Credit Operational Manual PDF

CREDITS
(OPERATIONS MANUAL)
SYSTEMS, POLICIES & PROCEDURES GROUP TECHNOLOGY & OPERATIONS
THIS DOCUMENT PROVIDES GUIDANCE AND IS EXCLUSIVELY FOR USE BY THE STAFF MEMBERS OF BANK ALFALAH LIMITED.
ANY ACT OF DIVULGENCE SHALL BE VIEWED VERY SERIOUSLY AND SHALL WARRANT DISCIPLINARY/PENAL ACTION.
- Credits Operations Manual - Procedure
- Facility Guidelines
- Security Guidelines
- Watch list
CREDIT OPERATIONAL MANUAL
CHAPTER 1 INTRODUCTION TO MANUAL OVERVIEW

The most significant Asset on the Balance sheet of a Bank is its Loans & Advances. The profitability of a Bank primarily depends upon return from its Advance therefore the quality credit portfolio is of utmost importance for success of every Bank. The quality of Financing/Credits depends upon the following factors: a) b) c) d) e) f) The health of the credit portfolio, i.e. the liquidity or recoverability of financing. The diversity of credit portfolio; ensuring an appropriately spread risk instead of being concentrated in a particular segment, area or credit term (period of commitment). The predominant risk profile of the borrowers, emerging from individual risk assessments. Adequacy of provision for financing that may be doubtful of recovery. The quality of the guiding policies and systems/procedures on which the credit decisions and the management of credit relationships are based. The expertise and attitude of the credit managers, decision makers, administrators and controllers within the organization.
Given the fast changing, dynamic global economy and the increasing pressure of globalization, liberalization, consolidation and dis-intermediation, it is essential that banks have robust credit risk management policies and procedures that are sensitive and responsive to these changes. Risk is inherent in all aspects of a commercial operation; however for Banks and financial institutions, credit risk is an essential factor that needs to be managed. Credit risk is the possibility that a borrower or counter party will fail to meet its obligations in accordance with agreed terms. Credit risk, therefore, arises from the banks dealings with or lending to corporate, individuals, and other banks or financial institutions. Credit risk management needs to be a robust process that enables banks to proactively manage loan portfolios in order to minimize losses and earn an acceptable level of return for shareholders. OBJECTIVE OF THE MANUAL The Manual has been developed with the prime objective to provide directional guidelines to all credit related stakeholders that will improve the risk management culture, and assist in the ongoing improvement of the credit function at BAL while achieving excellence of services to our customers. Key objectives of the manual on credit have been summarized as follows:1. To ensure that effective prudent practices are followed which will contribute towards the achievement of the overall objectives and correlate with the Bank vision. 2. Ensuring compliance in letter and in spirit to the regulatory framework set out by the State bank of Pakistan (SBP) so that Banks Credit decisions remains aligned with the regulatory requirements and the framework;
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3. All marketing and business Initiatives should be compatible in substance and structure with the policy documents. 4. Credit decisions are explicit and clear; 5. To ensure quality credit portfolio of the bank and to maintain the quality and corrective measures if any required to be taken on timely basis. 6. Providing guidelines procedure applicable on various credit related products incorporated transparency and accountability/ 7. The manual serves as a tool for training of the existing and new staff so that each officer has a better understanding of the credit function in line with banks policy & procedures. 8. Credit decisions are in line with the banks goals, mission and the Bank-wide strategy set by the Board of Directors. 9. Business decisions optimize the risk-return trade-off; SCOPE This Policy document is specifically directed towards the processing of Credit Operations; however it does not document detailed procedural and operational matters. It sets out the BAL's supervisory policies and practices, the minimum standards are expected to attain in order to satisfy the requirements of the Banking Ordinance and recommendations on best practices that BAL staff should aim to achieve. It is intended mainly for the reference of staff, their auditors and advisors and the BALs supervisory staff. This Manual covers only selected parts of the Banking Ordinance and regulatory requirement. Further, it is not possible in a publication of this type to cover all of the ground and provide guidance for all eventualities. BAL Managers and their officers remain ultimately responsible for complying with applicable law by continuing consulting the relevant laws and taking appropriate legal advice to ensure compliance with the standards expected of them. MAINTENANCE OF MANUAL The creation and updating of the documents shall be initiated and processed by all stakeholders involve in the process i.e. review, recommending and approval authorities. The maintenance of the manual covers the following aspects: Creation, updates & modifications. review & approval Custody Distribution and mode of distribution. Creation: Concerned Group head will be responsible to ensure creation of all related policy, procedure documents & systems and will be put forth for other reviews by other stakeholders for subsequent approval from concern. REGIONAL VARIATIONS Policies to be followed meticulously, however Local conditions/regulations requirement may be at variance with the mentioned polices. In these circumstances, regional variations will be documented by the concerned regional/country head and approval must be sought from concerned authorities for these variations. It will be incorporated as separate sections in the relevant chapter to which they apply with the original text being cross referenced.
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OTHER AMENDMENTS In order to ensure systematic and coordinated approach to update the document, Queries regarding Manual or suggestions for additions and changes or improvement shall be submitted form concerned group and /or can be addressed for the attention of the Policy and Procedures Department. UPDATES AND REVIEW This manual and bank processes are not static in nature. While the broad processes defined in the manual may remain the same, the procedures to execute the processes may require amendment from time to time in response to changes in the regulatory, economic and legal scenario in the country and the banking environment and therefore will be a separate document. In addition review of the Bank policy and procedure shall be the responsibility of the concerned as per the SBP & Bank internal control policy. Updating Standard formats: documents/reports formats or correspondence letter for internal or external use such as reports, reminders shall be reviewed by Banks Audit, Compliance, Risk and legal division. Financial entries shall be reviewed and approved by Finance Group before its submission to CMC approval. FREQUENCY FOR REVIEW Updating of this Manual will be ongoing basis .However Manual will be reviewed in its entirety after three years or in accordance with SBP guidelines, changes considered essential may be implemented with immediate effect & would be included post facto as an amendment following the review. Modifications - Change requests in the manual can originate from any of the following: a) b) c) d) e) Concerned Group Head Other stakeholders involve in the process Group head Technology & Operations Audit, Risk & Compliance Senior management at BAL
Once the changes are approved, the same can be recorded as an amendment. A separate section & date wise log of all amendments will be maintained. a) Custody & Distribution: The manual is the property of the bank and it should not be shown to, or its contents discussed with anyone who is not in the employment of the organization unless specifically authorized by the System, Policy and Procedure Department. Photocopying or reproducing of the contents for other than bank use is prohibited.
The Credit Group and SP&P - Technology and Operation Group is responsible to ensure distribution and maintain the distribution history which provides a permanent record of copies of the manuals issued to particular staff members/stakeholders including all segments. GOVERNING RULES & REGULATIONS SBP Prudential Regulation of Corporate/SME/ Consumer Companies ordinance 1984. Banking & companies ordinance Contract act Negotiable instrument act
Banking tribunal ordinance
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Partnership act Registration act Transfer of property act Qanun-shahadat ordinance Stamp act Sale of good act Custom act SBP, instructions issued time to time Basel accord Internal control guidelines Country trade policy Taxation and excise laws UCP AND OTHERS Credit policies FE Manual
ASSOCIATED DOCUMENTS Internal policy & guidelines Trade Finance Policy & Procedure Risk management Policy & Procedure CAD manual Retail Banking Policy & Procedure Credit Monitoring Policy & Procedure Special Assets Management Policy & Procedure Other Business Group other then mentioned above SOC Schedule of discretionary powers of segments/centralized departments/ branches Automated reports manual
CHAPTER 2 CREDIT ROLE & KEY PERFORMANCE INDICATORS (KPI)

ROLE OF CREDIT The role of credit is the back bone of bank and quality of a banks assets determines it profitability and sustainability over the period of time. Like every business entity financial institutions strive to maximize the risk adjusted returns. In order to achieve this goal credit team at all levels of the bank should be well conversant with the business environment locally and globally, Banks policy and procedure regulatory frame work. Broadly, Credit Framework covers the credit extension strategy/plan, credit limits caps sector wise /segment wise criteria, delegation and exercising of discretionary powers, sanctioning, and classification aspects of Credit Portfolio. 1. The business groups involved in marketing, prepare Proposals, interact with the customers, monitor
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and control credit exposures and maintain credit file. 2. 3. Credit Analysts of Credit Group Head office reviews all CLPs recommended by Area/Region authorities for Credit Group or CCC approval. relevant
Credit Administration Department (CAD) prepares documentation, reviews, processes operational activities and maintains credit related security and charge documentation. However, in certain branches where CAD is not centralized, relationship officers have been posted along with credit officers. In such situations, these persons shall perform all credit related roles i.e., customer relationship, credit review/ disbursement and credit administration. In addition, Special Assets Management Group (SAMG) is responsible for recovery of credits that are having been classified and transferred to SAMG.
4.
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STRUCTURE OF CREDIT GROUP - HEADOFFICE

Credit Group has the following organizational structure:
GH Credit
Regional Head North Retail & Middle Market
Regional Head South Retail & Middle Market
Regional Manager Corporate and International Operations
RH Quality Assurance
Area Credit Managers
Officer
Credit Officers
Credit Officers
Credit Officers
RESPONSIBILITIES OF GROUP HEAD CREDIT

To ensure sound asset quality and a conservative credit culture throughout the lending and treasury trading/underwriting activities of the bank while ensuring the credit approval process is responsive to customer needs and credit losses and collection costs are minimized. To provide an independent, third party assessment/approval of credit and business risks of the bank, and serve on the Banks Asset and Liability Management committee. Promote strong asset quality and endeavor to ensure that outstanding classified as lower & medium risk forms majority of total outstanding assets. Ensure a prudent level of portfolio diversification. Maximize recovery of problem loans, and minimize credit losses and collection expenses. Ensure compliance with internal policies and procedures and external regulatory requirements. Provide input/advice to the CEO/Board regarding the formulation of annual credit plan Validation of TRMAC Approve credits line proposals as per authority delegated by the Board Credit Committee /or Board.
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Ensure training of credit staff across the bank. Organize portfolio reviews focusing on quality assessment, risk profiles and industry concentrations etc. Manage systems established to identify significant portfolio indicators, problem credits, and relevant level of provisioning required etc.
RESPONSIBILITIES OF REGIONAL HEAD CREDIT

Purpose of Job To establish, implement, monitor, and all policies, risk acceptance criteria, verification requirements relating to credit risk and to manage the credit requirements of assigned Areas and supervise the overall Credit portfolio, Credit Strategy, and rewards emanating from Risk Assets underwritten. Support GH credit in disposal of his duties mentioned above. Primary Duties and Responsibilities 1. To review Credit Line Recommendations of allocated branches and Area Committees to ensure conformity with Banks policy & to identify potential credit problems/deviations. 2. To ensure that banks credit policy and all regulatory requirements are being followed at the time of sanction/renewal. Suggest, complement and help in devising and improving policy and operational aspects concerning security documentation and related concerns of branches/areas. 3. To provide an ongoing assessment of credit risks in the product and portfolio strategies. 4. To advise credit and loan personnel on the Banks overall lending policy, keeping in mind significant market trends. 5. To recommend credit limits and authorizes credit risk exposures up to allocated limits of authority; Approves/Recommends deviations as per authorization limit. 6. To develop credit risk acceptance criteria, credit risk management strategies, approval and verification processes in line with the banks overall business strategies. 7. To recommend and implement policy change for existing and new products based on transactional behavior and feedback from frontend teams vis--vis the credit risk acceptance levels. 8. To ensure adherence to Internal Credit Risk Management Guidelines and external regulatory requirements by other units involved in credit processing and execution of transactions. 9. To prepare Credit bulletins and policies to provide line managers clarity on their roles, responsibilities in the credit management process; updates on changes in guidelines. 10. To facilitate approval of appointments of external agencies (e.g. evaluators and surveyors). 11. To maintain close watch on assigned Branches/Areas complex accounts with large lines of credit. If and when needed, liaises with the Branches to structure credit limits in line with requirements. 12. To maintain a balance between managing credit risk and ensuring constant growth of the portfolio. 13. To prepare and review statistical analysis performed on segment performance, various trends and potential market realities. 14. To manage credit risk in segment portfolio through each step of the credit process
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ROLE OF REGIONAL HEAD (QUALITY ASSURANCE DEPARTMENT)

To maintain uniformity in Credit Memorandum with respect to presentation, contents and synchronization in expiry review dates etc. To maintain uniform policy for approval, extension for adjustment purpose and refusal (Only for seasonal financing) To review sanction advices, status of eCLP/eSanctions To identify anomalies, variations to concerned credit officer/regional head and gist of these anomalies to be sent to Group Head on fortnightly basis Deviations from credit policy to be noted/highlighted and reported to the Senior Management for necessary ratifications and /or explanations Identify deviations from credit policy to senior Management for ratification/corrective action
ROLE OF AREA MANAGER-CREDIT

Area Managers are responsible to monitor quality of credit portfolio of their respective areas. They have joint approval authority with Area Managers Business Line upto a certain level as approved by the competent authority (See Discretionary Powers). Besides, they recommend cases to the higher approval authority for all those cases which are beyond their own discretionary powers. They conduct frequent reviews of the portfolio of their areas and keep a close eye on the deteriorating credits and liaise with the Area Managers-Business line to improve the quality of their portfolio.
ROLE OF CREDIT OFFICER/ RELATIONSHIP MANAGER

Purpose of Job This role is primarily responsible for assisting the Area Managers/Regional Heads to evaluate credit risk of lending proposals in recommending/rejecting for initiation, renewal or enhancement (cancellation/amendments) of credit extended to the customer by helping in conducting detailed analysis of credit, financial risks, industry and security etc. Facilities approval of appointments of external agencies to aid credit administration functions. Primary Duties and Responsibilities 1. Evaluating Credit proposal by analyzing financial risk profile, CIIRS Risk Ratings (Obligor & facility) repayment capability, security adequacy and industry position, conducts preliminary analysis and provides observations prior to the detailed analysis to be undertaken by the Regional Head. 2. Ensures that credit facilities have been properly structured and no violation of internal or external (SBP) regulatios/policies 3. Prepares detailed notes of recommendation for approval, rejection or amendments based on risk analysis while using ECLP the same shall be generated through the system 4. Conducts external environment analysis to understand its impact on credit portfolio 5. Gathers data to ensure availability of all information needed for effective credit decisions 6. Helps the area managers/regional heads in deciding whether to recommend for approval or rejection a. Co-ordinate with Group Head and Central Credit Committee (CCC) for approval of credit request (where applicable) b. Exception management- recommend for approvals of deferral, temporary extension and Excess Over Limit (EOL)
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Corporate & Investment Banking Group (CIBG) Corporate & Investment Banking Group captures its market share by offering a wide range of products to its corporate clients at competitive terms. The clients include multinational companies and medium to large corporate clients in the public and private sector. Corporate & Investment Banking Group of BAL either leads or participates in major transactions which include Syndicated Loans, Structured Finance, Leveraged Buyouts, Project Finance, Term Finance Certificates, Equity Underwriting, Initial Public Offerings, Independent Advice, Mergers & Acquisitions, Corporate Restructuring and other products and financing to major Corporate customers. Corporate & Investment Banking Group is authorized to approve the credit proposals and limits within approved delegated (time to time) limits exceeding its powers will be elevated to CCC and BCFHRC respectively for approval. CIBG has the following approval levels:
Level I II III IV V
Joint Approving Authority Area Manager -Credit Area Manager-CIBG (South/North/Central) Regional Head-Credit Regional Manager-CIBG (South/North/Central) Group Head-Credit Group Head-CIBG (South/North/Central) Central Credit Committee (North/South) Board of Directors (BCFHRC)
For detailed discretionary powers of CIBG, see attachment (Annexure -C, D, E)
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Level I
Retail & Middle Market Group (RMMG) All the commercial and small & medium enterprises entities in both public and private sectors have been tagged with Retail & Middle Group. Limits up-to Rs.300Mn have been tagged with RMM Group. However, CIBG & RMMG have mutually agreed to interchange some of the relationships which may relate to one group in view of its exposure with the bank but will be parked with the other group parking of account should be in context of branch i.e. those Corporate accounts which are parked at RMMG Branch would pass their ownership completely to RMMG. Upon parking the account will become responsibility of the Group in whose Branch it is parked/ located. Approval levels of Retail & Middle Market Group are as follows:
Level
I II III IV
Joint Approving Authority

Area Manager-Credit Area Manager-RMM (South/North/Central) Regional Head-Credit Regional Manager-RMM (South/North/Central) Group Head-Credit Group Head-RMM (South/North/Central) Sub-Committee Central Credit Committee (North/South)
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For detailed discretionary powers, please refer Circular Ref CG/AA/ dated 10.05.2010 (attached)
Consumer Banking Group

This business group is responsible to market consumer related products. The group formulates its risk policy and operational procedures in line with the parameters defined by SBP in the prudential regulations for consumers. Consumer Banking Group of Bank Alfalah Ltd. offers products such as credit cards, vehicle loans, home finance etc. For more details please refer to the Consumer Credit manual. Approval authorities are CIBG & RMM
Financial Institution Division (FID) / CIBG & RMM

The Division assesses the financing needs of not only the local and foreign banks but those of non banking financial institutions including DFIs etc. The Division operates with a structure of relationship managers who provide competitive services to the valued customers. The Division takes due diligence regarding the risk management aspect of the financing. Approval authorities are CIBG & RMM
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Islamic Banking Group/ CIBG & RMM

Islamic Banking Group of BAL is offering Shariah compliant products and services to its customers which include corporate, commercial and small & medium size enterprises entities. All the regulatory requirements of SBP are meticulously complied with while offering financing and investing activities. The group is endeavoring to offer innovative products at competitive terms to meet varied business and individual requirements of the customers. All the products presently being offered have been duly approved by the Shariah Advisor wherein detailed guidelines have been provided to facilitate branches. Approval authorities are CIBG & RMM
International Business
Bank Alfalah Ltd has its overseas branches in Afghanistan and Bangladesh to cater to the financing needs of commercial and corporate customers. These branches work in line with the regulatory requirements of the central banks of their respective countries. Bank has a wholesale banking at banking hub in the Kingdom of Bahrain. There is a representative office in UAE where bank is providing its services to Pak expats living in UAE through this office. The staff housed in UAE refers the business to BAL Pakistan and BAL Bahrain. Approval authorities are CIBG & RMM
Rural Finance Division (RFD)

Government emphasizes on the importance of agriculture sector of the country therefore banks encourage financing to this sector. Bank Alfalah Ltd. has a specialized unit to evaluate the requirements of agricultural sector under the name of ALFALAH RURAL FINANCE which covers the entire spectrum of farming, that is, from providing short, medium and long-term finances for the production and development of crops and non-crop items and for packing, grading, processing, marketing and export of these items. ALFALAH RURAL FINANCE has a separate policy which encompasses entire rural financing operations of the Bank in Pakistan with no restriction on territorial jurisdiction. The division keeps itself abreast of all the latest State Bank of Pakistans regulations and local laws and updates its policies accordingly. The division does not have approving authority of its own but all the financing proposals falling under rural financing are routed through RFD. The division sends the financing proposal to an appropriate approval authority level along with its recommendations in compliance with SBP regulations for Agriculture financing.
For details please refer BAL Rural Finance Manual Special Asset Management Division
SAM Division shall carry prime responsibilities for handles assets which have been classified, after the cases have been transferred to SAM. SAM will be responsible for legal matters other negotiation with borrowers for out of court settlement. SAMG Manual in this regard shall be referred.
Key Performance Indicators (KPI)

a. Portfolio limits
Bank credit plan shall ensure that the aggregate Credit exposures shall not, at any point in time, exceed the limits for individual as well as commercial customers within each business lines and remains within the overall umbrella limit as may be prescribed by State Bank of Pakistan and/ or defined by the Bank authorities from time to time. In exceptional cases, to meet seasonal requirement for a specified short period, bank designated authority may allow at its discretion subject to the condition that threshold of exceptional volumes are not violated as per the relevant product governing rules and/or internal policy with or without SBP approval as per SBP requirements. Where the banks have taken exposure on exceptional basis as mentioned above, record of the reasons and
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justifications for doing in the approval form shall be maintained and will meet the requirements of related SBP Prudential and other Regulations. b. Minimum conditions for enhancing Business Portfolio and compliance of Credit Policy instructions
While considering proposals for any customer requests/extending further services (including renewal establishing relationships, banks shall comply with AML/KYC polices specially analyzing customers transaction turn over, bill payment history & behavior verified through other bank statement, utility bills, credit card bills etc. Call back to the given references as declare by the customer on the relationship forms/request forms or may refer the prospective customer to the related Associations for obtaining information about its character especially in those circumstances where no information is available from CIB of State Bank of Pakistan. c. i. ii. iii. iv. v. vi. Key Ingredients To Trigger Growth product development and differentiation, innovation and business process reengineering, micro-planning, marketing, prudent pricing, customization, technological up gradation, home / electronic / mobile banking, cost reduction
d.
i. To Help customer to Understand How Our Financial Products And Services Work By: I. II. III. IV. Giving information relevant to customers in any one or more of the following languages: Urdu, English or may be in the appropriate local language. Ensuring that Bank advertising and promotional literature is clear and not misleading. Ensuring that Customers are given clear information about Bank products and services, the terms and conditions and the interest rates/service charges, which apply to them. Giving them information on what are the benefits to the customers, how they can avail of the benefits, what are their financial implications and whom they can contact for addressing queries and how.
ii.
To Help Customers Use Account Or Service By: I. II. Providing regular appropriate updates. Keeping informed about changes in the interest rates, charges or terms and conditions.
iii.
To Deal Quickly And Sympathetically With Things That Go Wrong By: I. II. III. IV. Correcting mistakes promptly and canceling any bank charges apply due to Bank mistake. Handling complaints promptly. Telling customer how to take complaint forward if still not satisfied Providing suitable alternative avenues to alleviate problems arising out of technological failures.
iv.
To Treat All Customer Personal Information as Private and Confidential I. We will treat all customer personal information as private and confidential subject to matters mentioned in related policies.
v.
To Publicize the Code We will I. provide customer ( existing customer) with a copy of the Code
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II. III. IV.
provide ( new customer) with a copy of the Code at the time of account opening; make available this Code at every branch and on our website; and Ensure that our staff is trained to provide relevant information about the Code and to put the Code into practice.
vi.
To adopt and practice a Non - Discrimination Policy I. We will not discriminate on the basis of age, race, gender, marital status, religion or disability.
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CHAPTER 3 TYPES OF CUSTOMERS & EXPOSURE LIMIT

