‘ and above.
(iii) 50% weightage on exposure to banks / DFIs rated ‘BBB’ and
above.

2. For the purpose of this regulation, exposure shall not include the following:

(i) Loans and advances (including bills purchased and discounted) given
to the Federal Government or any of their agencies under the
commodity operations programme of the Federal Government, or
guaranteed by the Federal Government.

(ii) Obligations under letters of credit and letters of guarantee to the

extent of cash margin held by the bank / DFI.

25
 (iii) Letters of credit, which do not create any obligation on the part of the
bank / DFI (no liability L/C) to make payments on account of imports.

(iv) Letters of credit opened on behalf of Federal Government where

payment is guaranteed by State Bank of Pakistan / Federal
Government.

(v) Facilities provided to commercial banks / DFIs through REPO

transactions with underlying SLR eligible securities.

(vi) Pre-shipment / post-shipment credit provided to finance exports of

goods covered by letter of credit/firm contracts including financing
provided from the bank’s / DFI’s own resources.

(vii) Letters of credit established for the import of plant and machinery.

26
 ANNEXURE II-A

BORROWER’S BASIC FACT SHEET- FOR CORPORATE

PRESCRIBED UNDER REGULATION R-3

Date of Request._______________

(TO BE COMPLETED IN CAPITAL LETTERS OR TYPEWRITTEN)

1. BORROWER’S PROFILE:
Name Address

Phone # Fax # E-mail Address

Office Res.
National Identity Card # National Tax # Sales Tax #

Import Export Date of Date of opening of A/c.

Registration # Registration # Establishment

2. DETAILS OF DIRECTORS/OWNERS/PARTNERS:
Name Address

Phone # Fax # E-mail Address

Office Res.
National Identity Card # National Tax #

Share-holding Amount % of Share-holding

3. MANAGEMENT:
A) EXECUTIVE DIRECTORS/PARTNERS:
Name Address NIC # Phone #
1.
2.
B) NON-EXECUTIVE DIRECTORS/PARTNERS:
Name Address NIC # Phone #
1.
2.

4. CORPORATE STATUS:
Sole Proprietorship Partnership Public / Private Limited Company

5. NATURE OF BUSINESS:
Industrial Commercial Agricultural Services Any other

6. REQUESTED LIMITS:
Amount Tenor
Fund Based
Non-Fund Based

27
7. BUSINESS HANDLED/EFFECTED WITH ALL FINANCIAL
INSTITUTIONS DURING THE LAST ACCOUNTING YEAR:
Imports Exports Remittances effected (if any)

8. EXISTING LIMITS AND STATUS:

Status
Amount Expiry Date Regular Amount Overdue
(if any)
Fund Based
Non-Fund Based

9. ANY WRITE-OFF, RESCHEDULING/ RESTRUCTURING

AVAILED DURING THE LAST THREE YEARS:
Amount during Amount during Amount during
Name of 1st Year 2nd Year 3rd Year
Financial Write- Rescheduled/ Write- Rescheduled/ Write- Rescheduled/
Institution off Restructured off Restructured off Restructured

10. DETAILS OF PRIME SECURITIES MORTGAGED/ PLEDGED:

A) AGAINST EXISTING FACILITIES:
Name of Financial Nature of Total Amount Rank of Charge Net Realizable Value
Institution Security
1.
2.
B) AGAINST REQUESTED/ FRESH/ ADDITIONAL FACILITIES:
Name of Financial Nature of Security Total Amount Net Realizable Value
Institution
1.
2.

11. DETAILS OF SECONDARY COLLATERAL MORTGAGED/ PLEDGED:

A) AGAINST EXISTING FACILITIES:
Name of Financial Nature of Total Amount Rank of Charge Net Realizable Value
Institution Security
1.
2.
B) AGAINST REQUESTED/ FRESH/ ADDITIONAL FACILITIES:
Name of Financial Nature of Security Total Amount Net Realizable Value
Institution
1.
2.

