Furqan Makkee 508192745

CREDIT MANAGEMENT

What is Bank?

A bank is financial intermediary accepting deposits and granting loans offers

the widest menu of services of and financial institution.

What is Credit Management?

Credit management is the system of doing business by trusting that a customer

will pay at a latter date for goods or services supplied and it is a tool through
which we can control an analysis the credit.

Banking Regulation:

As bankers work within the financial system to supply loans, accept deposits
and provide other services to their customers the must do so within a climate
Of extensive regulation designed primarily to protect the public interest.
There is a popular saying among bankers the letters FDIC (federal deposit
insurance corporation) really mean forever demanding increased capita to
banker at least the FDIC and the other bank regulatory agencies seem to be
forever demanding some thing more capital more reports more public service
and so on. No new bank can enter the industry in the United States and in most
other countries as well without government approval. The type of deposits and
other financial instruments banks sees to the public to approval. The types of
deposits and other financial instruments banks sell to the public to raise to funds
must be sanctioned by each banks principal agency.

The Reason banks are subject to government regulation:

• To protect the safety of the publics savings

• To control the supply of money and credit in order to achieve a
nation’s rad economic goals such as high employment and low
inflation.
• To ensure equal opportunity and fairness in the public’s access to
credit and other vital financial services.

• To promote public confidence in the financial system, so that savings

flow smoothly into productive investment and payments for goods and
services are made speedily and efficiently.
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• To avoid concentrations of financial power in the hands of a few

individuals and institution.

• To provide the government with credit, tax revenue and other services.

What Is Dual Banking System?

Both the federal and state government possess the power of supervise banks
within territory.

What Is State Bank Commission?

Committees appointed by government or legislators and supervise banks

within territory.

The Impact Of Regulation In Bank:

While the reasons for the bank regulation are well known, the possible
impacts of regulation on the industry are in dispute. One of the earliest
theories about regulation. On the other hand contends that regulation shelter
a firm from change in demand and cost, lowering its risk. If true this implies
that the lifting of regulation of banking would subject individual banks to
greater risks eventually result in more bank failures.
If bankers are successful in striking existing regulation then new rules will be
created, encouraging bankers to seek futures innovation in services and
methods. Thus struggle between regulated firms and regulators goals on
indefinitely.

Baking’s principal regulatory agencies and their

responsibilities:

• Federal Reserve System

• Comptroller of the currency

• Federal Deposit insurance corporation

• Department of justice

• Securities and exchange commission

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• State banking boards or commission

The Purpose of the Rules And Regulation:

For the purpose of these regulations that are describe under the following:

1. Account Holders.

Account holder means a person who has opened any account with a bank or
is a holder and deposit / deposit certificate or any instrument representing
deposit / placing of money with a bank / DFI or has borrowed money from
the bank / DFI.

2. Bank.

Bank means a banking company as defined in the banking company’s

ordinance. 1962.

3. Borrower.

Borrower means a person on whom a bank / DFI has taken any exposure
during the course of business.

4. Contingent Liability.

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.
(B) A present obligation that arises from past events but is not recognized
because.
(1). It is not probable that and out flow of resources embodying
economic benefits will be required to settle the obligation.
(2).The amount of the obligation cannot be measured with sufficient
reliability.

5. Corporate Card.

Corporate card means credit card issued to the employees of and entity where
the repayment is to be made by the said entity.

6. DFI.
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DFI means Development Financial Institution and includes the Pakistan

Industrial and Investment Corporation (PICIC), the Saudi Pak Industrial and
Agriculture Investment Company Limited, The Pak Kuwait Investment
Company Limited.

7. Documents.

Documents include vouchers Cheques bills pay orders, promissory notes and
securities for leases and claims by or against the bank/ DFI or other supporting
entries in the books of a bank.

8. 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.

9. 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.
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Case Study

STATE BANK OF PAKISTAN

Introduction:
The State Bank of Pakistan (SBP) is the central bank of Pakistan. While its
constitution, as originally lay down in the State Bank of Pakistan Order 1948,
remained basically unchanged until January 1, 1974, when the bank was
nationalized, the scope of its functions was considerably enlarged. The State
Bank of Pakistan Act 1956, with subsequent amendments, forms the basis of
its operations today. The headquarters are located in the financial capital of
Pakistan, Karachi with its second headquarters in the capital, Islamabad.