The customers with exposure size of 150 million or above are defined as corporate and those with exposure size of 75 million and above as commercial customers. SME exposure is defined as funded and unfunded facility of up to Rs. 75 million given to a customer for business or commercial purposes. Corporate customer is defined as a counterparty / borrower having a turnover of Rs 600 million or above or the exposure size is at least Rs 150 million and above. SME Customers SME customer is defined as a counterparty / borrower having a turnover below Rs. 300 million or having an exposure of upto Rs 75 million, except consumer / retail exposure. Additionally the bank has consumer exposures in the form of retail portfolio. The retail portfolio includes exposures to individuals. The retail exposures are segregated according to various products. CATERGORIES OF BORROWERS While extending credit it is important that the corporate status/structure of the customer should be clearly established. The corporate status/structure of the borrower determines what security/collateral and documentation is required to secure the finances. Borrowers have been segregated into various categories, as per SBP Classification, on a "Constitution Type" basis, as follows: INDIVIDUAL i) ii) iii) iv) v) Bank employees & other banks employees Government employees Autonomous bodies' employees Private sector corporations Others
PRIVATE SECTOR i) ii) iii) iv) v) vi) Sole proprietorship Partnership Private limited/Public limited (listed & unlisted) Joint venture Trust & Nonprofit Organizations Others
PUBLIC SECTOR i) ii) iii) iv) Public sector enterprise(listed & unlisted) Autonomous bodies Trust & Nonprofit Corporations Others
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GOVERNMENT DEPARTMENT i) ii) iii) iv) v) Federal/provincial government Local bodies Govt. Trust Nonprofit Organizations Universities, Government corporate bodies, Federal & Provincial government agencies, etc.).
FOREIGN CONSTITUENT i) Official ii) Business iii) Personal
INDIVIDUAL (i) Banks employees & other banks employees Finances to banks own employees are administered and controlled by the Human Resource Department. They are covered under a separate policy duly approved by the Board of Directors which is subject to revision as deemed necessary and in compliance with the prevailing SBP guidelines. Close Relatives of Staff Members Blood relatives and spouse of staff members can cause conflict of interest. In order to avoid such situations, no staff member will actively canvass or seek credit facilities for close relatives. In case a loan applicant is a close relative of any staff member, clearance from credit group/ HRD is obtained.
Businesses Sponsored By Staff Members Primarily the staff members are not allowed to either own or share partnership with a business entity as per policy. Additionally, credit facilities to businesses sponsored by employees of the bank should be discouraged. However, Credit Group Head Office may consider such requests, in extraordinary circumstances, strictly on merit basis and subject to following conditions I. Irrespective of the limit, all such facilities should only be approved by the Central Credit Committee. ii. Facilities should not be approved/ placed at the same branch where the staff member is employed. iii. Renewal of existing facilities should be approved by the Head Office. iv. Human Resource & Administration should be informed and updated of all such transactions. Granting of facilities to employees of other banks is done with due diligence. The underlying reason is that generally banks do not transfer the salaries and terminal benefits of their employees to other banks. Besides, such advances can cause breach of confidentiality, which a bank employee should always maintain. (ii) Government employees BAL offers financing to employees of government and autonomous bodies under credit card scheme, car loan, house loan and various SME products e.g. AQF, AKF, AMF etc which are handled under separate manuals.
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(iii) Autonomous bodies employees Private sector employees Same as 3.1 (ii) (iv) Others Proprietors/Partners (a) Minors No financial accommodation of any type should be accorded to minors, as any undertaking by them to repay borrowings is not legally binding. At present, persons below the age of 18 (eighteen) years may be classified as minors. However, in case where guardians have been appointed by a competent court of law, persons below the age of 21 (twenty one) years are at present, to be treated as minors. (b) Married Women A husband cannot be made responsible for the debts incurred by his wife. Keeping this in perspective, financial accommodation would be extended to a married woman against property/assets exclusively owned by her. In case where a married woman offers by way of securing arrangements in Bank's favour, her own, separate property assets, against her husband's borrowings or his business debts, it is advisable to have the relevant documents executed within the Bank's premises in the presence of suitable witnesses to safeguard Bank's position in case of any subsequent attempt on her part to disclaim liability on grounds of undue influence. In case of parda nashin women, it is advisable to have their close family member as one of the witnesses. It should also be borne in mind that the status of married women's property is not affected by virtue of having been acquired either before or after the marriage. (c) Pardanashin Ladies Financing to such customers should be avoided as such financing may lead to legal problems / intricacies at an uncertain future stage in connection with transfer / charge of property in Bank's favour, by way of security. It is presumed in Law that 'Pardahnashin' women are subject to undue influence, and this legal contention would prevail unless the contrary could be proved. If at all, under exceptional circumstances, a credit facility is to be made available to such type of customer, a request to do so should be submitted to the next higher approving authority with valid reasons in support. A copy of such request letter should also be endorsed to the appropriate approving level at Head Office. No disbursement should be allowed under this facility unless prior sanction has been obtained from those higher authorities. If, as a rare instance, the credit facility is allowed to be made to such type of borrower by the aforementioned controlling authorities, the following precautions should, particularly, be taken: Whenever securing/charge documents are to be obtained from such type of customers to secure either their own credit facilities or those of their husbands/relatives, etc., these documents should be executed in the presence of two witnesses who could be both able to personally identify her and attest her signature/thumb impression. Such person should preferably be mahram of the Pardahnashin lady. An independent solicitor should explain to her the nature and significance of the documents to be executed by her, and this fact should also be attested on the securing documents.
PRIVATE SECTOR
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(i)
Sole Proprietorship
In the eyes of law, the proprietorship concern and the proprietor himself are indistinguishable. However, as per the entity concept of accountancy the operations of the proprietorship concern and the accounts of the proprietor himself are kept separate. Accordingly the balance sheet of a proprietorship firm shows the amount of capital contributed by the owner as a liability i.e. the business owes this amount to the owner. This amount is shown as an asset (investment) in the personal balance sheet of the owner. As lenders, we are concerned with both aspects i.e. the accounting aspect for financial appraisal and the legal aspect for recovery. Since the business liabilities and the personal liabilities of a proprietorship firm cannot be separated or demarcated, personal guarantee from a proprietor is not necessary as he is already liable in the eyes of law to the extent of his personal assets also. There is no formal procedure for the formation of proprietorship concern. However, a declaration evidencing the proprietors name etc. should be obtained on firms letterhead. The concern should preferably be registered with trade associations/bodies and NTN should be obtained, if applicable. The account opening and lending documents stipulated by the Bank should be signed by the sole proprietor and the firms stamp should be affixed. (ii) Partnership/Firm
Partnership is a contract between two or more persons to carry on a business for the purpose of sharing of profits. Partnership is governed by the Partnership Act 1932. The members of the partnership are called individual Partners. Entity formed by such association is known as Partnership or Firm. The capital of a partnership is provided by the partners who are jointly and severally liable for the liabilities of the firm. The rules of the partnership concern are laid down in a document called Partnership Deed. The partnership deed needs to be examined carefully to ascertain the following: 1. The object/purpose of the partnership 2. The partners and their rights, liabilities, and restrictions (if any) to operate the bank account or borrow, and 3. The conditions relating to continuation or dissolution of the partnership in case of retirement, death or insolvency of a partner In a partnership account, the establishment of which is evidenced by a partnership deed/preprinted partnership format, the signing and delegation powers of those partners authorized to operate the account including power to overdraw must be clearly established through the same. Unless provision is made to the contrary in the deed / partnership format, any document acknowledging the Bank's charge over a specific security must be signed and executed by all the partners. Where the partnership is fixed for a definite period, the expiry date must be clearly diarized. Any facility obtained must be repaid before the expiry date. Where there is a change in partners, the operations on the old partnership account should be stopped. Upon acknowledgment of the old debt, the liability should be transferred to a new partnership account and operations on the account permitted after obtaining fresh account opening documentation (AOD). (iii) Private Limited Company/Public Limited Company
Companies are the largest class of borrowers availing various credit facilities from banks therefore it has been discussed in detailed.
The Companies Ordinance, 1984, defines a Company as, a Company formed and registered under this Ordinance or an existing Company. (Existing Company means a Company incorporated under previous law on the subject i.e. Companies Act, 1913)
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A Company has a number of legal features and characteristics, as defined in the Ordinance. Some of the important characteristics relevant to topic are discussed below: a) A Company is a legal person, which status it attains as soon it is incorporated under the Ordinance. Following incorporation, it becomes capable of purchasing and disposing of property, entering into contracts, suing or being sued etc. in its own name; and capable of performing all the functions which a Company is authorized to perform, though the functions are performed through its management. b) A Company has an existence which is separate, independent and distinct from its shareholder/members, as well as from the management. c) A Company has the privilege of limiting personal liability of its shareholders /members for the business debts/obligations. d) A Company having a separate personality from its shareholders/members is itself bound for its debts and obligations; and the shareholders/members are liable for the Companys debts/obligations only in case of a Companys winding up; and that also to the extent of; Amount of value of the shares respectively held by the shareholders, in case of a Company limited by shares; and ii. To the extent of such amount as the members may respectively undertake vide the Memorandum of Association to contribute to the assets of the Company, in case of a Company limited by guarantee. e) A Company has a perpetual succession. Its existence is independent of existence of its members and directors i.e. the company shall remain, unless wound up. Laws Governing Companies in Pakistan Companies Ordinance, 1984 and the Securities Exchange Commission of Pakistan Act, 1997 are the basic laws governing companies in Pakistan. The Ordinance provides basic principles and procedures of the Company law, whereas, the Act provides regulatory and monitoring principles of the Company Law. Types of Companies Generally, companies can be categorized as follows: a. Company limited by Guarantee CO1984 b. Company limited by Shares Companies limited by Shares have further two types, (i) Public Limited Companies (ii) Private Limited Companies. i) Public Limited Company i.
ii) Private Limited Companies A Private Limited Company means a Company with limited liability (by shares) which prohibits invitation to the public to subscribe for the shares of the Company; and restricts transferability of its shares. Additionally, it limits the number of its shareholders to fifty. Furthermore, the minimum number of its directors should be at least two (02). It is required to use the word Private Limited with its name. A Private Limited Company may also be of another type of Company i.e. Single Member Company (SMC) which has only one member. It is required to use the word SMC Private Limited with its name. It is governed by all the provisions applicable upon a Private Limited Company, except that the number of its members and directors can not exceed one (01). However, it is required that the single member of every SMC shall nominate a nominee director to act as director in case of his death; and
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shall nominate an alternate nominee director to act as nominee director in case of non-availability of nominee director. Extent of Liability of Directors Directors are shareholders representative and are not liable for the debts /obligations of the company. Banks obtain personal guarantees of directors of companies for finances allowed to the companies, especially in case of Private Limited Companies, so that if companies fail to repay the finances, the same can be recovered from the personal assets of their directors. Documents required at the time of establishing banking relationship with a Company The validity of any act of a company is dependent upon firstly, whether it is within the powers of the company, as provided in the Memorandum of Association (MOA) thereof (or in the Ordinance); and secondly whether the act has been performed by the management of the company in accordance with the rules and regulations provided in the Articles of Association (AOA) (or in the Ordinance). Consequently, any act of a company contrary to the said aspects would be invalid. S# 1 Account Nature Individuals/Sole Proprietorship Documents Required
Attested photocopy of CNIC Proprietorship declaration Trade body Association Letter/NTN, if applicable (for Sole Proprietorship only) 2 Partnership/Firm Attested photocopies of CNICs of all partners Attested copy of Partnership Deed duly signed by all partners of the firm Attested copy of Registration Certificate with Registrar of Firms. (In case if partnership is registered) Partners resolution to borrow 3 Societies/NGOs/ Clubs Certified copy of Certificate of Registration etc. Certified copy of By-laws/Rules & Regulations Resolution of the Governing Body/Executive Committee for opening of account authorizing the person(s) to operate the account and attested copy of the identity card of the authorized person(s) Legal opinion regarding finance 4 Trust Attested copy of Certificate of Registration (where applicable) Attested copies of NIC of all the trustees Certified copies of Instrument of Trust/Trust Deed Legal opinion regarding finance 5 Government Bodies Attested copies NICs of authorized signatories Certified copy of By-laws/Rules & Regulations Resolution of the Governing Body/Executive Committee for opening of account authorizing the person(s) to operate the account and attested copy of the identity card of the authorized person(s) Legal opinion regarding finance 6 Foreign Constituents Copy of passport,? List of documents required for companies Source of Certified Copy Memorandum of Association Company Secretary Articles of Association Company Secretary Certificate of Incorporation Registrar Joint Stock of Companies (SECP) Certificate of Commencement of Business Registrar Joint Stock of Companies (SECP) (Only required for Public Limited Companies) Board Resolution to Borrow Company Secretary Form 29 (List of Directors)/Form A Registrar Joint Stock of Companies (SECP)
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Attested copies of CNICs of all directors
Documents Required i. Memorandum of Association (MOA)
MOA is the constitution of a company. It defines objectives and purposes for which the company has been formed. It also provides basic information about the company i.e. Name, Registered Office/Address etc; information as to liability of the members; the amount of share capital with which the company proposes to be registered, and the division thereof into shares of a fixed amount etc, MOA should be carefully examined as to any restrictive clause i.e. whether it places any restrictions on the actions of the company. ii. Articles of Association (AOA)
AOA are bye-laws for the working and general administration of a company. It provides the powers and duties of the Directors and Officers of a company. The AOA should be examined to establish how, by whom; and to what extent the borrowing powers of a company would be exercised. Generally, AOA of companies allow the directors to exercise borrowing powers. However, it must be ensured that the directors may exercise the powers without any restriction. iii. Board Resolution (BR)
Generally, all the powers of a company are exercised by its directors, except as provided in the Ordinance or AOA of a company. However, as regards the borrowing powers of a company, the Ordinance specifically provides vide Section 196 that the directors of a company shall exercise the said powers on behalf of the company by means of a Resolution passed at their meeting. It is therefore, necessary that whenever a Company requests a financial facility, a copy of the Board Resolution be obtained in this regard, duly attested by Company Secretary/Director(s). Similarly, on each renewal/enhancement of the facility (ies), a fresh Board Resolution should be obtained to cover the aspect of renewal/enhancement. The Board Resolution should preferably be specific as to bank name, nature and amount of facility (ies), aspect of renewal/enhancement, and nature of securities; and should specify the companys representatives, who would sign/execute the document. In addition, a BR must confirm that the minutes of the relative meeting of the Directors have been entered in the Minutes Book of the Company. (iv) JOINT VENTURE
A Joint Venture is an association among two or more firms/companies to share jointly the profits or loss of a commercial business or businesses. The association is restricted to the relationship among the firms/companies. Evidence of association can be substantiated in any manner of attestation. A joint venture agreement regulates the entitlements and obligations of the participant firms / companies and distribution of profit and loss. Usually such entities are established for carrying out a specific project or contract. The authorities vested with the parties to the venture to enter into a partnership should be carefully examined. Also usual precautions applicable to partnership accounts regarding authority to operate and overdraw accounts, create security etc. will apply on these accounts as well. The account should be opened and conducted for a specific project or contract basis. The account should be closed immediately once the project or the contract is completed and the Bank's exposure is liquidated. (v) Other forms like Trusts, Societies, NGOs, Clubs etc.
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While extending loans to these bodies special care should be exercised. Charter of incorporation, by-laws as well as proof of their registration should be carefully examined before granting any facility. Clear legal opinion from banks internal legal department should be obtained prior to extending finance, regarding borrowing powers and charging of security and other requirements. The mandate obtained on opening the account should include power to overdraw and it should be backed by a resolution passed by the Committee/Governing body of the club specifying the persons authorized to borrow and to charge security. In this type of advance, it is preferable to insist on security say assignment of funds expected by the Club/Association or personal guarantee of the chairman of the club, etc. PUBLIC SECTOR Public Sector organizations and autonomous bodies are government owned companies which are controlled by government. Their shares can be traded in stock exchanges and these are governed under the Companies Ordinance 1984. Financing to these organizations is made on the similar lines as to public limited companies Risk assessment for Trust and Non-Profit Organizations run by public sector are evaluated by following the guidelines of a private trust. There is no significant difference from financing point of view. GOVERNMENT DEPARTMENT (i) Federal, Provincial and Local Government Bodies
All advances or facilities to the Federal Government/Local Government or related entities are subject to prior approval of the Central Credit Committee/Board of Directors. Negotiations regarding advances to such entities should be made at the highest level and the person(s) conducting the negotiation on behalf of the borrower should have the necessary authority. The lending documents should be signed by the Government officials authorized to sign such documents and the decrees authorizing them to do so must be carefully checked and copies kept on Bank record. Legal Clearance from banks internal law department should also be obtained.
Local Bodies
The term "Local Bodies" means such bodies as Municipalities, District Boards, Town Committees, Union Councils, Development bodies etc., whose function and powers are governed by the respective Acts, rules and by-laws through which these bodies are created. These bodies usually have at their disposal substantial funds and banks regard them as desirable customers. However, their accounts should be conducted strictly in accordance with the statutory rules and regulations. Local authorities are regarded as trustees of the funds under their control and, therefore, all banking transactions must always be consistent with the rules and by-laws and within the scope of their respective authority. Local bodies have no implied power to obtain finance/arrange accommodation, as a general rule, and unless some statutory power exists to authorize the obtaining of such finance/ accommodation, a local authority cannot validly contract a financial arrangement.
Before considering the grant of finance/ accommodation to such bodies, reference must be made to the relevant Act and Rules governing their power to borrow, limitations, if any, and authorized form for obtaining finance. In some cases, the prior sanction of the Provincial and Federal Government is necessary. It is important to bear in mind that not only should the financing be strictly in accordance with the provisions of the statute under which it takes place but the finance obtained should be utilized solely for the purpose for which it was initially raised.
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After looking into all these aspects it would be necessary to get a resolution passed by the local authority through its governing body/managing committee in accordance with its constitution. It follows that if the necessary formalities are not complied with, the finance may become "ultra vires" and as a consequence its recovery would be difficult. Since a number of legal technicalities are involved, proper legal advice would have to be taken from Head Office, Legal Affairs Division, before entertaining a proposal for such finance/ financial accommodation. (ii) Govt. Trust Nonprofit Organizations
Such organizations will be handled on the same lines on which any type of trust/NGO are allowed financing (iii) Universities, Government corporate bodies
Financing to universities must be carefully analyzed. Legal Opinion should be obtained to analyze borrowing clauses i.e. persons authorized to borrow, purpose of borrowing and assets which can be offered as collateral. Clearance should be obtained from Credit Group to finance universities. (iv) Federal & Provincial government agencies etc.
These agencies will be treated on similar lines as financing to any federal/provincial bodies (Ref. 3.4 (i)) FOREIGN CONSTITUENTS BAL does not restrict financing to foreign individuals/companies. While analyzing the proposal of such persons/firms, all the normal criteria are assessed with respect to need of financing, repayment capacity, regulatory requirements, security assessment etc. all the formalities should be strictly completed in accordance with legal opinion. 3) Group Accounts INTRODUCTION In order to get a consolidated view of credit risk in a particular relationship, the credit facilities should also be reviewed with regards to a related GROUP of borrowers. Groups are to be assessed in aggregate as the interdependencies or trends in one group entity may impact the credit worthiness or business potential of another group entity. This chapter includes definition of group companies, illustrations of group companies and guidelines for filling a Group Summary Sheet, the later of which aggregates the financial and borrowing requirements of group entities. 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% 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.
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For efficient monitoring and control, the business entities mentioned herein may be classified under a "Group Account" by the bank when they operate with two or more business units. They are discussed as follows: a) The main purpose of identifying customer groups is to determine i. Risk concentration of banks credit portfolio on related borrowing entities as a "Group" ii. The management capability and financial strength vis-a-vis bank's exposure to the group iii. The applicable level of approval authority on the basis of combined exposure of group and, iv. Whether the exposure to the group is within the directives of the regulatory authorities. v. All related borrowing customers should be identified as a Group to constitute a single risk in the following cases: Where one borrower directly or indirectly has control over others, or can exercise controlling influence over the others in making financial and operating decisions e.g. Company A has 20% shareholding in company B, but has majority or controlling interests in other companies C & D, who in turn (lets say) owns 20% or 25% shares in Co. B, and as such company A has 65% of voting stock of company B. When they have a common set of key decision makers or managers, or the same marketing or sales force. Where the business in the group are independent but are so inter-related that if one of them experiences any financial problem, the other(s) is/are likely to encounter repayment difficulties e.g. when one company sells 40% of its product to the other company and both also have some common sponsors or they have provided intercompany loans. Where one borrower provides (significant) support to other borrower i.e. acts as a guarantor for credit facilities extended to the other borrower. The following guidelines are in addition to SBP Regulations, and should be rigorously followed: i. ii. iii. iv. v. All accounts relating to a group should be titled with a 'Group Name' to be used in all correspondence. Group ownership structure should be properly explained in the proposal. Consolidated financial statements of the group enterprise should be obtained and properly analyzed to ascertain group financial position in addition to individual financial statement of the borrowing group enterprise. Consolidated group liability and deposit position must be provided along with the proposal with individual breakdown of limits and borrowings of all group entities, whether at one or more operating units. In addition to personal guarantees of the owners, parent company guarantee and cross guarantees of borrowing group entities should also be obtained to mitigate credit risk. The operating unit should inform the Credit Group of any material change in the constitution, ownership, management and financial condition of the group constituents at the time of such change (via written details, highlighting the change and its effect on the group's accounts / financials) As far as possible, expiry/review dates of all group borrowing accounts should be the same for simultaneous review, whether at one or more operating units.
vi.
GLOBAL ACCOUNT/RELATIONSHIP MANAGER Marketing/recommending authorities and approving and monitoring functions should adhere to the following guidelines with respect to Group Accounts: Global Account Manager (GAM) Where singular relationships are parked at more than one branch, such segments after mutual consultation are to appoint one Global Account Manager to manage such a relationship. Subsequent to the appointment (under
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advice to Credit Group) of the Global Account Manager (GAM), any and all credit requirements raised under CLPs/SFRs/OTTs/EOLs by any branch are to be pre-cleared by the GAM. However, the responsibility for risk analysis and risk booking will primarily remain with the Marketing/relationship Manager of the segment, which is booking that risk. The GAM will only act as a consolidator/facilitator. Global Relationship Manger (GRM) Likewise, Global Relationship Mangers (GRMs) are to be appointed for groups that are banking with BAL and domiciled at more than one branch. This is to be done by Business Units after mutual discussions amongst themselves, under advice to Credit Group. Any and all credit requirements raised under CLPs/SFRs/OTTs/EOLs by any segment recommending authorities with regards to any constituent of that Group are to be pre-cleared by the GRM. However, the responsibility for risk analysis and risk booking will primarily remain with the Marketing/relationship Manager of the segment. The GRM will only act as a consolidator/facilitator. In either case, it will be incumbent upon the GAM or the GRM to facilitate the clearance of receipt of such a request. GROUP SUMMARY SHEET The purposes of a group summary sheet are: 1. 2. 3. 4. To provide a medium to bring together for credit purposes limits which make up the Groups total exposure to a customer; To help determine the level of credit discretion required to approve the credit limit; To be attached with all Credit proposals with a group exposure; and To include limits for the same entity / company from different branches / units of the bank.
The Group Summary Sheet Format is attached as Annexure 5a-15. 4) EXPOSURE LIMIT The maximum exposure of a bank / DFI on a single Corporate/SME consumer borrower shall not exceed the limits prescribed by the SBP in Prudential Regulations. Each segment can take exposure segment wise i.e. Corporate/SME/Consumer, for each overseas operations and economic sector wise based on annual credit plan. LIMIT ON EXPOSURE TO A SINGLE PERSON/GROUP 1. The total outstanding exposure (fund based and non-fund based) by a bank / DFI to any single person shall not at any point in time exceed 30% of the banks / DFIs equity as disclosed in the latest audited financial statements, subject to the condition that the maximum outstanding against fund based exposure does not exceed 20% of the banks / DFIs equity. 2. The total outstanding exposure (fund based and non-fund based) by a bank / DFI to any group shall not exceed 50% of the banks / DFIs equity as disclosed in the latest audited financial statements, subject to the condition that the maximum outstanding against fund based exposure does not exceed 35% of the banks / DFIs equity. 3. Limit on exposure to a single person/Group effective from 31-12-2009 and onward would be as under: Exposure limit as a % of banks/DFIs equity (as disclosed in the latest audited financial statements) For single person For group Total Fund based Total outstanding Fund based outstanding outstanding (fund and non-fund outstanding (fund and non-fund limit based) exposure limit limit based) exposure limit 30 20 45 35
Effective date
31-12-2009
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31-12-2010 31-12-2011 31-12-2012 31-12-2013 same group.
30 30 30 25
20 20 20 25
40 35 30 25
35 30 25 25
4. The group will cover both corporate entities as well as SMEs, in cases where such entities are owned by the Subordinated Loans
Subordinated loans as per slandered sub ordinate agreement may be extended to the borrower only by its sponsors i.e. any person with beneficial shareholding of 10% (5% for banking companies) or more whether individually or in concert with his dependent family members. Moreover, subordinated loans of associated undertakings/group companies may be treated as part of equity of the borrowing entity provided such group concern (whose loan will be subordinated) owns minimum 10% shareholding in the borrowing company and also fulfills all other conditions as laid down in the definition of subordinated loan under Prudential Regulations. Industry Limits BALs Credit Policy briefly discusses various industry sectors in which the bank can take exposure. However, to avoid risk concentration in a particular business segment, annual credit plan should be made to evaluate amount of financing to be made in any sector based on current industry scenario. The aggregate credit facilities extended to each sector should not exceed 30% of the total credit portfolio (as per sector approved by the board of directors). Any exception shall require prior approval of the board of directors. Country/Cross Border limits and Risks Country risk is the uncertainty which arises when funds must cross international boundaries. It is the risk that a foreign counter-party will not service its debt for macro rather than micro reasons, i.e. beyond the usual risks, which arise in relation to credit exposures. Thus country risk in international trade financing arises when a buyer does all that he can do to pay what he owes, but authorities of his country either refuse to make the required foreign currency available to him or are unable to do so because their depleted foreign currency reserves do not permit. Risk of war, revolution, disintegration of a country, etc also fall under county risk. On the contrary Sovereign risk arises when the government of country incurred a loan/debt or guarantee repayment of a loan, but is unable to repay the loan/debt & / or claims immunity from the process of law. Transfer risk is the risk that a foreign country will find itself unwilling or unable to service its international obligations because of an overall shortage of foreign exchange or where such servicing is not permissible under the law. Business Unit should pay due attention and seek guidance from Foreign Trade Division and same shall also be reviewed by FI, where necessary to this aspect before entering into any such transaction and keep themselves abreast of developments on the international scene. Although BAL local business Units do not engage in lending overseas, it faces country risk exposures from its nonfunded activities and against lending to exporters. The review of country limits are to be allocated as per Banks overall country Risk Policy and recent assessment.
CHAPTER 4 SECTION-A CREDIT LINE PROPOSAL Page26
Introduction The Credit Proposal process is a highly crucial activity in the credit cycle. The concerned branches/Business groups marketing staff, normally the Credit Officer / Relationship or Account Manager or Branch Manager, as appropriate, builds on the various strands of credit information collected on a potential / existing customer and gathers further specific information, such as security details and documentation. The information is compiled in a standard format, suitable for competent sanctioning authority to take necessary credit decisions and reduce risk to the bank. To enhance customer service, it is essential that all such information is collected in an efficient and organized manner and presented appropriately. The RM/respective business segment authority should be the owner of the customer relationship, and must be held responsible to ensure the accuracy of the entire credit application submitted for approval. RMs must be familiar with the banks Lending Guidelines and should conduct due diligence on new borrowers, principals, and guarantors. It is essential that RMs know their customers and conduct due diligence on new borrowers, principals, and guarantors to ensure such parties are in fact who they represent themselves to be. All banks Know Your Customer (KYC) and Money Laundering guidelines should be adhered to at all times. Objective of Credit Proposal The objective of a credit proposal is to provide relevant information about the customer and business in a standardized format so as to make the decision making process simple and more accurate. Therefore, information should be brief and relevant. It should however, contain every detail that will be helpful in approval of credit. CREDIT INVESTIGATION Credit investigation is an important task whether it is conducted when initializing a new credit line or before renewal of facilities. Before marketing a borrower, ideally branch/ business unit should ask the borrower to open a current account. Once that account is maintained satisfactorily, only then credit lines need to be proposed. Once branch / business unit decides to market the customer, it is imperative that the credit worthiness of the prospective borrower is confirmed. There are a number of ways of investigating credit worthiness of borrower, some of them are mentioned below: Getting CIB report of the customer. Visit the customer's factory/ shop/ place of business to find out about the true state of activity done there Getting credit information about the customer from other banks Checking market reputation of the borrower from outsourcing agencies ,other customers of the bank in the same market
Visit Report Branch manager and / or his designated lending officer should visit the customer and discuss relevant details of the account and the business including clarifications on their financial statements, as required. The calling officer should make use of the visit to gather up-to-date information and strengthen bank's relationship with the customer. Details of the visit should be recorded in the customer file. Business visits are an important tool for assessing the business situation of a customer and it is therefore desirable that the customers are visited by credit officers regularly and should be more frequent for high risk, watch list and classified accounts. CREDENTIALS OF BORROWERS
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Knowledge of a customers credit worthiness is essential before taking any lending related decision and therefore helps to reduce risk of default. Such information is required at all times, especially at inception/ renewal of credit facilities and is to be monitored constantly during the course of the banking relationship. The ambit of credit investigation is pervasive, covering not only specific financial information about the existing potential customer but also financial data, such as business /marketing strategy, managements interests and competence, technology employed, etc. In addition, information should also be obtained about the industry, competitors, customers, suppliers, regulatory and economic environment, as all such extraneous factors can significantly impact the creditworthiness of a customer. The State Bank of Pakistan realising the vital importance of such information has also laid down minimum requirements for obtaining credit information, such as Credit Information Bureau Reports and Basic Fact Sheet. There can be no one source that could provide all such information. The process of obtaining such information is both methodological and unstructured. In addition, market intelligence cannot reasonably be obtained in one go, but is acquired through a process of gradual accruement of knowledge over a period of time from a host of various sources, such as other customers, other bankers, competitors, newspapers, etc. Therefore, it is crucial for a banker to have accurate knowledge about the developments in the economy, and key industries being focused by the Bank. This chapter explains the formal credit information needs of the regulators and the Bank. The subject matter being of paramount importance requires careful attention at all levels. This chapter divides into 9 subsections enlisted below: 1. 2. 3. 4. 5. 6. 7. 8. Borrowers Basic Fact Sheet Credit Worthiness Report (Local) Credit Worthiness Report (Foreign) Credit Information Bureau (CIB) Report Call Report Basic Information Record Directors Search and Charges Search Reports Bankers Report
BORROWERS BASIC FACT SHEET This is a regulatory requirement of State Bank of Pakistan under Prudential Regulation which is required for all exposures whether fresh, renewal, enhancement, restructuring or rescheduling, and at least once in a year. The purpose is to acquire basic information on the Borrower for initiation of a relationship or monitoring after disbursement. This BBFS shall be prepared sealed and signed by Borrower and countersigned by bank official. This will be regularly obtained & with each Loan Application or Renewal request, this will be retained till adjustment of finance, minimum 3 years. The basic fact sheet provides minimum information, (such as the legal name, address, details of ownership & their network, management financial limits etc) required for entertaining a credit relationship request and has been mandated by SBP for Banks and Financial Institutions. The collection and analysis of adequate information on the prospective borrowers help in expeditious credit processing, minimizing the risk of default and effective monitoring after disbursement of funds. In this context and with a view to streamline the standardization of information regarding credit processing, it has been obligated by SBP that, no financing whether fund based or non-fund based (including renewal and enhancement) shall be provided by Branches/business segments unless the Loan Application Form (LAF) is accompanied by a Borrowers Basic Fact Sheet. Therefore, no financing facility shall be approved unless and until the borrower under his seal and signature provides the information required in the Basic Fact Sheet. In all cases of restructuring and rescheduling of financing facilities by the Bank, the Borrowers Basic Fact Sheet should invariably be filled by the borrowers as per aforesaid regulation. Thus Branches/relationship Manager should ensure that Borrowers Basic Fact Sheet (BBFS) is obtained duly filled from all borrowers, and authenticated, in the manner laid down above in the presence of bank official. The Bank official in whose presence the borrower authenticates / signs the BBFS: Shall make a note that the BBFS was signed in his presence places his/her signature on last page and affix his/her initial on other pages of BBFS, and shall mention his / her name, designation and employee number in the space provided for the counter signature.
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The format prescribed for Borrowers Basic Fact Sheet is attached as Borrowers Basic Fact Sheet for Corporate / Commercial [Annexure a)] and Borrowers Basic Fact Sheet for Individuals and Consumers, [Annexure (b)] together with the guidelines for filling in the same as Annexure c. CREDIT WORTHINESS REPORT (LOCAL) It is required for all new local borrowers, at least once for each fresh client. This report shall provide credit Worthiness / Business Information of the borrower this report shall be prepared by i) Any Officer of the proposing segment for proposals below Rs.5.000M. ii), agencies for exposures of Rs.5.000 M and above. (Services of banks approved panel agencies may also be utilized for CPs within i above if approved by Area Manager & above). This report will be retained till the adjustment of finance, minimum of 3 years. This report will be reviewed by concern officer. 1. By Banks own officer:
Borrowers Business Information/ Credit Worthiness report identifies the applicants place of business, ownership pattern, latest history, operational information, back ground of sponsors, banking information, overall net wealth and resources, details of current investigations based on visit to borrowers premises, feedback from competitors and bankers, market reputation reports and the standing of the customers etc. While undertaking a credit investigation, different source of information has to be tapped by credit investigator while the following are the most important: Interview with principals & / or key officials of subject company after visit to the factory or place business / office. Trade suppliers feed back on payment by the subject. Financial statements of accounts / Balance Sheet. Banks own record. Market Report. Credit Investigator will report the results and findings in orderly sequence, guiding proforma for which is enclosed as Credit Worthiness Report [Annexure] alongwith explanatory notes / guidelines for filling the same, [Annexure] mentioning their name and designation as well. The report will be signed by Credit Investigator and countersigned by a designated officer at Regional Office / Area Office mentioning their name and designation as well. Credit Worthiness Report is required to be compiled by the branch by deputing an Officer of the branch, where a borrower is availing any fresh limit below Rs. 5.000M. CREDIT REPORT (FOREIGN) a confidential report on Foreign Suppliers / Buyers for opening of Import L/C of Rs. 1.50M or above and in case of exports under firm contract on D.P. / D.A. or Trust Receipt/ Consignment This is a regulatory requirement of State Bank of Pakistans Foreign Exchange Regulations which require banks to obtain basis. Moreover as per Foreign Exchange Regulations, even in case of L/Cs below the above amount and export transactions other than those mentioned above, Banks are required to satisfy themselves with the genuineness of the Foreign Buyers/Sellers.. Credit worthiness Reports on Foreign Buyers and Suppliers may be obtained directly from Banks abroad/correspondents where value of Import / Export is below Rs 5.000M. The Standard Form shall be used, a specimen of which is attached as Annexure. For a list of correspondents, International Division, May be contacted in case a list of foreign correspondent is required for cases of Rs. 5.000 M and above, the concerned branches shall obtain such. The procedure for obtaining a Foreign Buyers report appears as Annexure. of
CREDIT INFORMATION BUREAU (CIB) REPORT
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This is a regulatory requirement of State Bank of Pakistan under Prudential Regulation which is required for all exposures as required by amendments in Prudential Regulations, Reports are to be obtained at the time of sanction renewal and enhancement of any accommodation under Fund Based and Non-Fund Based facilities. The purpose of this report is to have a clear picture of total outstanding amounts of a borrower and group with its present status from all Banks and Financial institutions. This report shall be prepared byCredit Information Bureau of the SBP on request and will be retained till receipt of next report and minimum of every 3 years and review consistency Credit Information Bureau (individual or corporate) SBP has established a Credit Information Bureau with the purpose of making available to Banks and Non-Banking Financial Institutions (NBFIs), on request, the exposures and overdues of borrowers with Banks and NBFIs. This enables the Banks and NBFIs to take into account the exposure of the borrowing enterprises or group at the time of considering extension of Fund Based and Non-Fund Based facilities. Prudence demands that Banks and NBFIs should not over expose themselves to any borrower or group. As per Prudential Regulation, Banks are required to give due weight age to CIB report while considering any financing proposal. The CIB report provides the following information: a. b. c. d. e. f. g. h. i. j. k. l. m. Fixed Investment Working Capital Letter of Credit Guarantees Other Liabilities Fund Based unsecured liabilities Non Fund Based unsecured liabilities Over dues past 90 days Over dues past 365 days Remarks Total liabilities of associated Group Over dues (90) days of associated Group Over dues (365 days) of associated Group
The standard remarks appearing on the Credit Information Bureau report are as follows: * N) X) [] Group Non Group No information at the Credit Information Bureau Reported having overdue amount for the first time and has been issued a letter to intimate within a period of 60 days to settle the overdue amount.
Definition of overdue, default and group as per Credit Information Bureau is appended below:1. Overdue means any amount payable or owing by the customer to the Bank, whether by way of Principal, markup or to meet obligations under any instruments, which is delayed or in respect of which the maturity is past beyond the period agreed between the Bank and the customer by 90 days up to a maximum 364 days or which the bank has to per force incur to safeguard its interest or fulfill its commitment and 90 days have elapsed since incurring such payment. 2. Default or Due for 365 days or more means any amount payable or owing by the customer to the Bank, whether by way of principal, mark up or to meet obligations under any instruments, which is delayed or in respect of which the maturity is past beyond the period agreed between the Bank and the customer by 364 days and above or which the bank has to per force incur to safeguard its interest or fulfill its commitment and 364 days have elapsed since incurring such payment. 3. No request for C.I.B. report shall be sent to CMU directly by business Unit. These must be routed through respective Area/regionals Office.
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Area/Regional office on receipt of C.I.B. report shall send a photocopy of the report to business segment for their use and placing the same in the limit file, so that the same could be available as and when required. Where (i) exposure is reported (ii) overdue / default or (iii) Total liabilities of associated Group as per CIB report exceeds exposure at BAL, this indicates that borrower / its group units are availing facilities from another Bank. In such cases the branch / borrower should fill in the Bank-wise Details of Exposure Position, a format of which is enclosed as Annexure. Branches are advised to avoid fund based and non-fund based facilities to defaulters of any bank unless the overdues of the concern or its Group concerns are settled. If on receipt of CIB report, a concern does not agree with its Group Liability / Group Units, a Letter of Group Declaration/ Changes format enclosed as Annexure may be obtained on companys letterhead, before representing to CIB through Head Office. Private Credit Information Bureau (PCIB) Reports For consumer credit products, wherever mandated credit checks from PCIBs shall be also undertaken. However, it may be noted that obtaining of eCIB report is mandatory from all accountholders. Confidentiality CIB reports are meant for internal use and copies thereof should not be provided to third parties. As per State Bank of Pakistans All financial institutions are advised that the CIB reports are meant for their internal use and copies thereof should not be provided to third parties. Furthermore, credit reports should not be disclosed to any party without prior written approval of SBP, and (ii) they should not refer their clients to SBP but to facilitate and properly guide them, clearly indicating to them as to which bureau viz SBPs CIB has reported their name as defaulter, so that they can approach them accordingly. It is mandatory to prepare Call Report twice a year and, at the time of renewal or enhancement, whichever is earlier. This is required for all exposures for any amount where borrowers having continued relationship or in cases of renewal of facilities. The purpose is to provide the latest information about business performance and discuss issues and the financial arrangements and needs of the customer. This shall be prepared by It is prepared by Credit Officer after paying visit to office and factory and having discussion with the concerned Executive(s)/ Director(s). The Credit Officer/RM, before visiting, prepares a list of objectives of call/visit and seeks written approval of Branch Manager/Chief Manager/Segment team leader).This report shall be retained in files for three years. Business visits are an important tool for assessing the business situation of a customer and it is therefore desirable that the customers, Site/Plant visit, are visited by credit officers/RMs not only at initiation but regularly. Call Reports of clients should be prepared on the format enclosed as Annexure. Each Call Report is prepared after: Conducting site visits of the clients office and factory/mortgaged assets where the clients core business activities actually take place. For Having brief discussion with the senior management / personnel of the company and its environment. As a general guideline a call report may cover some of the followings items: 1. 2. 3. 4. 5. 6. 7. Companys latest operating performance (sales and profitability) not already mentioned in the CP. Industry situation Demand and Supply dynamics for the clients and industrys products and services and inputs for services Future plans, etc., including potential requirements for incremental facilities. Current issues and problems in the account. Information on competitors strengths and weaknesses. New projects expected to come on stream in the customers business.
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8. 9. 10. 11.
Any other issue needing urgent attention. Comments on any issue mentioned in the last Credit Proposal. Regulatory and taxation changes and their impact such as General Sales Tax, Import duties etc. Current economic environment and its impact on the companys performance.
DIRECTORS SEARCH AND ASSETS CHARGES SEARCH (ES) REPORTS Directors search is mandatory requirement for fresh facilities or enhancement of facilities, this report shall be prepared at least every 12 months during tenancy of the limit and It is also required at least once every two years. The purpose is to check the correct names of directors of the company and the total charges created on the Asset of the companies by other Banks / FIs. This report shall be prepared by enlisted companies or obtained from S.E.C.P. These shall be obtained, yearly and at every renewal as well as at the time of allowing any NOC for charges and shall be retained in the customers file as per record retention policy. Both Directors Search & Charge Search of encumbrance of assets of limited companies (both private & public) is a public record and available on application to S.E.C.P on prescribed forms and payment of the required fee. Form 29 / Form A of the company ordinance provides details of changes in directorship and photo copies of these should be obtained from customers bearing attestation of Registrar office. Obtaining of charge search report is compulsory before allowing any fresh financing / enhancement whether Fund based or non fund based. These are provided by S.E.C.P in chronological order in which various bank / lenders get their charge registered at S.E.C.P or get the same released. Assets Charge reports from S.E.C.P need to be analyzed asset-wise (Fixed & current etc), Bank-wise as well to ascertaining the status/ranking of our charge. Before allowing any financing facility to limited companies it should be ensured that Banks charge for the desired asset Category with S.E.C.P has been registered, after obtaining NOC from Senior Creditors, if applicable. Request for registration of Fresh charge is filed on Form 10 alongwith copy of relevant security / Hypothecation agreement letter and affidavit relating to documents / IBs submitted. Whereas, request for Modification of Pari Passu charge are filed on Form 16 alongwith relevant supplement security agreement / letter and affidavit as per above. Charge search shall be obligatory for all exposure in private limited companies exceeding Rs.5.000M (F.B. &/or NFB) for cities where their services are available. Branches / Offices utilizing their services shall ensure that search reports of approved firms are provided. This report to be initiated for all PVT/Public Limited companies at least once for fresh facilities of Rs. 5.000 M and above where a customer has banking relationships with other Banks/ Financial Institutions all PVT/Public ltd companies registered with SECP. The purpose of the report is to know charge status on customers and also depicts past dealings and payment behavior with other Banks. Credit Worthiness Report For fresh borrowers applying for credit accommodation of Rs. 1.000M and above, credit worthiness report is to be obtained from their present as well as previous bankers directly by branches as per specimen enclosed [Annexure]. The purpose of this report is to ascertain their credit worthiness and to know about their dealings and payment behaviour with other banks. Standard Credit Application: The approval for all extensions of credit must be documented in writing. Different forms of the Standard Credit Application are available for this purpose for various business groups. The Application may be used for any situation requiring credit approval. Its use will be mandatory for all initial, interim, and annual reviews. The Standard Credit Application must also be submitted in other circumstances including but not limited to, when deteriorating conditions make it necessary to reevaluate credit facilities extended to a client, restructuring of facilities, and for temporary extensions of annual reviews.
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Credit Proposal forms shall be prepared on prescribed form (annexure). The prescribed form and its related guidelines issued from time to time shall be strictly adhered to and financing shall not be allowed until and unless credit processing has been done on the prescribed format. The Format of Form is enclosed as Annexure. Further, projected Cash Flow statement (for next 12 months in case of working capital financing and update of final repayment / expiry in case of term facilities) with its assumptions recorded in writing and cash operating cycle of the borrower must be analyzed in case of SMEs / Corporate / Commercial customers. Efforts should be made also to identify the drives of borrowers business and its risk mitigates. DIFFERENT TYPES OF CLP Generally, there are two different types of CLP. Each one of them has its separate purpose. CLPs along with their functions are mentioned below: CLP for Fresh / Renewal As the name suggests, it is used for initiation of fresh credit lines or renewal of facilities. It uses a detailed format and is comprehensive in nature. Short hand CLP These CLPs are very brief and normally consist of single pager. They are used for one time transactional facility e.g. SLC, LG, EOL etc, amendment in sanction advice, waivers, deferrals etc. To offer better customer service, it may be necessary to override the more elaborate requirements of CLP Form in case of urgent or unforeseen needs of a regular customer. Such service can be imparted through offering Temporary/ One off transaction. These may arise, say in an event, when a customer wants to open an L/C immediately to take advantage of a very good bargain or may require funds for clearing an un-foreseen tax demand. Such approvals are taken on an exceptional basis only. In addition, under no circumstances a temporary/ one off transaction is to be approved which would violate the State Bank of Pakistans Prudential Regulations for Banks. Temporary / one off transactions approvals may be obtained on Short Form CLP, as per the format given in Credit Proposal Temporary Accommodation. The approval process for temporary/one off transaction is similar to CLP proposal. APPRAISAL OF A CREDIT PROPOSAL The key to sound lending is to identify measure and understand the associated risks accurately. When considering an application for any facility, the Manager or his duly delegated lending officer should study the following: General Considerations The Constitution of the borrower and his nationality For all types of borrowers be it individual, firm or company, the nationality of sponsors is an important element in considering the facilities. For businesses exclusively promoted by expatriates, additional care should be taken in determining the nature of entity like Corporate, SME, Consumer and amount of facilities, securities required etc. In case of expatriate firms/sponsors the L Form (lending form) should be approved by the State Bank of Pakistan. Legal capacity of the borrower to borrow The eligibility to borrow should be clearly laid down in the account opening/other business documents furnished by the borrower. In case of doubt regarding such eligibility, advice from Head Office should be sought. In case of limited companies, credit officer need to ensure that articles of association and board resolution both are in
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conformity to each other and any special condition set in either of the documents for borrowing should be mentioned in CLP. The integrity and reliability of the borrower This will be primarily based on market inquiry and the borrowers past dealings with the Bank. In case of proprietor or partnership concern, special care needs to be taken on the history of the sponsor(s). Any previous business done by the borrower and its details need to be mentioned in the CLP. In order to check the authenticity of information provided, branch can obtain NTN verification from FBR's website. It will provide all the registered businesses of the borrower, past and present, any contradiction should be reported in CLP. CIB Report, Credit reports, from other banks, relevant associations etc are the tools of the integrity and reliability of the borrower. History of the borrower's relationship with the other bank/BAL This will primarily comprise of past account conduct, borrower's ability to meet all commitments on schedule or if not, corrective actions initiated, e.g. the nature and the volume of business routed for overall profitability of the account. Details of all personal and business accounts of borrower and immediate family members need to be provided including the turnover, average balance, and rate of return on each account and overall profitability of the account. For a new borrower it is to be ascertained that whether he/she has previously borrowed from BAL. if he/she did then how conduct of account was, reason for ending relationship, waivers involved if any. Management structure of the borrower This would include an analysis and review of the management of the applicant. The evaluation will cover experience, technical skills and competence, sales, finance and commercial segments of the business culminating with the overall management expertise available. Nature of business For a better understanding of a customer's business, the credit officer needs to study and analyze the following: Organizational structure Business parameters and preferences Human resources Communication hierarchy Public relations Industry and Financials To have further clarity and for critical analysis purpose, there should be clear indication of the 1) Industry i.e. viability of industry and any other matters, which may adversely influence customers performance, type of industry i.e. manufacturing, trading, telecommunication etc, and industry code, 2) Commodity / type of product i.e. mention type of product i.e. textile , sugar etc and then nature of business i.e. briefly write main line of business of the customer (like cotton spinning / weaving (in case of textile industry) The borrower's financial position As per SBP PRs, it is mandatory to obtain audited financial reports of borrower with exposure Rs.10M while for exposures below Rs.10M; financial report signed by the borrower will suffice. For individuals trading as a firm or partnership: the financial position of the partners and trading figures of the firm should preferably be audited. Branches must insist that such borrowers disclose reliable evidence of their financial position by submitting certified annual financial statements and other relevant information. Branches should invariably obtain the Net worth Statements and Wealth Tax Returns of all the partners. For corporations, audited financial statements and details of group inter-company relations are required. Audited financial statements should be obtained annually and the customers should undertake to keep the Bank informed of any major change occurring throughout the year. In case of public limited company, revised Form-29 should be
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obtained at the time of processing the borrowing request and subsequent renewals. Where PGs of directors are obtained Branches should invariably obtain the Net worth Statements and Wealth Tax Returns of all the directors. Strict adherence and compliance of Prudential Regulation regarding, "Linkage between Financial Indicators of the borrower and Total exposure from financial institutions must be ensured at all times. For the borrower's financial position, the following different types of analyses are conducted: Financial Analysis a) Before granting or renewing facilities to a company or partnership, the manager should insist upon latest audited / certified accounts. For comparison purposes, it is desirable to have such accounts for the previous two years. Even though such accounts may not reflect the true Position of a company or firm, much useful information can be gained from studying them. The inability to produce upto date accounts usually indicates that something is wrong; the company or firm may be inefficiently conducted or has something to hide. Where the customer cannot produce Audited accounts, it should be ensured that the unaudited accounts submitted by them are detailed and contain all relevant information and later complemented by certified accounts which should be compared for misreporting etc. However, no exceptions are to be made for large (corporate) customers, and branches must insist on regular audited financial statements prior to processing of the requested facilities.
b)
When audited accounts are more than six months old, efforts should be made to obtain upto date management accounts as experience has shown that the unexpected surfacing of internal or external problems like exchange loss has led to the collapse of companies which had previously appeared sound and profitable. The manager should therefore look beyond the balance sheet and profit and loss accounts and inquire more deeply into borrowings, losses or any extraordinary items. A copy of the customer's latest available accounts together with the auditor's certificate and notes, (if applicable) with Spread Sheets should accompany the CLP which should draw attention to and comment upon exceptional features in the accounts. Spread Sheet: In each analysis it is essential to show: Name of Company or Firm; Date of closure of the accounts; Whether or not consolidated; Whether or not audited (and if so, by whom); Currency used; Units used (e.g. thousands, millions, etc.) and whether the accounts are with or without qualifications / reservations. Major headings of the analysis form and some examples of the relevant components are given below:-
c)
i. ii. iii. iv. v. vi.
Current Assets Current liabilities Fixed & Other Assets Other Liabilities Financial Ratios Contingent Liabilities In order to reflect a correct picture of the customer's financial obligation and leverage in the Bank's analysis form, these items should be treated as follows:
i)
Documents outstanding under Letters of Credit under this item should be shown under 'Goods in transit' (current assets). The same amount should also be shown under 'Short term debts payable' (current liability) as the bank will be honoring its obligation under the letter of credit.
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ii)
iii)
Bills for collection outstanding under this item should be shown under 'Goods in transit' (current assets). The same amount should also be shown under 'Trade Creditors' (current liability) as the customer is expected to honor his obligation to his creditor. Acceptances under letters of credit outstanding under this item should be shown under 'Stocks' (current assets) as the goods are in the physical possession of the customer. The same amount should also be shown under 'Short term debts payable' (current liability) as the bank will honor its obligations under the letter of credit.
For working capital financing request in favor of ongoing concerns, financial analysis with emphasis on liquidity, profitability and leverage aspect should be submitted with the proposal. Such aspects shall be covered by way of analyzing the following ratios: Sale growth and profitability (Net profit margin, percentage increase in sales, gross profit margin, ROE etc) Cash management (Cash conversion cycle with breakup) Structural liquidity (Working capital, Current Ratio, Quick Ratio etc) Debt equity management (Leverage Ratio, Long term debt over equity) Asset management (ROA, Percentage increase in Assets) Bank borrowing and debt servicing ability (Turnover ratios , interest coverage ratio etc) For term/project financing, financial analysis should be accompanied with the projections and stress testing for the entire tenor of the facility/project based on rational assumptions.
Guidelines for approval where Current Ratio is below 1:1 Following the changes made to Prudential Regulations R-5 by SBP, whereby banks may decide their own minimum Current Ratio threshold, as follows for Current Ratio falling below 1:1. Following grid mentions the various approval levels for current ratio of less than 1may be allowed based on proper justification, dully documented and held in record for SBP Auditors. Current Ratio Up-to 0.85:1 Approving Authority Corporate Level - I & II RMM Level - II ACC IB Group Corporate Level III RMM Level III For IBG (Group Head Credit + Group Head IBG) Central Credit Committee
0.75:1
Below 0.75:1
Feasibility Analysis For a new project, full feasibility study will be submitted by the operating unit along with the proposal. This should include a sensitivity analysis with due consideration given to the underlying assumptions. The relevant project risks should be highlighted including risks associated with the industry.
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Project Analysis This should cover project cost analysis besides other details on the project under review. Some customers understate the amount required for fear that if they asked for a larger, more realistic figure the bank will refuse their application. Others ask for more than what is actually required and use the surplus for other, less viable, projects. Technical feasibility should be required for specialized projects. Facilities to be extended must be supported by past results and acceptable future projections to eliminate possibilities of over trading and diversion of funds for speculative non-business purposes. The profitability of the transaction to the Bank The profitability of the transaction is an important element to be analyzed. The overall return from the transaction i.e. markup, commission, fee, charges, average utilization of Banks fund etc should all be considered. This includes the level of financing, business volume, spreads, mark-up and growth prospects. Thus all transactions shall be priced as per pricing Grid of RMD, for all CIBG customers (For R&MM it will be implemented when introduced) Repayment ability A repayment schedule should be drawn up for term finance, with the source of repayment clear from the outset. In the case of continuing credit facilities, cash flow forecasts are a useful guide to the turnover that can be expected on the account.
The security offered Every good proposition should stand on its own merits but as most entail a degree of risk, the Bank generally seeks to obtain security at the outset before the advance is actually made. Branches should never allow the advance to be drawn until finance and security documentation has been satisfactorily completed. The security offered should be perfected, should match with the nature of borrowers business, should offer appropriate margin against credit facilities Group Considerations Group consideration (as discussed earlier) should be taken into account while considering fresh approval and/or renewal/revision/enhancement of credit facilities. A satisfactory history of group with the bank facilitates in considering additional financing to any allied fresh entity account and provides a comfort level. Further, cross corporate guarantees can be obtained to secure banks exposure. A group summary sheet with pertinent details should be attached with each CLP. Prudential Regulation Checklist The PR check list ensures that all regulatory requirements are met by the customer and there is no danger of violation of regulations. State Bank of Pakistans Prudential Regulation checklist is required to be filled before sanctioning of all approvals, whether normal or one off / temporary. The Prudential Regulation Compliance Checklist is enclosed as Annexure Credit Proposal Scrutiny Checklist: A Credit Proposal Scrutiny Checklist (Annexure 7.2) should be attached with each Credit Proposal, and should be signed by: 1. Person preparing the credit proposal 2. Branch Manager/Team Leader/ Area/Regional office INITIATION OF CREDIT LINE PROPOSAL
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i. ii. iii. iv. v.
Credit Line Proposal (BAF-CR-024) must be prepared by the branch according to which facilities are to be extended. Where CLPs are sent to HO for approval, copies of enclosures which are not part of e-CLP must be sent to HO, and a photocopy should be retained with the forwarding branch. CLPs should portray a factual picture of the borrower discussing in detail the constitution of the firm, line of business, business commitment, financial health, etc. In order to bring a degree of uniformity into the CLPs, the branches are required to forward eCLP (procedure attached). A Credit Line Proposal (CLP) should be initiated two months prior to its expiry date by the initiating officer in case of existing customers and should reach relevant authority office to ensure that fresh sanctions are in place well before the expiry date. Before commencing the CP, the initiating officer must ensure a detailed meeting with the customer to ascertain his banking requirements for the next one-year. Requirement must be in line with the customers current business needs and resources. Such a meeting will minimize interim request for enhancement and / or changes in limits.
vi.
Proposition To state clearly and concisely the limits that are being requested, highlighting changes if any
Purpose: Specific reasons for granting facilities (particularly for new facilities/ increase in existing facilities) should be brought out here. Some examples are 'to secure the customer's business from other banks', 'increased facilities required to finance a supply contract 'etc. Purpose should be in line with the customers occupation/nature of business. Background: Full information on the customer's constitution and business when applying for establishment of facilities should be given. For renewals, changes since last review should be covered. The write-up should comment on the length of relationship and time in business including general reputation of the customer. If the customer has changed his business line, his expertise and length in the previous as well as the new business must be disclosed. Management: Providing Names of Directors/Partners/Owners/Key persons, their respective shareholding/ownership and an assessment of their capacity to manage the business highlighting any changes since last review is a prerequisite. The write-up should also comment on standing of the proprietor/ partners/ shareholders (details of net worth should be provided). Key Person: Name (s) of person (s) and designation(s) that is (are): Running the business being financed on day to day basis, or The person (s) with whom the bank will be dealing on a day to day basis and who will be responsible for drawing the line of credit as well as be called upon by the bank to adjust them.
In case of proprietorship or partnership concerns the key person will be the proprietor and the active partner
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For limited liabilities companies, the person could the main director or the senior management executives running the business. In case of group exposure, it is very much important to identify the key person behind the group as he/she may be required to provide his/her PG for the group liabilities. Market/Competitors: An idea of the market the business is functioning in, major competitors and the state of the business. The write up should comment on product range/export/ import goods handled, agencies held etc. In case of manufacturing companies, special emphasis should be placed on the product line and viability of the venture to be established. Financial Statements: Brief comments on the important aspects as highlighted by the customer's financial statements with steps being taken to eliminate the shortcomings, if any, should be given. A detailed spread sheet should be attached along with the CLP to assess the financial health of the borrower. Conduct of Account While quantitative aspect of account operation is available elsewhere in the Facility Application, the qualitative aspect should be covered here. Does the borrower meet his commitment on time? Is there an adequate spread on drawers of bills? Does the overdraft swing into credit? etc. Adverse features like cheque returns, frequent excesses in facility lines, hard-core and over dues should be highlighted along with steps being taken to overcome the shortcomings. In this section, the facilities sought should also be justified vis-a-vis turnover, future projections etc. Profitability to Bank: While the numbers are available in 'Customer Profitability Analysis', branches should comment on pricing aspects vis-a-vis risk grade. The considerations which justify lower pricing (when recommended on a proposal) should be clearly brought out here. If significant increase in facilities is being sought or downward revision in rates, this should be backed by projected profitability analysis. In essence, an attempt should be made here to gauge the true value of the account to the bank. Any deviations from the risk based pricing should be approved by the same competent authority that sanctions the credit. Calculating yield on account: (BAL Annexure 5a-4 for Yield to be attached) Yield/ Profit on Fund Based facilities is calculated and attached with Credit Line Proposals (CLPs) involving concessional finance and for all funded exposure. For Yield/ Profitability Report of Borrowers, see a format which is enclosed as Annexure. eCIB: Latest eCIB shall be analyzed to review status of liabilities/overdue if appears prior to initiating CLP reasons shall be ascertained and there must be proper justifications eCIb shall also be arranged on quarterly basis for monitoring updated status and timely preventive actions. CIB report should be checked to have borrowing history of the customer. In addition, the branch should also obtain a credit report of the prospective borrowers from their other bankers. Security: Security analysis should take care of appropriateness of mode of valuation, agency undertaking the valuation, margin of safety available etc. If significant change in security position is taking place, this should be elaborated here in the Security analysis format. CAD shall ensure the adequacy of insurance & security or any deviations approvals, if required.
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The banks security position should normally not be inferior compared to any other lenders. i.e. if a bank has granted facilities to a customer against a first charge, we must also have a first charge (ranking pari passu) to be able to lend to the same customer. Security analysis will comprise of various annexure i.e, Security held for existing facilities, with value & Risk rating mapped with respective facility both (Existing + Fresh / Enhancement). Details of securities held for the existing facilities and those which will be held for the proposed facilities (existing plus fresh & enhancement) are to be mentioned against each facility, in the respective column. Security covering more than one facility to be mentioned only once stating the facilities that it covers, so that value is not double counted. Forced Sale Value (calculations of force sale value should be at least guided by SBP guidelines) Audit Comments: Branch should confirm that any Audit Departments observations has been rectified or state why the matter is still outstanding. If there are no audit comments, this fact should be stated. Waivers: Waivers sought from normal procedures must be supported by justifications and all waivers & deferrals to be time bound as per banks approved policy. Others: Any other aspect of the account which warrants comment to enhance understanding relating to conduct of the account or its management etc. should be highlighted. Recommendation: A summary highlighting strengths and weaknesses of the account and an unequivocal recommendation shall be made CAD and Risk Review: Risk Management Department (RMD) shall comment on RAR (risk asset review) for the cases reviewed by the department.
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SECTION-B OBLIGOR RISK RATING