12. CREDIT RATING (WHERE APPLICABLE):

Name of Rating Agency Rating

13. DETAILS OF ASSOCIATED CONCERNS

(AS DEFINED IN COMPANIES ORDINANCE, 1984):
Name of Concern Name of Directors Share-holding % of Total Share Capital

28
14. FACILITIES TO ASSOCIATED CONCERNS BY THE CONCERNED FI:
Name of Nature & Outstanding Nature & Overdues Defaults
Concern Amount of as on-------- Value of
Limit Securities

15. DETAILS OF PERSONAL GUARANTEES PROVIDED BY THE

DIRECTORS / PARTNERS ETC. TO FIs TO SECURE CREDIT:
Names of Institutions/persons to Amount of Validity NIC # NTN Net-worth
the whom Guarantee given Guarantee Period
Guarantors

16. DIVIDEND DECLARED (AMOUNT) DURING THE LAST THREE YEARS:

During 1st Year During 2nd Year During 3rd Year

17. SHARE PRICES OF THE BORROWING ENTITY:

Listed Company Break-up Value of the Shares
Current Price Preceding 12 Months Average in case of Private Limited Company

18. NET-WORTH (PARTICULARS OF ASSETS OWNED IN THEIR

OWN NAMES BY THE DIRECTORS/PARTNERS/PROPRIETORS):
Owner’s Name Particulars of Assets Market value Particulars of Liabilities

19. DETAILS OF ALL OVERDUES (IF OVER 90 DAYS):

Name of Financial Institution Amount

20. Details of payment schedule if term loan sought.

21. Latest Audited Financial Statements as per requirements of Regulation R-3 to be submitted
with the LAF (Loan Application Form).

22. Memorandum and Articles of Association, By-laws etc. to be submitted by the borrower
alongwith the request

I certify and undertake that the information furnished above is

true to the best of my knowledge.

CHIEF EXECUTIVE’S/ BORROWER’S

SIGNATURE & STAMP

COUNTER SIGNED BY:

AUTHORISED SIGNATURE & STAMP

(BANK / DFI OFFICIAL)

29
 ANNEXURE II-B

BORROWER’S BASIC FACT SHEET - FOR INDIVIDUALS

PRESCRIBED UNDER PRUDENTIAL REGULATION R-3

Date of Request._______________

(TO BE COMPLETED IN CAPITAL LETTERS OR TYPEWRITTEN)

1. BORROWER’S PROFILE:
Name Address

Phone # Fax # E-mail Address

Office Res.
National Identity Card # National Tax #

Father’s Name Father’s National Identity Card #

2. REFERENCES (AT LEAST TWO):

Name Address

Phone # Fax # E-mail Address

Office Res.
National Identity Card # National Tax #

3. NATURE OF BUSINESS/ PROFESSION:

Industrial Commercial Agricultural Services Any other

4. EXISTING LIMITS AND STATUS:

Status
Amount Expiry Regular Amount Over- Amount Rescheduled/
Date due (if any) Restructured (if any)
Fund Based
Non-Fund Based

5. REQUESTED LIMITS:
Amount Tenor
Fund Based
Non-Fund Based

6. Details of payment schedule if term loan sought.

7. Latest Income Tax / Wealth Tax Form to be submitted by the borrower.

I certify and undertake that the information furnished above is

true to the best of my knowledge.

APPLICANT’S SIGNATURE & STAMP

COUNTER SIGNED BY:

AUTHORISED SIGNATURE & STAMP

(BANK / DFI OFFICIAL)

30
 ANNEXURE-III

CASES ELIGIBLE FOR RELAXATION UNDER REGULATION R-7

For bid bonds issued on behalf of local consultancy firms bidding for
international contracts where the consultancy fees are to be received in foreign
exchange, and including Bid Bonds issued on behalf of all contractors of goods and
services bidding against International Tenders.

2. For issue of performance bonds on behalf of local construction companies/

contractors of goods and services bidding for international tenders. Provided that
the liability of the bank / DFI will be on reducing balance basis after taking into
account progressive billing certified by the beneficiary/project owner and payment
received against these bills.

3. For issue of guarantees on behalf of local construction companies/

contractors of goods and services bidding for international tenders in respect of
mobilization advance.

(i) Guarantees issued should contain clause that the mobilization advance
and other proceeds under the contract shall be routed by the
beneficiary/project owner through the account of the contractors
maintained with the guaranteeing bank / DFI.

(ii) At the time of issuing such guarantee the Construction

Company/contractor shall sign an agreement with the bank / DFI that cash
proceeds out of mobilization advance will be released as per satisfaction
of the bank / DFI about the progress of the contract.