History:
Before independence on 14 August 1947, the Reserve Bank of India (Central
Bank of India) was the central bank for what is now Pakistan. On 30
December 1948 the British Government's commission distributed the Bank
of India's reserves between Pakistan and India - 30 percent (750 M gold) for
Pakistan and 70 percent for India.

The losses incurred in the transition to independence were taken from

Pakistan's share (a total of 230 million). In May, 1948Muhammad Ali Jinnah

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(Founder of Pakistan) took steps to establish the State Bank of Pakistan

immediately. These were implemented in June 1948, and the State Bank of
Pakistan commenced operation on July 1, 1948.

Function:
Under the State Bank of Pakistan Order 1948, the state bank of Pakistan was
charged with the duty to "regulate the issue of bank notes and keeping of
reserves with a view to securing monetary stability in Pakistan and generally
to operate the currency and credit system of the country to its advantage".

A large section of the state bank's duties were widened when the State Bank
of Pakistan Act 1956 was introduced. It required the state bank to "regulate
the monetary and credit system of Pakistan and to foster its growth in the
best national interest with a view to securing monetary stability and fuller
utilization of the country’s productive resources". In February 1994, the State
Bank was given full autonomy, during the financial sector reforms.

On January 21, 1997, this autonomy was further strengthened when the
government issued three Amendment Ordinances (which were approved by
the Parliament in May 1997). Those included were the State Bank of
Pakistan Act, 1956, Banking Companies Ordinance, 1962 and Banks
Nationalization Act, 1974. These changes gave full and exclusive authority
to the State Bank to regulate the banking sector, to conduct an independent
monetary policy and to set limit on government borrowings from the State
Bank of Pakistan. The amendments to the Banks Nationalization Act brought
the end of the Pakistan Banking Council (an institution established to look
after the affairs of NCBs) and allowed the jobs of the council to be appointed
to the Chief Executives, Boards of the Nationalized Commercial

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Banks (NCBs) and Development Finance Institutions (DFIs). The State Bank
having a role in their appointment and removal. The amendments also
increased the autonomy and accountability of the chief executives, the
Boards of Directors of banks and DFIs.

The State Bank of Pakistan also performs both the traditional and
developmental functions to achieve macroeconomic goals. The traditional
functions may be classified into two groups:

1. The primary functions including issue of notes, regulation and

supervision of the financial system, bankers’ bank, lender of the last
resort, banker to Government, and conduct of monetary policy.
2. The secondary functions including the agency functions like
management of public debt, management of foreign exchange, etc.,
and other functions like advising the government on policy matters and
maintaining close relationships with international financial institutions.

The non-traditional or promotional functions, performed by the State Bank

include development of financial framework, institutionalization of savings
and investment, provision of training facilities to bankers, and provision of
credit to priority sectors. The State Bank also has been playing an active part
in the process of islamisation of the banking system.

Regulation of liquidity:
The State Bank of Pakistan has also been entrusted with the responsibility to
carry out monetary and credit policy in accordance with Government targets
for growth and inflation with the recommendations of the Monetary and
Fiscal Policies Co-ordination Board without trying to effect the
macroeconomic policy objectives.

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The state bank also regulates the volume and the direction of flow of credit to
different uses and sectors, the state bank makes use of both direct and
indirect instruments of monetary management. During the 1980s, Pakistan
embarked upon a program of financial sector reforms, which lead to a
number of fundamental changes. Due to these changed the conduct of
monetary management which brought about changes to the administrative
controls and quantitative restrictions to market based monetary management.
A reserve money management programmed has been developed, for
intermediate target of M2 that would be achieved by observing the desired
path of reserve money - the operating target.

State Bank of Pakistan has changed the format and designs of many bank
notes which are currently in circulation in Pakistan. These steps were taken
to overcome the problems of fraudulent activities.