RISK GRADING Risk grading system should define the risk profile of borrowers to assist in decision making, monitoring & controlling too, and pricing commensurate with the risk involved. Risk grading is a key measurement of a Banks asset quality, and as such, it is essential that grading is a robust process. All facilities/securities should be assigned a risk grade. Where deterioration in account/business is noted, the Risk Grading shall be reassigned to a borrower immediately. Borrowers Risk Grades should be clearly stated on Credit Applications. Refer the Risk Grading circulars and guidelines issued time to time by RMD. Classification based on risk Credit Initiation and Internal Rating System (CIIRS) under the current system, standard risk rating score cards are used as part of the framework to assign risk ratings to the customers. Ratings from 1 to 9 are assigned to regular customers with 1 being lowest risk and 9 being the highest there are three non-performing grades. The framework encompasses all significant risk factors relating to the customer or the individual transaction/facility including the following: Business risk Industry characteristics; Competitive position (e.g. marketing/technological edge); and Quality of management and experience in business
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Financial risk Financial condition; Profitability; Capital and gearing structure; Present and future cash flows; and Reliability of financial statements
Other factors Country risk Account conduct with bank
Definitions For the purpose of CIIRS, rating methodology and borrower segregation is based on counterpartys exposure and turnover, whichever is higher. Definitions of Corporate, Commercial & SME customers shall be as defined/ amended by SBP time to time.
Procedures for Overrides Overrides will allow a Group to downgrade / upgrade a particular obligor or clients rating upto maximum 2 grades and in case of Greenfield projects and GOP exposure upto a maximum of 6 grades due to non-availability of quantitative / requisite data. The approved overrides procedures shall be exercised by the Relationship Officer / Relationship Managers upon recommendation of the Regional Manager. Further all overrides shall be conveyed to / cleared by the Group Head of the respective business line. Usage of overrides option should not be a frequent occurrence. The reason for the overrides shall be documented and maintained with the rating in the following format: Name of Borrower Rating as per the system Assigned rating Reason for override Rating assigned by Rating approved by
Obligor ratings are independent of facilities, hence, borrowers having multiple exposures / facilities will be assigned single obligor rating, irrespective of any differences in the nature of each specific transaction. There are two exceptions to this which shall be overrides to the rating system:In case of country transfer risk, where the Bank may assign different borrower grades depending on whether the facility is denominated in local or foreign currency. When the treatment of associated guarantees to a facility may be reflected in an adjusted borrower grade
In either case, separate exposures may result in multiple grades for the same borrower. Coverage of Ratings Each borrower except GoP direct exposure, consumer product, shall be assigned separate rating / score. This shall be applicable on Corporate; Commercial and SME customers either may be a part of a group. The borrower
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availing consumer finance like Auto, Credit card, house loans and products secured against liquid securities should be rated under separate rating models introduced Rating Approval Final rating generated (either score based or through the use of overrides) will be validated by the limit sanctioning authority.RMD However will have to review the rating assigned on selective basis. Requirement of Annual Financial Statements Every customer needs to be rated at least once a year preferably on receipt of its annual financial statements which in turn should commensurate with its review date. Ratings should ideally be generated only on the basis of annual audited financial statements covering a period of 12 months. However annual management accounts for yearend can be used in case of non-availability of audited financial statements at the time of renewal but quarterly/half yearly accounts should not be used. To address this issue, expiry/renewal of clients limits should be aligned with their financial year end so that by the time of renewal, latest annual financial statements are available. Facilities should be renewed/ allowed on the basis of financial performance of the client, which can be gauged only from financial statements. Re-rating, Upgrading/Downgrading and Classification/Declassification: There are a number of instances where certain events can have significant effect on customers risk profile. Such events call for revisiting/redoing the clients rating which can be done either through re-rating or upgrading/downgrading. Following is the distinction between re-rating and upgrading/downgrading: Re-rating is to be done while staying within the scope of the rating model i.e. re-visiting the inputs of model parameters and changing them on receipt of any information pertaining to these parameters already defined in the model. Re-rating can be done anytime during a year. It needs to be clarified here that for re-rating, only qualitative/judgmental data should be updated/changed and no changes should be made to financial information/quantitative data unless latest year end financials are available. Upgrading/Downgrading is to be done whenever some material information having a direct bearing on customers risk profile emerges but it is not being captured by any of the parameters already given in the rating model. Upgrading/Downgrading is basically forced rating to depict the clients actual position. For instance, significant deterioration in clients financial strength shown by quarterly/half yearly financial statements, which doesnt fall under the models scope but can have a substantial effect on clients creditworthiness. Similarly events such as owners death, change in external ratings etc also constitute the same situations that trigger downgrading/upgrading. Upgrading/downgrading can be done using Overrides up to 3 notches by relevant authority depending upon criticality of the event. Downgrading can be done at Area office whereas Upgrading rights are assigned to Group office only and all upgraded ratings should be verified by Credit Group. Upgrading/Downgrading can be used any time during a year as well as at the time of generating ratings. Classification/Declassification: Classification entails marking an account Watch-list, Substandard, Doubtful or Loss as per the criteria given in the banks policy. Declassification means flagging an account regular as and when the account reverts to normal status. Frequency of Ratings All customers, fresh as well as existing, must be rated on CIIRS. Regional / Area Manager should ensure that rating of all the borrowers is updated (recalculated) at least on an annual basis / at the time of renewal and to be approved by the limit sanctioning authority. Renewed rating shall also be generated if new information about the obligor is obtained and or conduct of the account deteriorates, which the respective Group believes is significant enough to have an impact on the credibility of the borrower. Independence Requirement
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For the purpose of independence requirements regarding the CIIRS systems, the person who shall be responsible for rating a particular borrower in a CIIRS scoring system shall be independent from the person who reviews, approves it and the person who monitors the performance of the exposure. Data Integrity For Quantitative criteria data input personnel as well as approving authority must ensure that scores given are on the basis of facts. More specifically, data pertaining to Qualitative criteria data input personnel along with the approving authority should ensure that all the subjective information obtained is rational, reasonable and thoroughly investigated. Moreover, Regional Managers must ensure the data integrity of the ratings generated. Furthermore, scorecard signed/ authorized (for eCLP) by the approving authority (a three page rating sheet available in CIIRS) must be attached with every CLP prepared, which shall be a mandatory requirement and must be followed rigorously. As a matter of regulatory requirement it must also be ensured that all customers / borrowers, new and existing, must be rated and subsequently reported in eCIB under the Loan Detail Table Credit Rating Internally field Classification of defaulters As mentioned above, regular customers are assigned ratings ranging from 1 to 9, where customers rated 9 are considered watch list i.e. on the brink of default. However, when a customer defaults, no matter what his rating was before defaulting, it is rated at 10 and above. As per PR, doubtful accounts are rated 10, sub-standard at 11 and Loss at 12. Once an account goes into default, it is dealt by the Special Asset Management (SAM) division. Details of which are discussed later. RATING GRADES / STRUCTURE (FOR CORPORATE, COMMERCIAL AND SME) There are twelve grades in the CIIRS master scale; nine for regular and three for defaulted customers. This is to ensure that there is a meaningful distribution of exposures across grades with no excessive concentrations on the Banks borrower ratings. The CIIRS of corporate, commercial and SME shall be developed as per the Board of Directors (BoD) approved master scale, considering the risk of both types of customers. The characteristics of the twelve grades in the master scale CIIRS are as follows: Grade 1: An obligation rated Grade 1 has the highest rating assigned by the Bank. The borrowers capacity to meet its financial commitment on the obligation is extremely strong. Grade 2: An obligation rated Grade 2 differs from the highest-rated obligations only to a small degree. The borrowers capacity to meet its financial commitment on the obligation is very strong. Grade 3: An obligation rated Grade 3 is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rated categories. However, the borrowers capacity to meet its financial commitment on the obligation is still strong. Grade 4: An obligation rated Grade 4 exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to weaken the capacity of the borrower to meet its financial commitment on the obligation. Grade 5: An obligation rated Grade 5 is less prone to non-payment than other highly vulnerable Grades. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead to the borrowers inadequate capacity to meet its financial commitment on the obligation. Grade 6: An obligation rated Grade 6 is more vulnerable to non-payment than obligations rated Grade 5, but the borrower currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions likely will impair the borrowers capacity or willingness to meet its financial commitment on the obligation.
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Grade 7: An obligation rated Grade 7 currently is vulnerable to non-payment and is dependent on favorable business, financial, and economic conditions for the borrower to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the borrower is not likely to have the capacity to meet its financial commitment on the obligation. Grade 8: An obligation rated Grade 8 currently is highly vulnerable to non-payment. Grade 9: The Grade 9 rating may be used when a counterparty falls under the watch list bucket.. Grade 10 (Sub-standard): represents sub-standard loans as defined by SBP from time-to-time. Grade 11 (Doubtful): represents doubtful loans as defined by SBP from time-to-time. Grade 12 (Loss): represents loans classified as loss and as defined by SBP from time-to-time. No grades need to be defined for retail portfolio as these are dealt with / managed on Pool basis.
EARMARKING
Each Credit line approved for a customer is structured to cater to its specific financing need(s) and bears a unique risk for the Bank. Usage by the customer of a credit line other than for the specified purpose, changes the credit risk profile which may not have been assessed by the bank. It is therefore, not desirable to recommend, approve or commit to a customer any credit line which has interchangeable character. Interchangeable credit lines for use by member companies of a group or a conglomerate carry steeper risks for the Bank both from the credit as well legal standpoints and hence are strongly discouraged. Customer's financing needs, at times may, however, dictate to request use of an unutilized or a partially utilized line of credit for another purpose. This may be allowed in exceptional cases through sub-allocating one credit line to another. At times, it may be convenient to accommodate an unanticipated/one off request from a customer for enhancement in a specific facility by sub-allocating or earmarking from another facility, without an increase in overall exposure to the company/group. Earmarking of facilities should, however, be treated as an exception, as excessive use of this flexibility reflects poor facility structuring. Earmarking can be done from a high-risk facility to a low-risk facility but not the other way round.
RULES
Earmarking can be done as follows: Credit lines carrying higher risk (funded) may be sub-allocated interchange to lower risk lines (non-funded) provided the tenor of the non funded line is either identical or less. Sub-allocation in the reverse order is not allowed. The risk to be measured by facility rating system 1. By proportionately reducing the Current Finance line, an equal amount under Pre-shipment Finance (FAPC) part-I may be allowed. The reverse is however, not permitted. 2. By proportionately reducing the Pre shipment Finance (FAPC) Part-II line, an equal amount under Pre shipment Part-I may be allowed. The reverse is however not permitted. 3. By proportionately reducing either of the Pre shipment lines (Part I or II), equal amount may be allowed under Post shipment (FAFB). The reverse is however, not permitted. 4. By proportionately reducing the Current Finance line, an equal amount may be allowed in the form of FATR and/or FIM facilities to finance imports made under SLCs opened through BAL. The reverse is however not permitted.
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5. By proportionately reducing the Usance Letter of Credit line, the customer may be allowed to open Sight Letters of Credit. However, customer is not allowed to open Usance Letter of Credit by blocking/reducing the Sight Letters of Credit line. 6. Letters of Credit Lines may not be allowed for issuance of bids, performance, advance money, retention or financial guarantees. Vice Versa is also not permitted. Earmarking can only be from high risk to facilities of equal or lower risk. The tenor of the transaction being done through earmarking should not exceed the tenor of facility being earmarked from. Earmarking from a specifically approved (special transaction) is not permissible. Non-fund based facilities cannot be earmarked for fund based facilities. However, Acceptance shall not be part of documentary credits and shall be given 100% weight age while arriving at exposure under Prudential Regulations R-I The facility being earmarked from is effective, i.e., all security or documentation is in place, or adequate documentation is taken for the proposed transaction. Also, all regulatory or other requirements for the transaction being executed should be in place. There can be no earmarking from funded term facilities. Earmarking from lower risk facility to a higher risk facility (i.e., proposed transaction) can only be allowed if the proposed transaction is secured by cash or near cash collateral. In case of a group credit, earmarking from facilities of one company to another company is not allowed, unless specifically allowed in the previously approved CP. No earmarking is allowed in classified accounts. One- Off limits & NOCs should also be addressed.
SECTION-C APPROVAL
Credit Granting: It is extremely important that Credit line Proposal (CLP) is prepared on standard format (annexure attached) and each person preparing and recommending/approving the proposal clearly states his recommendations and reasons for approving or disapproving a credit proposal Approval of facilities As per the new restructuring in R&MM, proposals initiated at branch level will be approved by Level-I (Area Manager-Business line and Area Manager-Credit).Where the amount of financing required exceeds the powers of Level-I then the same will be elevated at an appropriate higher approving level as per discretionary powers. Similarly, corporate cases will also follow approval guidelines as mentioned in their respective discretionary powers. The discretionary powers have been given at various levels involving approval by Business side together with approval of Credit Group (AM/RH/GH etc.) to ensure qualitative decision, impartiality and effective control over credit lending. It is also pertinent to mention here that all proposals elevated to the level of CCC are to be routed through RMD so that CCC can deliberate upon RMDs recommendations also. Internal Rating Grades in addition to exposure amounts have been incorporated in Discretionary powers matrix to ensure that high risks clients are approved at a higher level only. Moreover the new discretionary powers ensure that credit decisions are not taken by business side alone; rather these are jointly taken by business and credit personnel. Rating based discretionary grid shall be applicable for all CLPs that is both renewal & fresh facilities. Before approving facilities to a new or existing customer, the following guidelines in addition to mentioned in previous chapters should be followed: Verify from the customer and ensure that the borrower has not obtained facilities at any other BAL branches either in personal name or in any other business name. All regulatory instructions from time to time should be followed. Verify and confirm that the new borrowers are not black listed by the Bank. Review of CIB/credit reports
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Note: The Bank shall preferably finance trade-related businesses in order to derive maximum yield in addition to the mark-up e.g. Commissions on L/Cs, L/Gs, Exchange earnings etc. Name Lending should not be undertaken in any case. For completing the Credit Line Proposal, the Credit / Branch Managers will add value by highlighting the strengths and weaknesses of the advance. The competent authority's decision whether "approval or rejection" will duly be conveyed to the branch. A copy of the sanctioned advice with the notation Approved or Declined by (Sanctioning Authority) on (Date) and signed by the Competent Authority will be sent to the branch. If further information/clarification on any proposal is required by the Competent Authority, it will take up the matter with the concerned branch and will consider the proposal further on receipt of their reply. For Politically exposed persons special approval are required.
Sanction Advice When a regular facility is granted for whatever period, the sanction advice will be prepared/ generated by the approving authority, original sent to the concerned branch, which upon receipt should file the original advice in the respective customer file. In eCLP module the Sanction/Advices can be automatically generated, such S/Advices also contain specifics as well as general conditions. After ensuring their correctness signing authority may issue such sanction advices. The following instances warrant issuance of a sanction advice: i. When a facility is granted on a regular basis. ii. When OTTF is granted on accounts on which no regular facilities are in place. Examples of OTTFs are, OTT L/C, Guarantee, FTR, FIM, FBP and TOD. Sanction Advice need not be prepared, when excesses are permitted on accounts having regular facilities. This concession is granted as it is found administratively inconvenient to prepare Sanction Advice in such cases in view of the large volume involved and the need for confirmation of approval to the branch can be satisfied by a return memorandum only. Also no limit maintenance need be passed in these cases. The transaction should reflect as excess in the EOL Reports. The period of excess allowed should be diarized for follow-up. The sanctioning authority in the Business Group approving the credit proposal shall issue approval of Finance for credit Proposals approved under their respective Discretionary power. All Approvals of Finance should be issued under joint signature. All Approval of Finance shall be addressed to concerned branches, with a copy endorsed to each of the relevant Area /regional offices, Group Head Operations and Head of Credit Administration. All signatories of CLPs, Sanction advices should necessarily mention their Name and Designation. The credit proposals forwarded by business groups should be critically appraised by the Area Managers/Regional Managers, particularly for any inherent risks involved and, if so, whether these are acceptable from the Banks view point and also for compliance with regulatory requirements and banks policy guidelines. The case may accordingly be approved or declined. In every instance, relevant 'Approval of Finance' / Regret Letter should be sent to the Area office /Relationship manager. While finalizing Approval of Finance, a reference to previous approval (if applicable) shall also be made. If a proposal exceeds Regional Managers discretionary limits, he should elevate the same at an appropriate approval level with necessary comments and specific recommendations, under an appropriate covering letter.
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Area/Regional Manager should ensure that renewal proposals are received from branches, at least 6 weeks before the expiry date. All approved limits will only be available for drawdown for 60-days from the approval date. Fresh revalidation will be required where the limit has been exceeded. This should also be incorporated in the offer letter. Note: RMD has automated the entire process of CLP movement. RMD has also developed a separate module for Sanction Advices, which contains General as well Specific conditions. Now Sanction Advices can be automatically generated from eCLP which is to be issued after detail scrutiny. Offer / Facility Letter Having received the "Sanction Advice" the concerned branch will ask the respective CAC department to prepare the Offer Letter in accordance with the terms and conditions of the "Sanction". Once the offer letter is received by the branch, the offer Letter will be signed by the Branch / Credit Manager on behalf of the Bank and dispatched to the customer for his acceptance. This acceptance must manifest itself in the form of signatures by the authorized signatories of the customer. Facilities Declined In the instance of credit facilities being declined by Area Managers, Regional Heads or CCC for that matter, the declined CLPs should be kept on record. Both at Area and Regional level, the data on declined proposals should be gathered. Post Facto Approval Post Fact or alternatively known as As Done credit approvals are usually not acceptable. Post Fact credit approvals are required when initial approval is not obtained from competent authority by the field officers (credit officers/relationship managers or branch managers) before the incidental drawings such as when: 1. A debit balance has arisen for which a facility has not been arranged; 2. Drawings exceed existing limits; and, 3. Forced Finance occurs such as when imported goods / machinery are cleared and funds are not paid by the importer or due to non-timely retirement of Export Refinance. Post Fact credit approvals, should be discouraged and treated as exceptions and, where necessary, should be initiated simultaneously, but not later than 3 days of the event. Common causes that result in unauthorized exposures are: 1. Clients needs have not been properly assessed by both client and the banker. 2. Clients' lack of understanding of their business requirements or lack of familiarity with the Bank's policies and procedural requirements. 3. Diversion of funds or changing cash cycle. Should the excesses be recurring in nature, the account should be reviewed for proper structuring of facilities.
DEFERRAL POLICY
It is BALs policy to disburse the approved credit facilities after perfection of the security / support documentation and compliance to all terms and condition of limit. Therefore, deferral of credit documents will generally be discouraged. There may however, be genuine situations where deferral of credit documents will be necessary for disbursement of approved credit facilities on exceptional basis for selected customers. The deferrals will be kept at the minimum.
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The maximum tenor for all deferrals will not exceed prescribed time line (Presently approved by BOD Annexure attached which may be amended time to time) i.e. maximum 90 days. Deviation to this rule will require approval from Group Head - Credit. The following guidelines will be observed for allowing deferrals: The customer has proven positive track record with BAL in case of existing customer or has an excellent market reputation. However deferral to new customers is to be allowed in very exceptional cases The need for awarding deferral should be justified and substantiated Deferral for critical documents should only be given in exceptional circumstances only with the recommendation of Business Group by the Group Head credit. Business Head will be responsible for perfecting the security within the deferral period. The deferral does not jeopardize the rights and remedies available to the bank and Banks security position is not weakened Deferral shall only be allowed on the basis of justifiable reasons. Should not be allowed to customers with CRR of 7 & higher. Fourth deferral should not be allowed and if account is not regularized after third deferral then limits should be blocked for fresh disbursement. The higher level deferral should include days that have already been allowed by Lower level.
It will ultimately be the responsibility of business units to complete documentation within deferral time allowed. In an effort to make the perfection of documentation and issuance of DAC more business friendly, it is suggested to segregate the required security documentation into 3 broad categories i.e. Crucial Documents, Semi Crucial Documents and Non-Crucial Documents. Deferral of Crucial Documents: As a rule, deferral of crucial documents will not be allowed. However, only in exceptional cases deferral of crucial documents will be approved by Group Head Credit on the recommendation of Group Head of respective business line. (Ref. Annexure-A).In case of any other support document not specifically included in the lists above and business considers that there is a genuine requirement to defer the document. They can seek approval from Deferral approval authority as per matrix. Deferral of Semi Crucial Documents: Respective Regional Manager (RMM Credits) may allow deferral up to 30 days for the semi crucial documents. On the recommendations of the Regional Manager (dealing credits) of respective business line, deferral for a maximum period of 60 days for the semi crucial documents by Regional Head (Credit Group) may be allowed as mentioned under proposed matrix (Ref. Annexure B). Approval from GH, Credit is necessary for deferral exceeding 60 days. Deferral of Non-Crucial Documents: Regional Managers (business lines dealing credits), can also approve a deferral of any Non-Crucial document for a maximum period of 30 days enabling the CAC to issue (conditional) DAC, if the DAC is withheld due to absence / imperfection of any particular document categorized under non crucial document. Deferral for a maximum period of 60 days for the non crucial documents by Regional Head (Credit Group) may be allowed as mentioned under proposed matrix (Ref. Annexure C). Approval from GH, Credit is necessary for deferral exceeding 60 days. Such approvals will not require any ratification. Pre DAC Exemption Pre DAC Exemption maybe allowed up-to 10 days as per details/ in cases given under Annexure-D Extension of Deferrals:
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Extension beyond period or over 90 days (only in exceptional cases with proper justification) will require approval of CCC. Note: It will be the responsibility of Relationship Manager / Credit Manager of respective business line (Retail and Middle Management (RMM), Corporate, IBG) to make sure that the required documents are perfected within the originally approved deferred period. Extension in deferral period must be discouraged, unless there are compelling reasons for such requests. Monthly Deferral Reports to be submitted by business units to their Regional Manager (dealing credits) and Group Head.
Waivers: The waiver of any document required with Credit Facility Application Form / CLP or otherwise essential to the granting of credit facility will require approval in the following manner: 1) Crucial: - Group Head - Credit 2) Semi Crucial: - Regional Head (Credit Group) or as per Policy. 3) Non Crucial: - Regional Head (Credit Group) / Regional Manager of the respective line (dealing credits) or as per policy from time to time to be advised by GH, Credit. All waivers have to be properly justified by Relationship Manager / Credit Manager/Area Manager. Maintenance: The monitoring of all outstanding deferrals and other documentation discrepancies will be the responsibility of Regional CAC, which will maintain a monthly follow up with the respective Business Units to ensure the timely elimination of all exceptions. A detailed exception report is to be circulated to the respective line Management and Group Head, and the Group Head - Credit on a monthly basis. The credit facilities of the client shall automatically be frozen upon lapse of 30 days after the expiry of third deferral. It will be the responsibility of Line Management to ensure that further exposure / withdrawal is not allowed after expiry of deferral period. Once approved, deferral policy shall supersede the existing HO instructions.
Management
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ANNEXURE-A LIST OF CRUCIAL DOCUMENTS