4. While issuing guarantees to the exporters of cotton in terms of F.E. Circular

No. 77 dated December 4, 1988, banks / DFIs may settle the type and quantum of
security with their customers.

5. Issue of performance bonds/bid bonds and guarantees issued for

mobilization advances on behalf of the manufacturers of engineering goods. The
term ‘engineering goods’ shall have the same meanings as are given to locally
manufactured machinery in State Bank of Pakistan scheme for financing locally
manufactured machinery. Such condition may, however, not be necessary in case of
guarantees issued by the International Banks.

31
 ANNEXURE-IV

GUIDELINES IN THE MATTER OF CLASSIFICATION

AND PROVISIONING FOR ASSETS (REGULATION R-8)

(I) SHORT TERM FINANCING FACILITIES:

CLASSIFICATION DETERMINANT TREATMENT OF PROVISIONS TO

INCOME BE MADE
(1) (2) (3) (4)
1. OAEM (Other Where mark- Unrealized mark- No Provision is
Assets up/ interest or up/ interest to be required.
Especially principal is put in Suspense
Mentioned). overdue (past Account and not
due) by 90 to be credited to
days from the Income Account
due date. except when
realized in cash.

2. Substandard. Where mark- As above. Provision of 20% of

up/ interest or the difference
principal is resulting from the
overdue by 180 outstanding balance
days or more of principal less the
from the due amount of liquid
date. assets realizable
without recourse to a
Court of Law and
adjusted forced sale
value of mortgaged/
pledged assets as
valued by valuers
fulfilling prescribed
eligibility criteria, in
accordance with the
guidelines provided in
this regulation.

3. Doubtful. Where mark- As above. Provision of 50% of

up/ interest or the difference
principal is resulting from the
overdue by one outstanding balance
year or more of principal less the
from the due amount of liquid
date. assets realizable
without recourse to a
Court of Law and
adjusted forced sale
value of mortgaged/
pledged assets as
valued by valuers
fulfilling prescribed
eligibility criteria, in

32
 accordance with the
guidelines provided in
this regulation.

4. Loss. (a) Where As above. Provision of 100% of

mark-up/ the difference
interest or resulting from the
principal is outstanding balance
overdue of principal less the
beyond two amount of liquid
years or more assets realizable
from the due without recourse to a
date. Court of Law and
adjusted forced sale
value of mortgaged/
pledged assets as
valued by valuers
fulfilling prescribed
eligibility criteria, in
accordance with the
guidelines provided in
this regulation.

(b) Where As above. As above.

Trade Bills
(Import/Export
or Inland Bills)
are not
paid/adjusted
within 180 days
of the due date.
(II) MEDIUM AND LONG TERM FINANCING FACILITIES:

CLASSIFICATION DETERMINANT TREATMENT OF PROVISIONS TO

INCOME BE MADE
(1) (2) (3) (4)
1. OAEM (Other Where mark- Unrealized mark- No Provision is
Assets up/ interest or up/ interest to be required.
Especially principal is put in Suspense
Mentioned). overdue (past Account and not
due) by 90 to be credited to
days from the Income Account
due date. except when
realized in cash.

2. Substandard. Where As above. Provision of 20% of

installment of the difference
principal or resulting from the
interest/ mark- outstanding balance
up is overdue of principal less the
by one year or amount of liquid
more. assets realizable

33
 without recourse to a
Court of Law and
adjusted forced sale
value of mortgaged/
pledged assets as
valued by valuers
fulfilling prescribed
eligibility criteria, in
accordance with the
guidelines provided in
this regulation.

3. Doubtful. Where As above. Provision of 50% of

installment of the difference
principal or resulting from the
interest/ mark- outstanding balance
up is overdue of principal less the
by two years or amount of liquid
more. assets realizable
without recourse to a
Court of Law and
adjusted forced sale
value of mortgaged/
pledged assets as
valued by valuers
fulfilling prescribed
eligibility criteria, in
accordance with the
guidelines provided in
this regulation.

4. Loss. Where As above. Provision of 100% of

installment of the difference
principal or resulting from the
interest/ mark- outstanding balance
up is overdue of principal less the
by three years amount of liquid
or more. assets realizable
without recourse to a
Court of Law and
adjusted forced sale
value of mortgaged/
pledged assets as
valued by valuers
fulfilling prescribed
eligibility criteria, in
accordance with the
guidelines provided in
this regulation.
Note:
Classified loans / advances that have been guaranteed by the Government would not require provisioning,
however, markup / interest on such accounts shall be taken to suspense account instead of income
account.