Banking:

The State Bank of Pakistan looks into a lot of different ranges of banking to
deal with the changes in economic climate and different purchasing and
buying powers. Here are some of the banking areas that the state bank looks
into;

• State Bank’s Shariah Board Approves Essentials and Model

Agreements for Islamic Modes of Financing
• Procedure for Submitting Claims with Sbp In Respect of Unclaimed
Deposits Surrendered By Banks/DFIs.
• Banking Sector Supervision in Pakistan
• Micro Finance
• Small Medium Enterprises (SMEs)
• Minimum Capital Requirements for Banks
• Remittance Facilities in Pakistan

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• Opening of Foreign Currency Accounts with Banks in Pakistan under

new scheme.

• Handbook of Corporate Governance

• Guidelines on Risk Management
• Guidelines on Commercial Paper
• Guidelines on Securitization
• SBP.Scheme for Agricultural Financing

Bank Assets and Liabilities:

This is a chart of trend of major assets and liabilities reported by scheduled
commercial banks to the State Bank of Pakistan with figures in millions of
Pakistani Rupees.

Year Deposits Advances Investments

2002 1,466,019 932,059 559,542

2006 2,806,645 2,189,368 799,285

Departments:
• Agricultural Credit
• Audit
• Banking Inspection
• Banking Policy & Regulations

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• Corporate Services
• Economic Analysis
• Monetary Policy
• Research
• Statistics and Data Warehouse
• Exchange Policy
• Human Resource
• Information Systems & Technology
• Islamic Banking
• Legal Services
• Library
• Payment System
• Real Time Gross Settlement System (RTGS System)
• Small and Medium Enterprises
• Training and Development Department (TDD)
• Treasury Operations
• Strategic & Corporate Planning
• Microfinance
• Banking Supervision

Governor:
The principal officer of the SBP is the Governor. The current Governor of
State Bank of Pakistan is Syed Salim Raza who took over from Dr.
Shamshad in January 2009 for a three year term. He is a retired professional
from Citibank and was the Chairman of Pakistan Business Council.

Central Board of Directors:

1. Syed Salim Raza Chairman
2. The Secretary Finance Member
3. Mr. Khair Mohamed Junejo Member

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4. Mr. M. Yaqoob Vardag Member

5. Mr. Mohsin Aziz Member
6. Dr. Wasim Azhar Member
7. Mr. Kamran Y. Mirza Member
8. Mr. Alman A. Aslam Member
9. Mr. Riaz Ahmed Secretary
10.Mr. Ehsen Rashid

Trivia:

Old Five hundred Rupee note featuring

the State Bank's premises in Islamabad

An image of the Islamabad branch appears on the former five-hundred-

Rupee banknote.

State Bank as a regulator of banking sector Credit in the

country

Bank:
It means a banking company as defined in the Banking Companies Ordinance,
1962.

Borrower:
It means an individual to whom a bank / DFI has allowed any consumer

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financing during the course of business.

Consumer Financing:
It means any financing allowed to individuals for meeting their personal,
family or household needs. The facilities categorized as Consumer Financing
are given as under:

(i) Credit Cards

It means cards which allow a customer to make payments on
credit. Supplementary credit cards shall be considered part of the
principal borrower for the purposes of these regulations. Corporate
Cards will not fall under this category and shall be regulated by
Prudential Regulations for Corporate / Commercial Banking or
Prudential Regulations for SMEs Financing as the case may be. The
regulations for credit cards shall also be applicable on charge cards,
debit cards, stored value cards and BTF (Balance Transfer Facility).

(ii) Auto Loans

It means the loans to purchase the vehicle for personal use.

(iii) Housing Finance

It means loan provided to individuals for the purchase of
residential house / apartment / land. The loans availed for the purpose
of making improvements in house / apartment / land shall also fall
under this category.

(iv) Personal Loans

It means the loans to individuals for the payment of goods,
services and expenses and includes Running Finance / Revolving
Credit to individuals.

DFI:
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It 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 and any other financial institution
notified under Section 3-A of the Banking Companies Ordinance, 1962.
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.
Equity of the Bank / DFI:
It 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.
Financial Institutions:
It means banks, Development Financial Institutions (DFIs) and Non-Banking
Finance Companies (NBFCs).
Government Securities:
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.
Liquid Assets:

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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 or Fitch-Ibca. The indemnity for this
purpose should be similar to a guarantee i.e. unconditional and demand in
nature.

