PRUDENTIAL REGULATIONS

FOR
CONSUMER FINANCING

(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 Minimum requirements for consumer 3

financing.

PART-C Regulations 6

Regulation R-1 Facilities to related persons. 6

Regulation R-2 Limit on exposure against total consumer 6

financing.

Regulation R-3 Total financing facilities to be 6

commensurate with the income.

Regulation R-4 General reserve against consumer finance. 6

Regulation R-5 Bar on transfer of facilities from one 7

category to another to avoid classification.

Regulation R-6 Margin requirements. 7

REGULATIONS FOR CREDIT CARDS

Regulation O-1 Receipt of credit cards. 8

Regulation O-2 Statement of accounts. 8
Regulation O-3 Unauthorized / wrong transactions. 8
Regulation O-4 Partial payment by cardholder. 8
Regulation O-5 Due date for payment. 8

Regulation R-7 Maximum credit limit. 8

Regulation R-8 Classification and provisioning. 9

REGULATIONS FOR AUTO LOANS

Regulation R-9 Only personal use vehicles to be 10

admissible.

Regulation R-10 Maximum tenure of loan. 10

Regulation R-11 Minimum down payment. 10
Regulation R-12 Hypothecation of vehicles. 10
Regulation R-13 Insurance. 10
Regulation O-6 Repossession of vehicles. 10
Regulation O-7 Repayment schedule. 10
Regulation O-8 Financing the purchase of used cars. 11
Regulation O-9 Authorized auto dealers. 11
Regulation R-14 Classification and provisioning. 11

REGULATIONS FOR HOUSING FINANCE

Regulation R-15 Maximum per party limit. 12

Regulation R-16 Debt-equity ratio. 12
Regulation R-17 Total exposure 12
Regulation R-18 Maximum tenure of loan. 12
Regulation R-19 Mortgage. 12
Regulation R-20 Evaluation of property. 12
Regulation R-21 Monitoring of market conditions. 12
Regulation R-22 Floating rate products. 12

Regulation R-23 Classification and provisioning. 13

REGULATIONS FOR PERSONAL LOANS INCLUDING LOANS

FOR THE PURCHASE OF CONSUMER DURABLES

Regulation R-24 Per party limit. 15

Regulation R-25 Hypothecation. 15
Regulation R-26 Maximum tenure of loan. 15
Regulation R-27 Running / revolving finance. 15
Regulation R-28 Classification and provisioning. 15
Annexure-I Margin requirements under Regulation R-6. 17
 PART – A
DEFINITIONS

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

Ordinance, 1962.

2. Borrower means an individual to whom a bank / DFI has allowed any

consumer financing during the course of business.

3. 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 Cards 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).

(ii) 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.

4. 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.

5. 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.

6. 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,

1
 equity will mean capital maintained, free of losses and provisions, under
Section 13 of the Banking Companies Ordinance, 1962.

7. Financial Institutions mean banks, Development Financial Institutions

(DFIs) and Non-Banking Finance Companies (NBFCs).

8. 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 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.

9. 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.

10. 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.

11. Secured means exposure backed by tangible security with appropriate

margins (in cases where margin has been prescribed by State Bank of
Pakistan, appropriate margin shall at least be equal to the prescribed
margin). Exposure without any tangible security is defined as clean.

12. Tangible Security means liquid assets (as defined in these Prudential
Regulations), mortgage of land and building, hypothecation or charge on
vehicle, but does not include hypothecation of household goods, etc.

2
 PART – B
MINIMUM REQUIREMENTS FOR CONSUMER FINANCING

Apart from the specific regulations given under each mode of financing
separately, general requirements laid down here should also be followed by
the banks / DFIs while undertaking consumer financing. It may be noted that
these are the minimum requirements and should not in any way be construed
to restrict the role of the management of the banks / DFIs to further strengthen
the risk management processes through establishing comprehensive credit
risk management systems appropriate to their type, scope, sophistication and
scale of operations. The Board of Directors of the banks / DFIs are required to
establish policies, procedures and practices to define risks, stipulate
responsibilities, specify security requirements, design internal controls and
then ensure strict compliance with them.
PRE-OPERATIONS:
Before embarking upon or undertaking consumer financing, the banks / DFIs
shall implement / follow the guidelines given below. The banks / DFIs already
involved in the consumer financing will ensure compliance with these
guidelines within six months of the date of issuance of Prudential Regulations
for Consumer Financing.