34
 ANNEXURE-V

UNIFORM CRITERIA FOR DETERMINING THE VALUE

OF ASSETS MORTGAGED / PLEDGED (REGULATION R-8)

Only assets having registered mortgage, equitable mortgage (where NOC

for creating further charge to another bank / DFI / NBFC has not been issued by
bank / DFI) and pledged assets shall be considered. Assets having pari-passu
charge shall be considered on proportionate basis of outstanding amount.

2. Hypothecated assets and assets with second charge and floating charge
shall not be considered.

3. Valuations shall be carried out by an independent professional valuer who

should be listed on the panel of valuers maintained by the Pakistan Banks’
Association (PBA) for this purpose. PBA shall lay down the minimum eligibility
criteria with the prior approval of the State Bank of Pakistan for placement of valuers
on the panel to be maintained by it. The valuer while assigning any values to the
mortgaged / pledged assets, shall take into account all relevant factors affecting the
salability of such assets including any difficulty in obtaining their possession, their
location, condition and the prevailing economic conditions in the relevant sector,
business or industry. The values of mortgaged / pledged assets so determined by
the valuers must have to be a reasonably good estimate of the amount that could
currently be obtained by selling such assets in a forced / distressed sale condition.
The valuers should also mention in their report the assumptions made, the
calculations / formulae / basis used and the method adopted in determination of the
values.

4. Full Scope Valuation shall be done at least once in three years. For example
any valuation done on November 01, 1999 would be valid for consideration for the
accounting periods ending on December 31, 1999, December 31, 2000 and
December 31, 2001, thus for subsequent accounting periods, a fresh valuation
would be required. The valuation process will include conducting a ‘Full-Scope
Valuation’ of the assets in the first year and then followed by ‘Desktop Valuations’ in
the second and third year. Evaluators on the panel of the PBA will be eligible to
conduct only two Full Scope valuations consecutively of a company, as such the
companies being evaluated will require to change evaluator after two consecutive
Full Scope valuations i.e for a full period of six years.

5. State Bank may check the valuations of the mortgaged assets through an
independent evaluator, on random basis, to verify the reasonableness of the
valuations. The unjustified differences in the valuations of the banks / DFIs and
State Bank of Pakistan shall render the concerned bank / DFI and evaluator to penal
actions.

6. The categories of mortgaged / pledged assets to be considered for valuation

along with discounting factors to be applied would be as under (no other assets shall
be taken into consideration):

a) Liquid Assets:
Valuation of Liquid Assets shall be determined by the bank / DFI itself
and verified by the external auditors. However, in the case of pledged

35
 shares of listed companies, values should be taken at market value as
per active list of Stock Exchange(s) on the balance sheet date and as
per guidelines given in the TR-23 issued by the Institute of Chartered
Accountants of Pakistan (ICAP). Moreover, valuation of shares pledged
against loans/advances shall be considered only if these have been
routed through Central Depository Company of Pakistan (CDC),
otherwise these will not be admissible for deduction as liquid assets
while determining required provisions.

b) Land and Building:

Valuation of land and buildings would be accepted as determined by the
valuers in accordance with the criteria given above and no further
discounting factor would be applied on forced sale value determined by
them.

c) Plant and Machinery:

Entities of classified borrowers shall be divided into following categories
at the balance sheet date and discounting factors shall be applied to
forced sale value as under:

Category Discounting factors to be applied to

forced sale value

A) In operation. No discounting factor to be applied.

B) In operation at the • 15% of forced sale value on the date

time of valuation but of closure.
now closed / in
liquidation. • 1st year after closure-25% of forced
sale value
• 2nd year-50% of forced sale value.

C) Closed / in liquidation • After valuation-1st year 25% of forced

at the time of valuation sale value.
and no change in
situation. • 2nd year-50% of forced sale value.

d) Pledged Stocks:
In case of pledged stocks of perishable and non-perishable goods,
forced sale value should be provided by valuers, which should not be
more than one year old, at each balance sheet date. The goods should
be perfectly pledged, the operation of the godowns should be in the
control of the bank / DFI and regular valid insurance and other
documents should be available. In case of perishable goods, the valuer
should also give the approximate date when these are expected to be of
no value.

