ANNEXURE TO BCD CIRCULAR NO: 15

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ANNEXURE TO BCD CIRCULAR NO: 15
DATED THE 29^TH AUGUST, 1992

REGULATION - I

1. LIMIT OF BANK'S EXPOSURE TO A SINGLE PERSON
The total outstanding financing facilities by a banking company to any single person shall not at any point of time exceed 30 per cent of the bank's unimpaired capital and reserves subject to the condition that the maximum outstanding against fund based financing facilities do not exceed 20% of the unimpaired capital and reserves. In the case of branches of foreign banks operating in Pakistan, the maximum exposure limit of 30% shall be calculated on the basis of their assigned capital maintained under Section 13(3) of the Banking Companies Ordinance, 1962 free of all losses and provisions, provided that maximum exposure on the basis of fund-based facilities sha11 be 20% of the capital maintained under Section 13(3) of the Banking Companies Ordinance, 1962, or RS 12 million whichever is higher.

2. No bank shall provide any accommodation fund based or otherwise to any member of its Board of Directors, its Chief Executive and its shareholders holding 5(five) percent or more of the share capital of the bank, including their spouses, parents, and children or to firm and companies in which they are interested as partners: directors or shareholders holding 5(five) per cent or more of the share capital of that concern.

3. The term person shall include any individual, association or body of individuals, firm, or company whether incorporated or not and any other juridical person.

4. For the purposes of para 1 and 2 above accommodation shall mean and include:

(a) any form of loans and advances or credit facilities including bills purchased and discounted;

(b) any loans and advances, or bills purchased or discounted extended to another person on the guarantee of the person;

(c) 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 person;

(d) any financing obligation undertaken on behalf of the person under a letter of credit including a stand-by letter of credit, or similar instrument;

(e) loan repayment guarantees issued on behalf of the person;

(f) any obligations undertaken on behalf of the person under any other guarantee;

(g) acceptance/endorsements made on account; and

(h) any liability assumed on behalf of the client to advance funds pursuant to a contractual commitment.

(i) In arriving at exposure per-person weightage of 50% shall be given to –
(a) documentary credits opened by banks; and
(b) gurantees/bonds other than repayment gurantees.

(j) In arriving at per party exposure, 80% of
(a) deposits of the party with the bank under lien and
(b) face value of FIBs lodged by the party as collateral shall be deducted.

BUT SHALL NOT INCLUDE:
(i) Loans and advances given to the Federal or Provincial Government or any of their agencies under the commodity operations programme of the government.

(ii) Loans and advances (including bills purchased and discounted given to Federal/Provincial Government, or guaranteed by the Federal Government.

(iii) Pre-shipment/post-shipment credit provided to finance exports of goods covered by letters of credit/firm contract.

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

(v) Obligations under letters of credit and letters of gurantee of the extent of the cash margin retained by the bank.

(vi) Letters of credit which do not create any obligation on the part of the bank to make payments on account of imports.

(vii) The single person limit does not apply to facilities provided to banks.

5. Banks are directed to complete the regularization of their port-folios in accordance with the above regulations latest by 30-6-1993.

REGULATION II

LIMIT OF BANK’S EXPOSURE AGAINST CONTIGENT LIABILITIES
1. Contingent liabilities of a bank shall not exceed at any point of time 10 times of its paid up capital and general reserves free of losses. In case of branches of foreign banks operating in Pakistan, capital will mean capital maintained under Section 13(3) of the Banking Companies Ordinance, 1962. Following shall not constitute contingent liabilities for the purpose of this regulation.

(a) Bills of collection and

(b) Forward foreign exchange contracts, weightage of 50% shall be given to bid/mobilization advance/performance bonds.

2. Exposure limit on contingent liabilities shall come into effect on 1^st July, 1993.

REGULATION – III

LIMIT ON BANK’S EXPOSURE AGAINST UNSECURED ADVANVES
1. Banks may grant financing facilities on unsecured basis upto a maximum of Rs. 50,000/- to any one borrower for agriculture, commercial and industrial purposes, provided the aggregate exposure of the bank against all its unsecured assets does not at any point of time exceed the amount of the bank's capital (free of all losses) and general reserves.

