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Prudential Regulations for SMEs

2012 Click to edit Master subtitle style

3/25/12

Equity of the Borrower includes paidup 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. Revaluation reserves will remain part of the equity for first three years only, from the date of asset revaluation

Definitions

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Any subsequent revaluation will be for a period of three years and only incremental amount will be added to equity

Definitions

Exposure means financing facilities whether fund based and/or non-fund based and includes: 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.
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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

Subsidiary 50% or more ownership Control 50% or more ownership through subsidiaries Substantial ownership / Affiliation Shareholding of more than 25%

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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, gold ornaments, gold bullion , certificates of deposit, shares of listed companies which are actively traded on the stock exchange, NIT Units, certificates of mutual funds, Certificates 3/25/12 of Investment (COIs) issued by

Liquid Assets:

Guarantees issued by domestic banks/DFIs when received as collateral Guarantees issued by foreign banks, the issuing banks rating, should be A and above or equivalent. mean facilities with maturities of more than one year and

Medium and Long Term Facilities

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Short Term Facilities

PBA means Pakistan Banks Association 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. exposure backed by tangible

Secured
means 3/25/12

Subordinated Loan

means an unsecured loan, extended to the borrower for a minimum original maturity period of 5 years Documented by an agreement To be disclosed in the audited financials

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Clean Exposure

Means exposure secured against personal guarantee of owners of SME

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Small and Medium Enterprise means an entity, ideally not a public limited company, which does not employ more than 250 persons and meets the following criteria: Type of organization Total assets excluding Net sales as per land and building audited financials Trading / Service Concern Manufacturing Concern less than Rs. 50 Million less than Rs. 100 Million Not exceeding Rs. 300 M Not exceeding Rs. 300 M

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Tangible Security

means readily realizable assets (as defined in these Prudential Regulations), mortgage of land, plant, building, machinery and any other fixed assets.

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R 1 SOURCE AND CAPACITY OF REPAYMENT AND CASH FLOW BACKED LENDING

Banks/DFIs shall specifically identify the sources of repayment and assess the repayment capacity of the borrower on the basis of assets conversion cycle and expected future cash flows. Condition of borrowers industry Identify key drivers of business and

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Projected Cash flows of SME are required


Assumptions must be documented If SME is not able to prepare cash flows then bank to assist it in its preparation and not decline the loan on this basis

R 2 Personal Guarantees

PG of all owners of SME are required Exception


Facilities secured against liquid assets

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R 3 Limit on clean facilities

Limit on clean exposure (against PG) of SME

Total (fund based and non fund based) Rs 3 Million Fund based Rs. 2 Million

Declaration from SME that, in aggregate, it is not breaching this limit

Clean exposure to SME will not include credit card and personal loan allowed to 3/25/12

R 4 Securities:

All facilities must be appropriately secured to the satisfaction of Bank except for relaxation in R 3. Banks/DFIs are free to determine the margin requirements on facilities provided by them to their clients taking into account the risk profile of the borrower

R 5 Margin Requirements:

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R 5 Margin Requirements:

100% margin on import of caustic soda SBP may change the margin requirements any time Restrictions in para 1A of R-6 of Corporate PR will apply

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R 6 PER PARTY EXPOSURE LIMIT

Maximum exposure of a bank / DFI on single SME not to exceed Rs. 75 Million. Total facilities of an SME from all financial institutions should not exceed Rs. 150 Million such that facilities excluding leased assets should not exceed Rs. 100 Million.

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R 7 AGGREGATE EXPOSURE OF A BANK/DFI ON SME SECTOR

should not exceed the following limits

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R 8 MINIMUM CONDITIONS FOR TAKING EXPOSURE

CIB report

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While considering proposals for any exposure (including renewal, enhancement and rescheduling/restructuring) exceeding such limit as may be prescribed by State Bank of Pakistan from time to time (presently at Rs 500,000/-), banks/DFIs should give due weightage to the credit report relating to the borrower and his group obtained from a Credit Information Bureau (CIB) of State Bank of Pakistan.

CIB

SME association may be contacted to ascertain character and creditworthiness of borrower

Audited financial statements


Must be obtained when exposure exceeds Rs. 10 M for analysis and record Chartered accountant or Cost and Management accountant (CMA) may be the auditor CMA cant audit financials of public limited

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BBFS (Borrower Basic Fact Sheet)

Required for all exposures (including renewal, enhancement and rescheduling/restructuring) Loan application form must be accompanied by BBFS Seal/Stamp and signature of the borrower are required on each page of BBFS Individual borrowers and sole

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R 9 Proper Utilization of Loan

The banks/DFIs should ensure that the loans have been properly utilized by the SMEs and for the same purposes for which they were acquired/obtained. The banks/DFIs should develop and implement an appropriate system for monitoring the utilization of loans.

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R 10 RESTRICTION ON FACILITIES TO RELATED PARTIES

Facilities to related parties are not allowed.