As a rule, deferral of crucial documents will not be allowed. However, only in exceptional cases deferral of crucial documents (only Account Opening Formalities for the documents where regulatory requirements / minimum conditions for taking exposure under SBP Borrowers Board Resolution PR are not violated) will be + Memorandum and Articles of Association approved by Group Head Credit on Borrowers Request Letter the recommendation of Group Head of respective business line Facility Letter Accepted with proper justification giving (Proper reason should be recorded e.g., timeline for perfection (maximum 90 differences over mark-up rate or any term / condition). days). Prime Security, Collateral, title documents and Credit Documentation, Personal Guarantees (if included in security) along with Legal Opinion including Mutation. E-CIB Report Latest at the time of approval Audited Financial Statement within six months of FYE Premium Paid Receipts relating to Insurance Policies along with Cheques Realization Certificate. Fresh valuation report and visit report on initiation of finance. Exceptions
S#
1 2 3 4 5 6 7 8 9
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ANNEXURE-B LIST OF SEMI - CRUCIAL DOCUMENTS

Exceptions S# APPROVAL MATRIX
Dealing Credits
RM Business Line *Maximum Layout plans of building/Completion Certificates for 30 days mortgaged properties. Note: In case urban properties (which come under P.T - 1 record where authorities like TMA (Tehsil/Town Municipal Administration) are present & active, a duly certified sanctioned plan of the building must be presented on the record of the bank & regarding properties situated in rural area (which come under revenue record) where no authority is available, in these circumstances the valuator who conducts the valuation of property shall certify the completion of the premises in this regard. Undertaking from the mortgagor as per attached format maybe obtained to safeguard bank interest. In the event of demolishing of the mortgage building, as the bank may recover the outstanding liability through the attachment of other assets of the mortgagor in the court of law Charge Certificate evidencing registration of BALs charge 30 days on the borrowers assets provided the borrower has filed the papers with SECP and obtained the acknowledgement. within 21 days from the date of markup agreement. **Search Report/non encumbrance certificate and notation 30 days of Banks mortgage charge in record of concerned Authority (Revenue/LDA/Excise etc.) Any document not specified in the list of crucial document 30 days and non-crucial documents (provided there is no regulatory violation). Stock Statement & Receivable position along with 30 days outstanding with other banks provided SBP regulations including R-12 are not violated Cross Company Guarantee if its not the 1st way out. 30 days Valuation Report (After 3 years). (Fresh valuation report on 30 days initiation of finance is however non-deferrable). RH Credit GH Credit
*Maximum *Maximum 60 days 90 days
60 days
90 days
60 days
90 days
60 days 60 days 60 days 60 days
90 days 90 days 90 days 90 days
6 7
* It is the maximum period and may vary depending upon criticality of the document and expected time for
completion of document. **It shall be evident from certificate/report that charge was registered within 21 days
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ANNEXURE-C LIST OF NON - CRUCIAL DOCUMENTS

