MINIMUM REQUIREMENTS FOR CONSUMER FINANCING

Apart from the specific regulations given under each mode of financing separately, general requirements laid down here should also be followed by the banks/DFIs while undertaking consumer financing. It may be noted that these are the minimum requirements and should not in any way be construed to restrict the role of the management of the banks/DFIs to further strengthen the risk management processes through establishing comprehensive credit risk management systems appropriate to their type, scope, sophistication and scale of operations. The Board of Directors of the banks/DFIs are required to establish policies, procedures and practices to define risks, stipulate responsibilities, specify security requirements, design internal controls and then ensure strict compliance with them.

PRE-OPERATIONS:

Before embarking upon or undertaking consumer financing, the banks/DFIs shall implement/follow the guidelines given below. The banks/DFIs already involved in the consumer financing will ensure compliance with these guidelines within six months of the date of issuance of Prudential Regulations for Consumer Financing.

1. Banks/DFIs shall establish separate Risk Management capacity for the purpose of consumer financing, which will be suitably staffed by personnel having sufficient expertise and experience in the field of consumer finance/business.

2. The banks/DFIs shall prepare comprehensive consumer credit policy duly approved by their Board of Directors (in case of foreign banks, by Country Head and Executive/Management Committee), which shall interalia cover loan administration, including documentation, disbursement and appropriate monitoring mechanism. The policy shall explicitly specify the functions, responsibilities and various staff positions’ powers/authority relating to approval/sanction of consumer financing facility.

3. For every type of consumer finance activity, the bank/DFI shall develop a specific program. The program shall include the objective/quantitative parameters for the eligibility of the borrower and determining the maximum permissible limit per borrower.

4. Banks/DFIs shall put in place an efficient computer based MIS for the purpose of consumer finance, which should be able to effectively cater to the needs of consumer financing portfolio and should be flexible enough to generate necessary information reports used by the management for effective monitoring of the bank’s/DFI’s exposure in the area. The MIS is expected to generate the following periodical reports:

Delinquency reports (for 30, 60, 90, 180 & 360 days and above) on monthly basis.

Reports interrelating delinquencies with various types of customers or various attributes of the customers to enable the management to take important policy decisions and make appropriate modifications in the lending program.

Quarterly product wise profit and loss account duly adjusted with the provisions on account of classified accounts. These profit and loss statements should be placed before the Board of Directors in the immediate next Board Meeting. The branches of foreign banks in order to comply with this condition shall place the reports before a committee comprising of CEO/Country Manager, CFO and Head of Consumer Business.

5. The banks/DFIs shall develop comprehensive recovery procedures for the delinquent consumer loans. The recovery procedures may vary from product to product. However, distinct and objective triggers should be prescribed for taking pre-planned enforcement/recovery measures.

6. The banks/DFIs desirous of undertaking consumer finance will become a member of at least one Consumer Credit Information Bureau. Moreover, the banks/DFIs may share information/data among themselves or subscribe to other databases as they deem fit and appropriate.

7. The financial institutions starting consumer financing are encouraged to impart sufficient training on an ongoing basis to their staff to raise their capability regarding various aspects of consumer finance.

8. The banks/DFIs shall prepare standardized set of borrowing and recourse documents (duly cleared by their legal counsels) for each type of consumer financing.

OPERATIONS:

1. Consumer financing, like other credit facilities, must be subject to the bank’s/DFI’s risk management process setup for this particular business. The process may include, identifying source of repayment and assessing customers’ ability to repay, his/her past dealings with the bank/DFI, the net worth and information obtained from a Consumer Credit Information Bureau.

2. At the time of granting facility under various modes of consumer financing, banks/DFIs shall obtain a written declaration on the prescribed format attached as Annexure–CF1 from the borrower divulging details of various facilities already obtained from other banks/financial institutions¹. The banks/DFIs should carefully study the details given in the undertaking and allow fresh finance/limit only after ensuring compliance with the limits set in these PRs for exposure and for total monthly amortization payments of consumer loans. The undertaking will also help banks/DFIs to avoid exposure against a person having multiple facilities from different financial institutions on the strength of an individual source of repayment.

3. Before allowing any facility, the banks/DFIs shall obtain a consumer credit report from the Credit Information Bureau of State Bank of Pakistan or from any consumer Credit Information Bureau of which they are a member¹. The report will be given due weightage while making credit decision.

¹ Amended vide BPRD Circular No. 4 of 2009 dated February 11, 2009.

4. Internal audit and control function of the bank/DFI, apart from other things, should be designed and strengthened so that it can efficiently undertake an objective review of the consumer finance portfolio from time to time to assess various risks and possible weaknesses. The internal audit should also assess the adequacy of the internal controls and ensure that the required policies and standards are developed and practiced. Internal audit should also comment on the steps taken by the management to rectify the weaknesses pointed out by them in their previous reports for reducing the level of risk.

5. The banks/DFIs shall ensure that their accounting and computer systems are well equipped to avoid charging of mark-up on mark-up. For this purpose, it should be ensured that the mark-up charged on the outstanding amount is kept separate from the principal.

6. The banks/DFIs shall ensure that any repayment made by the borrower is accounted for before applying mark-up on the outstanding amount.

DISCLOSURE/ETHICS:

The banks/DFIs must clearly disclose, all the important terms, conditions, fees, charges and penalties, which interalia include Annualized Percentage Rate, pre-payment penalties and the conditions under which they apply. For ease of reference and guidance of their customers, banks/DFIs are encouraged to publish brochures regarding frequently asked questions.

For the purposes of this regulation, Annualized Percentage Rate means as follows:

Mark-up paid for the period	x	360		x 100
Outstanding Principal Amount		No. of Days

ANNEXURE – CF-1 ¹

 

 

UNDERTAKING

 

I ----------------------------- S/O, D/O, W/O ------------------------------- holder of CNIC ---------------

----------, undertake that the detail of my existing exposure from the “Entire Banking Sector”

as on---------- is as under:

 

Details of Credit Cards (Clean) limits being availed from other banks/DFIs:

Sr. #

Name of the Bank/DFI

Approved Limit

Details of Credit Cards (Secured) limits being availed from other banks/DFIs:

Sr. #

Name of the Bank/DFI

Approved Limit

Details of Personal Loan (Clean) limits being availed from other banks/DFIs:

Sr. #

Name of the Bank/DFI

Approved Limit

Amount Outstanding On

Application date

Details of Personal Loan (Secured) limits being availed from other banks/DFIs:

Sr. #

Name of the Bank/DFI

Approved Limit

Amount Outstanding On

Application date

Details of other facilities if any (Clean & Secured) being availed from other banks/DFIs:

Sr. #

Name of the Bank/DFI

Approved

Nature

Current

Limit

(Clean/Secured)

Outstanding

Applied Limits (Including the application in process):

Sr. #

Name of the Bank/DFI

Facility under Process

Nature

of

Facility

(Clean/Secured)

 

 

Signature:____________________________

 

Name of Applicant: ____________________

 

CNIC # _____________________________

 

 

¹ Inserted vide BPRD Circular No. 4 of 2009 dated February 11, 2009.

 

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