36
 ANNEXURE VI-A

QUESTIONNAIRE PRESCRIBED UNDER REGULATION G-1

PHOTO
2x2 ½

1. FULL NAME_________________________________________________________

2. FATHER’S NAME ____________________________________________________

3. DATE & PLACE OF BIRTH _____________________________________________

4. N.I.C. NUMBER ______________________ N.T.N. _______________________

5. EDUCATION ________________________________________________________

6. PRESENT DESIGNATION, DEPARTMENT AND OFFICAL ADDRESS __________

___________________________________________________________________

7. TELEPHONE NUMBERS ____________________________________________

8. IF YOU HAVE CHANGED YOUR NAME, STATE PREVIOUS NAME AND

REASONS FOR CHANGE _____________________________________________

9. APPOINTMENTS HELD DURING THE LAST FIVE YEARS (WITH DATES)

___________________________________________________________________

10. NAME(S) & DESIGNATION(S) OF THE DIRECT SUPERVISOR (ONE GRADE UP)
UNDER WHOM YOU HAVE SERVED DURING THE LAST FIVE YEARS
___________________________________________________________________

11. DATE WHEN YOU LAST FILLED IN A SECURITY VETTING FORM AND THE
NAME OF THE DEPARTMENT FOR WHOM FILLED ________________________

12. PRESENT RESIDENTIAL ADDRESS IN FULL _____________________________

13. PERMANENT RESIDENTIAL ADDRESS IN FULL __________________________

___________________________________________________________________

14. NAMES & ADDRESSES OF THREE RESPECTABLE PERSONS (NOT

RELATIVES) WHO HAVE BEEN CLOSELY ACQUAINTED WITH YOU DURING
THE LAST FIVE YEARS_______________________________________________

37
 ANNEXURE VI-B

QUESTIONNAIRE – FITNESS AND PROPRIETY OF KEY

EXECUTIVES PRESCRIBED UNDER REGULATION G-1

PHOTO
2x2 ½

1. POSITION HELD BY THE EXECUTIVE

_____________________________________________________________________

2. FULL NAME___________________________________________________________

3. DATE & PLACE OF BIRTH ______________________________________________

4. N.T.N. _______________________________________________________________

5. EDUCATIONAL QUALIFICATION _________________________________________

6. PROFESSIONAL QUALIFICATION ___________ EXPERIENCE _________ YEARS

7. TIME SPENT IN CURRENT POSITION _____________________________________

8. PREVIOUS POSITION / JOB HELD _______________________________________

9. HAS HE/SHE EVER BEEN CONVICTED OF ANY OFFENCE?

YES _______________ NO________________
IF YES, NATURE OF OFFENCE AND PENALTY IMPOSED: ____________________

10. HAS HE/SHE EVER BEEN CENSURED OR PENALIZED BY ANY FINANCIAL

REGULATOR (LOCAL OR FOREIGN)? YES _________ NO __________
IF YES, REASONS FOR ADVERSE FINDINGS AND AMOUNT OF PENALTY
IMPOSED (IF ANY)_________________________ ___________________________

11. HAS HE/SHE EVER BEEN DISMISSED FROM EMPLOYMENT?

YES ___________NO_______________
IF YES, NAME OF THE EMPLOYER AND REASON FOR DISMISSAL ____________
_____________________________________________________________________

_______________________________
SIGNATURE & STAMP OF EMPLOYER

38
 ANNEXURE VII-A

FIT & PROPER TEST FOR APPOINTMENT OF PRESIDENT /

CHIEF EXECUTIVE AND DIRECTORS ON BOARD UNDER REGULATION G-1

INTEGRITY, HONESTY AND REPUTATION

• Has not been convicted in any criminal offence, involved in any fraud/forgery,
financial crime etc.
• Has not been subject to any adverse findings or any settlement in civil/criminal
proceedings particularly with regard to investments, financial/business,
misconduct, fraud, formation or management of a corporate body etc.
• Has not contravened any of the requirements and standards of regulatory
system or the equivalent standards of requirements of other regulatory
authorities.
• Has not been involved with a company or firm or other organization that has
been refused registration / licence to carry out trade, business etc.
• Has not been involved with a company/firm whose registration / licence has
been revoked or cancelled or gone into liquidation.
• Has not been debarred for being Chief Executive, Chairman or Director of a
company.