2. Banks shall regularize their existing exposure against unsecured advance latest by 30-6-1995.

REGULATION-IV

LINKAGE BETWEEN A BORROWER'S EQUALITY AND TOTAL BORROWING FROM BANKS.
1. While granting any accommodation, banks shall ensure that the total accommodation availed by any borrower from banks/financial institutions does not exceed 10 times of the capital and reserves (free of losses) of' the borrower as disclosed in its Audited Accounts. Every bank shall, as a matter of rule, obtain copy of accounts relating to the business of each of its borrower for analysis and record in the following manner :(For the purpose of this regulation, accommodation shall have the same meaning as in Regulation I above).

a) Where the bank's exposure does not exceed Rs.2 million	Accounts duly signed by the borrower
b) Where the exposure exceeds Rs. 2 million but does not exceed Rs. 10 million.	Accounts duly signed by the borrower and countersigned by the Internal Auditor of the bank or a Chartered Accountant.
c) Where the exposure exceeds Rs. 10 million.	Accounts duly audited by the practicing Chartered Accountant.

(d) The regulation shall not apply to loans not exceeding Rs. 500,000/- per borrower.

(e) Compliance with this regulation shall be judged on the basis of written statement filed by borrower.

2. (a) ‘Banks shall strictly observe the regulation when sanction fresh/additional credit facilities. Following relazation is hereby granted upto 30-6-1996 for renewing existing facilities:-

Total accomodation availed by a borrower from banks/financial institution may exceed 10 times of the capital and reserves (free of losses) of the borrower provided the borrower injects additional equity during each year (92-93, 93-94, 94-95 and 95-96), an amount equal to 1/4^th of the difference between the equity prescribed by this Regulation and the existing equity.

EXAMPLE

i. Limit proposed to be renewed.	100
ii. Prescribed equity (I) 10	10
iii. Actual Equity (say).	6
iv. Difference between the prescribed equity and the existing equity (ii) - (iii)	4
v. Additional equity Required to be injected in 92-93 (iv) + 4	1

(b) Export finance and finance provided to ginning and rice husking factories and finance provided on the basis of lien on foreign currency deposit shall be excluded from the borrowings when determining linkage between equity and borrowing for the purpose of this Regulation. The borrowers availing this relaxation shall plough back 20% of the net profit each year until such time that they are able to borrow without this relaxation.

3. For the purpose of this Regulation sub-ordinated loans shall be counted as equity.

REGULATION – V

MAINTENANCE OF DEBT-EQUITY RATION
(l) Banks shall ensure that :-

(a) Current asset to current liability ratio of the borrower does not fall below the minimum indicated hereunder :-

i) Upto 31-12-1992.	0.7 :1
ii) From 1-1-93 to 30-6-1993	0.8:1
iii) From 1.7.1993 to 31-12-1993	0.9:1
iv) From 1-1-1994	1:1

Current maturities of long term debt not yet due for payment may be excluded from the current liabilities for the purpose of calculating these ratios.

(b) Fresh/additional accommodation in the form of long-term debts shall be provided on the basis of s debt equity ratio not exceeding 60:40. The position of existing facilities may be regularized by 30-6-1996. The borrowers shall inject during each year (92-93, 93-94, 94-95 & 95-96) an amount equal to 1/4^th of the difference between the required equity and the existing equity. Provided that where a different debt equity ratio has been laid down by the Government the ration laid down by Government shall apply.

REGULATION -VI

FINANCING FACILITIES AGAINST SHARES
1. No bank shall provide unsecured credit to finance subscription towards floatation of share capital of public limited companies.

2. No bank shall allow financing facilities whether fund-based or non-fund-based against the shares of companies not listed on the stock exchange.

3. Facilities against the shares of listed companies shall be subject to the following minimum margins:-

(a) Where the market value does not exceed the preceding 12 months average market value.	20%
(b) Where market value exceeds the preceding 12 months average market value but does not exceed twice the preceding 12 months average market value.	40%
(c) Where the market value exceeds twice the preceding 12 months average market value.	50%

4. The regulation will come into force with immediate effect. The prescribed margin requirement may be completed before the close of the financial year ending 31-12-1992.