Exceptions APPROVAL MATRIX Dealing Credits RM RH Credit Business Line *Maximum *Maximum Any other Document Conditions for allowing Deferral: Sanctioning authority while allowing deferral must be satisfied that: 1. Deferral documents do not fall under category A 30 days (Crucial) and B (Semi- Crucial). 2. Where deferral will not expose bank to any pecuniary risk and banks security position is not weakened. Note: CAD may accept the legal opinion of lawyers if there are minor discrepancies. However, if CAD discovers glaring omissions/mistakes in the legal opinion, they may take-up the matter with concerned Approving Authority/RM/GH. In following renewal cases, deferral for availment of credit facilities maybe allowed from the last expiry date of credit limit within which renewal DAC has to be arranged. a. b. c. Limits have been renewed by competent authority. Branch/business unit holds previous clean DAC. No material change in security or structure of facilities. However, in case of revision/enhancement in facility /security, disbursement upto the level of earlier approved package / securities provided clean DAC held. Pre-Requisite: Accepted offer letter after renewal along with a new set of charge documents should be in place before allowing credit facilities in above cases. 30 days GH Credit *Maximum
60 days
90 days
60 days
90 days
* It is the maximum period and may vary depending upon criticality of the document and expected time for
completion of document.
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ANNEXURE-D
Pre DAC Exemption are allowed in the following cases up-to 10 days 1. All approved facility (ies) is/are fully secured by Cash Collateral If deposits are with BAL then lien should be marked at least one day before disbursement (i.e. Cash Margin or Lien on account at any branch of BAL,). 2. EOLs / Enhancements in existing facility (ies) is /are allowed (by competent authority) within existing security arrangements & branch holds previous clean DAC. 3. SLCs (except for capital goods) which are secured either partially or fully by cash margin / lien documents and / or no collateral security is involved. on
4. All OTT transactions (i.e. SLCs/LGs) in approved limits which are either fully covered by existing security and / or secured by cash collateral or where, other than cash, no additional security is involved. In all such cases, branch holds previous clean DAC. 5. Direct Lease facility (for vehicles) less than or equal to Rs.5.00 million, where no additional security other than leased asset(s) is involved. In all such cases business units shall invariably confirm that they hold all relevant documents for institution of limit. LBD (Post Acceptance)/FBP: subject to FID clearance.
Conditions: The business groups (BGs) categorically mention Pre-DAC exemption in CLP of the account and accordingly SANCTIONING authority to mention the same in the Sanction Advice. In all such cases (1-6), the business unit sends the email to respective CAC /Area Manager confirming that all the necessary documents i.e. FOL etc. have been obtained from the customer. After sending confirmation email the business unit shall proceed with the transaction without obtaining Pre-DAC. Pre-DAC exemption will be allowed maximum for 10 days period from the institution of facility (ies). It will be sole responsibility of respective Business Group to complete the entire documentation requirement (from preparation to perfection) in coordination with CAC and issuance of Clean DAC. The respective CAC will generate exception report where the conditions not fulfilled within the specified 10 days period and will be forwarded to Business Groups with a copy to Credit Group for completion of documentation / rectification of exceptions. If respective business unit persistently fails to comply with the stated policy, the PreDAC exemption shall be withdrawn upon the recommendation of CAC or deferral /waiver from competent authority should be obtained as per policy. Note: It will be the responsibility of Relationship Manager / Credit Manager of respective business line (Retail and Middle Management, Corporate, IBG) to make sure that the required documents are perfected within the originally approved deferred period. Repeated requests for second and third deferral must be discouraged, unless there are compelling reasons for such requests. Monthly Deferral Reports to be submitted by business units to their Regional Manager and Group Head. Prescribed format for obtaining the deferral from relevant authority is to be used. If approval require from two different authorities, separate memo will be submitted to approving authority. Details of all deferrals should be attached for information of approving authority.
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SECTION-D DOCUMENTATION AND DISBURSEMENT

Documentation: All finance and security documentation must be obtained before disbursement of any facility. Where the documentation process is centralized; branches should have copies of all documents sent to CAC in order to have review of documents when required. At annual renewal/enhancement of facilities a fresh/revised set of documents should be obtained. i. It will be the responsibility of Relationship Managers to ensure that complete and legally enforceable documentation is obtained as required for each credit transaction / facility. CAC will check and ensure completeness. All documents intended as security or support for credit facilities must be reviewed by BAL's approved legal counsel for appropriateness to the transaction / facility, adequate coverage of the risks involved, completeness, proper execution, and registration if required. The security / support documentation (credit documents) should be signed (executed) by the borrowers as follows: a. In case of individual, sole proprietorship and, documents must be signed by the owners. Bank will not accept any delegation of power for the signing of credit documents. In the cases of Registered Firms, authorized partners (as per partnership deed) can sign documents. b. In the cases of limited liability companies, credit documents may be signed by authorized person(s) of the company if BAL has proper documents viz. Board Resolution in place delegating such powers. c. In the case of evidencing a lien on specific property/assets, it will also be the responsibility of Relationship Managers to verify the actual existence and value of the assets involved.
ii.
iii.
d. In international business, local regulatory requirements in each region will be followed for creating a charge on assets/real estate. e. Instructions concerning the requirements to establish valid liens on various categories of assets will be issued from time to time. In case of pledge of shares, Shares should be held in banks CDC account. f. Except as otherwise specifically provided, no disbursement against approved credit facilities will be permitted before the CAD determined that all required documents have been received. CAD will not issue the DAC/disburse limits unless all the required security / support documentation have been received and lodged.
Release of Documents Request for permanent release of credit documents will also be initiated by the RM and approved as per procedure mentioned below provided that all Bank formalities for release of securities have been fulfilled such as: Related facilities have been fully liquidated / settled / cancelled or Expired documents are to be exchanged / replaced with the new ones. In all other cases of permanent release of documents, the request will be approved by the level of Credit authority/Committee originally required to approve the total facilities.
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Release of Security (ies) Upon Adjustment of Outstanding Liability (ies): a) If a facility has been approved on standalone basis against a specific security (inclusive of branchs own deposits and/or government security (ies) issued by them and kept under their lien/pledge); the release of security/collateral should be authorized by the respective segment area manager and the manager, Central Credit Administration Department upon full adjustment of principal and mark-up. b) Where multiple facilities are covered by multiple securities: - Partial release of securities/collaterals is sought; obtain prior approval of the Group Head, Credit. - In case of full adjustment (principal and mark-up) of the whole package; prior authorization of the respective segment area manager and the manager, Central Credit Administration Department to be obtained for release of securities/collaterals. - In case any security/security package also covers any limit(s)/outstanding(s) at any other branch, written confirmation of the said branch shall be obtained. Thereafter, obtain prior authorization of the respective segment area manager and manager, Central Credit Administration Department for release of security/security package. c) Where a group is availing facilities and even when a facility has been approved on standalone basis in one of the companies of the group, any security (ies) release should be subject to prior clearance from the Group Head, Credit d) The release of security/ collateral as above should be under the following situations: Facility (ies) has (have) been cancelled Specific security(ies) is (are) not linked with any other facility(ies) There is no approval condition that the security (ies) released is (are) to be effected upon prior approval. Expired Documentation Obsolete or expired documents in the vault will only be retained when problems in the relationship preclude obtaining new ones, or when there is necessary to evidence the past due status of an obligation. Obsolete or expired documents must be replaced promptly and retained as per record retention policy. Witness i) All documents which may have to be presented to a Court of Law in Pakistan are required to be witnessed. ii) Two adult male Pakistani nationals will be preferred as witnesses. Female witnesses may also be accepted, but two females are required to replace one male witness. Presence of one witness is necessary The following precautions must be observed when selecting witness. a) They must be physically present at the time of signing. b) They must be properly identified, and number of their Computerized NIC must be shown on the document itself. c) To the extent possible, witnesses should be independent. As a rule, documents that are subject to foreign jurisdiction need not be witnessed. Instead, the procedure prescribed by the foreign jurisdiction for the authentication of signatures must be followed.
iii)
iv)
Copies in Credit Files
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Whenever practical, photocopies of support documents will be kept in the appropriate section of the credit file to minimize the need for access to the originals held in the vault. All post sanction documents shall be maintained with the CAD.
DOCUMENTATION FOR CONSIDERING CREDIT FACILITIES

While considering credit facilities, till FRS are introduced, following documents should be given special attention as they serve to bring to light the vary factors that play an important part in facilitating "Credit Granting and Credit Enhancement" decisions. The format of Credit Risk Rating checklist and guidelines for completing it are enclosed as Annexure (BAL) CONSORTIUM FINANCING In cases where a consortium of banks is involved, the banks share of stocks and receivables will be the proportionate share of the outstanding Banks lending against the outstanding consortium lending multiplied by the current customers stocks and receivable balances. Effort should be made to arrange joint inspection of such stocks and carried out at least on bi-annual basis. Moreover, Stock inspections will be carried out in accordance with the frequency and details laid down in the security guidelines For stock reports where an aggregate bank borrowing is required, will be relied on information provided by the customer. However, on a best efforts basis, cross check on a six-monthly basis from other consortium lenders (in case we have a joint Pari Passu charge along with a consortium of banks). AGEING ANALYSIS If the customer's financials reflect a high level of receivables which is not in line with normal business norm or where the position of receivables has significantly deteriorated vis-a-vis the previous years, a critical look at the customer's component of receivables will be necessary. Conduction of concentration analysis, assist the credit worthiness of that parties in case of concentration of receivables to certain parties then credit worthiness of that parties to be duly assessed. In such cases, the detailed breakdown of receivables should be obtained on the following format (the format can be amended as per needs): Amount Receivables over 90 days: Receivables between 60 and 90 days: Receivables between 30 and 60 days: Receivables below 30 days Of which Receivables considered irregular: XX XXX This statement should be accompanied by a detailed list of (i) receivables over 90 days and (ii) those which are considered irregular along with steps being taken to recover these receivables. The review proposal should be processed after the business unit/branch is satisfied with the customer's explanation. Thereafter the status of receivables should be periodically monitored by obtaining 'outstanding receivables statement' from the customer on a quarterly or six monthly bases as considered appropriate. Comments on receivables should be incorporated in 'comments and recommendations' section under 'others. Even between two reviews, if it is observed that the customer is facing liquidity strain due to slow recovery of receivables, the branch should ask for a break up of receivables and monitor the position till the situation normalizes. (Also refer Security Consideration) XX XX XX XX XXX
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Concentration analysis shall also be made and if receivable concentrate with certain parties customers credit worthiness shall be reassessed.
Security to be held with value and Risk rating

Security Risk Class(SRC) CLASS 1 Security Description i) ii) Deposit (Rupee / Fcy) Receipts / Certificates issued by BAL. Registered DSCs/SSCs/U.S.$ Bonds / Govt. security issued by Banks, National Saving Centers or SBP.
CLASS 2
i) ii)
FEBCs / Bearer US $ Bonds issued by BAL / Balance in Deposit a/c at BAL (duly earmarked). Export documents under Irrevocable LCs of top 1000 Banks. In case of DA LC after receipt of authenticated advice from the Banks for acceptance of the documents. Financial Guarantee of Approved @ Scheduled Banks in Pakistan or top 1000 Foreign Banks functioning abroad. Documents under inland LCs of Approved Banks@. In case of DA LC after receipt of authenticated acceptance. Item, Margin
iii)
iv)
CLASS 3
i)
Pledge of goods of general use imported through BAL/ Cotton / Rice / Sugar in godowns controlled by approved mucaddams. Pledge of goods of general use imported through BAL/ Cotton / Rice / Sugar in borrowers godown under control of Bank appointed Chowkidar / Godown Keeper, additionally secured by mortgage of property. Import documents under foreign LCs. Deposit Certificates/Receipts of Approved @ Scheduled Banks within exposure limit allocated by FI Division. FEBCs / Bearer US $ Bonds / other Govt. Bearer securities notified to be eligible by C&RM. Hypothecation / any other tangible security backed by Certificate of Investment of Approved @ Investment Banks within limit approved by FI Division. Item, Margin Pledge of goods imported through BAL at Public / Custom bonded warehouse.
ii)
iii) iv)
v)
vi)
CLASS 4
i)
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CREDIT OPERATIONAL MANUAL ii) Pledge of locally procured / produced goods except Cotton / Rice / Sugar in godowns controlled by approved mucaddams .
iii)
Pledge of locally procured / produced goods except Cotton / Rice / Sugar in Borrowers godown under control of Banks appointed Chowkidar / Godown keeper, additionally secured by mortgage of Property. IBP (without L/C) backed by property. Against self occupied property (in case of business concerns in the name of Director / Partners / Proprietor) for period not exceeding 1 year (under SBP small loan scheme only). Shares listed on Stock Exchanges in Pakistan (at stock exchange branches and for members of the Stock Exchanges only). Hypothecation of stocks in trade and receivables / TR / Acceptances backed by TR / Lien on Export bills under firm orders, additionally secured by mortgage of property / fixed assets. Title documents under foreign LCs for plant and machinery and items of restricted use, subject to undertaking that bills will be retired from borrower's own resources. Export Documents under Irrevocable LCs of top 1000 Banks before receipt of authenticated advice for acceptance of the documents. Title documents under inland LCs. Export documents under LCs of other than top 1000 Banks (subject to clearance from F.I. / Int. Div.). In case of DA LC after receipt of authenticated advice from the Bank for acceptance of the documents. Pledge of goods imported through BAL / Cotton / Rice / Sugar in borrowers godown under control of Banks appointed Chowkidar / Godown keeper. Item, Margin
iv) v)
vi)
vii)
viii)
ix)
x) xi)
xii)
CLASS 5
Other than Class 1 to 4 : i) Hypothecation of stocks in trade and receivables / TR / Acceptances backed by TR / lien on Export bills under firm orders.
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CREDIT OPERATIONAL MANUAL ii) IBP (without L/C) favouring Govt. Departments / Autonomous Bodies / Multinationals accompanied by Challan and Inspection Note / Power of Attorney. Uncleared effects / cheques in clearing.
iii)
Agriculture Finance ranked through Security Risk Class(SRC) Security Risk Class(SRC) CLASS 4
i)
Security Description Against Mortgage of land through passbook system (PIU value, Market value, Realizable value/forced sale value of Agriculture land) backed by personal guarantee acceptable to the bank. Mortgage of any property of Rural or Urban, Earmarking of Deposit, lien on DSCs, SSC and pledge of gold and silver ornaments (duly insured). [Production Purposes] Against Mortgage of land through passbook system (PIU value, Market value, Realisable value/forced sale value of Agriculture land) backed by personal guarantee acceptable to the bank. Mortgage of any property of Rural or Urban, Earmarking of Deposit, lien on DSC, SSC and pledge of gold and silver ornaments (duly insured). [Development Purposes] Against two sureties and obtaining certified copies of Khasra Girdawari/ Fard Jamabandi (or form VII and VII-A in Sindh). [Production Purposes] Against two sureties and obtaining certified copies of Khasra Girdawari/ Fard Jamabandi (or Form VII and VII-A in Sindh). [Development Purposes]
ii)
CLASS 5
i)
ii)
Guarantees ranked through Security Risk Class(SRC) i) a. b. Guarantees to Govt. Departments :Customs : 100% Cash Collateral [SRC-2]. Others: 50% Cash, remaining 50% Property [SRC-3].
ii) iii)
Financial Guarantees 100% Cash Collateral [SRC-1]. 25% Cash Collateral, remaining 75% Property [SRC-4]. Registration of Charge (For limited companies) : Date of Charge registration,
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SECTION- E REVIEW OF FACILITIES

The credit monitoring Group is entrusted with continuous monitoring of all credit facilities to timely identify weakening relationships to address the issues and secure Bank financing. Watch list parameters are their guiding tools for ongoing review however in addition to this after disbursement of credit proper
monitoring and review should be made on a frequent basis. This section lays down different guidelines for the review of facilities. Purpose The purpose of review of the facility is to analyze the conduct of account and identify any potential problematic areas. Duration between reviews Annual Review
Facilities granted to a customer should be reviewed at least once a year or at earlier intervals (if considered appropriate). Prior to the review, the branch/Credit Managers or their designated credit officer should visit the customer and discuss relevant details of the account and the business reciprocity, including any clarifications on their financial statements, if required. The visit should also be used to gather information on current business activity; future business plans and proposed diversifications, if any, etc. The calling officer should gather up to date information on the customer and use the visit to strengthen the Bank's relationship if it is an account the Bank values. Details of the visit should be recorded in a Visit Report, which should be attached with CLP. Interim Reviews
Often between two annual reviews, an interim review is stipulated. This is usually performed to monitor an account conduct where defaults in meeting commitments have been noticed, deterioration in financials have occurred etc. An interim review is also stipulated to monitor use of existing/additional facilities granted, updating of documentation etc. he interim review is only an additional safeguard and does not change the next annual review date unless extension in the annual review date is sought and agreed in the interim review. Frequent review of watch list & high risk customers as per CIIRS ratings shall be ensured. Checklist for reviews Review of facilities should incorporate all the relevant issues regarding the customer and the account, however, some more important contents are mentioned below: - Financial Statements - Conduct of accounts - Markup serving behavior - Detail review of last: a) Stock reports (if applicable) b) Ageing of receivables (if applicable) c) eCIB Maximum Maturities Unless stated otherwise and agreed between the Bank and the borrower, all credits are repayable upon demand. The maximum maturity/tenor for each facility is as follows. Any deviation from maximum maturity/tenor will require approval from Credit Group as per delegated approving power:
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S. No 1 2 3 4 5 6 7
FACILITIES Term Finance Current Finance Validity of L/Cs L/C / Usance Period DA Bills under L/C Pre-shipment/ finance Other Loans Post-shipment
TENOR Maximum seven years or as per approval of CCC Maximum one year. Maximum 1 year inclusive of usance period or as per SBP Maximum 6 months or as per SBP (Except for supplier credit) Maximum 180 days (Subject to approval of SBP if tenor exceeds 120 days ) Maximum 150 days ( Presently ) Tenor as specifically approved by Credit Group
Loans are subject to minimum repayment installments as per Sanction advice. Maximum Grace period 6 months (no grace period for mark-up payment) Amortization is at least quarterly after the grace period. Bank Guarantees Maximum period 3 years or as approved by the Credit Group Note: Changes in tenors / maturities are subject to regulatory requirements advised by State Bank of Pakistan from time to time and approval by Credit Group Expiry / Renewal of credit proposal a) All short term limits for working capital requirements (Revolving Limits) are renewed every twelve months. b) In case of one off (terminating / non-revolving) facility, tenure may be different from the normal tenure of twelve months. If such a facility is not fully settled or paid on the expiry or due date, a CLP to regularize this facility should be proposed. c) In case of long term limits only, limits should be reviewed at least once a year. For more than one year long term facility, the renewal date shall be in accordance with the expiry of the shortest term facility. d) For short and long term limits, annual renewal of facility should be initiated prior to expiry date to ensure renewal well before time. e) For seasonal financing, expiry should be set in line with the respective seasons of a particular commodity in the area. f) In case of group limits, the expiry of all the concerns in the group should be set in line so that whole limits are renewed at once. g) CLPs for renewal purposes should be initiated two months prior to the expiry of limits to ensure timely approval. ALIGNMENT OF LIMIT EXPIRIES WITH LATEST AUDITED FINANCIALS Every year, Business Group will ensure to obtain un-audited/in-house financials within (03) months and audited financial statements within six months of the end of accounting period. Business Lines should set/align expiry of limits, except seasonal financing sectors like Textile & Sugar whose expiry date has to be aligned with the end of the season regardless of financials availability, in manner that latest Financial/Audited Financial can be obtained for review. FOR PUBLIC LTD COMPANIES EXPIRY SHOULD BE ALLIGNED WITH
THE LEGAL REQUIREMENTS FOR SUBMISSION OF THEIR FINANCIAL STATEMENT WHICH IS GENERALLY THREE MONTHS AFTER THE CALENDER YEAR
Conditions
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CLPs for Textile & Sugar Mills should be submitted based on last audited financials alongwith latest 9 months Management Accounts, subject to audited financials to be submitted within 5 months of their financial closing and that these are to be satisfactory and acceptable. Preferably expiry date of all accounts relating to a group shall be set ONE date
CHAPTER 5 CREDIT MAINTENANCE