NBFC:
It means Non-Banking Finance Company and includes a Mudarabah,

Leasing Company, Housing Finance Company, Investment Bank, Discount

House, Asset Management Company and a Venture Capital Company.

Secured:
It means exposure backed by tangible security with appropriate margins (in
cases where margin has been prescribed by State Bank of Pakistan,
appropriate margin shall at least be equal to the prescribed margin). Exposure
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without any tangible security is defined as clean.

Tangible Security:
It means liquid assets (as defined in these Prudential Regulations), mortgage
of land and building, hypothecation or charge on vehicle, but does not
include hypothecation of household goods, etc.

REGULATIONS FOR CREDIT CARDS

REGULATION O-1
The banks / DFIs should take reasonable steps to satisfy themselves that
cardholders have received the cards, whether personally or by mail. The banks
/ DFIs should advise the card holders of the need to take reasonable steps to
keep the card safe and the PIN secret so that frauds are avoided.
REGULATION O-2
Banks / DFIs shall provide to the credit card holders, the statement of account
at monthly intervals, unless there has been no transaction or no outstanding
balance on the account since last statement.
REGULATION O-3

Banks / DFIs shall be liable for all transactions not authorized by the credit
card holders after they have been properly served with a notice that the card
has been lost / stolen. However, the bank’s / DFI’s liability shall be limited to
those amounts wrongly charged to the credit card holder’s account. In order to
mitigate the risks in this respect, the banks / DFIs are encouraged to take
insurance cover against wrongly charged amounts, frauds, etc.

The bank/DFI shall, however, not charge the borrowers’ account with any
amount under the head of “insurance premium” (by what so ever name called)
without obtaining consent of each existing & prospective customer in writing.
In addition to obtaining consent in writing, the banks/DFIs may also use the
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following modes for obtaining prior consent of their customers provided

proper record is maintained by banks/DFIs:-

i) Customer’s consent on recorded lines via out bound/in bound call center
(after due verification)
ii) ATM screens – screen pop up before conducting transaction and after
inputting pin code
iii) Signed consent acquired with credit card application or as separate form
iv) IVR (Integrated Voice Recording)

REGULATION O-4
In case the cardholders make partial payment, the banks / DFIs should take
into account the partial payment before charging service fee / mark-up amount
on the outstanding / billed amount so that the possibility of charging excess
amount of mark-up could be avoided.
REGULATION O-5
Due date for payment must be specifically mentioned on the accounts
statement. If fine / penalty is agreed to be charged in case the payment is not
made by the due date, it should be clearly mentioned in the agreement.

Maximum Credit

Maximum unsecured limit under credit card to a borrower (supplementary

cards shall be considered part of the principal borrower) shall generally not
exceed Rs 500,000/.
Banks / DFIs may, however, assign a clean limit beyond Rs 500,000 but not in
excess of Rs 2 million to their prime customers who have extraordinary strong
repayment capacity, moderate debt burden and a clean track record. But the
aggregate limits in this respect should not exceed 10% of the total credit card
portfolio at any point in time. However, while availing benefit of this
provision, banks / DFIs would place on record well defined criteria for terms

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"
Prime Customers" and "Moderate Debt Burden" approved by their Board of
Directors / Chief Executive.
Banks / DFIs may also allow financing under the credit card scheme in
excess of Rs 500,000/-(up to Rs 2 million) to other customers as well,
provided the excess amount is appropriately secured according to the
definition given in Part A of these regulations.
The loan secured against liquid securities shall, however, be exempted from
the above limit.
The loans against the securities issued by Central Directorate of National
Savings (CDNS) shall be subject to such limits as are prescribed by CDNS /
Federal Government / State Bank of Pakistan from time to time.
For Charge Cards, pre-set spending limits generated by the standardized
systems, as is the global practice, shall be allowed.

