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911205

STATE BANK OF PAKISTAN NBFIs REGULATION & SUPERVISION DEPARTMENT
CENTRAL DIRECTORATE

NBFIs Circular No. 1
5^th December, 1991

Chief Executive of DFIs, Investment Banks, Leasing Companies, Modarabas and Housing Finance Companies
As you are aware, the Government has, through an amendment in the Banking Companies Ordinance, 1962 assigned the responsibility of supervising the business of NBFIs to the State Bank of Pakistan. The State bank has, accordingly, framed Rules of Business for NBFIs. These appear in paragraph II below. These rules will come into force with affect from 1^st January, 1992. The rules will govern the business of NBFIs which, they are permitted to undertake under the relevant laws, SROs, Notifications, Government Consent Charters etc. The rules should not be construed, as permission to undertake business which you is not authorized to do. All transactions taking place on or after 1^st January 1992 shall be in conformity with these rules. It should be ensured that undertaking of business on or after 1^st January, 1992 done not result in violation of these rules. Business undertaken prior to 1^st January, 1992 shall be regularized within reasonable time. Process of regularization may be taken in hand immediately and completed as early as possible. The State bank will monitor the progress of regularization through quarterly progress reports.

II. RULES OF BUSINESS

A. DEFINATIONS
For the purposes of these regulations:-
a) "NBFIs Circular No." means Non-Bank Financial Institution and includes a DFI, Modaraba, Leasing Company, Housing Finance Company and Investment Bank.

b) "Exposure" would include fund and non-fund based facilities.

c) "Principal Lines of Business" would mean:
i) For a leasing company, the leasing business.
ii) For a Development Finance Institution fixed investment financing and other lines of businesses declared by the DFI in order of priority.
iii) For an Investment bank, lines of business declared by the Investment Bank in order of priority.
iv) For Housing Finance Companies, the financing of housing.
v) For a Modaraba lines of business declared by the Modaraba in order of priority or as specified by registrar Modaraba.

d) "facilities to Small Entrepreneurs" would men:
i) Facilities allowed by the NBFIs Circular No. for genuine business purpose up to Rs. 300,000.
ii) Facilities allowed to Industrial Units, including cottage industries, which have fixed assets (excluding land and buildings) the original value of which does not exceed Rs. 20,00,000/-

(e) "Major Shareholder" would mean any person holding 5% or more of the share capital.

(f) "Person" include an individual, a Hindu undivided family, a firm, an association o body of individuals whether incorporated or not, a company and every other juridical person.

(g) "Records" include ledgers, daybooks, cash books and all other manuals or magnetic records used in the business of the NBFI.

(h) "Documents" include vouchers, bills, promissory notes, securities for leases/advances and claims by or against the company and documents supporting entries in the books of the NBFI.

(i) "Equity" includes Share Capital and Reserves.

(j) "Facilities" would include fund based and non-fund based facilities.

(k) "Lease Key Money" means lease security deposit.

B. RULES

Limit On Exposures
1) Liabilities, excluding contingent liabilities, of a NBFI for the first two years of its operations shall not exceed seven times of its equity. In the subsequent years the liabilities shall not exceed ten times of the equity of the NBFI.

2) Contingent Liabilities of the NBFI for the first two years of its operation shall not exceed seven times its equity. In the subsequent years the contingent liabilities shall not exceed ten times of the equity of the NBFI.

Creation & Building Up of Reserve.
3) Every NBFI shall create reserve fund to which shall be credited:

a) An amount not less than 20% of its after tax profits till such time the reserve fund equals the mount of the paid up capital.

b) Thereafter a sum not less than 5% of its after tax profits.

Stock dividends shall be treated as appropriation for the purpose.

Deposit Insurance
4) When Deposit Insurance arrangements are in place every NBFI shall arrange full insurance cover for its deposits/COIs etc. up to Rs. 100,000/-

Return On Deposits
5) Every NBFI shall allow a rate of return to all its depositors/COI holders on uniform basis i.e. rate of return shall be the same for the same maturity period irrespective of amount. Deposits etc. of Listed recognized charitable trusts and statutory bodies shall be exempt.

Maintenance of Liquidity Against Cartain Liabilities
6) Not less than 15% of the NBFI's liabilities shall be invested in Government Securities. For this purpose liabilities shall not include NBFI's equity and its borrowings from Financial Institutions and Lease Key Money. In the case of modarabas if the religious Board does not permit investment in Government securities e.g. Federal Investment Bonds (FIBs) they will comply with this regulation by investing in NIT Units.