The bank/DFI shall not take any exposure on a SME in which any of its director, major shareholder holding 5% or more of the share capital of the bank/DFI, its Chief Executive or an employee or any family member of these persons is interested. 3/25/12

R 11 CLASSIFICATION AND PROVISIONING FOR ASSETS

Guidelines in annexure III to be followed for provisioning (Time based criteria)

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Classification Substandard

Determinant Mark up or Principal overdue by 90 days

Treatment of Income

Provisions to be made

Un realized income 25% * to be kept in ( Outstanding memorandum Principal liquid account. Amount assets upto 75% taken to income to FSV of stocks, be moved to machinery and memo account mortgaged properties) 50% * ( Outstanding Principal liquid assets upto 75% FSV of stocks, machy and mortgaged properties) 100% * ( Outstanding Principal liquid assets Upto 75%

Doubtful

Mark up or Principal overdue by 180 days

Same as above

Loss 3/25/12

Mark up or Principal overdue by 365 days

Same as above

Please refer to BSD circular of Oct 2011

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Subjective evaluation of performing and non-performing credit portfolio shall be made for risk assessment. Even performing account may be classified. evaluation shall be carried Criteria for subjective evaluation:

credit worthiness of the borrower cash flow

its 3/25/12

The rescheduling/restructuring of non-performing loans shall not change the status of classification of a loan/advance etc. unless

the terms and conditions of rescheduling/ restructuring are fully met for a period of at least one year (excluding grace period, if any) At least 10% of the outstanding amount is recovered in cash

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The unrealized mark-up on loans (declassified after rescheduling/restructuring) shall not be taken to income account unless at least 50% of the amount (Profit) is realized in cash Any short recovery (cash) of profit will not change status of account if (10% principal has been recovered and terms have been met for 1 year) 3/25/12

In CIB rescheduled / restructured loans not to be reported as default. Default subsequent to rescheduling / restructuring:

Loan will again be classified in the same category prior to rescheduling / restructuring Unrealized profit taken to income to be reversed may subjectively further

Banks 3/25/12

At the time of rescheduling/restructuring, banks/DFIs shall consider and examine the requests for working capital strictly on merit, keeping in view the viability of the project/ business and appropriately securing their interest etc Separate monitoring of such loans to be done. They may be classified 3/25/12

Factors to be considered with making provisions:

benefit of 40% of Forced Sale Value (FSV) of the pledged stocks and mortgaged residential, commercial and industrial properties (building only) held as collateral against NPLs for three years FSV of Land 4 years, Separate valuation must be available

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Banks may avail the benefit of FSV subject to the following conditions:

Additional impact of profitability from using FSV will not be used for paying cash or stock divident. Head of Credit must determine that FSV is calculated accurately Party-wise details of such cases must be maintained on file for verification by SBP

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Misuse of FSV benefit:

Any misuse of FSV benefit detected during regular/special inspection of State Bank shall attract strict punitive action Quarterly (Evaluation and provisioning)

Timing of creating provisions:

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Reversal of provisions: In case of cash recovery, other than rescheduling/restructuring, banks/DFIs may reverse specific provision held against classified assets, subject to the following:
i) In case of Loss account, reversal may be made to the extent that the remaining outstanding amount of the classified asset is covered by 3/25/12 minimum 100% provision.

Netting off liquid assets is allowed Provisioning done by SBP can only be reversed with prior permission of SBP. External auditors will confirm that the requirements of classification and provisioning have been met

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Annexure IV UNIFORM CRITERIA FOR DETERMINING THE VALUE OF PLEDGED STOCK AND MORTGAGED PROPERTIES REGULATION (R-11) Please refer to BSD circular of Oct 2011

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Benefit of FSV

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Annexure IV

Only liquid assets, pledged stock, plant & machinery under charge, and property having registered or equitable mortgage shall be considered for taking benefit for provisioning Hypothecated assets and assets with second charge and floating charge shall not be considered for taking the benefit for provisioning. 3/25/12

Annexure IV

Valuation by PBA approved valuer

FSV must be mentioned All assumptions must be mentioned Comprehensive valuation

Full scope valuation in first year and desktop valuation in subsequent years. Full scope valuation is valid for three years
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Annexure IV

For amount exceeding Rs. 100 M desktop valuation to be done by the same valuer who conducted full scope valuation. For amount less than Rs. 100 M desktop valuation can be done by the bank or any other PBA approved valuer. Desktop valuations to be used only 3/25/12 additional provisioning and not for for

Annexure IV

If borrower does not allow the bank to enter their premises then full scope valuation conducted as such will not be acceptable for provisioning benefit. SBP may check valuations on random basis and any unjustified differences in the valuations of banks / DFIs and State Bank of Pakistan shall render the concerned bank/DFI and 3/25/12

Annexure IV

Assets to be considered for valuation:

Liquid assets:

Valuation determined by the bank / DFI itself and verified by the external auditors. Value of shares at market value at balance sheet date Shares must be registered with CDC

Mortgaged Property, and Plant & Machinery under Charge

Would be acceptable as done by the valuer

3/25/12 Pledged

stock

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