The current status of a customer's account / conduct, comprehensive reports are prepared and circulated to RMs at various frequencies to enable them to initiate appropriate action, if required, as per banks credit policy. The role of CAD is to be proactive, i.e. to collect and present current information / trends to pass on timely information and to help manage the relationship effectively. Credit Process Administration of Approved Credit Facilities Customer Contact: To evaluate properly the ongoing quality of management, financial performance and the overall business condition of their clients, it is essential that Relationship Managers maintain regular contact with their clients through periodic calls at their places of business. Clients should also be encouraged to call on their Relationship Managers at the Bank whenever needed. All pertinent information derived from such calls will be recorded in the credit file through call reports. Call Reports: Call Reports of all Business Groups should be done according to established call programs detailed in their respective Marketing Plan. As a general guideline, the following may be used for the Call Reports: Credit issues. Company's performance year-to-date vis-a-vis sales/profitability. Industry situation. Comment on risk areas indentified in last CLP . Future plans, etc., including potential requirements for incremental facilities. Workers/labor related issues. Business/marketing. Our earnings year-to-date from the relationship. Current issues. Potential deal Information on competitor's strengths /weaknesses and current situation. Labor situation, succession planning and prior experience of such negotiations. How their competitors are doing. Industry demand/supply dynamics and future projections. International markets situation. Outlook for change in mark-up rates, devaluation, and inflation, and their impact on the customer's business. New projects expected to come on stream in the customer's business. Regulatory changes and their impact. Industry critical success factors. Raw materials procurement policy. Parent policy vis-a-vis its subsidiaries in Pakistan for Multinationals.
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Likelihood of getting Parent Support for locally supported facilities for Multinational.
Circulation of Call Reports Call reports, on prescribed formats, will be sent by the RMs through email to their Business Head, CAD, and Credit Monitoring Group. Business Heads are responsible for taking action, if any, after having gone through the contents of the call reports. The call reports duly reviewed and initialed by them, will be filed thereafter in the respective credit file being maintained with the RM, CADs & Credit Group. CAD will follow-up on conditions to be followed. If there is an issue it should be circulated to Senior RMs for its resolution.
INSURANCE
It is an important requirement that the securities charged to the Bank are adequately insured against stipulated risks and that the Bank's charge on the insurance policy is noted/ assigned as required. Furthermore, insurance coverage should be obtained from the companies which are on the Banks "approved" list and within the Risk loss insurance limit approved for them by Credit Monitoring Group. The bank must satisfy that adequate and valid insurance cover over stocks and other assets pledged to the bank, which form part of the Bank's security, is assigned in favor of the Bank as mortgagee & loss payee and that the policies are held by the CAD with an endorsement noting the Bank's interest in the policy. a) A proper record of policies held should be maintained and updated. b) In the case of some large corporate borrowers where the CAD holds many policies or where the Bank is a member of a consortium, the sanctioning authority may be approached to waive(copy to held) the holding of actual policies. Ensure that the original policy covering BAL interest held by syndicate leader c) In all such cases the borrower must include an undertaking in each stock statement to the effect that the Bank's security at each location is at all times held fully covered by insurance against the risks of (to be specified), that all the warranties in the policies are being complied with and that the policies are held current at all times. d) Where the Bank is a member of a consortium, the branch must ensure that the Lead Bank holds all relevant policies and shall hold duplicate/certified copy from lead bank. e) In instances, where pledge/hypothecation of stocks and other assets constitute a security, the following conditions must be ensured regarding insurance on stocks and other assets: The expiry dates of insurance policies should be carefully diarized so that the customers renew them on time. It would however be preferable to obtain an authorization letter from the customer to enable the bank to renew the insurance policy without the customer's intervention. Following shall be taken care of while handling insurances of stock/assets: a) Assets charged to the Bank (Pledge, hypothecation or mortgage) should be insured through an approved insurance company. b) Obtain original insurance policy together with premium payment receipt. c) The insurance limit fixed by Head Office for the respective insurance company is adhered. d) Where cover note is held, the same should be replaced by insurance policy within the period stipulated. e) Where the Bank is a member of consortium, obtain photocopy of the relevant insurance policy from the lead Bank.
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All insurance policies are to be kept in the relevant charge / security documents packet and a copy filed in the applicable credit file. g) A photocopy each of insurance policies is retained in the Credit file and a second copy is delivered to the officer monitoring records of pledge / hypothecation of goods / stock. h) 45 days before the expiry of the policy, the concerned customer should be reminded to renew the policy and advised that If insurance cover is not renewed / received before the 15 days of the expiry date, Bank has the right to renew the insurance from Bank approved panel and deduct the charges of the same even by creating OD. i) Receive original insurance policy with copy of the Premium Receipt from the customer or directly from the insurance company. Guidelines for Accepting Insurance Policy: Following the receipt of Insurance policy, the same is required to be reviewed with special emphasis on the following points: a) BAFLs name as loss payee/ mortgagee/ Mortgagor/ Pledgor/ Pledgee/ Lessor/ Lessee as per the borrowing relationship and nature of financing. b) Expiry date of insurance policy to cover the tenor of the facility. In case the expiry of insurance does not match the expiry of facility or it is expiring within the tenor of facility then Business Unit should ensure the renewal of the same well before the expiry. While Credit Administrations should diarize the same for follow up & reminders. Continuous monitoring both by Business Unit & CAD must be ensured so a valid insurance policy is always held. c) Description and location of insured property (stocks, plant & machinery, building, etc.) is same as mentioned in Credit Proposal, Approval and/ or Stock Report. i. If credit proposal & approvals are silent on the location of goods then it is assumed that the location of goods is the same as the business address or manufacturing location. In case this is not so (third part go-down etc.) then specific Approval must be obtained from the relevant approving authority. Thus in case of pledge the address of ware house must be approved by the Competent Authorities and the same should be covered in the insurance policy.
f)
d) Pertinent Risks, whether or not specifically mentioned in Credit Approval, should be covered. For instances where Credit Approval is silent about risks coverage, all pertinent / applicable risks (fire, theft & burglary, malicious damage, riot, strike, etc.) are covered. Field should ensure that there is no restrictive clause or any cap for any related risk in the insurance policy. i. ii. iii. iv. Any exceptions in this regard can be approved by the Competent Authority on the basis of justifications provided by the business/ relationship. Full premium paid receipt/ or certificate of premium payment in original is available. Insurance policy received from the client must be authenticated by the Insurance Company. It should be ensured that stocks/machineries providing cover to our facilities must always be adequately covered and value of insurance is adequate to cover BAFLs exposure (exposure is calculated by adding margin on the facility amount). Insurance must always provide cover to the required or pledged stocks/assets declared from time to time for coverage/value not less than outstanding loan or exposure / operative limit whichever is higher plus 25% or approved margin / security value whichever is higher. Group Head Credits, on recommendations of Business Groups, can relax the value of the Insurance policy upto outstanding loan or exposure / operative limit whichever is higher plus 10%. However in all such cases the average clause in the policies should be appropriately amended to ensure that BAL exposure is adequately covered regardless of the value of stocks held.
v.
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e) Amount / percentage of BAFLs share is mentioned in joint insurance policy or in place exemption from competent authority (Group Head Credits) is available. f) Adhesive stamps of required value are affixed on the face of original insurance policy.
g) Amount insured by insurance company (ies) is within the approved per party per risk limits. h) In case of co-insurance, share of each insurance company is authenticated by co-insurers. Insurance policy shall not be acceptable in case if any of the co-insurer is not on approved list of insurance companies. However Group Head Credits have the discretion to authorize accepting the insurance policy only in cases where only the outstanding loan or exposure / operative limit is being insured by the insurance company on the approved list of insurance companies.
1.
Additional guidelines for meticulous compliance: It is in the interest of the Bank as well as clients that adequate insurance cover is obtained for finance facilities extended to our clients against machinery / stocks and hypothecation / pledge of goods. It should be ensured that advances do not remain unsecured for lack of adequate insurance cover and a proper policy of insurance is obtained. Any deviation from the policy should be reported in the proposals for renewal/enhancement of existing facilities and/or for grant of fresh finances mentioning therein validity date/risk covered/amount of insurance obtained.
2. It may be suggested to customer to get insurance cover for remaining stocks/assets also, so that in case of any mishap their loss may be minimized. Where customers do not get the remaining assets/stocks insured, an undertaking should be obtained from customers, to the effect, that insurance claim received shall be first available towards adjustment of Banks financing and balance if any shall be repaid / paid from their own sources. In case where goods under banks lien have to be transported, the transit risk coverage should also be obtained. 3. Insurance coverage should be obtained for all risks pertinent to the assets being insured and keeping in view area / storage conditions where goods are stored. This must be ensured by the relationship 4. Open Pledge: Some limits allowed against Phutti, Cotton, Rice, Paddy, Sugar and like stocks are under open pledge arrangement, exposing the Bank to high risks for Burglary, Fire, Riot, Strike, Damage/Malicious damage etc. As such, it is necessary that appropriate insurance policy is obtained keeping in view the fact that goods are kept under open pledge. The policy / policy cover note should clearly mention that the insurance stocks/assets are stored in open and there should be no restrictive clause regarding such storage arrangement to avoid any dispute in the event of a claim. Similarly in cases where the insured stocks/assets are stored in open sided building/sheds or where there is/are deviation(s) from policy or warranty conditions are not fulfilled, the policy/policy cover note should clearly mention the same and there should not be restrictive clause regarding such storage arrangement, to avoid any dispute in the event of any claim. Business Unit should ensure that clause excluding the storage as above is deleted or varied by the insurance company and duly authenticated bearing signature & seal. 5. The Business Unit should invariably obtain insurance cover note in original and examine the same vis-vis appropriateness of the risks covered, with Bank Clause, before allowing any disbursement/taking any exposure on such assets under our lien. Please note that no risk extension is covered unless premium for the extension(s) is/are received by the insurance company. They should diarize the validity date of Insurance Cover Note and ensure that Premium Payment Receipt in original / Policy are received before the expiry of validity of the cover note. During currency of cover note if any claim is lodged, the insurance company is only liable to pay claim only after receipt of premium. 6. In case of insurance of building, insurance cover is available for value above plinth level and as such insurance coverage for fixed property under our lien may be obtained after deducting value of land and below plinth civil works etc., for which necessary assistance of banks approved valuer, may be obtained.
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Group Head Credits, on recommendations of Business, can relax the obtaining of Insurance Policy if the FSV (as per the banks approved valuator) of land is sufficient to cover the finance limit / operative limit along with required margin. 7. Normally Insurance policies expire at 4 Oclock in the afternoon of the policy expiry date and as such Business Unit should hold the documents confirming renewal of policy before the aforesaid time. However, as a matter of rule, Business Units /relationships are advised to obtain renewal of the policy atleast one week before its expiry and should diarize the same. Where Night-work is applicable, the matter be referred to insurance companies for coverage &/or exclusion of Night-work clause from warranties. 8. In case of financing, where during Banks exposure (fund based &/or non fund) transportation by sea vessel is involved, appropriate marine insurance cover shall be obtained in all cases. 9. In case of financing, where during Banks exposure (fund based &/or non fund) transportation is involved other then sea, appropriate in-transit insurance cover shall be obtained in all cases. Insurance coverage to be obtained should not only be limited to above guidelines, but be based on specific ground reality. To further facilitate understanding of relationship/Business Units on the subject, Appendix I to provide details of perils for which insurance cover (other than marine insurance) are generally available for stocks/assets under banks lien and the risks usually not covered in a standard policy. However, relationships are advised to study the specific original policy / policy cover note and ensure that all pertinent risk for which cover is available & required has been obtained/relevant exclusion have been deleted and duly stamped by the insurer. Clients /Receivables Report: While extending fund based facilities to borrowers against hypothecation of stock and/or receivables on paripassu basis, bank shall obtain monthly statements from borrowers that contain a bank-wise breakup of outstanding amounts with the total value of stocks and receivables there-against against signed/stamped by the customer. Ageing of receivables must also be given in the receivables report. The stock (hypo) reports submitted by clients should be checked and signed by respective RMs before delivering them to CADs. Where clients fail to submit these, RMs are required to follow-up either verbally or through reminder letters. Damaged or old stock should be separately recorded and should be excluded for computation of drawing power. Site Visits: For contracting and manufacturing clients, a periodic schedule of site visits to ongoing projects, based on the nature of each credit, will be established. The results of such site visits will be documented in the credit file on the given format enclosed as annexure Credit packages must contain site visit memoranda. It will be preferred if such site visits are conducted as close to the annual review cycle as possible. However, RM/SRM will conduct site visits at least once a year. Documentation Verification: Relationship Managers and CAD/CAC will be required to inspect physically the security and support documentation pertaining to their accounts at the time of each annual review. Evidence of compliance with this requirement will be recorded on the credit approval document and by completing a documentation check list. CAD will withhold the issuance of DAC/disbursement of limits until the provisions of this clause have been satisfied. Drawing Power Limit calculation: Other than centralized Branches, the receipt of stock reports, calculation of drawing power and issuance of delivery order will be done by the respective Branch Credit Manager and RM will ensure delivery of copy of stock report to CAD for review purposes. It will be the responsibility of the RMs to make sure that adequate stock is available to meet the purposes for which capital finance is approved. RMs will also ensure that stock reports are received in time. CAD will remind RMs and CMU if stock reports are not received on due date. At any time in case of any short fall the customer shall be advice to top up/ increase the stock immediately. Where the shortfall is not top up by the customer, matter shall be referred to Area Office.
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Maintenance of Credit Information History: Credit files will contain an adequate history of the credit relationship, sufficient to reconstruct credit approvals and actions taken in remedial management situations. They will incorporate by reference all other sources of information, such as desk or departmental files, so that they will be the complete and ultimate document in support of the extension of credit. Credit Files A Credit file must be maintained for every borrowing account as it provides all the relevant information when considering credit facilities. The file should contain: a) i. ii. iii. b) i. ii. c) i. ii. iii. iv. d) i. ii. iii. iv. v. vi. Review Diary : Credit Line proposal, expiry dates / renewals / rescheduling. Sanction advice HO stipulations and their deadlines. Temporary excess over approved limit by BOD/CCC/concern authority Internal Memos : All correspondence with HO and their responses. Check of markup rates on a quarterly basis to approved financials etc. Correspondence Correspondence with the customer regarding renewal, adjustment and enhancement of facilities. Facility request letter from the customer. Correspondence regarding overdue facilities and markup etc. Other miscellaneous correspondence. Financial Reports / Valuation/ CIB /Credit Reports: Copies of last three years approved Financial Statements together with financial analysis. Valuation Certificates by banks approved surveyors Updated CIB Reports from SBP. Credit Reports from other banks and financial institutions previously/ partly handling borrowers business. Companys Reports evidencing ranking of charge. Visit Report. NOTE: 1) Correspondence that is not directly related to the credit standing or the credit facilities of the customer must be filed separately.
All post approval documents will be filed with CAD including following: e) i. ii. f) Insurance Policy & Stock Reports: Insurance policy (along with premium paid receipts) Stock Reports Inspection reports of both pledged and hypothecated stocks with the bank. Opinions / Copies of Charge Documents: a) Copies of Finance / Securities Documentation Checklist. b) Copies of charge Forms and property documents.
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c) d) e) f) g) h) i) g)
Legal opinion on documents. Offer letter duly signed in acceptance by the customer. Confidential opinion from other banks and institutions Copy of Memorandum & Articles of Association or Partnership Deed. Copy of Certificates of Incorporation and Commencement of Business. Correspondence regarding any change in companys name, management etc. Company mandate & copy of AOF. Stock Inspection/ Report: For annual reviews, inspection reports must accompany the proposals unless specific waiver on an account has been obtained from the Head Office in this regard. (Such a waiver may be granted to customers with undoubted creditability and high network). The following guidelines should be adopted by the business unit/branch/CAD/CMU(CRMD) in regard to conduct of stock inspection: Stock inspection will be carried out when the stocks are pledged/hypothecated with the Bank and form part of the collateral and /or when the stocks are financed under the following facilities: Current Finance Usance Letters of Credit (ULC) Sight Letter of Credit (SLC) Commodity Financing (During peak seasons) Finance against Trust Receipts (FTR) in the above cases, if the goods have been disposed off, then the outstanding receivables should be checked at the time of stock inspection.
h)
The frequency of stock inspection should be determined considering nature of pledged item, exposure involved, and track record of the customer. Where clients fail to submit, business unit/branch/CAD are required to follow-up through reminder letters. 1. 2. 3. 4. 5. 6. The first reminder will be sent not later than 1st week of the month in which the report is due and the second letter one week later. Collateral valuation reports should be documented in both the credit files and in the inventory file. The value of collateral and the most recent valuation dates should be indicated in the security section of the Credit Proposal submitted for approval / renewal. Credit Proposal requirement for Stock Inspection frequency and margin requirements are to be strictly followed and checked each time it is prepared. Combined stock inspection once a year is mandatory where customer is High, Medium Risk rated Non-submission of stock statements should be highlighted in a Call Report and customer should be sent constant reminders. Copies of reminders should be filed in the Credit File.
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Annexure I
INSURANCE GRID
F BT RSD MD T +EFR +ES +AD Ar D * ID E Exp
Commodities Under Pledge / Hypothecation (excluding Open Pledge)
Under Open Pledge Plant & Machinery (including stores & spares) Ginning Factories Spinning Factories Weaving Factories Flour Mills Cigarette Manufacturing Factories Fertilizer Factories Beverage Factories Automobile Factories Electric Cable Factories Electronic Goods Engineering Factories Power Generation & Distribution Pharmaceuticals & Chemicals Vanaspati & Allied Industries Sugar Mills & Plants/ Metal & Allied Products/ Refinery/ Printing & Publishing Rice Mills Other Industries Vehicle Buildings Residential Industrial Building Commercial Building (Multi Storey) Hypothecated Good other then Commodities
@ @
Comprehensive / FULL COVER except for EFR, ES, Ar D FULL COVER except Burglary & Theft, Ar D, AD and R &S (excluding value of land) FULL COVER except Ar D FULL COVER except Burglary & Theft, Ar D, AD and R &S (excluding value of land where applicable in case of complete project) *
* Risk coverage should be taken & approved, keeping in view nature, location and storage conditions of the asset
held as security on recommendation of Business Group Head and approved by Group Head Credits. @ In these cases for obtaining insurance risk cover should be decided keeping in view the size, value & sensitivity of the plant. Where sophisticated precision (usually expansive) instruments are dues which are of a smaller size the burglary & theft risk cover should be obtained.
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Central Credit Committee, on recommendation of Business Group Head & Head CAD, Group Head Credits & GM RMD, can allow deferral of coverage of risks even where such relaxations are not permissible as per Insurance Grid. + For Areas like parts of Muzaffarabad, Quetta, Pashin, Chaman, Pasni Gawadar, Kalat, Khuzdar, Kohlu, Gilgit, Chitral, Srinagar, Sialkot, Srinagar, Rawalakot, Gilgit, Patan, Gopis, Karachi and Thatta where the risk of Earthquake Damage is Severe or Moderate (as per the Seismic Harzard Zones of Pakistan latest attached) the relaxations with regards to Earthquake should be discouraged and can be allowed with justifications on case to case basis by Group Head Credits on recommendation of Business Group Head. +For flood affected areas like Swat, Upper dir, Mianwali, Dera Ismail Khan, Leiah, Rahim Yar Khan, Rajanpur, Sibi, Nasirabad, Nowshera, Charsada, Mardan, Chitral, Kohistan, Balagram, Mansehra, Haripur, Mianwali, Kohat, Dera Ghaizi Khan, Shikarpur, Kashmore, Khandhkot, Kolhu, D.I. Khan, Jhang, Dadu, etc, which were adversely affected by floods (as per the disclosures made by US AIDattached) the relaxations with regards to Atmospheric Disturbance should be discouraged and can be allowed with justifications on case to case basis by Group Head Credits on recommendation of Business Group Head. F BT R&S MD T EFR ES AD Ar D ID E Exp Fire Policy Burglary/ Theft Riots & Strikes Damage Malicious Damage Terrorism Earthquake Fire Risk Earthquake Shock Atmospheric Disturbances Aircraft Damage Impact Damage Electrical Shock Explosion
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Annexure II
Seismic Hazard Zones of Pakistan
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Chapter 6: REMEDIAL MANAGEMENT- MANAGEMENT OF IRREGULAR, BAD AND DOUBTFUL DEBTS

