1. Account Holder means a person who has opened any account with a bank or is a holder of deposit/deposit certificate or any instrument representing deposit/placing of money with a bank/DFI or has borrowed money from the bank/DFI.
2. Alternate Director means a person who has been designated by a director during his absence, as per provisions of the sub-section (2) of section 192 of Companies Ordinance, 1984.
3. Bank means a banking company as defined in the Banking Companies Ordinance, 1962.
4. Borrower means a person on whom a bank/DFI has taken any exposure during the course of business.
5. Chief Executive Officer (CEO), in relation to bank/DFI means an individual who, subject to the control and directions of the directors, is entrusted with the whole, or substantially the whole, of the powers of management of the affairs of the bank/DFI occupying the position of Chief Executive Officer and include President, acting President, Managing Director, Country Head of Foreign bank, Executive assuming charge of the bank for interim period or by whatever name called, and whether under a contract of service or otherwise.
6. 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.
7. Corporate Card means credit card issued to the employees of an entity where the repayment is to be made by the said entity.
8. DFI means Development Financial Institution and includes the Pakistan Industrial Credit and Investment Corporation (PICIC), the Saudi Pak Industrial and Agricultural Investment Company Limited, the Pak Kuwait Investment Company Limited, the Pak Libya Holding Company Limited, the Pak Oman Investment Company (Pvt.) Limited, Investment Corporation of Pakistan, House
Building Finance Corporation, Pak Brunei Investment Company Limited1, Pak-Iran Joint Investment Company Limited2, Pak-China Investment Company Limited3 , and any other financial institution notified under Section 3-A of the Banking Companies Ordinance, 1962.
9. Documents include vouchers, cheques, bills, pay-orders, promissory notes, securities for leases/advances and claims by or against the bank/DFI or other papers supporting entries in the books of a bank/DFI.
10. Director includes any person occupying the position of a director on the Board of a bank/DFI and includes sponsor, nominee and alternate director or by whatever name called.
11. Executive Director means a paid employee or executive in the concerned bank/DFI or employee or executive in a company/group where sponsor shareholders of the bank/DFI have substantial interest.
12. Equity of the Bank/DFI means Tier-I Capital or Core Capital and includes paid-up capital, general reserves, balance in share premium account, reserve for issue of bonus shares and retained earnings/accumulated losses as disclosed in latest annual audited financial statements. In case of branches of foreign banks operating in Pakistan, equity will mean capital maintained, free of losses and provisions, under Section 13 of the Banking Companies Ordinance, 1962.
For the purpose of Regulation R-1, reserve shall also include revaluation reserves on account of fixed assets to the extent of 50% of their value. However, for this purpose assets must be prudently valued by valuators on the panel of Pakistan Bank Association (PBA), fully taking into account the possibility of price fluctuations and forced sale value. Revaluation reserves reflecting the difference between the book value and the market value will be eligible up to 50%.
13. 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.
The Preference Shares, only with the following features, will also be included in the equity of the borrower:
There should not be any provision for redemption or the redemption should be at the option of the issuer.
In case the issuer is given an option to redeem the preference shares, as per agreed terms and conditions, the issuer will redeem the share only through a sinking fund created out of the profits of the company. Further, the sinking fund created for this purpose would not be calculated towards the equity of the issuer.
The terms and conditions should not give rise to a contractual obligation on the part of the issuer to deliver another financial asset or exchange another
financial instrument under conditions that are or can be potentially unfavorable to the issuer. However, an option to convert preference shares into common shares may be included in the features of the preference shares.
The terms and conditions of the preference shares should not be such as to compel the issuer economically, financially or otherwise to redeem the shares.
Payment and distribution of dividend to the holders of preferred shares, whether cumulative or non-cumulative, should be at the discretion of the issuer.
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. However, if a borrower gets revaluation during the three years period, the borrower will be allowed the benefit from fresh revaluation, to the extent of increase in revaluation reserves, but restricting the benefit of such incremental value to 3 years only. Similarly, if after 3 years, the borrower again gets revaluation of the assets with resultant addition in their value, the benefit of such revaluation may also be allowed for the next 3 years, again to the extent of increase in revaluation reserves.
The revaluation reserves to be eligible for benefit should be calculated by the valuers on the approved panel of the PBA. If the bank/DFI obtains copy of accounts as per requirement in Prudential Regulation R-3, then such revaluation reserves should appear in the said accounts, and in such case, no parallel calculation by the banks/DFIs for amortization purposes will be required. In case of no requirement of copy of accounts, the borrower may still be given the benefit of revaluation reserves in the way mentioned above, but the bank/DFI will calculate the amortization of the same independently.