1. Banks / DFIs shall establish separate Risk Management capacity for the
purpose of consumer financing, which will be suitably staffed by
personnel having sufficient expertise and experience in the field of
consumer finance / business.

2. The banks / DFIs shall prepare comprehensive consumer credit policy

duly approved by their Board of Directors (in case of foreign banks, by
Country Head and Executive / Management Committee), which shall
interalia cover loan administration, including documentation,
disbursement and appropriate monitoring mechanism. The policy shall
explicitly specify the functions, responsibilities and various staff positions’
powers / authority relating to approval / sanction of consumer financing
facility.

3. For every type of consumer finance activity, the bank / DFI shall develop
a specific program. The program shall include the objective / quantitative
parameters for the eligibility of the borrower and determining the
maximum permissible limit per borrower.

4. Banks / DFIs shall put in place an efficient computer based MIS for the
purpose of consumer finance, which should be able to effectively cater to
the needs of consumer financing portfolio and should be flexible enough
to generate necessary information reports used by the management for
effective monitoring of the bank’s / DFI’s exposure in the area. The MIS
is expected to generate the following periodical reports:

• Delinquency reports (for 30, 60, 90, 180 & 360 days and above) on
monthly basis.
• Reports interrelating delinquencies with various types of customers
or various attributes of the customers to enable the management to

3
 take important policy decisions and make appropriate modifications
in the lending program.
• Quarterly product wise profit and loss account duly adjusted with the
provisions on account of classified accounts. These profit and loss
statements should be placed before the Board of Directors in the
immediate next Board Meeting. The branches of foreign banks in
order to comply with this condition shall place the reports before a
committee comprising of CEO / Country Manager, CFO and Head of
Consumer Business.

5. The banks / DFIs shall develop comprehensive recovery procedures for

the delinquent consumer loans. The recovery procedures may vary from
product to product. However, distinct and objective triggers should be
prescribed for taking pre-planned enforcement / recovery measures.

6. The banks / DFIs desirous of undertaking consumer finance will become

a member of at least one Consumer Credit Information Bureau.
Moreover, the banks / DFIs may share information / data among
themselves or subscribe to other databases as they deem fit and
appropriate.

7. The financial institutions starting consumer financing are encouraged to

impart sufficient training on an ongoing basis to their staff to raise their
capability regarding various aspects of consumer finance.

8. The banks / DFIs shall prepare standardized set of borrowing and

recourse documents (duly cleared by their legal counsels) for each type
of consumer financing.

OPERATIONS:
1. Consumer financing, like other credit facilities, must be subject to the
bank’s / DFI’s risk management process setup for this particular
business. The process may include, identifying source of repayment and
assessing customers’ ability to repay, his / her past dealings with the
bank / DFI, the net worth and information obtained from a Consumer
Credit Information Bureau.

2. At the time of granting facility under various modes of consumer

financing, banks / DFIs shall obtain a written declaration from the
borrower divulging details of various facilities already obtained from other
financial institutions. The banks / DFIs should carefully study the details
given in the statement and allow fresh finance / limit only after ensuring
that the total exposure in relation to the repayment capacity of the
customer does not exceed the reasonable limits as laid down in the
approved policies of the banks / DFIs. The declaration will also help
banks / DFIs to avoid exposure against a person having multiple facilities
from different financial institutions on the strength of an individual source
of repayment.

3. Before allowing any facility, the banks / DFIs shall preferably obtain
credit report from the Consumer Credit Information Bureau of which they

4
 are a member. The report will be given due weightage while making
credit decision.

4. Internal audit and control function of the bank / DFI, apart from other
things, should be designed and strengthened so that it can efficiently
undertake an objective review of the consumer finance portfolio from
time to time to assess various risks and possible weaknesses. The
internal audit should also assess the adequacy of the internal controls
and ensure that the required policies and standards are developed and
practiced. Internal audit should also comment on the steps taken by the
management to rectify the weaknesses pointed out by them in their
previous reports for reducing the level of risk.

5. The banks / DFIs shall ensure that their accounting and computer
systems are well equipped to avoid charging of mark-up on mark-up.
For this purpose, it should be ensured that the mark-up charged on the
outstanding amount is kept separate from the principal.

6. The banks / DFIs shall ensure that any repayment made by the borrower
is accounted for before applying mark-up on the outstanding amount.