REGULATION R-8
CLASSIFICATION AND PROVISIONING
The credit card advances shall be classified and provided for in the following
manner:
CLASSIFIC DETERMI TREATMENT PROVISION TO
ATION NANT OF BE MADE*
(1) (2) (3) (4) It is
Loss. Where Unrealized Provision of 100% clarified
mark-up / mark-up / of the difference that the
interest or interest to be resulting from the lenders
principal is put in Suspense outstanding balance are
overdue by Account and of principal less
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180 days or not to be the amount of
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allowed to follow more conservative policies. Further, provisioning may be

created and maintained by the bank / DFI on a portfolio basis provided that
the provision maintained by the bank / DFI shall not be less than the level
required under this Regulation.

REGULATIONS FOR AUTO LOANS

REGULATION R-9
The vehicles to be utilized for commercial purposes shall not be covered under
the Prudential Regulations for Consumer Financing. Any such financing shall
ensure compliance with Prudential Regulations for Corporate / Commercial
Banking or Prudential Regulations for SMEs Financing. These regulations
shall only apply for financing vehicles for personal use including light
commercial vehicles also used for personal purposes.

REGULATION R-10
The maximum tenure of the auto loan finance shall not
exceed seven years.

REGULATION R-1 1

While allowing auto loans, the banks / DFIs shall ensure that the minimum
down payment does not fall below 10% of the value of vehicle. Further,
banks / DFIs shall extend auto loans only for the ex-factory tax paid price
fixed by the car manufacturers. In other words, banks / DFIs cannot finance
the premium charged by the dealers and / or investors over and above the ex-
factory tax paid price of cars, fixed by the manufacturers.
REGULATION R-12
In addition to any other security arrangement on the discretion of the banks/
DFIs, the vehicles financed by the banks / DFIs shall be properly secured by
way of hypothecation. Payments against the sale orders issued by the
manufacturers are allowed till the time of delivery of the vehicle subject to the
condition that payment will directly be made to the manufacturer / authorized
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dealer by the bank/ DFI and upon delivery, the vehicle will immediately be
hypothecated to the bank/ DFI.
REGULATION R-13
The banks / DFIs shall ensure that the vehicle remains properly insured at all
times during the tenure of the loan.
REGULATION O-6
The clause of repossession in case of default should be clearly stated in the
loan agreement mentioning specific default period after which the
repossession can be initiated. The repossession expenses charged to the
borrower shall not be more than actual incurred by the bank / DFI. However,
the maximum amount of repossession charges shall be listed in the schedule of
charges provided to customers. The banks / DFIs shall develop an appropriate

procedure for repossession of the vehicles and shall ensure that the procedure
is strictly in accordance with law.
REGULATION O-7
A detailed repayment schedule should be provided to the borrower at the
outset. Where alterations become imminent because of late payments or
prepayments and the installment amount or period changes significantly, the
revised schedule should be provided to the borrower at the earliest
convenience of the bank / DFI but not later than 15 days of the change.
Further, even in case of insignificant changes, upon the request of the
customer, the bank / DFI shall provide him revised repayment schedule free of
cost.

REGULATION O-8

The banks / DFIs desirous of financing the purchase of used cars shall
prepare uniform guidelines for determining the value of the used vehicles.
However, in no case the bank / DFI shall finance the cars older than five
years.
REGULATION O-9

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The banks / DFIs should ensure that a good number of authorized auto
dealers are placed at their panel to eliminate the chances of collusion or
other unethical practices.

REGULATIONS FOR HOUSING FINANCE

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.

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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.

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-1 1 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

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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.

REGULATIONS FOR PERSONAL LOANS INCLUDING

LOANS FOR THE PURCHASE OF CONSUMER DURABLES
REGULATION R-23
The clean limit per person for personal loans will generally not exceed Rs
500,000/-.
Banks / DFIs may assign a clean limit beyond Rs 500,000 but not in excess of
Rs 2 million to their prime customers who have extraordinary strong
repayment capacity, moderate debt burden and a clean track record. But
aggregate outstanding in this respect should not exceed 10% of the total
outstanding personal loans at any point in time. However, while availing
benefit of this provision, banks / DFIs would place on record well defined
criteria for terms "Prime Customers" and "Moderate Debt Burden" approved by
their Board of Directors / Chief Executive.
Banks / DFIs may also allow financing under Personal Loans in excess of Rs
500,000 (up to Rs 1,000,000) to other customers as well, provided the loan is
appropriately secured according to the definition given in Part A of these
regulations.

