Securities & Exchange Commission of Pakistan

SPECIALIZED COMPANIES DIVISION NBFC DEPARTMENT

NBFCs are advised to ensure circulation of Regulations among all their officers / branches for meticulous compliance in letter and spirit. Any violations or circumvention of these Regulations shall be dealt with under the provisions of the Ordinance.

The new set of Regulations has also been placed on SEC Website www.secp.gov.pk for information of the concerned quarters and general public.

Please acknowledge receipt.

(Asif JalalBhatti)

Joint Director

Distribution:

1.  Chief Executives of all NBFCs

2.                 Managing Directors of all Stock Exchanges

3.                 The Chairman, Investment Banks Association of Pakistan

4.                 The Chairman, Leasing Association of Pakistan

5.                 The Chairman, Mutual Funds Association of Pakistan

6.                 The Chairman, ICP

7.                 The Managing Director, HBFC

8.                 Director, Banking Supervision Department, State Bank of Pakistan

9.                 The President, Institute of Chartered Accountants of Pakistan

10.   The President, Institute of Cost and Management Accountants of Pakistan

11.          All Divisions of SEC

12.    All CROs

 

PRUDENTIAL REGULATIONS FOR NON-BANKING FINANCE COMPANIES

Part -I

Definitions.__ (1) In these guidelines, unless there is anything repugnant in the subject or context:-

(a)                                     Borrower includes a person on whom a NBFC has taken any exposure during the course of business.

(b)                                    Contingent liability means:

(i) 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

(ii) a present obligation that arises from past events but is not recognized because:

(a)                                    it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or

(b)                                   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.

(c)                                     Documents include vouchers, cheques, bills, pay-orders, promissory notes, securities for leases / advances and claims by or against the NBFC or any
other record / papers supporting entries in the books of a NBFC.

(d)                                    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.

Explanation: 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.

(e)         Exposure includes facilities and subscription to or investment in shares.

Explanation:   Secured  exposure   means   exposure  backed  by tangible security and any other form of security with appropriate margins (in cases where margin has been prescribed by SEC, appropriate margin shall at least be equal to the prescribed margin). Clean exposure means exposure without any security or collateral.

(f)             Financial Institutions includes, -

(a)                            a company or an institution whether established under any special enactment and operating within or outside Pakistan which transacts the business of banking or any associated or ancillary business through its branches;

(b)                           a modaraba, leasing company, investment bank, venture capital company, financing company, housing finance company, a non-banking finance company and a bank or any institution duly licensed by State Bank of Pakistan;

(c) such other institution or companies authorised by law to undertake any similar business, as the Federal Government may, by notification in the official Gazette, specify for the purpose;".

(g)              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/ leased/collaterally held assets in a forced / distressed sale conditions.

(h)              Government   Securities   include   monetary  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 and any other security as the Federal Government may, by notification in the Official Gazette, declare, to the extent determined from time to time, to be Government Securities.

(i)               Group means persons, whether natural or juridical, if one of them or his

family members including spouse, lineal ascendants and descendants and brothers and sisters or its subsidiary, have control or hold substantial ownership interest or have power to exercise significant influence over the other. For the purpose of this:

(i) 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.

 

(ii) Control refers to an ownership directly or indirectly through subsidiaries, of more than one half of voting power of an enterprise.

(iii)Substantial ownership / affiliation means beneficial share holding of 10% by a person and/or by his family members including spouse, lineal ascendants and descendants and brothers and sisters.

(iv) 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 o material inter- company transactions.

(j)               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, shares of listed companies which are actively traded on the stock exchange, NIT Units, certificates of mutual funds, Certificates of Investment (COIs)/Certificates of Deposits (CODs) issued by DFIs / NBFCs and Certificates of Musharika (COMs) issued by Modarabas rated at least 'A' by a credit rating agency registered with the SEC, listed TFCs and Commercial Papers rated at least 'A' by a credit rating agency registered with the SEC, National Saving Scheme securities and units of open ended schemes for which a duly licensed asset management company quotes daily offer and bid rates. These assets with appropriate margins should be in possession of the NBFCs with perfected lien.

(k)              Major Shareholder of a NBFC means any person holding 10% or more

of the share capital of a NBFC either individually or in concert with family members.

(l)               Medium and Long Term Facilities  mean facilities with maturities of

more than one year.