DISCLOSURE / ETHICS:
The banks / DFIs must clearly disclose, all the important terms, conditions,
fees, charges and penalties, which interalia include Annualized Percentage
Rate, pre-payment penalties and the conditions under which they apply. For
ease of reference and guidance of their customers, banks / DFIs are
encouraged to publish brochures regarding frequently asked questions.

For the purposes of this regulation, Annualized Percentage Rate means as

follows:

Mark-up paid for the period x 360 x 100

Outstanding Principal Amount No. of Days

5
 PART – C
REGULATIONS

REGULATION R-1
FACILITIES TO RELATED PERSONS
The consumer finance facilities extended by banks / DFIs to their directors,
major shareholders, employees and family members of these persons shall be
at arms length basis and on normal terms and conditions applicable for other
customers of the banks / DFIs. The banks / DFIs shall ensure that the
appraisal standards are not compromised in such cases and market rates are
used for these persons. The facilities extended to the employees of the banks /
DFIs as a part of their compensation package under Employees Service Rules
shall not fall in this category.

REGULATION R-2
LIMIT ON EXPOSURE AGAINST
TOTAL CONSUMER FINANCING
Banks / DFIs shall ensure that the aggregate exposure under all consumer
financing facilities at the end of first year and second year of the start of their
consumer financing does not exceed 2 times and 4 times of their equity
respectively. For subsequent years, following limits are placed on the total
consumer financing facilities:

PERCENTAGE OF CLASSIFIED CONSUMER

FINANCING TO TOTAL CONSUMER FINANCING MAXIMUM LIMIT

a) Below 3% 10 times of the equity

b) Below 5% 6 times of the equity

c) Below 10% 4 times of the equity

d) Upto and above 10% 2 times of the equity

REGULATION R-3
TOTAL FINANCING FACILITIES TO BE
COMMENSURATE WITH THE INCOME
While extending financing facilities to their customers, the banks / DFIs should
ensure that the total installment of the loans extended by the financial
institutions is commensurate with monthly income and repayment capacity of
the borrower. This measure would be in addition to banks’ / DFIs’ usual
evaluations of each proposal concerning credit worthiness of the borrowers, to
ensure that the banks’ / DFIs’ portfolio under consumer finance fulfills the
prudential norms and instructions issued by the State Bank of Pakistan and
does not impair the soundness and safety of the bank / DFI itself.

REGULATION R-4
GENERAL RESERVE AGAINST CONSUMER FINANCE
The banks / DFIs shall maintain a general reserve at least equivalent to 1.5 %
of the consumer portfolio which is fully secured and 5% of the consumer

6
portfolio which is unsecured, to protect them from the risks associated with the
economic cyclical nature of this business.

REGULATION R-5
BAR ON TRANSFER OF FACILITIES FROM ONE
CATEGORY TO ANOTHER TO AVOID CLASSIFICATION
The banks / DFIs shall not transfer any loan or facility to be classified, from one
category of consumer finance to another, to avoid classification.

REGULATION R-6
MARGIN REQUIREMENTS
The 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-I.

7
 REGULATIONS FOR CREDIT CARDS

REGULATION O-1
The banks / DFIs should take reasonable steps to satisfy themselves that
cardholders have received the cards, whether personally or by mail. The banks
/ DFIs should advise the card holders of the need to take reasonable steps to
keep the card safe and the PIN secret so that frauds are avoided.

REGULATION O-2

Banks / DFIs shall provide to the credit card holders, the statement of account
at monthly intervals, unless there has been no transaction or no outstanding
balance on the account since last statement.

REGULATION O-3
Banks / DFIs shall be liable for all transactions not authorized by the credit
card holders after they have been properly served with a notice that the card
has been lost / stolen. However, the bank’s / DFI’s liability shall be limited to
those amounts wrongly charged to the credit card holder’s account. In order to
mitigate the risks in this respect, the banks / DFIs are encouraged to take
insurance cover against wrongly charged amounts, frauds, etc.

REGULATION O-4
In case the cardholders make partial payment, the banks / DFIs should take
into account the partial payment before charging service fee / mark-up amount
on the outstanding / billed amount so that the possibility of charging excess
amount of mark-up could be avoided.

REGULATION O-5
Due date for payment must be specifically mentioned on the accounts
statement. If fine / penalty is agreed to be charged in case the payment is not
made by the due date, it should be clearly mentioned in the agreement.