EXPERIENCE & MANAGEMENT

This section shall apply separately for Directors and Presidents / Chief Executives
as under: -

For Directors on the Board of Bank / DFI

• Must have management/business experience of at least 5 years at senior level
in an active capacity. In case of lawyers, 7 years experience is required,
provided that they are not practicing/involved with any bank(s) / DFI(s) or acting
as legal counsel/adviser or on payroll of a bank / DFI.
• Must have knowledge of or be familiar with banking field.
• Minimum qualification is graduation. Higher education in the discipline of
banking and finance may be an added qualification. However, this condition
shall not be applicable on the existing director of the boards of the bank / DFI.

For Presidents/Chief Executive Officers of Bank/DFI

• Must be a career banker having experience of at least 15 years, including
minimum of 3 years at senior level viz. SEVP or equivalent i.e. Group Head or
Functional/Business Line Head at Head Office of banks / DFIs incorporated in
Pakistan or at Country Office for foreign banks.
• Minimum qualification is graduation. Higher professional education in the
disciplines of banking, finance, economics and related fields may be an added
qualification. This condition shall not, however, be applicable to those who have
/ are already working as President/Chief Executive of the bank / DFI.
• Relaxation in number of years of experience can be considered in case of
experience as President/CEO of financial institutions other than banking
institutions, for a period of not less than three years with a proven track record.

39
TRACK RECORD

• The person must have an impeccable track record in the companies he/she has
served either in the capacity of an employee or director/chief executive or as
chairman.
• Has not been terminated or dismissed in the capacity of employee,
director/chairman of a company.

SOLVENCY & FINANCIAL INTEGRITY

• Has not been associated with any illegal activity especially relating to banking
business.
• Has not been in default of payment of dues owed to any financial institution and/
or default in payment of any taxes individual capacity or as proprietary concern
or any partnership firm or in any private unlisted and listed company.
• Has sufficient means to discharge his/her financial obligations.

CONFLICT OF INTEREST

• Is not a director of any other financial institution.

• The conflict of interest shall not apply in case of:-

a. Directors nominated by the Government.

b. Managing Directors and other nominated officials of National Investment
Trust (NIT) and Investment Corporation of Pakistan (ICP) till the privatization
of these two financial institutions.
c. Nominees of foreign and local investors, provided that they are appointed on
the boards of dissimilar financial institutions.

For the sake of clarity, the term ‘dissimilar’ implies as an example, that one person
appointed as director on the board of an investment bank may not again be
appointed in any other investment bank.

40
 ANNEXURE VII-B

FIT & PROPER TEST FOR APPOINTMENT OF

KEY EXECUTIVES UNDER REGULATION G-1

HONESTY, INTEGRITY AND REPUTATION

(i) He/She has not been convicted of any criminal offence, particularly offences of
dishonesty, fraud, financial crime or other offences under legislation relating to
banking and financial services.
(ii) He/She has not been subject of any adverse findings or any settlement in
civil/criminal proceedings particularly with regard to investments,
financial/business, misconduct, fraud, formation or management of a body
corporate etc.
(iii) He/She has not contravened any of the requirements and standards of
regulatory system or the equivalent standards of requirements of other
regulatory authorities, which would adversely reflect on the above areas.

COMPETENCE AND CAPABILITY

He/She must have adequate professional qualification and experience

commensurate to the job as determined by the bank / DFI.

TRACK RECORD

(i) He/She has not been removed/dismissed in the capacity of an employee,

director/ chairman on account of financial frauds, moral turpitude, misconduct
and misappropriation of funds.
(ii) No material adverse reports, from past employers of the person being
considered for the key executive post.

FINANCIAL SOUNDNESS

He/She has not been in default of payment of dues owed to any financial institution
and/or has not been declared as defaulter in payment of any taxes in individual
capacity or as proprietary concern.

CONFLICT OF INTEREST

(i) He/She does not head more than one functional areas that give rise to conflict
of interest within the organization. For example the departments of Audit and
Accounts cannot be headed by the same person.
(ii) He/She does not hold directorship in his/her personal capacity in a business
concern that is also a client of the bank / DFI as well as in any other financial
institution.