(m)             Other Form  of   Security  means  hypothecation  of stock (inventory),

assignment of receivables, lease rentals, contract receivables, etc.

(n)               Readily Realizable Assets include liquid assets and stocks pledged with

the NBFCs and are in their possession, with 'perfected lien' duly supported with complete documentation.

(o)              Rentals   include  lease  rentals,  rentals  in respect of housin   g  finance

facilities, hire purchase installments or any other amount received by NBFC from borrower against the grant of facility.

(p)              Short Term Facilities mean facilities with maturities up to one year

(q)                    Subordinated Loan means an unsecured loan extended to the borrower by

its sponsors, subordinate to the claim of the NBFC taking exposure on the borrower and documented by a formal sub-ordination agreement between provider of the loan and the borrower. The loan shall be disclosed in the annual audited financial statements of the borrower as subordinated loan.

(r)                     Tangible Security means readily realizable assets, mortgage of land, plant, building, machinery and any other fixed assets.

(s)                     Underwriting Commitments mean commitments given byNBFCs 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 (NBFCs).

(2)                                     All terms and expressions used but not defined in these regulations shall have the same   meanings   as   assigned   to   them   in   the   Non-Banking   Finance   Companies (Establishment & Regulation) Rules, 2003.

(3)                                     Part - II & III of these regulations shall not apply to NBFCs operating solely or in any combination thereof, as an asset management company, investment advisor or a venture capital company. However, Part - IV of these regulations shall apply to all NBFCs undertaking any form of business mentioned in section 282A of the Companies Ordinance, 1984.

PART - II

(A)     Corporate Borrowers

1. Limit on NBFC’s exposure to a single person. -(1) The total outstanding exposure by a NBFC to any single person shall not at any point in time exceed 30% of the NBFC’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 NBFC’s equity.

(2)                                     The total outstanding exposure by a NBFC to any group shall not exceed 50% of
the NBFC’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 NBFC’s equity.

(3)                                     In arriving at exposure under this Regulation:

a) 100% of the deposits placed with lending NBFC and TFCs, having investment grade credit rating by a rating agency registered with the SEC, of the lending NBFC shall be excluded.

 

b)    90% of the following shall be deducted;

(i)     deposits with another financial institution under perfected lien;

(ii)    encashment    value   of   Government Securities 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, payable on demand, issued
by a financial institution rated at least   'A' by a credit rating agency
registered with the SEC, accepted as collateral by NBFCs shall be deducted.

d)                   75% 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 acredit rating agency registered with
the SEC.

e)                    Weightage of 50% shall be given to;

(i)             guarantees / bonds other than financial guarantees;

(ii)            underwriting commitments.

f)      The following   different weightages will be applicable   to exposure taken
against financial institutions in respect of placements;

(i)             10% weightage on exposure to financial institutions with 'AAA'

rating.

(ii)            25% weightage on exposure to financial institutions rated 'A' and

above.

(iii)         50% weightage on exposure to financial institutions rated 'BBB' and above.

(4)       For the purpose of this regulation, exposure shall not include the following:

(i) Obligations under letters of credit and letters of guarantee to the extent of cash margin held by the NBFCs.

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

(iii) Facilities provided to financial institutions through REPO transactions with underlying SLR eligible securities

(iv) Pre-shipment / post-shipment credit provided to finance exports of goods covered by letter of credit/firm contracts including financing provided from the NBFC’s own resources.

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

 

2. Minimum conditions for grant of financing facilities. - (1) When considering proposals for fund/non-fund based facility exceeding one million rupees, NBFCs should give due weightage to credit report relating to the borrower and his group obtained from Credit Information Bureau of the State Bank of Pakistan. If the credit report indicates over-exposure/default, the facilities shall be extended only after recording reasons to do so.

(2) While granting any facility to the customers other than individuals, NBFC shall obtain copy of accounts relating to the business of each of its borrower for analysis and record in the following manner, namely:-

 

(3) Every NBFC shall, before providing any facility (including renewal, enhancement and rescheduling/restructuring), ensure that the Loan Application Form prescribed/devised by a NBFC is accompanied with a "Borrower's Basic Fact Sheet" as per Annexure-I. NBFC shall also ensure that the information requested in the Basic Fact Sheet is provided by the borrower under his seal and signature.

3.          Linkage between a borrower's equity and total exposure from financial
institutions. - (1)       While taking any exposure, NBFCs shall ensure that the total exposure availed by any borrower from financial institutions does not exceed 10 times of borrower's equity as disclosed in its financial statements.