14. Exposure means financing facilities whether fund based and/or non-fund based and include:
i) Any form of financing facility extended or bills purchased/discounted except ones drawn against the L/Cs of banks/DFIs rated at least ‘A’ by Standard & Poor, Moody’s, Fitch-Ibca, Japan Credit Rating Agency (JCRA) or credit rating agency on the approved panel of State Bank of Pakistan and duly accepted by such L/C issuing banks/DFIs:
ii) Any financing facility extended or bills purchased/discounted on the guarantee of the person.
iii) Subscription to or investment in shares, Participation Term Certificates, Term Finance Certificates or any other Commercial Paper by whatever name called (at book value) issued or guaranteed by the persons.
iv) Credit facilities extended through corporate cards.
v) Any financing obligation undertaken on behalf of the person under a letter of credit including a stand-by letter of credit, or similar instrument.
vi) Loan repayment financial guarantees issued on behalf of the person.
vii) Any obligations undertaken on behalf of the person under any other guarantees including underwriting commitments.
viii) Acceptance/endorsements made on account.
ix) Any other liability assumed on behalf of the client to advance funds pursuant to a contractual commitment.
15. Family Member as defined in sub-section (ff) of section 5 of Banking Companies Ordinance 1962.1
16. Financial Institutions mean banks, Development Financial Institutions (DFIs) and NBFCs.
17. 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 assets in a forced/distressed sale conditions.
18. Government Securities shall include such types of Pak. Rupee 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 as the Federal Government may, by notification in the Official Gazette, declare, to the extent determined from time to time, to be Government Securities.
19. Group means persons, whether natural or juridical, if one of them or his dependent family members or its subsidiary, have control or hold substantial ownership interest over the other. For the purpose of this:
a) 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.
b) Control refers to an ownership directly or indirectly through subsidiaries, of more than one half of voting power of an enterprise.
c) Substantial ownership/affiliation means beneficial shareholding of more than 25%2 by a person and/or by his dependent family members, which will include his/her spouse, dependent lineal ascendants and descendants and dependent brothers and sisters. However, shareholding in or by the Government owned entities and financial institutions will not constitute substantial ownership/affiliation, for the purpose of these regulations.
20. Independent Director means such a person who is not linked directly or indirectly with bank/DFI or its sponsor or strategic shareholders. For the purpose of such determination, an "independent director" is a director who:
Has not been employed by Bank /DFI within the last five years;
Has not been an employee or affiliate of any present or former external auditor/consultant/legal advisor of Bank/DFI within the last three years;
Has not been an executive officer or employee of a subsidiary or associate company of the bank/DFI or where Directors of the bank/DFI has substantial beneficial interest (20% or more shareholding of director’s own or combined with family members);
Has not been employed by a company of which an executive officer of Bank/DFI has been a director within the last three years;
Is not affiliated with a not-for-profit entity that received contributions from Bank/DFI exceeding the greater of 10 million or 2 percent of such charitable organization's consolidated gross revenues during the current fiscal year or any of the last three completed fiscal years.
(Note: An independent director shall submit a declaration for his/her independence to SBP at the time of his/her appointment.)
21. Key Executive1 means key executives of banks/DFIs and includes the following functional responsibilities for the present:
a) Any executive, acting as second to CEO including Chief Operating Officer, Deputy Managing Director or by whatever name called
b) Chief Financial Officer/Head of Finance/Head of Accounts
c) Head of Internal Audit
d) Country Treasurer
e) Head of Credit/Risk Management
f) Head of Operations
g) Head of Compliance
h) Head of Human Resource
i) Head of Information Technology
j) Head of Islamic Banking
k) Head of overseas operations of a bank at head office level
l) Country Head/Regional Head (where a region is consisting of more than one foreign countries)
m) CEO/Head of subsidiary banking company outside Pakistan
n) CEO of Joint Venture (where majority stake is with the bank incorporated in Pakistan & authority to appoint CEO)2
The above list will be reviewed from time to time by SBP.
22. 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, certificates of deposit, shares of listed companies which are actively traded on the stock exchange, NIT Units, certificates of mutual funds, Certificates of Investment (COIs) issued by DFIs/NBFCs rated at least ‘A’ by a credit rating agency on the approved panel of State Bank of Pakistan, listed TFCs rated at least ‘A’ by a credit rating agency on the approved panel of State Bank of Pakistan and certificates of asset management companies for which there is a book maker quoting daily offer and bid rates and there is active secondary market trading. These assets with appropriate margins should be in possession of the banks/DFIs with perfected lien.