41
 ANNEXURE-VIII

DOCUMENTS TO BE OBTAINED FROM VARIOUS TYPES OF

CUSTOMERS / ACCOUNT HOLDER(S) UNDER REGULATION M-I

S.No. Nature of Account Documents/papers to be obtained

I Individuals 1. Attested photocopy of computerized
national identity card (CNIC) or passport of
the individual by a gazetted officer or an
officer of the bank / DFI.
2. In case the CNIC does not contain a
photograph, the bank / DFI should also
obtain, in addition to CNIC, any other
document such as driving license etc. that
contains a photograph.
3. In case of a salaried person, attested copy
of his service card, or any other acceptable
evidence of service, including, but not
limited to a certificate from the employer.
4. In case of illiterate person, a passport size
photograph of the new account holder
besides taking his right and left thumb
impression on the specimen signature card.
II Partnership (i) Attested photocopy of identity card of all
partners.
(ii) Attested copy of ‘Partnership Deed’ duly
signed by all partners of the firm.
(iii) Attested copy of Registration Certificate with
Registrar of Firms. In case the partnership is
unregistered, this fact should be clearly
mentioned on the Account Opening Form.
(iv) Authority letter, in original, in favor of the
person authorized to operate on the account
of the firm.
III Joint Stock Certified copies of:
companies (i) Resolution of Board of Directors for
opening of account specifying the person(s)
authorized to operate the company
account.
(ii) Memorandum and Articles of Association.
(iii) Certificate of Incorporation.
(iv) Certificate of Commencement of Business.
(v) Attested photocopies of identity cards of all
the directors.
(vi) List of Directors on Form 29 issued by the
Registrar Joint Stock Company.
IV Clubs, Societies (i) Certified copies of
and Associations (a) Certificate of Registration.
(b) By-laws/Rules & Regulations.
(ii) Resolution of the Governing
Body/Executive Committee for opening of
account authorizing the person(s) to

42
 operate the account and attested copy of
the identity card of the authorized
person(s).
(iii) An undertaking signed by all the authorized
persons on behalf of the institution
mentioning that when any change takes
place in the persons authorized to operate
on the account, the banker will be informed
immediately.
V Agents Accounts (i) Certified copy of ‘Power of Attorney’.
(ii) Attested photocopy of identity card of the
agent.
VI Trust Account (i) Attested copy of Certificate of
Registration.
(ii) Attested photocopy of identity cards of all
the trustees.
(iii) Certified copy of ‘Instrument of Trust’.
VII Executors and (i) Attested photocopy of identity cards of
Administrators the Executor/Administrator.
(ii) Certified copy of Letter of Administration
or Probate.

43
 ANNEXURE-IX

MARGIN REQUIREMENTS UNDER REGULATION R-13

A. ADVANCES MARGIN
REQUIREMENT

I. ADVANCES TO MANUFACTURING AND PROCESSING UNITS

Against raw materials and agricultural produces.

i. Raw materials to manufacturing/processing units of No margin
capital goods, engineering goods, consumer
durable, medicines, cotton yarn, cotton fabrics, jute
goods, woolen yarn, cigarettes, fertilizer, pesticides,
vegetable ghee and edible oil.

ii. Raw cotton (both phutti and lint cotton) to ginners. No margin

Banks are free to determine the basis of valuation of stocks

of cotton offered to them as security for credit facilities.
However, the stock of cotton may be valued by banks at
cost or market value, whichever is lower for advances to
cotton ginners.
While banks are free to lay down their own lending policies,
they are encouraged to also include in their lending
policies, for financing against pledge of cotton, the aspect
of contamination free cotton as also different grades of
cotton and their different prices, for determining the credit
limits of their borrowers.

iii. Paddy and Rice to modern rice mills viz. those rice No margin
mills, which have fully automatic machinery and
have a husking capacity of not less than five tons of
paddy per hour.

iv. Raw materials to Iron and Steel Industry as well as No margin

Ship-Breaking Industry. Ship (unserviceable) for
scrapping would constitute raw material for the ship-
breaking industry.
SBP has no objection to banks accepting ships as
collateral at their discretion.

v. Viscose Fiber to manufacturing units No margin

vi.
(a) Raw materials to manufacturing/processing units of 25%
goods other than those mentioned above.

