Lesson 41 Prudential Regulations Of SBP-Banking and Finance-Handout, Exercises of Banking and Finance

Download Lesson 41 Prudential Regulations Of SBP-Banking and Finance-Handout and more Exercises Banking and Finance in PDF only on Docsity! LESSON 41 PRUDENTIAL REGULATIONS OF SBP We shall continue with the remaining regulations/ aspects for consumer financing in this Lesson: Contents to be covered in this Lesson: REGULATIONS FOR HOUSING FINANCE  REGULATION R-15  REGULATION R-16  REGULATION R-17  REGULATION R-18  REGULATION R-19  REGULATION R-20  REGULATION R-21  REGULATION R-22 REGULATIONS FOR PERSONAL LOANS INCLUDING LOANS FOR THE PURCHASE OF CONSUMER DURABLES  REGULATIONS R-23  REGULATIONS R-24  REGULATIONS R-25  REGULATIONS R-26  REGULATIONS R-27 REGULATIONS FOR HOUSING FINANCE– R-15 to R-21, & R-22 REGULATION R-15 Banks / DFIs shall determine the housing finance limit, both in urban and rural areas, in accordance with their internal credit policy, credit worthiness and loan repayment capacity of the borrowers. At the same time, while determining the credit worthiness and repayment capacity of the prospective borrower, banks / DFIs shall ensure that the total monthly amortization payments of consumer loans, inclusive of housing loan, should not exceed 50% of the net disposable income of the prospective borrower. Banks / DFIs will not allow housing finance purely for the purchase of land / plots; rather, such financing would be extended for the purchase of land / plot and construction on it. Accordingly, the sanctioned loan limit, assessed on the basis of repayment capacity of the borrower, value of land / plot and cost of construction on it etc., should be disbursed in tranches, i.e. up to a maximum of 50% of the loan limit can be disbursed for the purchase of land/ plot, and the remaining amount be disbursed for construction there-upon. Further, the lending bank / DFI will take a realistic construction schedule from the borrower before allowing disbursement of the initial loan limit for the purchase of land / plot. Banks / DFIs may allow housing finance facility for construction of houses against the security of land / plot already owned by their customers. However, the lending bank / DFI will ensure that the loan amount is utilized strictly for the construction purpose and loan is disbursed in tranches as per construction schedule. Loans against the security of existing land / plot, or for the purchase of new piece of land / plot, for commercial and industrial purposes may be allowed. But such loans will be treated as Commercial Loans, which will be covered either under Prudential Regulations for Corporate / Commercial Banking or Prudential Regulations for SMEs Financing. Banks / DFIs may allow Housing Loans in the rural areas provided all relevant guidelines/regulations on the subject are complied with by them. REGULATION R-16 The housing finance facility shall be provided at a maximum debt-equity ratio of 85:15 docsity.com REGULATION R-17 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-18 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-19 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. It may, however, be noted that the requirement of full-scope and desk-top evaluation, as required under R- 8 and R-11 of Prudential Regulations for Corporate / Commercial Banking and SMEs Financing respectively, will not be applicable on housing finance. REGULATION R-20 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-21 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. REGULATION R-22 The mortgage loans shall be classified and provided for in the following manner: docsity.com PRUDENTIAL REGULATIONS FOR SMALL AND MEDIUM ENTERPRISES FINANCING Introduction: Keeping in view the important role of Small and Medium Enterprises (SMEs) in the economic development of Pakistan and to facilitate and encourage the flow of bank credit to this sector, a separate set of Prudential Regulations specifically for SME sector has been issued by State Bank of Pakistan. This separate set of regulations, specifically tailored for SMEs, is aimed at encouraging banks / DFIs to develop new financing techniques and innovative products which can meet the financial requirements of SMEs and provide a viable and growing lending outlet for banks / DFIs. Banks / DFIs should recognize that success in SME lending requires much more extensive involvement with the SMEs than the traditional lender-borrower relationship envisages. The banks / DFIs are, thus, encouraged to work in close association with SMEs. The banks / DFIs should assist and guide the SMEs to develop appropriate systems and effectively manage their resources and risks. The banks / DFIs are encouraged to prepare a lending program (including detailed eligibility criteria) for each specific