Prudential Regulations for SMEs
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Transcript of Prudential Regulations for SMEs
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Prudential Regulations for SMEs
2012
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Definitions 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.
Revaluation reserves will remain part of the equity for
first three years only, from the date of asset
revaluation
Any subsequent revaluation will be for a period of three
years and only incremental amount will be added to equity
Revaluation to be done by valuers approved by PBA.
No parallel calculation required if revaluation reserves
appear in audited financials of the company
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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 ofprice
fluctuations and can currently be obtained by
selling the mortgaged/pledged assets in aforced/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 Subsidiary50% or more ownership
Control 50% or more ownership through subsidiaries
Substantial ownership / AffiliationShareholding of
more than 25%
Liquid Assets
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Liquid Assets
are the assets which are readily convertible intocash without recourse to a court of law and mean
encashment/realizable value of governmentsecurities, bank deposits, gold ornaments, goldbullion1, certificates of deposit, shares of listedcompanies which are actively traded on the stock
exchange, NIT Units, certificates of mutual funds,Certificates of Investment (COIs) issued byDFIs/NBFCs rated at least A by a credit ratingagency
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Liquid Assets:
Guarantees issued by domestic banks/DFIs whenreceived as collateral
Guarantees issued by foreign banks, the issuing banksrating, should be A and above or equivalent.
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
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PBA means Pakistan Banks Association
Readily Realizable Assets
mean and include liquid assets and stocks pledged
to the banks/DFIs in possession, with perfectedlien duly supported with completedocumentation.
Secured
means exposure backed by tangible security andany other form of security with appropriatemargins
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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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Type of organization Total assets excluding
land and building
Net sales as per audited
financials
Trading / Service Concern less than Rs. 50 Million Not exceeding Rs. 300 M
Manufacturing Concern less than Rs. 100 Million Not exceeding Rs. 300 M
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:
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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 fixedassets.
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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 risks/
mitigants
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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 toassist 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
Nominee Directors of a limited company
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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 cardand personal loan allowed to sponsors
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R 4 Securities:
All facilities must be appropriately secured to thesatisfaction of Bank except for relaxation in R 3.
R 5 Margin Requirements: Banks/DFIs are free to determine the margin
requirements on facilities provided by them totheir clients taking into account the risk profile of
the borrower Margin restrictions on shares / TFCs 30% as per
Corporate PRs
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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 8MINIMUM CONDITIONS FOR TAKINGEXPOSURE
CIB report
While considering proposals for any exposure (includingrenewal, enhancement and rescheduling/restructuring)exceeding such limit as may be prescribed by State Bank ofPakistan from time to time (presently at Rs 500,000/-),banks/DFIs should give due weightage to the credit reportrelating to the borrower and his group obtained from a
Credit Information Bureau (CIB) of State Bank of Pakistan.
Exposure on defaulters after recording reasons andjustifications
Exposure excludes net liquid assets
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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 companies or privatelimited companies which is a subsidiary of public limited company
This requirement may be waived when exposure does not exceedsRs. 10 M.
When facilities are 100% backed by liquid assets financials signedby borrower are sufficient
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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 proprietorship
concerns are exempt from requirement of stamp
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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 wereacquired/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 anemployee or any family member of these persons
is interested.
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R 11 CLASSIFICATION AND PROVISIONING
FOR ASSETS
Guidelines in annexure III to be followed for
provisioning (Time based criteria)
Classification Determinant Treatment of Income Provisions to be
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Classification Determinant Treatment of Income Provisions to be
made
Substandard Mark up or Principal
overdue by 90 days
Un realized income
to be kept in
memorandum
account. Amount
taken to income to
be moved to memo
account
25% * ( Outstanding
Principal liquid
assets upto 75%
FSV of stocks,
machinery and
mortgaged
properties)
Doubtful Mark up or Principal
overdue by 180 daysSame as above
50% * ( Outstanding
Principal liquidassets upto 75%
FSV of stocks, machy
and mortgaged
properties)
Loss Mark up or Principal
overdue by 365 days
Trade bills not
adjusted within 180
days
Same as above
100% * (
Outstanding Principal
liquid assets Upto
75% FSV of stocks,
machinery and
mortgaged
properties)
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Please refer to BSD circular of Oct 2011
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R - 11
Subjective evaluation of performing and non-performing credit portfolio shall be made for riskassessment.
Even performing account may be classified.
evaluation shall be carried out Criteria for subjective evaluation:
credit worthiness of the borrower
its cash flow
operation in the account adequacy of the security, inclusive of its realizable value
documentation covering the advances.
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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 isrecovered 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 for1 year)
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In CIB rescheduled / restructured loans not tobe 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
Banks may subjectively further downgrade theaccount
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At the time of rescheduling/restructuring,banks/DFIs shall consider and examine therequests for working capital strictly on merit,
keeping in view the viability of the project/business and appropriately securing theirinterest etc
Separate monitoring of such loans to be done.They may be classified on the strength of theirown terms and conditions
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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 (This 40% amount has been revised)
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 dividend.
Head of Credit must determine that FSV is
calculated accurately
Party-wise details of such cases must bemaintained 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
Timing of creating provisions:
Quarterly (Evaluation and provisioning)
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Reversal of provisions: In case of cash recovery, other than
rescheduling/restructuring, banks/DFIs may reverse specificprovision held against classified assets, subject to thefollowing: i) In case ofLoss account, reversal may be made to the extent
that the remaining outstanding amount of the classified asset iscovered by minimum 100% provision.
ii) In case ofDoubtful account, reversal may be made to theextent that the remaining outstanding amount of the classified
asset is covered by minimum 50% provision. iii) In case ofsubstandard account, reversal may be made to the
extent that the remaining outstanding amount of the classifiedasset is covered by minimum 25% provision
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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
O C O G
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Annexure IV UNIFORM CRITERIA FOR DETERMINING
THE VALUE OF PLEDGED STOCK
AND MORTGAGED PROPERTIES REGULATION
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 forprovisioning.
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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 desktopvaluation to be done by the same valuer whoconducted full scope valuation.
For amount less than Rs. 100 M desktopvaluation can be done by the bank or anyother PBA approved valuer.
Desktop valuations to be used only foradditional provisioning and not for reducingprovisioning requirements
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Annexure IV
If borrower does not allow the bank to enter theirpremises then full scope valuation conducted assuch will not be acceptable for provisioningbenefit.
SBP may check valuations on random basis andany unjustified differences in the valuations ofbanks / DFIs and State Bank of Pakistan shall
render the concerned bank/DFI and evaluator topenal actions including, inter alia, withdrawal ofFSV benefit.
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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
Pledged stock valuation should not be more than six months old, at each balance
sheet date.
The goods should be perfectly pledged,
the operation of the godown(s) or warehouse(s) should be in thecontrol of the bank/DFI and
regular valid insurance and other documents should be available.
In case of perishable goods, the evaluator should also give theapproximate date of complete erosion of value.