REGULATION -VII

DEALING WITH DIRECTORS, MAJOR SHAREHOLDERS AND EMPLOYEES OF THE BANKS
1. Banks shall not without the prior approval in writing of the State Bank of Pakistan enter into leasing, renting and sale/purchase of any kind with their directors, officers, employees or persons who either individually or in concert with family members beneficially own 10 percent or more of the equity of the bank.

2. The regulation will come into force with immediate effect.

REGULATION – VIII

CLASSIFICATION AND PROVISIONING FOR LOSS AND OTHER ASSETS
Every bank shall observe prudential guidelines given hereunder in the matter of classification of its assets and provisioning there against.

i) Guidelines for Classification of short term facilities.

SPECIFICATION 1	DETERMINANT 2	TREATMENT OF INCOME 3	PROVISION TO BE MADE 4
1. OAEM (Other Assets Especially Mentioned)	Where mark-up/interest or principal is overdue (Past due) by 90 days from the due date	Un-realized mark-up/interest to be put in Suspense Account and not to be credited to Income Account.	Provision of 2% of the difference resulting from the outstanding balance of principal less the amount of liquid assets realizable without recourse to a Court of Law
2. Substandard	Where mark-up/interest or principal is overdue by 180 days or more from the due date.	As above	Provision of 25% of the difference resulting from the outstanding balance of principal less the amount of liquid assets realizable without recourse to a Court of Law
3. Doubtful	Where mark-up/interest or principal is overdue by one year or more from the due date.	As above	Provision of 50% of the difference resulting from the outstanding balance of principal less the amount of liquid assets realizable without recourse to a Court of Law
4. Loss	a) Where mark-up/interest or principal is overdue beyond two years from the due date.	As above	Provision of 100% of the difference resulting from the outstanding balance of principal
	b) Where Trade Bills (import, export or inland bills) are not paid/adjusted within 180 days of the due date.	As above	As above
ii) Guidelines for Classification of Long term Facilities
1. OAEM (Other Assets Especially Mentioned)	Where installment of principal or interest/markup is overdue (past due) by 18 days or more form the due date.	Un-realized mark-up/interest to be put in Suspense Account and not to be credited to Income Account.	Provision of 2% of the difference resulting from the outstanding balance of principal less the amount of liquid assets realizable without recourse to a Court of Law
2. Substandard	Where installment of principal or interest/mark-up is overdue by one year or more	As above	Provision of 25% of the difference resulting from the outstanding balance of principal less the amount of liquid assets realizable without recourse to a Court of Law
3. Doubtful	Where installment of principal or interest/mark-up is overdue by two year or more	As above	Provision of 50% of the difference resulting from the outstanding balance of principal less the amount of liquid assets realizable without recourse to a Court of Law
4. Loss	Where installment of principal or interest/mark-up is overdue by three year or more	As above	Provisions of 100% of the outstanding balance of principal.
The Regulation will come into force with effect from 30-12-1992.

REGULATION – IX

MANAGEMENT
1. No member of the Board of Directors Of a banking company holding 5 par cent or more of the paid-up capital of the banking company 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 in any capacity save as the chief executive of the bank (which should not exceed one in any case) and that no payment shall be made or perquisites provided to any such directors other than travelling and daily allowance 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.

2. The regulation shall come into force with immediate effect in respect of all the banks other than banks owned, controlled and managed by the Government.

REGULATION – X

BANK CHARGES.
1. All commercial banks shall be free to determine the rates of charges in respect of various services that they may provide to their constituents.

2. It shall be mandatory for each commercial bank to fix its rates of charges on half-yearly basis in advance for the half year January – June and July – December. Each bank shall get its schedule of charges printed and so notified as to be available to its constituents at least 7 days before the commencement of the half year during which the rates shall remain in force at all places of business. The bank shall be required to provide a copy of the printed schedule of charges to the Banking Control Department of State Bank of Pakistan before the commencement of the related half-year.

