Prudential Regulations:

Prudential regulations are basically the rules and regulations that are being implemented by the
State Bank of Pakistan in order to keep the banking sector in Pakistan in proper supervision and
to cope with various frauds and corruption activities that can be done due to losing control over
the banking sector.

Definition:
 Guidelines through which state bank supervise the institutions.
 Shows standard format for activities.
 To decreases their risk-taking.
Purpose:
 Provide safety to depositor’s funds
 Keep financial stability
 Uniformity in the sector.

Regulation R-1: Exposure limits

Limit to single party and group; means a bank gets how much maximum exposure on an
individual or a company. Exposure means how much loan a bank gives.
For an individual: it is not more than 30% of banks equity.
For a company: it is not more than 50% of banks equity.

Regulation R-2: Limit on exposure against contingent liabilities

Banks contingent liability is not more than 10% of banks equity.
Contingent liability is the liability which is not a liability in true terms for example if company
not pays the payment and default then the bank issues guarantee and on the behalf of that
company bank pays the payment and it is the Banks Liability.

Regulation R-3: Financial analysis and other conditions

Minimum conditions of a bank to give loan to company are:
Credit Information Bureau (CIB) a body through which bank gets information about customers.
Bank check customers past history. Bank check audited financial statement of a customer before
giving loan to them. Bank obtain Loan Agreement Form and Basic Fact Sheet before giving loan
to them.
Regulation R-4: Security and margin requirement
Banks set their margin according to their policy and State Bank gives relaxation to commercial
banks in this regard.

Regulation R-5: Monitoring

The loans of any bank which are outstanding its monthly monitoring occurs. Whose security as a
hypothecation is booked. Hypothecation for example bank kept machinery as a security and that
machinery kept as a security to another banks then the bank mark its hypothecation which means
bank has a share in it. Those loan whose hypothecation occurs their monthly monitoring occurs.

Regulation R-6: Exposure in shares

Acquisition of shares by banks:
Financing against shares means give loan against shares as a security some of its limitations are:
Not provide loan against security in the form of share.
Not provide unsecured loans for that purpose bank demand security.
Not provide loans to non listed companies in stock exchange.
For a single company limit: bank own single company shares but less than 5% of its own equity
For 10 companies limit, shares are not more than 35% of banks equity.

Regulation R-7: Guarantees

Guarantee must be secured. Banks gives guarantee of an importer or issue letter of credit.
Bank must demand some security for that purpose bank put aside some cash margin or collateral
but 50% favor is given.

Regulation R-8: Classification and provisioning for assets

Classification means if loan payment (interest or markup) is delay due to any reason than how to
categorize it. Provising means how to book its loss against that. State bank said provisioning
must be Time Based and Subjective Judgement.
Time based provisioning: if loan installment payment period is more than 90 days and the
customer don’t pay installment then we said loan fall in substandard category and we made its
provisioning on 25% means we assume that 25% of loan amount is in loss book. If the customer
who haven’t pay his loan from 180 days or more than 6 months then we said it is a doubtful loan
we do its 50% provisioning which means that 50% is a loss book then consider in it income
statement as loss provisioning. If customer not pay his loan from a year than we assume it falls in
loss category and whole loan bank shows in its income statement as a loss.
Regulation R-9: Assuming obligations on behalf of NBFCs
Non-Banking Finance Company are ‘A’ rated category company on that basis bank gives loan as
a guarantee.
Bank as a personal guarantee director on that basis gives loan based on banks internal policy.

Regulation R-10: Payment of dividend

Dividend not given to shareholders unless and until the banks own minimum capital
requirements (which is 10 billion rupees in Pakistan) completes.
If 10 billion rupees requirement not completes then no dividend is given to shareholders.