Guarantees issued by domestic banks/DFIs when received as collateral by banks/DFIs will be treated at par with liquid assets whereas, for guarantees issued by foreign banks, the issuing banks’ rating, assigned either by Standard & Poors, Moody’s or Fitch-Ibca, should be ‘A’ and above or equivalent.
The inter-branch indemnity/guarantee issued by the bank’s overseas branch in favor of its sister branch in Pakistan, would also be treated at par with liquid assets, provided the bank is rated ‘A’ and above or equivalent either by Standard & Poors, Moody’s, Fitch-Ibca or Japan Credit Rating Agency (JCRA). The indemnity for this purpose should be similar to a guarantee i.e. unconditional and demand in nature.
23. Major Shareholder of a bank/DFI means any person holding 5% or more of the share capital of a bank/DFI either individually or in concert with family members. Family members have the same meaning as defined in the Banking Companies Ordinance, 1962.
24. Medium and Long Term Facilities mean facilities with maturities of more than one year and Short Term Facilities mean facilities with maturities up to one year.
25. NBFC means Non-Banking Finance Company and includes a Modaraba, Leasing Company, Housing Finance Company, Investment Bank, Discount House, Asset Management Company and a Venture Capital Company.
26. Nominee Director means a person nominated on the board of a bank/DFI by sponsor(s), persons, company, institution etc. by virtue of his/their shareholding in a bank/DFI.
27. Other Form of Security means hypothecation of stock (inventory), assignment of receivables, lease rentals, contract receivables, etc.
28. PBA means Pakistan Banks Association.
29. Person means and includes an individual, a Hindu undivided family, a firm, an association or body of individuals whether incorporated or not, a company and every other juridical person.
30. Readily Realizable Assets mean and include liquid assets and stocks pledged to the banks/DFIs in possession, with ‘perfected lien’ duly supported with complete documentation.
31. Secured means exposure backed by tangible security and any other form of security with appropriate margins (in cases where margin has been prescribed by State Bank, appropriate margin shall at least be equal to the prescribed margin). Exposure without any security or collateral is defined as clean.
The banks/DFIs may also take exposure against Trust Receipt. They are, however, free to take collateral/securities, to secure their risks/exposure, in addition to the Trust Receipt.
Banks/DFIs will be free to decide about obtaining security/collateral against the L/C facilities for the interim period, i.e. from the date of opening of L/C till the receipt of title documents to the goods.
32. Sponsor Shares1 mean 5% or more paid-up shares of a bank, acquired by a person(s) individually or in concert with his family members (including his spouse, lineal ascendants and descendents and dependent brothers and sisters),
group companies, subsidiaries, and affiliates/associates. Such acquisition of shareholding will include all the shares acquired by aforesaid person(s) including, interalia, through (a) as original subscriber/promoter of the bank; (b) subsequent right/bonus issues; (c) market based acquisition deal; (d) reconstruction/restructuring of a bank carried out by SBP; (e) strategic sale through privatization (f) amalgamation of banking companies; or (g) any other mode of acquisition. All shares acquired by common shareholders, who are also sponsor shareholders, of amalgamating banking companies in amalgamation transaction shall be considered Sponsor Shares.
33. Sponsor Shareholders1 mean all those shareholders of a bank holding sponsor shares.
34. Sponsor Director1 means the member of the Board of Directors of a bank holding sponsor shares.
35. Strategic Investment is an investment which a bank/DFI makes with the intention to hold it for a period of minimum 5 years.
The following must be noted further in respect of strategic investment:
a. The bank should mark strategic investment as such at the time of investment.
b. If there are a series of purchases of stocks of a company, the minimum retention period of 5 years shall be counted from the date of the last purchase.
c. The banks/DFls will report their investment in strategic portfolio to the Banking Policy Department, within 2 working days from the date of such investment.
36. Subordinated Loan means an unsecured loan, extended to the borrower for a minimum original maturity period of 5 years, subordinate to the claim of the bank/DFI taking exposure on the borrower, and documented by a formal sub-ordination agreement between provider of the loan and the bank/DFI. The loan shall be disclosed in the annual audited financial statements of the borrower as subordinated loan.
37. Substantial ownership/affiliation2 means beneficial shareholding of more than 20% by a person and/or by his dependent family members, which will include his/her spouse, dependent lineal ascendants and descendants and dependent brothers and sisters. However, shareholding in or by the Government owned entities and financial institutions will not constitute substantial ownership/affiliation, for the purpose of these regulations.
38. Tangible Security means readily realizable assets (as defined in these Prudential Regulations), mortgage of land, plant, building, machinery and any other fixed assets.
39. Underwriting Commitments mean commitments given by commercial banks/DFIs 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 (commercial banks/DFIs).
