Institute of Bankers Pakistan Examinees: General SBP Prudential regulations concerning consumer lending

REGULATION R-1

FACILITIES TO RELATED PERSONS AND UTILIZATION OF CLEAN LOANS FOR INITIAL PUBLIC OFFERINGS (IPOs)

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. This condition shall not apply to the consumer financing allowed by the banks/DFIs to their employees as part of compensation package provided the detailed terms and conditions of the benefits which the banks/DFIs want to give to their employees are specifically mentioned in the Employees Service Rules/HR Policy. These employees Service Rules/HR policy should be duly approved by the Board of Directors. Further, such consumer financing to the employees should be treated as staff loans and not as general consumer loans.¹

Utilization of Clean Loans for Initial Public Offerings IPOs: While the State Bank’s intent is not to create any undue hindrance in the smooth flow of consumer financing to the borrowers, the banks /DFIs are, however, advised to institute necessary checks, so that clean loans are not used for subscription in Initial Public Offerings (IPOs). In this connection, State Bank of Pakistan suggests the following two minimum requirements:

a) At the time of sanction of a clean consumer loan/credit line, the banks/DFIs should obtain an undertaking from the client, that the drawings from the loan account will not be used for subscription in an IPO.

b) The banks/DFIs should introduce an internal system, whereby, no cheques, drafts and/or payment instructions will be made for an IPO subscription account from a clean personal loan/credit line account.

¹ Substituted vide BPRD Circular No. 01 of 2011 dated January 06, 2011.

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

MAXIMUM LIMIT

FINANCING

Below 3%

10 times of the equity

Below 5%

6 times of the equity

Below 10%

4 times of the equity

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. In this connection, while determining the credit worthiness and repayment capacity of the prospective borrower, the banks/DFIs shall ensure that the total monthly amortization payments of consumer loans should not exceed 50% of the net disposable income of the prospective borrower¹. 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.

2. Banks/DFIs may waive the requirement of 50% Debt Burden in case a Credit Card and Personal loan is properly secured through liquid assets (as defined in prudential regulations) with minimum 30% margin.²

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

The above reserve requirement will, however, be maintained for the performing portion only of consumer portfolio.

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-5A ³

RESCHEDULING/RESTRUCTURING OF NON-PERFORMING CONSUMER LOANS:

a) Banks/DFIs should frame policy for rescheduling/ restructuring of non-performing consumer loans. The policy should be approved by the Board of Directors or by the Country Head/Executive/Management Committee in case of branches of foreign banks.

b) For the purpose of rescheduling/ restructuring, banks/DFIs may:

i) Club or consolidate outstanding amounts on account of personal loans and credit cards and create one loan. The new loan so created shall be placed in

the lowest category of classification amongst the classifications of the loans clubbed.

ii) Convert revolving facility into an installment loan.

iii) Change the tenure of the loan by maximum two years beyond any regulatory cap on maximum tenure.

c) Rescheduling/ restructuring should not be done just to avoid classification of loans /advances and provisioning requirements. In this connection, banks /DFIs shall ensure that consumer financing facilities of any borrower should not be rescheduled/ restructured more than once within 12 months and three times during five year period.

d) While considering rescheduling/restructuring, banks/DFIs should, inter alia, take into account the repayment capacity of the borrower. The condition of 50% of Debt Burden Requirement (DBR) mentioned at Regulation R-3 of Prudential Regulations for Consumer Financing shall not be applicable to loan rescheduled/ restructured. However, any new consumer financing facility extended to a borrower who is availing any rescheduled/ restructured facility shall be subject to observance of minimum DBR prescribed in the Regulation R-3 of Prudential Regulations for Consumer Financing.

e) The status of classification of the non-performing loans shall not be changed because of rescheduling/restructuring unless borrower has paid at least 10% of the rescheduled/restructured amount or six installments as per terms & conditions of the rescheduling/ restructuring. However, for internal monitoring purpose, banks/DFIs may re-set the dpd (days past due) counter of the newly created loan to “0” dpd.

f) Provisions already held against non-performing loan, to be rescheduled /restructured, will only be reversed if condition of 10% recovery or six installments is met.

g) If the borrower defaults (i.e. reaches 90 dpd) again within one year after declassification, the loan shall be classified as under:

Type of Consumer Loan

Classification

Unsecured

Loss

Secured

Same category in which it was prior to

rescheduling/restructuring. Banks/ DFIs, however, at their

discretion may further downgrade the classification based

on their own internal policies.

REGULATION R-6

MARGIN REQUIREMENTS:

Banks/DFIs are free to determine the margin requirements on consumer facilities provided by them to their clients taking into account the risk profile of the borrower(s) in order to secure their interests. However, this relaxation shall not apply in case of items, import of which are banned by the Government.

Banks/DFIs will continue to observe margin restrictions on shares/TFCs as per existing instructions under Prudential Regulations for Corporate/Commercial Banking (R-6). Further, the restrictions prescribed under paragraph 1.A of Regulation R-6 of the Prudential Regulations for Corporate/Commercial Banking will also be applicable in case of Consumer Financing.

State Bank of Pakistan shall continue to exercise its powers for fixation/reinstatement of margin requirements on consumer facilities being provided by banks/DFIs for various purposes, as and when required.