Obtaining of Audited Accounts From Borrowers
Every NBFIs Circular No. shall regularly obtain accounts from every borrowers in the following manner and keep the same on its record:-

a) Exposure not exceeding Rs. Two million	Accounts to be signed by the borrower.
b) Exposure exceeeding Rs. Two million but not exceeding Rs. Ten million.	Accounts to be singed by the borrower and countersigned by the Internal Audit Officer of the NBFI or a practicing Chartered Accountant.
c) Exposure exceeding Rs. Ten million.	Accounts to be audited & signed by a practicing Chartered Accountant.

Maintenance of Debt Equity Ratio
8) While granting a credit facility every NBFI shall ensure that the total long term debt-equity ratio of the borrower does not exceed 60:40 except in cases where the Government Schemes provide for a different debt-equity ratio in which case the one fixed by the Government shall apply. It should also be ensured that current liabilities of the borrower do not exceed his current assets.

Limit on NBFI's Exposure
9) Total exposure of a NBFI to a single borrowing entity or group shall not exceed 20% of its equity. In the case of listed companies exposure shall not exceed 20% of total of the NBFI.

Margin Against Facilities
10) Following minimum margins shall be maintained against various facilities:-

i) Guarantees:
All guarantees except these specified below, will be backed by 100% realizable securities.

a) For issue of performance bonds, 100% cove of relizable securities may be waived by the NBFIs at their own discretion subject to minimum compulsory realizable security cover equivalent to 20% of the amount of the performance bond.

b) For issue of guarantees in respect of mobilization advance, 100% cover of realizable securities may be waived by the NBFIs at their own discretion subject to the following conditions:-

i) Guarantees issued should contain a clause that the mobilization advance shall be realeased by the beneficiary through the guarantor NBFI only; and

ii) At the time of issuing such a guarantee the construction company should sing an agreement with the NBFI that releases out of mobilization advance would be covered by them by realizable assets.

c) For 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 realisable securities may be waived at the discretion of the NBFIs.

d) Relaxation provided in (c) above, would also be admissible to all suppliers of goods and services bidding against International Traders.

ii) Advances Against shares.
No NBFI shall allow facilities against its own shares or shares of its associated companies or shares of companies not listed on the Stock Exchange. Facilities against shares of other listed companies would be subject to the following margins:-

a) Where market value does not exceed the face value	20%
b) Where market value exceeds the face values but does not exceed twice the face value.	40%
c) Where market value exceeds twice the face value	50%
d) No NBFI shall hold shares in any company whether as pledges, mortgages of absolute owner, of an amount exceeding thirty percent of the paid-up share capital of that company or thirty percent of its own paid-up share capital and reserves which-ever is less.

iii) Deposit Certificates
These will be subject to a margin of 20% .

iv) Facilites Against Stock

Raw Cotton	25%
Cotton yarn	25%
Edible Oil	25%
Sugar (to Sugar Mills)	25%
Industrial Raw material Imported Indigenous	25% 30%
Other Stocks	25%

Facilities to Small Entrepreneurs
11) At least 5% of the credit facilities shall be to small entrepreneurs. In the case of Housing Finance Companies at least 5% facilities shall be in the form of facilities not exceeding Rs. 125,000 per borrowers.

Focussing Attention On Principal Lines Of Business
12) Every NBFI shall hold not less than seventy percent of its assets in the form of its principal lines of business.

Restrictions on Certain Types of Transaction
(13) (i) NBFIs shall not provide any accommodation fund based or otherwise, to their Directors, Chief Executives and major shareholders including their spouses, parents and children or to firms & companies in which they are interested as partners, directors or major shareholders. Facilities allowed by the NBFIs to their Chief Executives as part of their remuneration will be exempt.

(ii) No NBFI shall allow unsecured facilities or facilities provided against bank guarantees, the end use of which will be verified by the NBFI to be productive will be exempt.

(iii) No NBFIs shall allow facilities for speculative purposes.

(iv) NBFIs shall not without the approval in writing of the State Bank of Pakistan enter into leasing, renting, purchasing or selling transactions with their directors, officers, employees or persons who either individually or in concert with close relative beneficially own ten per cent or more either of the equity or other securities with voting rights of the transacting NBFIs Circular No.

(v) No NBFIs shall hold, deal or trade in real estate except that in use of the NBFIs itself. In the case of Housing Finance Companies property acquired from a borrower in consequence of his failing to meet his obligations to Housing Finance Company would be exempt from this regulation.