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The loan secured against liquid securities shall, however, be exempted from
this limit.
The loans against the securities issued by Central Directorate of National
Savings (CDNS) shall be subject to such limits as are prescribed by CDNS /
Federal Government / State Bank of Pakistan from time to time.
REGULATION R-24
In cases, where the loan has been extended to purchase some durable goods /
items, including personal computers and accessories thereof, the same will be
hypothecated with the bank / DFI besides other securities, which the bank /
DFI may require on its own.

REGULATION R-25
The maximum tenure of the loan shall not exceed 5 years. However, this
period may be extended to 7 years for loans / advances given for educational
purposes, provided that disbursement of such loans shall directly be made by
the bank / DFI to the educational institution and the borrower shall not be
allowed to utilize / withdraw cash directly from the bank / DFI under this head
for any other purpose.
REGULATION R-26
In case of Running Finance / Revolving Finance, it shall be ensured that at
least 15% of the maximum utilization of the loan during the year is cleaned up
by the borrower for a minimum period of one week. In case the clean up is not
made by the borrower, the loan will be appropriately classified. However,
banks / DFIs who require their customers to repay a minimum amount
each month, will be considered compliant with this regulation subject to the
condition that the aggregate cumulative monthly installments exceed the
15% clean up requirement and accordingly the loans where the specified
minimum repayments are being made by the borrowers regularly, will not
require classification under this regulation.

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Credit Portfolio of Overall Banking Sector

Bank Credit to Private Sector:

The enormity of bank credit consumption by the private sector that had
started to unfold in FY03 continued through FY06. Bank credit to the private
sector during July-10 June FY06 grew by 19.49 percent against the 3-year
average annual credit growth of 29.7 percent (21 percent in FY03, 34.3
percent in FY04 and 34.4 percent in FY05). Such a significant growth of
credit to the private sector persisted despite tight monetary policy stance of

the SBP. Key factors accounting for such a phenomenon appeared to include
broad basing of credit structure; strong inter-bank liquidity on the back of
considerable flows of workers’ remittances, expectation of further rise in
interest rates and the consumer belief in the future strength of the economy.
Despite the fact that Credit to Private Sector
credit to the private sector grew (Cumulative Flows)
quite significantly at 19.49 4 5 0 495

percent during July- 10 June 4 0 5

FY06 it did show visible 3 6 0
deceleration against the credit 32 17 50
growth of 29.66 percent 2 2 5
experienced in the 1 8 0
corresponding period of last 19 30 5
year. This could be attributed to 4 5
tight monetary policy stance 0

that pushed 6-month KIBOR -45

-90
rate by 42 bps to 8.88 percent,
12-month KIBOR rate by 70
bps to 9.78 percent and
weighted average lending rate
by about 2 percentage points to 10.25 percent (as on April 2006) since the
end of June 2005. The recent trend of credit to the private sector indicates

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that credit absorption by the private sector by the end of the year may be
around Rs.370 billion against the annual credit plan target of Rs.330 billion.

Distribution of Credit to Private Sector:

The utilization of bank credit by various segments of the private sector

during July-April FY06 remained broad-based. The manufacturing sector as
usual continued to dominate the consumption of bank credit as its credit
consumption grew by 17 percent (Rs. 128.9 billion) against its consumption
growth of 20 percent (Rs. 146.8 billion) in the corresponding period of the
last year. The deceleration in credit consumption by the manufacturing sector
primarily resulted from a significant decline in credit consumption by the
textile industry (presumably due to strong profit margin and rising credit

cost) to Rs.68.8 billion from Rs.94.7 billion in the corresponding period of

last year.