REGULATION R-7
MAXIMUM CREDIT LIMIT
Maximum unsecured limit under credit card to a borrower (supplementary
cards shall be considered part of the principal borrower) shall not exceed
Rs 500,000/. The banks / DFIs may allow financing under the credit card
scheme in excess of the limit of Rs 500,000/-, provided the excess amount is
secured appropriately. However, in no case the limit will be allowed to exceed
Rs 2 million.

For Charge Cards, pre-set spending limits generated by the standardized

systems, as is the global practice, shall be allowed.

8
REGULATION R-8
CLASSIFICATION AND PROVISIONING
The credit card advances shall be classified and provided for in the following
manner:
CLASSIFICATION DETERMINANT TREATMENT OF PROVISION TO
INCOME BE MADE*
(1) (2) (3) (4)
Loss Where mark- Unrealized mark- Provision of
up / interest up / interest to be 100% of the
or principal is put in Suspense difference
overdue by Account and not resulting from
180 days or to be credited to the outstanding
more from Income Account balance of
the due date. except when principal less the
realized in cash. amount of liquid
securities with
the bank / DFI.
*This specific provision will be in addition to general reserve maintained under Regulation R.4

It is clarified that the lenders are allowed to follow more conservative policies.
Further, provisioning may be created and maintained by the bank / DFI on a
portfolio basis provided that the provision maintained by the bank / DFI shall
not be less than the level required under this Regulation.

9
 REGULATIONS FOR AUTO LOANS

REGULATION R-9
The vehicles to be utilized for commercial purposes shall not be covered under
the Prudential Regulations for Consumer Financing. Any such financing shall
ensure compliance with Prudential Regulations for Corporate / Commercial
Banking or Prudential Regulations for SMEs Financing. These regulations
shall only apply for financing vehicles for personal use.

REGULATION R-10
The maximum tenure of the auto loan finance shall not exceed seven years.

REGULATION R-11
While allowing auto loans, the banks / DFIs shall ensure that the minimum
down payment does not fall below 10% of the value of vehicle.

REGULATION R-12
In addition to any other security arrangement on the discretion of the banks /
DFIs, the vehicles financed by the banks / DFIs shall be properly secured by
way of hypothecation. Payments against the sale orders issued by the
manufacturers are allowed till the time of delivery of the vehicle subject to the
condition that payment will directly be made to the manufacturer / authorized
dealer by the bank / DFI and upon delivery, the vehicle will immediately be
hypothecated to the bank / DFI.

REGULATION R-13
The banks / DFIs shall ensure that the vehicle remains properly insured at all
times during the tenure of the loan.

REGULATION O-6
The clause of repossession in case of default should be clearly stated in the
loan agreement mentioning specific default period after which the
repossession can be initiated. The repossession expenses charged to the
borrower shall not be more than actual incurred by the bank / DFI. However,
the maximum amount of repossession charges shall be listed in the schedule
of charges provided to customers. The banks / DFIs shall develop an
appropriate procedure for repossession of the vehicles and shall ensure that
the procedure is strictly in accordance with law.

REGULATION O-7
A detailed repayment schedule should be provided to the borrower at the
outset. Where alterations become imminent because of late payments or
prepayments and the installment amount or period changes significantly, the
revised schedule should be provided to the borrower at the earliest
convenience of the bank / DFI but not later than 15 days of the change.
Further, even in case of insignificant changes, upon the request of the
customer, the bank / DFI shall provide him revised repayment schedule free of
cost.

10
REGULATION O-8
The banks / DFIs desirous of financing the purchase of used cars shall prepare
uniform guidelines for determining the value of the used vehicles. However, in
no case the bank / DFI shall finance the cars older than five years.

REGULATION O-9
The banks / DFIs should ensure that a good number of authorized auto dealers
are placed at their panel to eliminate the chances of collusion or other
unethical practices.

REGULATION R-14
The auto loans shall be classified and provided for in the following manner:
CLASSIFICATION DETERMINANT TREATMENT OF PROVISIONS TO
INCOME BE MADE*
(1) (2) (3) (4)
1. Substandard. Where mark- Unrealized mark- No provision is
up/ interest or up / interest to be required.
principal is put in Suspense
overdue (past Account and not to
due) by 90 be credited to
days from the Income Account
due date. except when
realized in cash.

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

up/ interest or of the principal
principal is amount less the
overdue by amount of liquid
180 days or securities with
more from the the bank / DFI.
due date.

3. Loss Where mark- As above. Provision of

up / interest or 100% of the
principal is principal less the
overdue by amount of liquid
one year or securities with
more from the the bank / DFI.
due date.