MANAGEMENT OF IRREGULAR, BAD AND DOUBTFUL DEBTS Introduction In spite of a number of precautionary measure and monitoring tools, debts may become irregular, or worse, bad, due to a number of risks businesses are exposed to. Some businesses might get adversely affected by certain economic conditions or government policies, while others might deteriorate due to bad management or some unforeseen event or disaster. Whichever the case may be it is critical that these debts should be identified and monitored while remedial steps should be taken to safeguard banks interest. This section lays down strategic guidelines for the identification and management of irregular and bad and doubtful debts. It also provides specific policies and procedures for Recovery of Advances, through litigation or otherwise. Function of Special Assets Management Group in managing post classification debts is also elaborated. Early warning Signals Credits do not deteriorate suddenly. In almost every case there are warning indications which when perceived should stimulate the Manager or the credit officer's curiosity and where necessary generate corrective action to safeguard the Bank's interests. Managers/Credit Officers should also downgrade the internal rating of the client whenever such symptoms are diagnosed. Listed below are some of the symptoms of potential problem finance. Some of these are displayed by sound companies as well. However, the existence of a number of these symptoms should alert the Managers/Credit Officers to further investigation as they could signal near term problems: I. in leverage a. Decrease in net worth b. Delayed payment of creditors c. Negative working capital d. Withdrawals against uncleared effects e. Decline in sales with corresponding decline in profits f. Increase in sales but reduced profits g. Product obsolescence h. Delays or inability to meet contract commitment i. Hard core fund based finance j. Default in repayments k. Violation of any clause of the finance agreement l. Disregard of subordination agreement m. Overtrading/Constant excesses in facilities and inability to bring excesses within limits. n. Tight liquidity position o. Delay in submission of audited financial statements p. Slow collection of receivables q. Increase in losses from bad debts r. Increase in level of stocks s. Utilizing short-term funds for long term needs t. Increase
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Following are the areas where the Credit Officers need to be more cautious. They may not be considered as problem finance indicators but have unparalleled importance in identifying deteriorating accounts:a) Inability to gauge management depth. This is especially true of larger companies where the Branch Managers feel they are not 'qualified' to comment on management ability other than that reflected in operating performance. b) Advances made against projections accepted without a careful study of underlying assumptions. c) Bank extending 'capital' finances, lending to a start-up firm with no proper assessment of repayment capacity. d) The branch manager's inability to unmask intricate group relationships. e) No proper study of economic environment i.e. general economic condition, industry prospects, impact of Government regulations etc. f) Advances made primarily on security considerations without proper evaluation of prospective cash flow. g) Poor follow up of facilities inadequate attention to monitoring devices such as stock statements, quality / spread of receivables etc. h) Lack of cross guarantees when lending to groups i) Failure to take an adequate margin to cover fluctuations in the price of goods. j) Insufficient facts about why funds are needed and how they will be repaid. k) Slow reaction to danger signals. l) Creative accounting e.g. change in the mode of stock valuation, revaluation of assets, change in depreciation policy, reluctance to setup depreciation provisions m) Evidence of pending lawsuits n) Change in auditors (e.g. frequent and /or from reputed to unknown) o) Delivery order book/cancellation of orders p) Change in banking relationship on pretext of 'poor' service q) Payment of excessively high mark-up rates for funds r) Irregular behavior of customer leading to evasive answers s) Shift over from normal business into new unrelated lines t) Extravagance in personal life style of the proprietor/partners/directors u) Concentration by customer on one product or one debtor v) Rapid turnover of senior management or a too conservative or too flamboyant management style. w) Significant deterioration of security and deficient security documentation. x) Unfavorable economic or political changes in sourcing or selling market. y) Adverse market reports, including litigation against borrower and / or guarantors or affiliates, having a negative effect on the borrowing entity or guarantors. z) Heavy dependence / increase in inter group companies aa) Decrease in trading level unmatched with a general market boom. Supervision and Watch listing of Accounts WATCH LIST: Watch List accounts are those borrowing accounts which are characterized as Watch list accounts on the basis of parameters approving authority. The list of Watch list account is a summary tool to assist monitoring and management of high-risk borrowers it helps focus management attention on those customers that require priority management so that their status does not further deteriorate to Classified/Non performing loans
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Criteria for Watch-Listing: Criteria for watch-listing: The watch list parameters are approved by CCC all accounts falling under this criteria should be classified as watchlist. The credit Monitoring group together with Business Group is responsible for closely monitoring all such accounts to ensure they do not further deteriorate and move to NPL criteria (refer annexure watch list parameters) comprising of various weaknesses in the performance of a credit relationship. The business group shall determine the period for monitoring the account under watch-list. The reasons for watch-listing should be documented and specific remedial actions should be recommended by Area Office/Regional Office (Business Group). Progress relating to remedial strategy should be reviewed on quarterly basis on the same format. To ensure close monitoring of watch-listed accounts, copies of the report shall be provided to respective Area Office/Regional Office/CMG who shall keep liaison with business units for the required remedial action by reviewing the progress Downgrading of Accounts If the Credit Officer feels that there are sufficient grounds for concern (upon identification of any problem indicator (s) or after a review of the facilities granted, then the account has to be re-examined keeping in view the relationship with the customers as well as the banks interest. Depending on the Manager's/Credit Managers perception of the risk involved, he must arrange for immediate downgrading of the account keeping in view the degree of risk involved. The level of downgrading will depend on the temporary or continuing nature of the problems as perceived by the branch. Where doubts exist, immediate advice must be sought from the Head Office on the level of downgrading. Accounts downgraded to watch list accounts or CIIRS rating 9 require very close monitoring to ensure that these do not deteriorate further and that over a period of time the accounts are either upgraded or worked out. No new facilities and renewal of existing facilities will be allowed by branches on CIIRS rating 9 accounts without prior Head Office approval. Also, if so required, branches will seek guidance from the Head Office on handling of specific accounts belonging to this grade. In order to enable the Credit Group, Head Office to monitor the state of watchlist accounts at branches and to answer to specific inquiries of the external auditors on such accounts, branches should submit a preliminary report on each watch list exposure on monthly as well as quarterly basis to analyze the trend of deterioration. The report, inter-alia, will incorporate the following information: Amount received in facilities reduction during previous 12 months (if the account was rescheduled). Ratio of credits to debits on the account in the previous 3 months. Net worth according to latest available financial statements. Review of security structure.
Based on the preliminary report submitted, the appropriate credit authority will review these accounts and decide on the need for further downgrading, provisioning etc. HO comments will be communicated to branches. Branches can appeal against HO decision where they feel that adequate justifications exist. Initial Screening of Problematic Accounts In case the manager suspects deteriorating signs or becomes aware of any circumstance that the debtor may be in financial difficulties, the following screening should immediately be undertaken: All account activities should be closely monitored and security / collateral be reviewed immediately.
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Facilities availed should be analyzed. This would enable to find out whether limits allowed were adequate, excess or short of requirement. It will also establish whether limits were authorized or unauthorized. In case of unauthorized sanction, fixation of responsibility would be easy All documentation to be checked. In case there are any defects in documentation, efforts should be made to remove these, in consultation with Law Division/Legal Consultants. Persons responsible for defective documentation would also need to be highlighted. All type of securities under charge/lien of Bank should be examined, assessed, evaluated, to find out the net realizable value. Shortfall, if any, should be ascertained. Financial status / position / means of all partners/ proprietor/guarantors and their assets, both movable and immovable, should be investigated and taken into account. This would enable the Bank to fall back on their personal property, in case the principal debtor fails. Borrowers' exact liability, including mark-up/ interest should be correctly determined. Branches should avoid applying mark-up on the finances not permissible under NIB System or which are not recoverable as per agreement/terms of loan. On-the-spot inspection of Inventory and Receivables should be undertaken by Team./Recovery Officer to have first hand knowledge about actual financial position. Probe into the causes of business failure should be conducted. It may be either due to overtrading, poor management, mis-management, adverse market conditions/product changes, competition, over concentration of business in few hands/market, etc. This would help in arriving at a correct, rational decision. Manager may also take steps to improve supervision and security and initiate all or some of the following steps:
a. Request the customer to furnish the Bank with or increase the frequency of periodical stock statements, statements of purchases, sales, sundry debtors and sundry creditors. b. Request the customer to provide additional security or if this is not available, at least the joint and several guarantees of the directors (in case of companies) or partners (in case of partnership concerns), if these are not already held. Managers should also gather information regarding the personal assets of the directors / partners so that in case of need the Bank can make efforts towards their attachment. c. Restrict the use of facilities and permit overdrawing, LCs issued, FTRs and Finance against Exports etc. on a case-to-case basis only. d. Recommend to appropriate credit authority to reschedule the debt by gradually scaling down the Bank's exposure, through an agreed repayment program. e. Suggest the customer to raise additional capital or raise a long term soft finance to provide funds in business. f. Open a wages account on behalf of the customer to establish priority in the event of the business going into liquidation. The aforesaid are in the nature of guidelines only. Steps to be taken by the manager will depend on the prevailing circumstances in each case. The steps will aim at eliminating the problems and where possible secure the Bank's exposure by obtaining additional security. Irregular/Substandard Debts CIIRS rating 10 This section covers all irregular and chronically overdue debts of rating 10 in accordance with CIIRS as Sub-Standard Facilities. As per State Bank definition sub standard debt is overdue by more than 90 Days. Strict adherence to SBP's Prudential Regulation for classification and provisioning should be ensured at all times.
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Over Due Advances Managers or their delegated officers should regularly examine the different types of advances outstanding in the branch's books for signs of slow repayment / movement. Advances, which are, identified as 'irregular debts' i.e. accounts failing to meet their maturing commitments on schedule persistently should be classified as overdue. Overdue advances should be checked by the branch management weekly and appropriate follow up action taken. However, for customers with satisfactory track record and where over dues are a temporary phenomenon due to unavoidable reasons with plans for regularization in place, the branches can allow operation of facilities within sanctioned limits (like opening of new import L/Cs) despite existence of over dues. Criterion for Classification as Overdue The following criteria will apply in classifying an advance as overdue unless proper justification accompanied by a proposal for regularization is forthcoming from the customer e.g.: 1. Current Finance Facilities: Static with no movement for 3 months or an account with excess over limit/temporary overdraft remaining unadjusted. In the latter case, the basis of calculation of overdue will be: a. Excess over limit: One month from the date the excess is required to be adjusted. b. Temporary Overdraft: One month from the date the temporary overdraft occurs. 2. Other Credit Facilities: I. If an installment is overdue for 3 months II. Finances repayable in a single payment if the payment is overdue by one month. 3. Import Bills: 14 days after arrival of shipment or 1 month after customer is advised of the arrival of documents, whichever is earlier. 4. Export Bills Purchased (Not Drawn Under L/C): If not paid by the due date, the bill should be treated as overdue and efforts should be made for recovery through customers account. Follow up to be continued with the collecting bank and the customers for realization of the bill. After 4 months from the shipment date the bill should be reported as over due to the State Bank of Pakistan as per laid down procedure. Application of Additional Rate of Mark-up In the case of Current Finance, a two tier mark-up rate must be maintained in the system to enable the system to automatically calculate additional mark-up on excesses allowed over the approved limits. Based on the value of the relationship and its profitability the branch may recommend waiver of the penal mark-up to the appropriate Credit authority for approval. Bad And Doubtful Debts CIIRS rating 11 & 12 Debts which are persistently past due or which are felt to be doubtful of recovery in full are classified and referred to in all correspondence as Bad and Doubtful Debts. Branch may recommend to the Head Office for classifying a debt as bad & doubtful, according to the performance of the account, at any time. Once a debt has been classified as Bad and Doubtful, the account should appropriately be graded as Risk rating 11 or 12 (See Section of Grading of Risk). Risk rating 11 corresponds to doubtful while risk rating 12 corresponds to loss. As per State Bank prudential regulations debt may be considered doubtful when it is more than 180 days overdue while it is classified as loss when it is more than 360 days overdue. The branches should prepare History Sheet of all such accounts, which should be regularly updated in the file. History Sheets are prepared only once i.e. at the time a debt is classified bad and Doubtful. These sheets should be updated by the branches evidencing follow up made towards regularization of the account. Progress will be reported through submission of a statement reporting all delinquent advances
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Outstanding at the end of each quarter. Updated History Sheets should thereafter be forwarded quarterly to the Head Office along with the quarterly Returns of delinquent advances. Necessary update should be made in the system so that such amount can be separately identified. All Bad and Doubtful Debts will be handled by branches where these accounts are located in collaboration with SAM. Subsequently bad and doubtful debts are reported to the State Bank of Pakistan through various statements/returns referred in next Section
CREDIT MONITORING
Monitoring of Customer Conduct Any warning signals/exceptions/short comings/deficiencies noted should be conveyed by the Relationship Managers to the concerned Team leader/Business head and relevant Head office Credit authority. RM shall also to ensure reporting of periodic statements as required by SBP and/or Bank risk management guidelines, Credit manual etc. Also Manager / officer, CAD should immediately apprise Relationship Manager and concerned Business Group, Credit Group, Credit Monitoring and RMD of the persistent weakness in account and deficiencies in security / documentation. Maintenance of Diaries: Relationship Managers/credit officers should also maintain due date diaries for effective monitoring of the following functions: Periodical submission of stock reports. Stock inspection (hypothecated/ pledged) Expiry of Insurance policy (ies) Expiry of facility (ies) Guarantees expiry Follow-up, completion of documents Any other matter which need to be diarized. Periodic reporting to RMD,CMG.CG, SBP.
Credit Monitoring Manual shall also be referred MONITORING PAST DUE OBLIGATIONS (to be checked with CAD) Loans and advances are treated as Past Due if they meet any of the following criteria: 1. Any principal repayment or interest payment is unpaid 15 or 21 days after becoming due; even if only an mark-up payment or a principal installment is past due, the entire unpaid principal must be transferred to past due account Temporary overdrafts (where the overdraft is extended in the current account, and an approved facility does not exist) that remain unpaid for a period of 15 days; TODs on approved facilities are considered past due when not covered within the terms of the underlying agreement, or in any event, on expiry of the facility
2.
When a principal installment, or mark-up, is past due for more than 90 days, all facilities to the Borrower/Group are blocked. The accrued (but unpaid) interest/mark-up be reversed from the relevant income account, and the entire fund based outstanding are transferred to non-accrual status and quarterly Mark-up be noted in memorandum. Responsibility of CAD & Business: CAD, being an independent function, is primarily responsible to ensuring compliance of approval conditions and following business units for timely renewal of Insurance Policy, necessary correction in insurance policy, premium payment receipts, verification of Insurance policy and other related activities.
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Since the primary ownership of relationship rests with the business therefore business is ultimately responsible for ensuring compliance of approval conditions, policies and rectification of discrepancies highlighted by CAD in this regard. INITIATING THE RECOVERY OF ADVANCES Introduction Even after taking all necessary measures, if it is evident that the repayment of receivable is doubtful, consideration will be given to calling up the advance . Some Important considerations for calling up advances are as follows: 1. The advance is considered a commercial transaction regardless of the capacity of the borrower and purpose for which the finance is sanctioned and appropriated. 2. Bank credit is offered for a limited period, but as per the Letter of Arrangement and Letter of Offer accepted by the customer, the facility can be withdrawn at any time. However, it would be more appropriate if the customer is served a 30 days notice before severance of credit facilities 3. The Bank should not cancel credit lines before their expiry except under the following circumstances: I. Where it is established that the customer is involved in illegal / nefarious activities then the credit facilities should be suspended with immediate effect. II. Default in payments by the customer. Filing of request for declaration of bankruptcy of the customer is not required. III. Misuse of Bank's credit facilities. IV. If the customer is a firm or company, the credit facility is terminated if the firm/ company ceases to exist due to dissolution/ liquidation etc. V. Death or incapacitation of the customer. 4. If two or more persons have entered into a commercial debt, they are jointly and severally liable for settlement of such debt unless the agreement provides otherwise. 5. In case of Personal guarantees offered for the facility, the guarantors are jointly and severally liable to the debtor. 6. In case of default by the customer, the creditor (Bank) has the right to start the liquidation process of borrowers assets after notifying the customer. The bank by submitting a petition to the judge of summary proceedings and after obtaining required decree/ permission may sell in public auction all or part of pledge trade inventories/mortgaged properties. (The Mortgage/pledge in order to be effective should be registered with the RJSC; the Bank should have possession of the pledged items and/or hold the original documents of title). The sale shall be effected at the place, date and time specified by the judge which event should be published, at least ten days or as advised by the court, prior to its occurrence, in reputable newspapers. 7. All public auctions should be carried out through an approved auctioneer. The auctioneer should establish reserve price(s) for the items to be auctioned and maintain proper records of the auction. 8. The courts may not grant the debtor who has a commercial liability time for payment or for making the payment by installments, except with the consent of the creditor or upon proof of extra ordinary circumstances. 9. No legal claim can be lodged against the debtor if three years have elapsed from the time the payment of debt became due. 10. The court will appoint a 'Trustee in bankruptcy' to administer the bankruptcy. Secured creditors will have the priority over general creditors who will be represented by the administrator of the bankruptcy in respect of their claims.
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Procedure for initiating call-up of advances Issue Of Legal Demand Notice When a decision is made to call up an advance, the Bank is required to make a formal written demand for payment of outstanding plus mark-up by a specified date on the borrower and the guarantors, where applicable. The issue of legal demand notice should be drafted and served by the Legal Department, Head Office or the Bank's approved lawyers. The purpose is to ensure that the legal demand notice conforms to local legal requirements and that further actions arising from the response to the notice (either a repayment arrangement or legal action) are handled with the active participation of Legal Department (HO)/legal counsel. The Legal Department should act as the coordinator between branches and the approved lawyers on all legal matters. On accounts where the branches require that legal demand notices should be issued, the details of those accounts will be advised by them to the Legal Department (HO) or Bank's approved lawyers. Legal demand notice should normally be served on a customer if he defaults in payment of principal or mark-up within 180 days from the date it became due. However, the manager may serve legal demand notice earlier if he feels that deterioration in financial position of the customer makes it imperative that the Bank calls up the advance to protect its interests vis-a-vis other creditors. The managers with prior approval from the Head Office can also delay issue of legal demand notice in a situation where a repayment program has been offered or partial repayments have been promised / forthcoming. Follow Up: If the debtor and/or guarantor (where applicable) fails to comply with the Bank's demand for payment, the manager may decide to take any or more of the following steps according to the security available. 1. Set off credit balances or deposits under lien. 2. Realize any shares pledged to the Bank. (Realization of mortgaged shares can only be done through a court order. However, if the transfer deeds have been signed by the mortgagor and registered with the company, there is no need for a court order). 3. Realize any Government Securities (SSC, DSC etc.) pledged to the bank. 4. Claim under assignment of insurance policies. 5. Take physical possession of any stocks of goods and raw materials charged to the Bank by placing the Bank's name board on the factory or place of storage. Post a guard to ensure that goods and machinery are not removed without the Bank's authority. 6. Appoint Receiver if the Bank holds a floating charge and obtain injunction on disposal of assets. i. Any action to be taken must be permitted by the security documents held from the debtor and guarantor. Where so required (depending on local laws), court approval should be obtained prior to initiating any action. Constant guidance should be obtained from the Legal Department / approved lawyers while taking such steps. ii. When the realization of security includes the sale of goods or property, care should be taken to observe the provisions of the local laws laid down in this respect. Endeavor will be made to obtain the best possible price and not merely sale proceeds sufficient to cover the debt. An independent valuation should invariably be obtained. If an auction is planned, a reserve price should be set as high as possible commensurate with the current market value and if necessary with the guidance of a reputable valuer. The Bank should reserve the right, in accordance with the law, of rejecting the highest bid or any bid without assigning any reason. A proper record of the sale transactions should be maintained. Any sum remaining surplus on satisfaction of the debt including interest, legal fees and expenses must be paid to the former debtor. 7. If an amount is still due to the Bank after utilizing any readily realizable security, the manager may initiate, with the help of the Bank's lawyers, to issue a writ against the debtor and/or guarantor and to obtain judgment. It will be advisable, at this stage, to identify and list out the assets of both debtor and guarantor in case execution of the judgment is required.
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8. If the debtor is in default of the judgment, it may be necessary to take recourse to execution of the judgment. The court should be approached with the details of identified assets of the debtor and guarantor with request for sale or auction in satisfaction of the debt. The sale in such cases is usually conducted by the court and the sale proceeds paid to the Bank in satisfaction of the debt as governed by the terms of the court judgment. Any shortfall will require to be absorbed by the Bank if other means of recovery are not available. Debt Provisioning/Write offs/ Write backs Bad and Doubtful Debt Returns Under Prudential Regulation for Classification and Provisioning for loans and other Assets, banks are required to create provisioning against classified loans as per the stated criteria. Returns are required round the year in respect of Bad and Doubtful Debts i.e. for advances classified as Risk Rating 10 till 12 or classified as substandard, doubtful or loss. The returns are prepared by the branches and subsequently submitted to the SAM and Credit Group, Head Office. SAM submits these returns to Finance Division where these are consolidated for onward submission to the State Bank of Pakistan. Debt provisioning is to be done as per updated PR requirement. Following points need to be considered: 1. The returns currently submitted to the State Bank as per frequencies. 2. The SAM Division at the Head Office retains the copy of these returns for monitoring delinquent advances. The purpose of these returns is to establish the total provision required and to determine which debts should be written off. All Bad and doubtful debts must be included in the return. The objective of preparing these returns is to adhere to the State Banks Prudential Regulations and to establish the provisioning amount required to cover bad and doubtful debts. To arrive at this figure, it is necessary to list the debts separately and consider each case independently. No entries to the specific provision account are to be made by branches without the approval of HO. 3. Notwithstanding the quarterly reviews, if further provisions become necessary in between the quarters, such provisions should be made immediately, with the HO approval. 4. A return is of great importance and the Head Office attaches great value to it. Care must therefore be taken to ensure that every bad and doubtful debt is shown. Charges forming part of the Bank's legitimate claim on the debtor but held in a Suspense Account (e.g. insurance or storage charges on goods) must not be overlooked when preparing this return. Other accounts where specific provisions are not made should also be examined and if considered necessary a General Provision for Bad and Doubtful Debts be made only with the Head Office approval. 5. The return should be sent with a covering letter listing in alphabetical order and under separate headings in respect of all new or changed provisions or write offs for which approval is sought from the Head Office. 6. Managers should give adequate information/reasons in the History Sheets as applicable to support their recommendations for new provisions and write offs. 7. It may become necessary to increase existing provisions for debts due to reasons such as incurring legal charges, court fees, etc. or if previously the debt was partly provided, the manager may now feel that full provision is required. New provisions and increased provisions should be indicated as "Shortfall" in the covering letter. 8. Recoveries made, on advances, for which provisions have been made should be indicated as "surplus. Follow Up Of Bad And Doubtful Debts Classifying an Advance as Bad and Doubtful and providing for a debt does not in any way imply that the Bank is prepared to write off the advance. A debt is classified as Bad and Doubtful in order to class it as a special account requiring close monitoring. Managers and credit officers should pay special attention to the follow up of these accounts and be guided by the following:
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1. Litigation The recovery of a debt should be entrusted to a lawyer only as a last resort. The manager or the credit officer should exercise all possible efforts to obtain repayment without litigation. A debt should be placed in the hands of lawyers only when all other avenues of recovery are exhausted. After a decision is taken to resort to legal action, the branch should be definite about the cost of litigation i.e. lawyers fee, court fee, attachment fee, etc. The cost of litigation should not be disproportionate to the debt. Prior approval of the Central Credit Committee/Board, through SAM division is required for initiating litigation. 2. Contact with the Borrower Frequent visits, telephone calls and letters assist to maintain contact with a delinquent borrower. If a debt has been guaranteed by one or more persons, the guarantors should be formally informed that the debtor is not adhering to the agreed repayment program. Sustained pressure should be applied on the borrower and the guarantor(s). 3. Settlements with Borrowers If a debtor offers to repay a lesser amount in settlement of the debt, the offer should not be accepted hastily. The borrower is likely to begin with his minimum offer expecting hard bargaining from the Bank. Once an offer of settlement or a revised repayment schedule is accepted, the branch should tie down the borrower to measurable commitments. Vague promises should not be accepted. A written undertaking should be obtained. If the Bank holds a third party guarantee for the debt, the guarantors should agree in writing, to grant time to the borrower to repay. All settlement proposals must carry the prior approval of the HO as these often involve write-offs/ mark-up concession/ longer repayment period etc. 4. Progress Charts The officer-in-charge of recoveries should regularly (weekly) maintain a Progress Chart for each Bad & Doubtful Debt. The Progress Chart is used to check expected repayments, follow up actions, progress by lawyers in pending legal cases etc., and to note further action for future reference. The Progress Chart is an internal 'Memo' sheet. These should be available for inspection to the Bank's Internal Auditors. Entries in the Progress Charts will be the basis on which branches will prepare the quarterly statement, showing the status of delinquent accounts. DEBT PROVISIONING Write Offs: Debts, full recoveries of which are in doubt, will be adjusted in the bank's records to reflect values comparable with the amounts estimated as realizable from all sources. The creation of specific Loan Loss Reserve (LLR), the subsequent assessment of their adequacy on a regular basis and the crediting of the funds provided for in LLR to income on adjustment of the delinquent advances in the branches is the responsibility of Finance Division. If a debt is to be written off during the year, recommendations are made by Branch to the HO for the amount of LLR to be adjusted against the write-off. After approval from the CCC (Central Credit committee), branches upon their requests, are provided with an IBCA (Inter Branch Credit Advice) for the appropriated amount. On the adjustment of a delinquent advance, the LLR if created against it, is credited to Income. This is also done at the year-end by the Finance Division with the recommendation of the Branch and subsequent approval of the CCC. 1. Frequency of Finance Loss Provision Assessments Though specific Loan Loss Provisions are frequently assessed, a detailed review of all non-performing advances at the branches should be undertaken at each year end by the Finance Division, HO, with a view to arrive at required provision level. This data can be obtained from SAM division. At the same time, opinion and consent of the external auditors is also obtained.
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2. Loan Loss Provision Levels In arriving at a required provision level, available security, market credibility of the borrower, estimated other assets (including other businesses) must be considered. 3. Suspension of Mark-up 1. Mark-up must be recognized on an accrual basis, i.e. taken into income in and for the period to which it relates under the condition that it has effectively been earned on performing assets. 2. The above mentioned general policy cannot be applied to non-performing assets, for which mark-up would not have as effectively been earned, as this would lead to an overstatement of an institution's real profit. 3. Credit officers responsible for monitoring should suspend mark-up on non-performing assets from the date the account is downgraded to Risk Rating 11 or when an account is over due, in accordance with the Prudential Regulations, as to principal or mark-up by booking the accrued amounts to a general ledger account, called "Suspense Account Mark-up " rather than Profit and Loss Account. 4. Additionally, all mark-up previously accrued but unpaid at the point mark-up is suspensed, should be reversed from income. 5. Where there is no chance of recovery, outstanding should be written off as soon as the nonrecoverability is recognized. A proposal should be prepared by the branch incorporating the entire details of the advance viz. date of sanction, name of recommending/approving authorities, outstanding since, details of securities, current outstanding, etc. The branch should recommend and forward the proposal to the Central Credit Committee for approval. In practice there has been a reluctance to actually write off debts, in case the elimination of the outstanding from the books, may be interpreted by the courts that monies are no longer owing. 6. When a debt is written off, the account must be credited with any amount that may be held against it in, 'Suspense Account Mark-up and Loan Loss Reserve Account. Any balance remaining must be debited to Profit and Loss Account. 7. When it is considered that there is a possibility of future recovery, HO may give instructions to write down the amount of the debt to a nominal one unit of currency. The item should then continue to be shown in all bad and doubtful debt returns. 8. Details of all debts written off should be listed and simultaneously updated in the system by the branch concerned. The entry should also clearly indicate the authority for writing off. This record must be kept under the personal control of the Manager or his deputy. 9. A remark should be added to the final sheet of the customer's credit file on write-off and the file closed. Write backs A write back is defined as any event, which results in a credit to Profit and Loss account because of the improvement of a debt situation. 1. Form of Recovery As a general rule, a recovery will be received in the form of cash, or a financial instrument. 2. Regularization of Account: In certain circumstances however other assets (e.g. property/shares) will be received from a debtor. These assets must be valued on a conservative basis, considered as an increase in the bank's assets and therefore form the basis of write back entries. 3. Recognition of income Recoveries are usually accounted for on a receipt basis. Where agreements have been reached with debtors who specify future cash/asset inflows, the agreement itself must not form the basis of any accounting entries unless the payment obligations are supported by a bank guarantee of first class standing.
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Basis of Write Back entries Write backs can occur through following circumstances: A recovery which results in a provision held against a debt becomes surplus to requirements then, A recovery, in respect of a debt which has previously been written off, No provision is affected because these would have been previously eliminated on the write off of the debt. (Being amount recovered for an advance previously written off) Accounting for Provision, Recoveries and Write backs of mark-up in suspense Recoveries and mark-up in suspense write backs are credited to the Profit and Loss account as and when these occur. Mark-up in suspense write backs is reported in monthly accounts within the recoveries section of profit and loss account. The justification of such treatment is: Monthly mark-up income/net mark-up margins are not distorted by the receipt of large exceptional mark-up write backs. The effect on monthly profits of mark-up in suspense written back is more easily identified if such credits are shown under "recoveries" rather than in a large monthly mark-up income figure. Such recoveries are in any case identified on a monthly basis. For accounting purposes however, it is correct to show Mark-up in Suspense written back in the mark-up income section of the Profit and Loss rather than recoveries (recoveries should theoretically refer only to movements in principal) and therefore an annual adjustment is made in the preparation of annual financial statements whereby all mark-up in suspense written back during the year is transferred from the recovery section of the Profit and Loss to mark-up income. Provisions (although accounts may be reviewed on a quarterly basis) are booked and shown in the Profit and Loss Account as and when the necessary debts for provisions are identified. Recoveries and mark-up in suspense items are reported separately from provision creations.
Application of Write Backs towards Principal and mark-up suspensed Any receipt of cash/assets must first be applied to principal and then to mark-up. RESCHEDULING/RESTRUCTURING Bank and customer may come up with some mutually agreed repayment plans to adjust the overdue exposure by taking the following lines of actions. This agreement should be also Preaudited by the audit department. 1) Rescheduling A loan shall be considered rescheduled when original terms of mark up and other terms remain unchanged but repayment of principal is extended, because of project delays etc. 2) Restructuring A loan shall be considered restructured when the terms and conditions of which have been modified, principally because of deterioration in the borrowers financial condition to provide for a reduction in markup rate or principal or capitalization of markup accrued. SBP considers a restructuring to include situation where economic or legal reasons relating to a debtors financial difficulties result in grant of a concession(s) by the Bank, that it would not otherwise consider giving which may include the following: a) The Bank accepts a third party receivable and or real estate and / or other assets of the Borrower in full or partial settlement of debt.
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b)
The Bank accepts conversion of borrowers debt into equity (to be held by the Bank) in full or partial settlement of debt outstanding The Bank accepts modification (absolute or contingent) of terms of the debt, such as a Combination of: Waiver/reduction in the agreed markup rate According to the demand of the situation, markup may be waived/ reduced to appropriate level to match the borrowers capacity. Efforts shall be made not to reduce the mark up below the cost of funds. Extension of maturity, on terms that are more favorable than the terms of the original contract Restructuring of facilities may be considered to match the borrowers repayment capacity based on the present and future cash flows. The cash flows however, will be projected conservatively and realistically keeping in view all the relevant factors to avoid possibility of further restructuring. Grant of additional financing Additional credit facilities may be granted in situations where the present financial constraints are considered genuine and further financing can result in revival of the borrowers business and the resultant repayment of the finance. Sale of collaterals The option of outright sale of collateral will be exercised wherever legally permissible when all the efforts aimed at amicable regularization / settlement of assets have exhausted including the liquidation through sale of the collaterals. This situation will genuinely call for some coercive measures ultimately leading to initiation of legal proceedings against the customer in case sale proceeds of the collateral falls short to meet his liabilities. The direct sale of collaterals shall result in: Prompt realization of sale proceeds without waiting for outcome of the ultimate legal proceedings. Reduction in the litigation cost as a result of reduction in the suit money. Avoidance of deterioration of quality of collaterals in case of their delayed disposal pursuant to the legal outcome. Recovery through revenue authorities The Bank shall seek assistance of the governments revenue authorities for recovery of defaulted credits as arrears of land revenues, where applicable.
c)
i.
ii.
iii.
iv.
v.
vi. vii.
Reduction of principal Reduction of accrued markup
Normally such accommodation shall be considered by the Bank: i. ii. iii. If the borrower offers additional security thereby strengthening Banks position The proposed plan results in substantive improvement in Banks risk. Capitalization of markup / principal may not be undertaken if any part of the borrowers obligation towards the Bank is classified substandard or worse. Capitalized markup should be separated and treated as a mark up fee liability (unserviceable portion of outstanding dues). However, while considering restructuring proposals, the situations may warrant depending upon the particular situation, foregoing the receivables partially or wholly related to accrued markup.
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Some important aspects about rescheduling / restructuring i. All rescheduling / restructuring arrangements shall be implemented by ensuring perfection in legal documentation, technical aspects of the facility, business dynamics of the borrower and rectification of flaws in charge / mortgages (if required). Where necessary, services of specialists (surveyors, lawyers, technical experts, chartered accountants) may be outsourced to complement expertise available within the Bank to arrive at a decision. Where restructuring package for a borrower involves a change in sponsors / management, due care should be exercised to ensure that the incoming management has integrity, the capability to successfully manage the business and is considered credit worthy by reviewing their CIB reports issued by SBP. Efforts should be made to restrict the grace period to one (1) year. Repayment schedule agreed upon should be based upon the cash generation capacity of the borrower, sponsors ability to inject funds into the business and the remaining economic life of the business (plant & machinery etc). As a matter of policy repayment period shall not exceed 7 year. Exceptions to the foregoing would require approval of Credit Committee. Criteria for Re-Structuring / Re-Scheduling i) Rescheduling refers to the extension in the date(s) of payment of installment(s) due to various reasons including late commencement of commercial production or teething problem faced by the project during trial run. Similarly, restructuring is an exercise to give relief to the sick project in the form of change in the forms of finance i.e. from interest or mark-up based to interest / mark-up free finance, Conversion of part of finance into equity of the Company etc. Similarly relief is also given in the form of reduction in the rate of return and extension in the date of payment of installment. ii) Rescheduling / Restructuring is allowed to borrower if the project / concerns / for which the finance has been borrowed is not running smoothly and is facing problems due to various reasons, some within the control of the borrower and others due to factors beyond the control of the borrower. iii) Rescheduling / Restructuring is allowed to borrowing concern in order to overcome the negative effect of the adverse situation faced by the project. However, care should be taken that rescheduling / restructuring should not be allowed if the factors responsible for making the project sick are still continuing because under these circumstances the rescheduling / restructuring will do no good to the project. iv) Rescheduling / Restructuring are generally allowed on merit basis but sometimes it is also allowed as per Govt. Policy. It is generally allowed to sick Industries subject to the payment of reasonable down payment of overdue amount. Reduction in down payment is also considered on case to case basis. The term Sick Industry may be applied on all project which are facing problems in maintaining their operations profitable in order to earn returns on their investment as well as to repay their debt, obligations. v) The factors which may contribute to the sickness may be external factors, they are those factors over which the promoters have not direct control while internal factors may be within the control of the management to some extent. The abrupt changes in the fiscal and tariff policies of the Government, big disparity in the import duties on imported raw materials and finished products which may induce smuggling and make locally manufactured goods in-competitive in the local market, are some of the factors beyond control of the management. a) i. ii. iii. When an advance is restructured following concessions / remissions are considered:Reduction in rate of mark-up. Capitalization of accrued interest / Liquidated damages. Sometimes, principal amount of loan is also written off if such circumstances warrant, as a very special case.
ii.
iii. iv. v. vi.
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b)
When an advance is rescheduled: Almost all general conditions remain unchanged except their repayment period which is extended for certain period.
Traditional modes The borrowers may face financial distress due to a number of reasons that adversely affect their repayment capacity. In such a situation, Bank may, at its sole discretion decide to offer financial reprieve to such customers. However before considering any such concession (s) the position vis--vis the following needs to be ascertained: a) b) c) d) e) f) The default is not willful and the borrower is not misrepresenting actual facts with the objective of securing any concession. The borrower has a viable business plan for the future, as demonstrated by financial projections; such projections are to be thoroughly examined to assess the validity of assumptions used and the veracity of cash flows projected. The management, despite the initial setback (normally due to exogenous factors) has a demonstrated competence ability to run the business profitably in future. Willingness and ability of the sponsors to participate in a resource program by injecting fresh equity or equivalent such as sponsors / subordinated loans to demonstrate commitment to business and make the whole exercise meaningful. Where other financial institutions are involved, or in case of a syndicated loan, other lenders must agree, in writing, to the proposed rescheduling/restructuring. There should be reasonable down payment to indicate the seriousness of the management towards the proposed plan. (Repayment made by the borrower during Preceding one year may be given due weight age in determining the amount of down payment)
Non-traditional modes The bank may come across situations when pursuit of non-traditional strategies may be preferable to achieve the desired results. Such options shall be exercised subject to presence of the preconditions including the following: The repayment of the loan is behind schedule. The reasons for non-repayment are genuine and considered temporary. Strong possibility of improved profitability and cash flows in future.
Management buyouts The option shall be evaluated only upon establishing the fact that change in management will result in turnaround of the company. To effect the proposed change, the bank may play a role typically relevant to investment banking by: a) b) Persuading the existing management to exit, and Identifying acceptable entrepreneurs with financial and management capabilities and convince them that the takeover proposal is commercially viable. This arrangement will entail continuation of our financial involvement until final settlement of our assets.
In case of taken over entities the Bank shall take all necessary actions to secure / enhance value of the subject entity to ensure realization of best value for the Bank in shortest possible time frame. In the process, the Bank may have to commit incremental financial resources and appoint officers / executives from within the bank or outside agents to manage such entities until good value can be realized by sale. Debt / equity SWAP This mode involves resorting to capital market solutions by way of acquiring equity shares of the borrowing company in lieu of the existing debt. Relevant SBP prudential guidelines will be adhered for all cases this option shall essentially be based on the following:
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a) b) c)
The relative stock is quoted preferably on all stock exchanges of the country. The acquisition value of stocks is considered undervalued and is likely to appreciate responding to the anticipated financial improvement. The management has a proven track record and is considered capable of managing the anticipated turn around.
Securitization This mechanism provides for disposal of undesired assets at discounted values to meet the following broad objectives: a) b) c) d) Clean and healthy balance sheet of the Bank Disengagement of the Banks staff form the recovery process and their allocation for their routine productive activities Improvement of the Banks liquidity for its further deployment Emergence of special expertise for collection of troubled assets
The assets shall be transferred to and acquired by Special Purpose Vehicle (SPV) specifically created to handle the troubled projects. The SPV may be funded either by the countrys financial system or though the capital market mechanism. The discount rate for the proposed transfer / sale of assets shall be determined by the following considerations: a) b) c) The quantitative / qualitative assessment of the securities held. Time lag involved in the realization of securities i.e., Net Present Value (NPV). Potential of repayments before and without resorting to liquidation of securities and the litigation.
Outsourced Recovery Recovery through outside agencies, specifically established for effective recovery of outstanding dues, shall be considered especially in case of small amount credit facilities and / or domiciled in geographically scattered / remote locations e.g., agriculture and consumer credit. The objective for outsourcing of recoveries includes: a) b) c) Utilization of agencies specialized in this area to ensure speedy recoveries. Reduction in the cost involved the recovery process through Banks internal system. Utilization of Banks staff presently assigned with the recovery task for routine business promotion activities.
Appropriation of securities After the exit decision as soon as possible, steps shall be taken to realize the securities in the exercise of legal right available to the Bank for reduction of the relative credits before and without resorting to the regular litigation. This will in turn result in the proportionate reduction of workload and the related costs. Important points to be considered for traditional / non-traditional modes The Bank shall consider following important points while adopting either traditional or nontraditional recovery modes: a) b) c) In order to have necessary information on obligors legal heirs, Bank must obtain copy of obligors CNIC. The Bank shall also ensure availability of Form B of minors at the time of rescheduling, restructuring, where applicable. In case of change of management, where incoming management has no relationship whatsoever with the outgoing one, the account shall be considered as a new relationship. Personal guarantees of outgoing directors shall not be released until and unless proper security for the outstanding amount of loan including personal guarantees of the incoming directors is obtained.
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d) e)
f)
g)
h) i)
Rescheduling / restructuring in litigation cases shall be implemented through the court accept otherwise advised by the legal counsel due to legal or other reasons. When the Government makes it mandatory upon banks to give certain concessions in order to revive sick units such directives must be carried out in letter and spirit. In all other cases, including situations where the Government allows banks the discretion to offer certain concessions to customers, but does not make it compulsory upon them to do so the guidelines outlined herein should be followed without exception. At all times and under all circumstances, SBP Prudential Regulations must be adhered to in letter and spirit, unless specific waivers are obtained from SBP or exceptions approved by competent authority. Even when such waivers are available, unless they are specifically stated to be given for an indefinite period of time, the Banks position / liability after expiry of the said waiver and in the event that the borrower is unable to rectify the breach must be clearly determined and the extent of (additional and contingent) risk clearly identified and approved at the appropriate level. Revaluation of assets, even when conducted by SBP approved firms, does not in any manners make it imperative upon the Bank to accept thus improved financials. Relationship manager of the concerned business group, while conducting their analyses, should in any case base these upon realistic values and not merely upon accounting values. Practically speaking, a revaluation, even when conducted by an SBP approved firms, is useful to the extent that it may improve the situation viz. SBP mandate Prudential Regulations. Most significantly, the relationship manager needs to focus on the methodology of (valuation and) revaluation in order to form an objective opinion. Income recognition in all rescheduled / restructured accounts must be on cash basis. Under no circumstances accrued mark-up is to be taken to P&L. No incremental financial accommodation (fund / non fund based) shall be granted to the borrower who has been given financial relief in the shape of mark-up waiver for more than three years as part of the restructuring package. Any exceptions would require the approval of Credit Committee.
SPECIAL ASSET MANAGEMENT (SAM)