Provisioning For Non-Performing Assets
(14) Every NBFI shall follow prudential guidelines in the matter of classification of its assets and provisioning there against. These are given hereunder:

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	Unrealized 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
Liquid assets means realiasable amount of bank deposits, certificates of deposits, government securities, shares of listed companies, ITT Units, Certificates of Mutual funds, inventories pledged to the bank with possession with 'Perfected lien' duly supported with flawlass documentation.
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.	Unrealized 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.
Liquid assets means realiasable amount of bank deposits, certificates of deposits, government securities, shares of listed companies, ITT Units, Certificates of Mutual funds, inventories pledged to the bank with possession with 'Perfected lien' duly supported with flawlass documentation.

Submission of Statistical Returns
(15) Every NBFI shall submit returns prescribed below as per prescribed format attached.

Title of Returns	Periodicity	Period for Submission
1. Weekly statement of affairs (as per NBFIs’ own format) as on week ended Thursday the _____ of _____1992	To be submitted weekly.	Within four days of the date to which the return relates.
2. State showing liquidity position	Weekly	Within four days of the date to which the return relates.
3. Statement showing equity and liability.	Monthly	Within seven days of the date to which the return relates.
4. Statement showing equity and contingent liability	- do -	- do -
5. Distribution of deposits/COIs by maturity.	Quarterly	Within fifteen days of the date to which the return relates.
6. Distribution of deposits by number of accounts.	- do -	- do -
7. Statement showing sources of borrowing and their maturity.	- do -	- do -
8. Ratewise analysis of borrowing.	- do -	- do -
9. Ratewise analysis of advances.	- do -	- do -
10. Constituent wise break up of advances.	- do -	- do -
11. Statement of advance to small borrowers.	- do -	- do -
12. Foreign & Local currency loan Sector/Industry-wise statement of advances.	- do -	- do -
13. Statement showing rescheduling of financial assistance.	- do -	- do -
14. Classification of advances by security pledged.	Quarterly	Within fifteen days of the date to which the return relates.
15. Statement of disbursements made.	- do -	- do -
16. Statement of defaults against contingent liabilities.	- do -	- do -
17. statement showing type-wise break-up of contingent liabilities.	- do -	- do -
18. Statement o recovery.	- do -	- do -
18 A. Statement showing recovery of foreign and local currency loan.	- do -	- do -
19. Rate of return on various types of deposits/COIs.	Half yearly	- do -
20. Statement showing position of classified short-term facilities to public sector.	Annually	- do -
20 A. Statement showing position of classified short term facilities to Public Sector.	- do -	- do -
20 B. Statement showing position of classified long term facilites to Public Sector.	- do -	- do -
20 C. Statement showing position of classified long term facilites to Private Sector.	- do -	- do -

Removal Of Record.
16) No NBFI shall remove from Pakistan and State of Azad Jammu Kashmir to a place outside Pakistan and State of Azad Jammu and Kashmir any of its records or documents relating to its business without the prior permission in writing of State Bank of Pakistan. The records taken out of Pakistan and State of Azad Jammu and Kashmir by the officers or the organization in the discharge of their official duties will be exempt.

Audit a submission of Accounts
Every NBFIs shall submit duly audited account to the State Bank of Pakistan within a period of six months after the end of its accounting year and shall comply with the following conditions with respect to the appointment of auditors:-

a) A person shall not be qualified for appointment as an auditor unless he is a Chartered Accountant within the meaning of Chartered Accountants Ordinance, 1961 (X of 1961).

b) An auditor shall hold office for a period of not less than three consecutive years and shall not be removed from the office before the expiry of that period except with the prior approval of the State Bank of Pakistan. In view of the provision of appointing auditors with the approval of Registrar Modarabas, this provision shall bot apply to Modarabas.

c) The SBP may from time to time lay down guidelines for the audit, and the auditors shall be bound to follow those guidelines.

d) The SBP may require special audit of any NBFIs in addition to regular inspection by the SBP at any time and may appoint special auditors. The Cost of such audit shall be borne by the NBFI.

Restriction On Election & Appointment
18) No person shall be elected or appointed as a director, an officer or an employee of a NBFI who;

a) has been convicted of an offence involving frauds, breach of trust or moral turpitude, or

b) has been adjudged as insolvent or has suspended payment of his debts or has compounded with his creditors.

Places of Business
19) No NBFI shall open further places of business without the prior permission in writing of the State Bank of Pakistan.

Code of Conduct
20) Every NBFI shall become a member of an association constituted in consultation with the State Bank of Pakistan. Such Association shall frame code of conduct for their members and ensure compliance therewith.

Internal Audit
All NBFIs shall have an Internal Audit Department. The Head of this Department will report to the Chief Executive Officer directly. He will be, inter alia, responsible for compliance with these regulations.

III. Please acknowledge receipt.

Yours faithfully,

(I.A. Farooq)
Director

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