sub-sector of SME in which they want to take exposure in a significant manner. For this purpose, the banks / DFIs may conduct / arrange surveys and research to determine the status and potential of specific SME sub-sectors. It is expected that banks / DFIs would prepare comprehensive docsity.com guidelines / manuals and put in place suitable mechanism / structure, aided by proper MIS, to carry out the activities related to SME financing in an effective way. This should, however, not stop banks / DFIs from lending to SMEs before undertaking the steps mentioned above as the banks / DFIs may start soft lending operations or test marketing campaigns, as they feel appropriate, to gain experience and necessary know how. The factors mentioned above gain more importance and become critical for the success of a bank / DFI in SME lending, as the exposure of the bank / DFI on SMEs becomes a significant portion of its loan portfolio. State Bank of Pakistan encourages banks / DFIs to lend to SMEs on the basis of assets conversion cycle and future cash flows. A problem, which the banks / DFIs may encounter in this respect, is the lack of adequate information. In order to overcome this problem, banks / DFIs may also like to prepare general industry cash flows and then adjust those cash flows for the specific borrowers keeping in view their conditions and other factors involved. As mentioned above, presently most of the SMEs in Pakistan lack sophistication to have reliable and sufficient data and financial information. In order to capture this data and information, banks / DFIs will need to assist and guide their SME customers. The banks / DFIs may come up with the minimum information requirements and standardized formats for this purpose as per their own discretion. For better understanding and to facilitate their SME customers, banks/ DFIs are encouraged to translate their loan application formats and brochures in Urdu and other regional languages. Banks / DFIs should realize that delay in processing the cases might frustrate the SMEs. Banks / DFIs are therefore encouraged to process the loan cases expeditiously and convey the decision to the SME borrowers as early as possible In order to encourage close coordination of the officials of the banks / DFIs and SMEs, the banks / DFIs may require the concerned dealing officer to regularly visit the borrower. For this purpose, at a minimum, the dealing officer may be required to pay at least one quarterly visit and document the state of affairs of the SME. In addition, an officer senior to the ones conducting these regular visits may also visit the SME at least once in a year. The banks may, at their own discretion, correlate the frequency of visits with their total exposure to the SME borrower. State Bank of Pakistan will closely monitor the situation on an ongoing basis and work proactively with banks / DFIs to make SME financing a success. During this process, we will keep on reviewing regulatory framework to ensure that any impediment is immediately removed while ensuring that banks / DFIs observe due prudence and necessary oversight. Definitions: Bank means a banking company as defined in Banking Companies Ordinance, 1962. Borrower means a SME on which a bank / DFI has taken any exposure during the course of business. Corporate Card means credit card issued to the employees of a SME where the repayment is to be made by the said SME. Contingent liability means: (a). A possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non- occurrence of one or more uncertain future events not wholly within the control of the enterprise; or (b). A present obligation that arises from past events but is not recognized because: i. It is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or ii. The amount of the obligation cannot be measured with sufficient reliability; and includes letters of credit, letters of guarantee, bid bonds / performance bonds, advance payment guarantees and underwriting commitments. Small and Medium Enterprise (SME) means an entity, ideally not a public limited company, which does not employ more than 250 persons (if it is manufacturing/service concern) and 50 persons (if it is trading concern) and also fulfills the following criteria of either ‘a’ and ‘c’ or ‘b’ and ‘c’ as relevant: (a). A trading/service concern with total assets at cost excluding land and building up to Rs 50 million. (b). A manufacturing concern with total assets at cost excluding land and building upto Rs 100 million. docsity.com (c). Any concern (trading, service or manufacturing) with net sales not exceeding Rs 300 million as per latest financial statements. (d). An Individual, if he or she meets the above criteria, can also be categorized as an SME. We shall continue with regulations for SMEs in the next Lesson. docsity.com