Textile Industry
despite experiencing a Distribution of Credit to Private Sector
(July - April FY06)
deceleration in credit
consumption continued to be
the largest recipient of bank
loans; it used loans to
finance mainstream operations
and on-going BMR initiatives
as the
import of textile machinery
continued unabated and totaled
$693.3 million during July-
April FY06. The textile
industry contributed quite
significantly to overall exports (customs based) which grew by 17.8 percent
to $13.5 billion during July-April FY06. The share of textile industry in
exports during July-April FY06 increased to 60 percent ($8.1 billion) from
59 percent ($6.8 billion) in the comparable period of last year. Within the
exports of textile industry, the export of bed-wear grew by 51.4 percent

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($1.66 billion) followed by cotton yarn (35.3 percent ($1.15 billion)), ready-
made garments (28.3 percent ($1.09 billion)) and cotton fabrics (16.7 percent
($1.75 billion)).
The performance of cement industry also improved significantly as its
credit consumption expanded by 46.9 percent (Rs.15.25 billion) while
fertilizer industry which had retired Rs.4.71 billion last year showed a net
credit consumption of Rs. 1.8 billion. The construction industry remained
buoyant as its credit off-take exhibited a growth of 30 percent (Rs.9.4 billion)
against the growth rate of 52.5 percent last year. Commerce-related activities
picked up strongly as their credit absorption rose by 34.4 percent (Rs.49.8
billion). Credit absorption by exporters (Rs. 11.09 billion), by importers
(Rs.5.80 billion) and by wholesalers and retail traders (Rs.26.03 billion)

seems consistent with the export growth of 17.8 percent and import growth
of 40.4 percent during July -April FY06.
Consumer loans continued to register strong growth as they showed an
expansion of 29.4 percent (Rs.73.3 billion) during July-April FY06.
Consumer loans comprised of auto loans (Rs.25.8 billion), personal loans
(Rs.22 billion), loans via credit cards (Rs. 11.7 billion) and loans for house
building (Rs. 11.1 billion). Major sources of growth of consumer loans were:
(i) increased demand for cars both domestically assembled and imported
ones; (ii) increased demand for house building well supported by rising
production of cement industry; and (iii) aggressive strategies of commercial
banks to market consumer loans.
It is quite encouraging to see that the private sector has utilized bank credit to
the extent of Rs.3 00-plus annually in recent years. However, the distribution
of credit to the private sector is still heavily skewed towards capital-intensive
sectors and hence the flow of credit to priority sectors like SME and
agriculture is still low. Therefore, it is highly desirable that more bank credit
goes to these sectors for greater job creation and poverty alleviation.

Credit to SME Sector:

The importance of SME sector in Pakistan has been appreciated in recent

years because of its ability to create employment opportunities and thereby

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reducing poverty through potentially strong forward and backward linkages

that exist among various economic activities.

There is no denying the fact that SME sector has the potential to foster
entrepreneurial culture, serve as training ground for managerial skills, offer a
wide range of working opportunities to entrepreneurs and low-income
individuals, help improve the economic profile of the county and ensure
allocative efficiency from a social point of view. Based on these realizations,
both SBP and Government took a number of initiatives to promote credit to
the SME sector. SBP provided adequate level playing field to SMEs by
opening up credit facilities and ensuring capacity enhancement and other
promotional activities. Similarly Government took a number of fiscal

measures (e.g. tax relaxation for SMEs) to facilitate operations of the SMEs. It
is because of all these initiatives that credit to SMEs has picked up strongly in
the last few years.

Credit from scheduled banks and DFIs to SMEs expanded by 13.3 percent
(Rs. 42.2 Billion) during July-April FY06 compared with an expansion of
25.6 percent (Rs.62.6 Billion) during same period in the last year.

However, credit to SMEs remained concentrated towards Commerce

and trade sector; its credit absorption amounted to Rs.23.5 billion during July-
April FY06 compared with the absorption of Rs.32.6 billion in the
corresponding period of last year. The credit consumption of the
manufacturing sector totaled Rs.8.8 billion compared with Rs.9.9 billion
consumed in the corresponding period of last year; bulk of the credit was
consumed as working capital to support downstream businesses related to
textile, cement, automobile and chemicals. Commerce and manufacturing
sectors combined together accounted for 76.6 percent share in total advances
to SMEs compared to 67.8 percent during the same period of last year. The
reason for persistent relative concentration of bank credit in these sectors is
that these are relatively well organized sectors with superior entrepreneurship.
The credit shares of other sectors included: Services: 13.5 percent (Rs.5.7
billion), Mining and Quarrying: 11.3 percent (Rs.4.8 billion) and Transport
and Communications: 2 percent (Rs.0.8 billion).