2) For the purpose of this regulation, subordinated loans shall be counted as equity of the borrower. NBFCs 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 NBFC’s prior approval.

4.          Financial indicators of the borrowers: - (1) It is expected that at the time of allowing fresh exposure / enhancement / renewal, the debt-equity ratio of the borrower does not exceed 60:40 and current assets to current liabilities ratio is not lower than 1:1 or any other ratios as may be prescribed by the Commission from time to time. Current maturities of long term debt not yet due for payment may be excluded from the current liabilities and lease rentals receivable within the next twelve months as disclosed in the annual audited accounts shall be treated as current assets for the purpose of calculating current assets to current liabilities ratio. However, in exceptional cases, NBFCs may relax these ratios in case of facilities upto three million rupees, if they are satisfied that appropriate risk mitigants have been put in place. Where the NBFCs have taken exposure on exceptional basis as provided 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 the SEC during the inspection.

2)       This regulation shall not apply to the facilities granted to financial institutions with investment grade rating by a credit rating agency registered with SEC   or 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.         Margin against facilities. - (1) Following minimum margins shall be maintained against various facilities and all guarantees will be backed by 100% realizable securities:

(a)             In case of performance bonds, the condition of 100% cover of realizable securities may be relaxed subject to minimum compulsory realizable security
cover equivalent to 20% of the amount of the performance bond;

(b)            In case of guarantees issued against mobilisation advance, the condition of 100% cover of realizable securities may be relaxed subject to the following
conditions, namely:

(i)  Guarantees issued shall contain a clause that the mobilisation advance shall be released by the beneficiary through the guarantor NBFC only; and

(ii) At the time of issuing such a guarantee the beneficiary shall sign an agreement with the NBFC that releases out of mobilisation advance would be covered by realizable assets; and

(c) In case of bid bonds issued on behalf of domestic consultancy firms bidding for international contracts where the consultancy fees are to be received in foreign exchange, the requirement of 100% cover by realizable securities may be waived off, and this relaxation would also be available to all suppliers of goods and services bidding against international tenders.

(2)       NBFCs shall adhere to the following margin requirements:

 

6.

not:

Facilities against Shares/TFCs and acquisition of shares. - (1)    NBFCs shall

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.

f)                                          take exposure against the shares/TFCs of listed companies that are not members of the Central Depository System.

g)                                       take exposure against unsecured TFCs or non-rated TFCs or TFCs rated
below investment grade by a credit rating agency registered with the SEC.

 

2.                                         NBFCs 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. Provided that this restriction shall not be applicable to the investments made by the NBFCs in the subsidiaries.

3.                                         Exposure against the shares of listed companies shall be subject to minimum margin of 30% of their current market value, though the NBFCs may, if they wish, set higher margin requirements keeping in view other factors. The NBFCs 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 NBFCs to do this.

4.                                         Exposure against TFCs rated 'A' (or equivalent) and above by a credit rating agency registered with the SEC 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%.

7. Restrictions on certain types of transactions. - (1) No NBFC shall allow facilities to any of its directors or to individuals, firms or companies in which it or any of its directors is interested as partner, director or guarantor, as the case may be, its chief executive and its major shareholders, including their spouses, parents, and children or to firms and companies in which they are interested as partners, directors or major shareholders of that concern without the approval by the majority of the directors of that NBFC;

Provided that the director interested in seeking such approval shall not take part in the proceedings of the approval of the facility;

(2)                                     No NBFC shall allow unsecured facilities or facilities that are not backed by bank guarantees. Provided that the bank providing the guarantee shall have a minimum investment grade credit rating.

(3)                                     No NBFC shall allow facilities on the guarantee of its chief executive, directors and major shareholders including their spouses, parents and children or to firms and companies in which they are interested as partners, directors or major shareholders of that concern.

(4)                                     No NBFC shall allow facilities for speculative purposes.

(5)                 No NBFC other than the NBFC licensed by the SEC to undertake housing finance services shall hold or trade in real estate except that in use of the NBFC itself. Property acquired from a borrower/lessee in consequence of his failing to meet his obligations to NBFC would be exempt from this regulation.

(6)                 The facilities extended by NBFCs 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 NBFCs. The NBFCs 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 NBFCs as a part of their compensation package under Employees Service Rules shall not fall in this category.