* These specific provisions will be in addition to general reserve maintained under Regulation R.4

11
 REGULATIONS FOR HOUSING FINANCE

REGULATION R-15
The maximum per party limit in respect of housing finance by the banks / DFIs
will be Rs 10 million.

REGULATION R-16
The housing finance facility shall be provided at a maximum debt-equity ratio
of 85:15.

REGULATION R-17
Banks / DFIs shall ensure that at no time their total exposure under house
financing exceeds 10% of their net advances.

REGULATION R-18
Banks / DFIs are free to extend mortgage loans for housing, for a period not
exceeding twenty years. Banks / DFIs should be mindful of adequate asset
liability matching.

REGULATION R-19
The house financed by the bank / DFI shall be mortgaged in bank’s / DFI’s
favour by way of equitable or registered mortgage.

REGULATION R-20
Banks / DFIs shall either engage professional expertise or arrange sufficient
training for their concerned officials to evaluate the property, assess the
genuineness and integrity of the title documents, etc.

REGULATION R-21
The bank’s / DFI’s management should put in place a mechanism to monitor
conditions in the real estate market (or other product market) at least on
quarterly basis to ensure that its policies are aligned to current market
conditions.

REGULATION R-22
Banks / DFIs are encouraged to develop floating rate products for extending
housing finance, thereby managing interest rate risk to avoid its adverse
effects. Banks / DFIs are also encouraged to develop in-house system to
stress test their housing portfolio against adverse movements in interest rates
as also maturity mismatches.

12
REGULATION R-23
The mortgage loans shall be classified and provided for in the following
manner:
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 to
due) by 90 be credited to
days from the Income Account
due date. except when
realized in cash.

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

up/ interest or of the difference
principal is resulting from
overdue by the outstanding
180 days or balance of
more from the principal less the
due date. amount of liquid
securities and
forced sale
value of
mortgaged
property as
valued by
valuers on the
panel of PBA.

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

up/ interest or of the difference
principal is resulting from
overdue by the outstanding
one year or balance of
more from the principal less the
due date. amount of liquid
securities and
forced sale
value of
mortgaged
property as
valued by
valuers on the
panel of PBA

4. Loss. Where mark- As above. Provision of

up/ interest or 100% of the
principal is difference

13
 overdue resulting from
beyond two the outstanding
years or more balance of
from the due principal less the
date. amount of liquid
securities and
forced sale
value of
mortgaged
property as
valued by
valuers on the
panel of PBA.
* These specific provisions will be in addition to general reserve maintained under Regulation R.4

14
 REGULATIONS FOR PERSONAL LOANS INCLUDING
LOANS FOR THE PURCHASE OF CONSUMER DURABLES

REGULATION R-24
The clean limit per person for personal loans will be Rs 500,000/-. However,
the banks / DFIs may lend higher amounts provided the loan is secured
appropriately. But, in no case, the loan amount will be allowed to exceed
Rs 1,000,000/-. The loan secured against liquid securities shall, however, be
exempt from this limit. The loans against the securities issued by Central
Directorate of National Saving (CDNS) shall be subject to such limits as are
prescribed by CDNS / Federal Government / State Bank of Pakistan from time
to time.

REGULATION R-25
In cases, where the loan has been extended to purchase some durable goods
/ items, the same will be hypothecated with the bank / DFI besides other
securities, which the bank / DFI may require on its own.

REGULATION R-26
The maximum tenure of the loan shall not exceed 5 years.

REGULATION R-27
In case of Running Finance / Revolving Finance, it shall be ensured that at
least 15% of the maximum utilization of the loan during the year is cleaned up
by the borrower for a minimum period of one week. In case the clean up is not
made by the borrower, the loan will be appropriately classified.

REGULATION R-28
The personal loans shall be classified and provided for in the following manner:

CLASSIFICATION DETERMINANT TREATMENT OF PROVISIONS TO

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

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

up/ interest or of the principal
principal is amount less the
overdue by amount of liquid
180 days or securities with
more from the the bank.
due date.

15
 3. Loss Where mark- As above. Provision of
up/ interest or 100% of the
principal is principal less the
overdue by amount of liquid
one year or securities with
more from the the bank / DFI.
due date.

* These specific provisions will be in addition to general reserve maintained under Regulation R.4

16
 ANNEXURE-I

MARGIN REQUIREMENTS UNDER REGULATION R-6

Shares of listed Companies / TFCs As per Prudential

Regulations for Corporate
/ Commercial Banking.

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.

17