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Credit to Agriculture Sector:

Bank credit to the agriculture sector comprises of loans termed as production
loans and development loans. Production loans are extended for the
procurement of inputs like seeds, fertilizer, and pesticides while
developmental loans are granted to increase and modernize the fixed assets
base of agriculture sector through the acquisition of tractors, threshers, and
tube wells. Historically, distribution of credit to the agriculture sector has
remained concentrated towards production loans. This is also evident from the
recent credit data as share of production loans further increased by three
percentage points to 84 percent during July-May FY06 over the corresponding
period of last year.

Bank credit to agriculture sector (on a gross disbursement basis) grew

by 25.7 percent (Rs. 116.9 billion) during July-May FY06 compared with an
expansion of 50 percent (Rs.93.02 billion) during the same period of last year.
Production loans rose by 30.8 percent to Rs.98.6 billion while development
loans registered an expansion of 3.7 percent to Rs. 18.3 billion. Commercial
banks deepened their dominance over the traditional credit leader ZTBL as
their share in gross disbursements further rose to 63 percent (Rs.73.6 billion)
from 58.6 percent (Rs.54.5 billion) in the corresponding period of last year.
However, their gross disbursements grew by 35 percent to Rs.73 .6 billion.
The credit performance of five major commercial banks continued to
improve. However, National Bank of Pakistan continued to play a lead role
and its gross disbursements amounted to Rs.21 .4 billion followed by Habib
Bank Limited (Rs.20.2 billion), United Bank Limited (Rs.8.1 billion), Muslim
Commercial Bank limited (Rs.5.5 billion) and Allied Bank of Pakistan
Limited (Rs.4.5 billion). The credit performance of small private domestic
banks also improved significantly as their credit share rose to 11.8 percent (Rs.
13.8 billion) from 10.6 percent (Rs.9.9 billion) last year.

Banks’ Concentration:

Bank wise data shows that the share of the large five banks in the
incremental credit has increased from 48.8 percent during Jul-Feb FY05 to
55.9 percent during FY06. As result institutional concentration in lending
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activities has increased. This can be attributed to: (1) rising credit to deposit
ratio, especially of the private sector banks and (2) the banks’ response to
capital requirements. Specifically, due to strong, sustained credit growth, the
average credit to deposit ratio of the banking industry has risen substantially
in the preceding three years. The trend has continued into Jul-Feb FY06 also,
with the ratio rising to 82.0 percent on average. This translates into a
weakening of banks’ ability to lend aggressively, and is most evident in
domestic private banks, some of which have credit to deposit ratio in excess
of 100 percent.

While the credit to deposit ratio of the big five banks is still relatively lower,
it should be noted that it too has also increased sharply during FY06 and, for
the first time in last five years, is now close to the industry’s average.

In addition to the liquidity constraints, more stringent capital adequacy

requirement might also have curtailed the ability of the smaller banks to
contribute significantly in the credit expansion. In fact, as per the new
requirements, banks have to maintain capital to risk weighted assets between
8 to 14 percent depending upon their IRAF rating; and one approach to
achieve the capital adequacy standards is to bring down the share of credit in
total assets.

Credit Quality:
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It should be noted that despite the aggressive lending to the private sector,
there is little evidence of the deterioration in the quality of banks’ assets.
The ratio of non-performing loans to total advances has declined to 2.4
percent at end December 2005 compared with 3.0 percent as at end June
2005 and 3.6 percent as at end December 2004, possibly suggesting the
impact of better credit appraisal practices by the banks and favorable
economic conditions.

Credit Quality Indicator (End December)

Percent NPLs / (gross) NPLs / loans Net*

loans
Dec 04 Dec 05 Dec 04 Dec 05
All banks 11.6 9.0 3.6 2.4
Commercial banks 9.1 6.7 2.7 1.5
Public sector banks 13.5 9.8 3.6 1.2
Private sector banks 9.0 6.5 2.8 1.8
Foreign banks 1.6 1.4 0.0 -0.6
Specialized banks 52.9 53.9 26.3 28.5
* net of provisioning

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