3. The regulation shall come into force with immediate effect.

REGULATION – XI

OPENING OF ACCOUNTS
Banks shall make all reasonable efforts to determine the true identity of every would-be account holder. Towards this end, banks shall institute affective procedure and methods for obtaining proper identification from new customers.

REGULATION – XII

PREVENTION OF CRIMINAL USE OF BANKING CHANNELS FOR THE PURPOSE OF MONEY-LAUNDERING AND OTHER UNLAWFUL TRADES
1. The following guidelines are issued to safeguard banks against their involvement in money-laundering activities, and other unlawful trades. These will add to or reinforce the precautions, banks may have been taking in this regard:

a) Before extending banking services, bank shall make reasonable efforts to determine the true identity of customer. Particular care should be taken to identify ownership of all accounts and those using safe-custody facilities. Effective procedures should be instituted for obtaining identification from new customers. An explicit policy should be devised to ensure that significant business transactions are not conducted with customers who fail to provide evidence of their identity.

b) Banks shall ensure that banking business is conducted in conformity with high ethical standards and that banking laws and regulations are adhered to. It is accepted that banks normally do not have effective means of knowing whether a transaction stem 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 should bet set out to offer services or provide active assistance in transactions which in their opinion are associated with money derived from illegal activities.

c) Specific procedures be established for ascertaining customer status and his source of earnings, for monitoring of accounts on a regular basis, checking identities and bonafides of remitters and beneficiaries, for retaining internal record of transactions for future reference. The transactions, which are out of character with the normal operation of the account involving heavy deposits/withdrawal/transfers, should be viewed with suspicion and properly investigated.

d) For an effective implementation of Banks' policy procedures, suitable training be imparted to members of staff and they be informed of their responsibility in this regard.

e) Banks may make arrangements for setting up an internal audit system in order to establish an effective means of testing/checking compliance with the Bank Policy and procedures established by it.

2. Keeping in view the above principles, banks shall issue necessary instructions for guidance and implementation by staff members.

REGULAT ION – XIII

SERVICE CHARGE ON PLS DEPOSIT ACCOUNTS.
1. No bank shall be levy any charge, in any form, on the credit balances held by it on PLS basis in customers deposit accounts.

2. The regulation shall come into force with immediate effect.

REGULAT ION – XIV

PAYMENT OF DIVIDEND
1. No bank shall pay any dividend on its shares unless and until:

a) All its capitalized expenses (including preliminary expenses, organization expenses, share selling commission/brokerage, amount of losses incurred and any other item of expenditure not represented by tangible assets) have been completely written off; &

b) All bad and doubtful debts and other classified assets have been fully and duly provided for in accordance with the prudential regulations of and to the satisfaction of the State Bank of Pakistan.

2. The regulation shall come into force with immediate effect.

REGULAT ION – XV

UNDERTAKING OF CASH PAYMENTS OUTSIDE THE BANK'S AUTHORISED PLACE OF BUSINESS
1. The banks are prohibited from undertaking any business of cash payments at any place other than the authorized place of business except through the installation of Automated Teller Machines (ATM).

REGULAT ION – XVI

WINDOW DRESSING
1. All banks are directed to, refrain from adopting any measures or practices hereby they would either artificially or temporarily show an ostensibly improved position of banks accounts as given in their Balance Sheets and Profit and Loss accounts specially in relation to its deposits mad profit. Particular care shall be taken in showing inter-branch and inter-bank accounts accurately and strictly according to their true nature.

REGULAT ION – XVII
Banks are directed not to 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 bank financial institution. In other words, banks shall not assume any obligation on behalf of any financial institution including investment banks, leasing companies, modarabas and development finance institutions, etc. in respect of any resources mobilized by them.

Some of the banks are providing fund management facilities (FMF) to their clients. In all such cases of fund management, banks must have a written contract with the persons on whose behalf fund management is being undertaken which agreement must, interalie, clearly state that the bank assumes no liability of any kind on account of such funds. Such funds shall not form part of bank’s time and demand liabilities.

The above Prudential Regulations are issued under the powers vested in State Bank under the Banking Companies Ordinance, 1962. All banks are mandated to observe, in letter and spirit, the prudential regulations so issued by the State Bank failing which they shall render themselves liable to penalties as prescribed.

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