44
 (b) Wheat to flour mills. 10 %
Banks can provide freely finance the procurement of wheat
by flourmills from any source in Pakistan and without any
time restriction on the basis of the annual manufacturing
capacity of each flourmill. All finances provided for
procurement of wheat shall be interalia, covered against
the pledge/hypothecation of wheat stocks.
vii. Red Chillies Banned

Against finished goods. 25%

II. ADVANCES TO TRADERS

Against raw materials and agricultural produce

i. Rice and paddy to entities other than authorized Banned
dealers, wheat flour, edible oils (refined, un-refined
and hydrogenated) and cotton seeds.

ii. Wheat to traders/growers. 15%

iii. Export of rice registered with Superior Rice Dealers No margin

Association, Punjab or Rice Millers and Traders
Association Sindh against basmati rice.

iv. Cotton. 25%

v. Fertilizers and pesticides. No margin

vi. Rice, paddy and tobacco to authorized dealers. 25%

Advances to authorized dealers against rice and paddy

shall be given only against such stocks of paddy/rice, which
have been declared to the Food Department / private
sector agencies for which they hold receipt from them.

vii. Other raw materials and agricultural produce. 50%

viii. Red Chillies. Banned

ix. Sugar. 25%

• Banks may allow advances to sugar mills
and other entities against sugar (both
indigenous and imported). Advances
against sugar may be valued by banks at
cost, or market value whichever is lower.

x.
a. Against finished goods. 75%

b. Finished goods manufactured in Pakistan to 40%

those traders who are registered with
GST/Income Tax Department.

45
 III. OTHER ADVANCES

i. Shares of listed Companies /TFCs As per Regulation

R-6.

ii. Bank deposits and deposit certificates. 25%

• 25% margin is applicable to all forms of
certificates including certificates issued under
National Saving Scheme such as (a) Special
Saving Certificate (b) Khas Deposits Certificates
(c) Defense Saving Certificates (d) NDFC Bearer
Certificates (e) Foreign Exchange Bearer
Certificates (f) Any other Government backed
securities.
• Value of such certificates, sum payable on date
of presentation will be taken for making
advances by the banks.
• Prize Bonds being issued by Government needs
to be given same treatment as that of other
securities issued by Government. As such banks
can provide financing facilities against Prize
Bonds at 25% margin or a margin of 1.5 times of
accrued markup on annual basis which ever is
higher. However, as the value remains stagnant
(on account of lack of interest payments)
financing provided against those Prize Bonds
should be for one year.

iii. For financing goods, including production machinery, No margin

commercial Vehicles and consumer durables on hire
purchase or installments plan.

iv. Against banned imports. Banned

v. Real Estates. No margin

vi. Ships. No margin

State Bank has no objection to banks accepting ships as
collateral at their discretion.

46
 IV. CLEAN ADVANCES AND ADVANCES SECURED BY GUARANTEES

(There are no margin restrictions applicable in the case of bank guarantees;

however, banks may exercise their own discretion in the matter if
necessary.)
• Clean advances or advances secured by guarantee: - As per
Prudential Regulation R-4

i. Agricultural loan against guarantee/securities under the scheme for

Agricultural Loan by Commercial Banks circulated vide ACD Circular
No.5/72 dated 27-11-1972 and Circular Letter No.ACD./1035-
1039/PD(P)-08/2001 dated 25-04-2001as amended from time to time,
can be granted to maximum amount of Rs 100, 000/- and that total
guarantee of one guarantor/person should not in any case exceed
Rs 500, 000/- excepting a processing unit.

ii. Rupee finance. Banks can grant rupee loans to their clients (including
foreign controlled companies) against guarantees of non-
residents/guarantees received from banks functioning abroad subject
to the conditions as prescribed under Prudential Regulations and such
other instructions issued by SBP from time to time.

V. ADVANCES FOR EXPORTS

The restrictions relating to grant of clean advances or minimum margin

requirements shall not apply to:
i. Advances granted to finance export under irrevocable letters of
credit or firm orders upto the amount for which credit is opened or
firm order made.
ii. Packing credit for export; and
Pre-shipment credit granted for financing export of goods covered by firm
contract made, or irrevocable letters of credit opened by foreign importers in
favor of exporters in Pakistan, provided that the advances do not exceed the
amount specified in the contract or the credit, as the case may be.

B. IMPORT LETTERS OF CREDIT

There is no mandatory minimum margin requirements for opening of import

letter of credit except Caustic Soda (PCT heading 2815:1200) which will be
subject to 100% cash margin.

47