Introduction If and when it is considered that the recovery/management of account requires specialized treatment, it may be transferred to the SAM department. SAM department carries out all the necessary legal and technical formalities. Follow-up with the customer or initialization of legal proceeding is also the responsibility of SAM Department. For detail Refer SAM Manual Settlement Negotiation / Proposal No settlement proposal from the borrower/ guarantor pursuant to demand notice or civil action should be accepted without prior HO approval. In discussions with the borrower/ guarantor, Legal Department (HO) or Bank's approved lawyers should be involved so that in drawing up repayment agreement all legal requirements are attended to. Additionally, the following precautions should be taken in respect of guaranteed accounts. a. The guarantor's consent should invariably be obtained whenever branches enter into a contract with the principal debtor resulting in a compromise and/or promise to give the debtor additional time to pay or not to take legal action. As a matter of abundant precaution, the aforesaid consent should be obtained from the guarantor even if the guarantee document does not specifically call for the same. For example, these contracts may be conversion of CF account into a TF account or changes in terms of repayment of a term loan or changing of the mark-up rate. b. If the guarantor does not give his consent to the above, the branches should get the guarantee document seen by the Legal Department HO/approved lawyers for their opinion as to whether the guarantee should be invoked or the existing guarantee document continues to safeguard the Bank's interests despite the compromise.
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Handling of deceased borrowers account Death of a Borrower After a borrower's death (in the case of an individual or sole proprietor of a concern), no further withdrawals or debits in his borrowing account should be permitted. If the borrower's successors and heirs approach the bank for continuation of the facility, the case will have to be examined thoroughly. In case the bank agrees to the request, the debit balance in the account of the deceased will be transferred to a new account in the name of his heirs or successors along with the securities held in the account. Note The debit balance will be transferred to a new account only in the absence of customer's request for continuation of facilities in the same account. Legal opinion will have to be taken before this is done. If a request is made for continuation of the facilities in the same account, a suitable document, approved by Legal Department (HO)/legal counsel must be obtained from the successors and heirs confirming the arrangement and absolving the Bank from any wrong doing by permitting such an arrangement. If the desired request is refused or no application is made by the heirs or successors in this regard, the securities, if any, may have to be sold and the guarantee invoked (if any). For the balance (if any) a suit may have to be filed and a decree obtained, if a settlement is not possible out of court. It is to be recognized that the heirs of the deceased, as per Shariat Law, are responsible to pay the debt of the said deceased only to the extent of the assets of the deceased, which they inherit. They are not personally liable. Death of a Joint Customer In such an eventuality, steps similar to those stated in the previous paragraph will be necessary with suitable modification depending on the circumstances of the case. The law requires that the surviving joint account holder must notify the Bank about the death of the co-account holder within 10 days from the date of death. The Bank shall stop operation of the account from the date of notification till a successor is appointed and a fresh arrangement for operation of the facilities account is finalized. Death of a Partner Unless there is an agreement to the contrary between the partners, a partnership is dissolved by the death of any partner. If the firm's account is overdrawn and the banker desires to retain his claim against the estate of the deceased, or if securities belonging to the deceased partner are held for the firm's account, the account should be stopped and new one opened for future transactions, otherwise, according to the rule in Clayton's case, all sums paid to credit will release the deceased's estate to the extent of the amount of such credits, and all debits will form a fresh debt against the new partnership for which the estate of the deceased will not be liable. If a guarantee is held from a third party, the operation of the partnership account should be stopped on the death of a partner, until fresh arrangements are made with the firm and with the guarantor. Any deviation from the aforesaid procedures must be approved by Legal Department (HO) / bank approved lawyers. The general guidelines stated above are governed by legal requirements in the country. It is mandatory to consult the Legal Department (HO)/approved lawyers in such cases to further safeguard the Bank's interests. Handling Of Bankrupt Borrowers Account When a borrower has been adjudicated bankrupt the following guidelines must be followed:1. Register the Bank's debt in the bankruptcy or; 2. File an appeal against the bankruptcy judgment to get such judgment set aside if it is in the interest of the bank that the judgment should not be upheld; 3. Advise the Court of any information with respect to the debtor's ability to pay his debts subsequent to the Court judgment and before the judgment becomes absolute (10 days afterwards) to enable the court to set aside the judgment vis-a-vis if the debtor after being adjudicated bankrupt inherits cash/property or somehow acquires possession of funds, of which
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4. Bank/branch receives information, renewed efforts should be initiated for the adjustment of the outstanding debts. 5. When proceedings of bankruptcy are filed by the debtor, normally summons will be served to all of his creditors to appear before the Court in these proceedings. The names of the said creditors will be taken from the list submitted with the statement of claim. 6. When proceedings against the debtor are filed by the creditor, and if such a creditor is successful in obtaining bankruptcy judgment the trustee in bankruptcy will be responsible for publishing a summary of the judgment declaring bankruptcy in one or more daily newspapers designated by the court. The summary will contain all relevant information such as the name of the bankrupt, his place of residence, the court which pronounced the judgment, the provisional date for suspension of payments, the name of the judge supervising the bankrupt estate and the name and address of the trustee in bankruptcy. The notice will also contain an invitation to the creditors to submit their debts for registration in the bankruptcy proceedings. At that time the bank claim may be registered or an appeal may be filed against the judgment. 7. As regards initiation of bankruptcy proceedings by a creditor, such proceedings may be initiated by a creditor having commercial or civil debt to declare the business bankrupt provided that the creditor submits proof that the debtor has ceased payment of his commercial debts. Again a creditor with deferred or conditionally suspended commercial or civil debt may apply for a bankruptcy judgment to be pronounced if he absconds, closes his business, starts to liquidate his business or engages in actions prejudicial to his creditors, provided that the creditor proves that the debtor has ceased payment of his immediate commercial debts. All matters relating to bankruptcy of borrowers should be handled with the assistance of the Legal Department, Head Office. Handling of Liquidation of a Company There are a number of circumstances in which a company may be wound up by the court. One of the circumstances is its inability to pay its present debts and/or contingent as well as prospective liabilities. As from the notice of commencement of winding up, the Bank should suspend all operations on the company's account. Thus the cheques signed by authorized directors or officers should not be honored. The law on the subject is rather complicated and proper legal advice should be taken in case the company, having a deposit or an advance account with the Bank, goes into liquidation. A comprehensive note stating the position of the company's accounts (debit and/or credit), the security/securities charged to the bank and its other dealings/commitments etc. with the bank should be prepared for the legal adviser and his opinion sought for further action. If there is probability left for the recovery of the advance, the bank may file a petition to put the company into liquidation. The winding up of a company may either be: 1. By the court at the request of the creditors 2. Voluntary or 3. Subject to the supervision of the court CREDIT RETURNS Credit returns are important instruments of supervision of credit portfolios by branches and by the Head Office. Returns are basically of two types: a) b) External: Returns to the State Bank of Pakistan and other regulatory authorities (as applicable). Internal: Returns submitted by branches to the Head Office.
Branches/Area Region shall ensure returns required by the Area/Region/ H.O/ SBP (as advised through various circulars of concerned ) are submitted to the respective corner within/well before stipulated time frame through the mode of submission defined.
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SECTION III- ANNEXURE A. FORMATS B. ENTRIES ( FORWARDED TO FINANCE FOR APPROVAL WILL BE CIRCULATED AS ANEXXURE)
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SECTION III- FORMATS
CONSOLIDATED ANNEXURE LIST Sno. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 5 26 5 Chapte r No. 4 4 4 4 4 4 4 4 4 4 4 4 5 5 5 5 5 5 5 5 5 5 5 5 Chapter Name Credit Investigation Credit Investigation Credit Investigation Credit Investigation Credit Investigation Credit Investigation Credit Investigation Credit Investigation Credit Investigation Credit Investigation Credit Investigation Credit Investigation Credit Initiation Approval Credit Initiation - Credit line Proposal Credit Initiation - Credit line Proposal Credit Initiation - Credit line Proposal Credit Initiation - Credit line Proposal Credit Initiation - Credit line Proposal Credit Initiation - Credit line Proposal Credit Initiation - Credit line Proposal Credit Initiation - Credit line Proposal Credit Initiation - Credit line Proposal Credit Initiation - Credit line Proposal Credit Initiation - Credit line Proposal Credit Initiation Approval Credit Initiation Approval Annexure Name BBFS - Corporate / Commercial BBFS Indiviuals Guideline for BBFS Credit Worthiness Report Performa Guideline for compilation of Credit Worthiness Report rerquest for local business information Credit Inquiry Procedure for Obtaining a foreign Buyers Report Form of request for obtaining information from CIB SBP Bank wise detail of exposure Format for letter of Group Declaration Call Report Limits Sanction Register Credit Proposal Format Credit Proposal - Temporary Accommodation/One Time Transaction Credit Proposal Scrutiny Checklist Profitability report of Borrowers Ownership/Share Holding Associated Concern Conduct of Account Summary of Key financials Liability Details - Allied Concern with BAL & Other banks/DFI Securities & Collateral Certification from Departments Credit Sanction Advice Earmarking of Limits Annexure No.
Page93
27 28 29 30 31 32 33 34 35 36 37 38
5 5 5 5 5 6 6 6 7 7 7 7
Credit Initiation Approval Credit Initiation - Credit Risk Management Credit Initiation - Credit line Proposal Credit Initiation - Credit line Proposal Credit Initiation - Credit line Proposal Credit Maintenance Credit Maintenance Credit Maintenance Remedial Management Remedial Management Remedial Management Remedial Management
Deferral Credit Risk Rating Checklist Group Summary Sheet (Format) Credit Limit Review Sheet Prudential Compliance Checklist Off Site Monitoring of Credit Exposure Downgrading/ Upgrading Memo Format Stock Inspection Report Watch List Special Asset Review Proposal Detail for Transfer of Classified Advances TOR For FSV
Page94
Annexure List of Documents borrower wise A) Specific documentation requirement categorized by the type of borrowers is summarized as follows:1) Clubs, Associations, Trusts, Charitable Institutes, Society, NGO: a) Accepted Offer Letter b) Borrower Basic Fact Sheet c) Certificate of lawyer that bank's interest is secured for granting facilities d) CIB Report e) Copies of new NIC of Office Bearers/ Management Committee/ Directors f) Copy of By-Laws, Trust Deed, Rules under which the Company is Registered g) Credit Report from Existing Bankers(Not reqd. in case of cash secured) h) Facility Request Letter from customer i) j) l) List of Office Bearer / Management Committee / Directors Memorandum and Articles (If entity is Registered with Concerned Authority) Undertaking for Compliance of PR
k) Resolution to Borrow (If entity is registered with concerned authority)
2) Foreign Controlled Companies not incorporated in Pakistan a) Clearance of all basic documents (mentioned in point A above) from Legal Division 3) Government (Federal & Provincial) Companies not incorporated in Pakistan a) Clearance of all basic documents (mentioned in point A above) from Legal Division 4) Individual (Foreign National) a) Accepted Offer Letter b) Borrower Basic Fact Sheet c) CIB Report d) Copy of Passport of Borrower e) Facility Request Letter from customer 5) Individual (Pakistan National) a) Accepted Offer Letter b) Borrower Basic Fact Sheet c) CIB Report d) Copy of NIC of Borrower e) Facility Request Letter from customer 6) Partnership Firm (Registered) a) Accepted Offer Letter b) Authority/Mandate to sign on behalf of Firm (if not covered under Deed) c) Borrower Basic Fact Sheet d) Certificate of Registration of Partnership Deed (if applicable)
Page95
e) CIB Report f) Copies of valid CNIC of all Partners g) Credit Report from Existing Bankers(Not reqd. in case of cash secured) h) Facility Request Letter from customer i) j) Partnership Deed Undertaking for Compliance of PR
7) Partnership Firm (Unregistered) a) Accepted Offer Letter b) Authority/Mandate to sign on behalf of Firm (if not covered under Deed) c) Borrower Basic Fact Sheet d) CIB Report e) Copies of new NIC of all Partners f) Credit Report from Existing Bankers(Not reqd. in case of cash secured) g) Facility Request Letter from customer h) Partnership Deed i) Undertaking for Compliance of PR
8) Private Limited Company incorporated in Pakistan a) Accepted Offer Letter b) Borrower Basic Fact Sheet c) Certificate of incorporation d) CIB Report e) Copies of valid CNIC/Passport (for foreign national) of all Directors f) Corporate Resolution to Borrow with company seal g) Credit Report from Existing Bankers(Not reqd. in case of cash secured) h) Facility Request Letter from customer i) j) l) Latest Form-29 List of Directors Search Report
k) Memorandum & Articles of Association m) Undertaking for Compliance of PR. 9) Public Limited Company incorporated in Pakistan a) Accepted Offer Letter b) Borrower Basic Fact Sheet c) Certificate of Commencement of Business d) Certificate of incorporation e) CIB Report f) Copies of new NIC/Passport (for foreign national) of all Directors g) Corporate Resolution to Borrow with company seal h) Credit Report from Existing Bankers(Not reqd. in case of cash secured) i) j) Facility Request Letter from customer Form-29
k) List of Directors
Page96
l)
Memorandum & Articles of Association
m) Search Report n) Undertaking for Compliance of PR 10) Public Sector Enterprises (Owned/Controlled by Government)
a) Clearance of all basic documents (mentioned in point I above) from Legal Division 11) Sole-Proprietorship a) Accepted Offer Letter b) Borrower Basic Fact Sheet c) CIB Report d) Copy of new NIC of Proprietor e) Credit Report from Existing Bankers(Not reqd. in case of cash secured) f) Facility Request Letter from customer g) New Document h) Undertaking for Compliance of PR
Page97
PROCEDURE

PROCEDURE
S. No Description Responsibilities
1. ASSIGNMENT OF AUTHORIZED POWER / DELEGATE RIGHTS TO STAFF

1.1 Assign the approval limits at various levels i.e. Area Office, Regional Office and Credit Group etc. as per discretionary powers approved by CCC Description of levels, parameters, discretionary powers and committee formulation is attached in Annexure A 1.3 Ensure assignment of authorized power/access rights are in line with the user access management rights issued by HO from time to time. documents will be reviewed as per assigned limits/ discretionary power of the staff Branch/Area Manager Branch Manager / Manager Ops / Credit & CAD / CAC Branch Manager / Manager Ops / Credit & CAD / CAC Branch M/Area Manager/CAD Branch M/Area Manager/CAD Branch/Area Manager/CAD Branch/Area Manager/CAD Central Credit Committee
1.4
1.5
verify Document/Transactions which involves system entries also Verify all relevant instruments/ documents/ supports etc. assign GPA / IPA as per their experience and requirement of the staff of department/Branch Ensure submission for assignment of IPA/GPA to HR. Review authorization of powers on annual basis. Sign documents as per the assigned IPA/GPA. Ensure that names of IPA/GPA holders are properly notified to all the concerned stake holders.
1.6 1.7 1.8 1.9
2. ARRANGEMENT OF STOCK OF GENERAL INVENTORY

2.1 Prepare stationary request(Stamps, application forms etc.) related to credit operations duly signed and send to stationary department through authorized rider/ authorized courier company. Send acknowledgment to stationary D:ep on receipt of required stationary through rider/authorized courier company. Keep all general inventory in safe custody, Manager Operations/ Account opening officer Manager Operations/ Branch Manager RM/OM/BM
2.2 2.4
3.
3.1 i
SETTINGS OF BUSINESS TARGETS AND MARKETING
Settings of Business Targets-Budgeting (Area / Branch wise) Assigns targets to business units keeping in view strategic goals of the bank, which are routed through the bank's hierarchy. Targets are normally divided into three categories, Assets, Liabilities and Profitability. In some cases, import TOP Management / Group offices / Regional office /
Page1
PROCEDURE

and export targets are also assigned. Review previous year targets and compare it to actual performance. In case of major deviation, seek justification. Once targets are reviewed at branch's end, Send Area office for the review On the basis of Area office target, age of the branches, last year performance of branches, allocated budget, Area Office set targets for current year and discuss it with BMs. Targets are finalized after few deliberations. Branches are normally assigned targets based on geographical locations and their market share. After setting the target issue the IOM to respective BMs. Upon receipt of the IOM\target set by the AO, discuss with Credit Manager, RMs and each individual to set new targets for the upcoming year. Area Office
ii iii
BM/AM/RM BM
iv
Area Office/ Area Manager Area Office/ Area Manager Branch Manager
v vi
3.2
a i ii iii iv
MARKETING
Develop Marketing Strategy After getting the targets, check the list of existing customers. Make the list of customers which are not currently BAL customers. In order to achieve targets, market existing customers for enhancement or pursue fresh customers through already established links. Contact those customers to start business with the branch and also try to get some new potential references for making new credit relations. Make Visit Schedule by listing names of customers, date and time to visit. Understand the industry type in which the customers fall prior to making actual visit for having better discussion. Incase of highly valued customers, arrange the meeting along with BM or Area Manager. Visit to Customer Visit existing customers to identify their enhanced financing needs and negotiate terms and conditions. Initial visits along with credit check as mentioned under FRESH CREDIT PROPOSALS is made For new customers. Identify the Customer Need Offer the best possible solutions to cater to the business needs of existing customer. For new customers, analyse customer's working capital requirements. Ask the customer about his\her existing banker(s) or any other business group(s).
RM RM RM RM
RM
b i ii c i ii iv
RM RM
RM RM RM
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PROCEDURE

v vi vii ix Provide the details of bank's products\facilities to customer as per his\her described need or requirements. Upon customer's willingness, structure the facility package and negotiate terms and conditions. Discuss about the security and its worth against agreed facility structure Take the customer profile, including last 3-year financials, facility offer letter(s) of other financial institution(s)(if working with). Account of the proposed customer may be opened at any stage of initiating the relationship. On the basis of type of business, related documents are required. If company is member of any government\private body certificate required and NIC required. Segment analysis ( RMM / Corporate ) Make necessary market division and appropriation as per the allocated target. Indentify the target segment as per the target allocated. Treat the market segment with the appropriate product combination. Submission of call report Pass the necessary information to the area/segment on the bases of analysis made. Prepare the Call Report and forward the same to the BM. (Format annexure attached 6.12) Discuss the credential\call report of the prospective customer with the BM. In case of any dispute on margin\security\any discrepancy, visit the customer again and negotiate with the customer for better terms. Submit the report to the area office with recommendation of BM for their record and signature. CIB Report: Request CIB report from the State Bank of Pakistan through the E-CIB department of the bank along with credit reports from other banks of the borrower. (For detailed ECIB, refer the procedure of ECIB) Annexure format attached 6.9 Ensure that borrower is not a defaulter, in case of defaulter the risk management policy should be referred and finance will be provided after properly recording the reason and justification of the same. Thorough study of CIB report before granting the credit line to the customer, as well as review the CIB report quarterly, semiannually (or as per approval terms). RM RM RM RM RM
RM
d i ii iii e i ii iii iv v f
RM RM RM RM RM RM RM RM BM\RM
iii
iv
Area Manager / Regional Manager / Relationship Manager / Credit Manager / BM Area Manager / Regional Manager / Relationship Manager / Credit
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PROCEDURE

Manager / BM Deduct CIB charges as per SOC from customer's account as per attached annexure and credit "XXXXXXX Account". Accumulated CIB charges of all customers are transferred to HO at "month end" for onward submission to SBP. Authorize the entry and file the voucher in respective file Credit investigation: Receive the prescribed reports from bank's internal ECIB cell. Process the proposal if the report is clean, otherwise return the proposal to the Credit / Branch Manager for their decision/further instructions. For unfavorable reports, either advise the borrower to regularize the exception or decline the proposal outright. Financial Report: Obtain audited financial reports of borrowers with exposure above Rs.10M in case exposures below Rs.10M; financial report signed by the borrower is enough. In case of partnership firm, financial position of the partners be preferably audited should be obtained, also obtain net worth statement and TAX return statement of all partners. In case of corporations: Strict adherence and compliance of SBPs Prudential Regulation (R-5) on "Linkage Between Financial Indicators of the borrower and Total exposure from financial institutions must be ensured. Status report: obtain status report of customer from other banks while marketing the customer for the first time. In case of expatriate firms/sponsors take L Form (lending form) should be approved by the State Bank of Pakistan History of the customer: borrower's ability to meet all commitments on schedule or if not, corrective actions initiated, e.g. the nature and the volume of business routed for overall profitability of the account. Details of all personal and business accounts of borrower and immediate family members need to be provided including the turnover, average balance, rate of return on each account and overall profitability of the account. Management structure of the borrower: Analysis and review of the management of the applicant. This evaluation will cover sales, finance and commercial segments of the business and management expertise available, For a better understanding of a customer's business, the credit officer study and analyze the following: Organizational structure Business parameters and preferences Human resources Communication hierarchy Public relations Industry and market presence Analyze the cost analysis of the project under review in order to ensure strict compliance of SBP PR (v) on maintenance of debt equity ratio. Diversification: Ensure diversification before setting exposure limits on several criteria such as industry exposure limits, counter party limits and per party limits.
vi vii
RM/ BM BM/RM
viii
RM RM/Credit Manager/ Branch manager RM
ix
RM & sanctioning Office
xi xii
RM RM RM
xiii
xiv
RM/Sanctioning Authority
xv
RM/Sanctioning Authority RM/Sanctioning Authority
xvi
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PROCEDURE

xvii
Feasibility Analysis: obtain feasibility study report from the borrower including sensitivity analysis. Financial Analysis: obtain financial analysis which covers liquidity, profitability and leverage aspect along with the proposal. Profitability of the transaction to the Bank: check the profitability of the transaction to the bank, which includes the level of financing, business volume, spreads, mark-up and growth prospects. Repayment ability: check the cash flow statement of the borrower to assess repayment ability
RM/Sanctioning Authority RM/Sanctioning Authority
xviii
xx
RM/Sanctioning Authority/RMD RM/Sanctioning Authority RM/Sanctioning Authority RM/Sanctioning Authority RM/Sanctioning Authority
xxi
xxii
Security offered: Check the degree of risk and liquidity of the security. Prudential Regulation Checklist (annexure attached 8.6): ensure that all regulatory requirements are met by the customer and there is no danger of violation of Prudential regulations. State Bank of Pakistans Prudential Regulation checklist is fully complied with Audit Comments: Ensure that any Audit Departments recommendations or observations on the account have been implemented or stated properly.
xxiii
xxiv
4
4.1
i ii iii
PROCESSING OF FRESH CREDIT PROPOSALS
Customer Request:
Obtain Borrowers Basic Fact Sheet (BBFS) from customer. (Annexure attached-6.1a & b customer wise) Place the signature on last page and affix his/her initial on other pages of BBFS in presence of customer. Mention customer name, designation and employee number in the space provided for the counter signature. RM RM RM
4.2
i ii iii iv
CIIRS System:
Incorporate qualitative and quantitative data in CIIRS system so that internal rating system may be generated after the authorization of area office (Different CIIRS reports are generated for SME and Corporate borrowers). CIIRS sheet is signed by the concerned RM, BM and AM and is attached with the CLP as an essential requirement. Visit the location of the property which needs to be mortgaged Prepare Visit / Credit Report and establish whether the borrower is a good credit risk. If found unsuitable, decline request. Branch Manager/AM Branch Manager RM/BM RM/BM
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PROCEDURE

v vi vii viii Market reputation of the customer should be check and due care should be taken while collecting market information of the customer. Search Report: request for the search report, Obtain the search report from Credits (in case borrower is Limited company). Deduct search report charges as per the bill of vendor from customer's account as per attached annexure and give the voucher to the operation officer for preparation of pay order. The PO is sent to the vendor Authorize the entry and file the voucher in respective file RM RM RM/ Operation manager BM/RM
4.4
i ii iii iv v
LEGAL OPINION ( in case of property mortgage):

Request the customer to provide the copy of property chain documents. Send the letter to the approved panel of lawyer with customer CNIC and copy of chain of documents for obtaining pre-mortgage legal opinion. On the basis of favorable legal opinion, process the customer's request, if unfavorable, decline the request with consultation of BM Deduct legal opinion charges as per the bill of lawyer from customer's account as per attached annexure and give the voucher to the operation officer for preparation of payorder. PO is sent to the lawyer as payment. Authorize the entry and file the voucher in respective file RM/BM BM/CR. M BM/CR. M RM/ Operation manager BM/RM
4.5
i
Valuation ( in case of property mortgage):

Get the valuation of the proposed property by approved valuators (Customer should not be asked to get the valuation to avoid any undue influence resulting a higher valuation as a coalition of the two parties i.e. borrower/evaluator). Deduct the valuation charges from customer's account. Valuation of the property provides a comfort level (second source of repayment if the primary source i.e. cash flow from business fails to adjust the loan). It should not be considered as a key basis to finalize entitlement of any credit facility for the proposed customer Deduct valuation charges as per the bill of vendor from customer's account as per attached annexure and give the voucher to the operation officer for preparation of payorder. PO is sent to the valuator who conducted the valuation. Authorize the entry and file the voucher in respective file
RM
ii
BM/CR. M
xiii
RM/ Operation manager BM/RM
xiv
4.6
i
Preparation of CLP (CLP):

Initial review of all documents shall be done. Review the documents received from the customer as mentioned below: 1) request letter , 2) Audit financial statement , 3) CIB report , 4) BBFS, 5) credit facility application form , 6) CIIRs rating sheet, 7) Customer property visit report( if required), stock inspection report( if required) , 8) customer business visit report, 9) status report, 10) market rotation report, 11) search report, 12) feasibility report, 13) financial analysis report etc Credit Manager\RM
ii
RM/Credit Manager
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PROCEDURE

iii Prepare/fill the Credit Line Proposal (CLP) document (Annexure of format attached) as per the chapter of attached guideline of CLP. Cross all columns / spaces which are to be left blank. In case of limited companies: ensure that Articles of Association and Board Resolution both are in conformity to each other and any special condition set in either of the two documents for borrowing is mentioned in CLP. Perform a comparative analysis of the audited financial statements over the past three years. Also prepare a spreadsheet for financial ratios and analyze cash flow position of the borrower. Ensure that all the applicable Prudential Regulations are complied with and fill in the PR checklist respectively for SME/Corporate borrowers. Request the prospective borrower for an undertaking that all charges will be borne by the customer in case of any penalty imposed by the SBP in event of non-compliance of any Prudential Regulation. Sign and forward the CLP, along with all the documents obtained earlier to the Credit Manager. Crosscheck the information in the CLP with that available in the spreadsheet and financial statements. Ensure that all aspects are thoroughly reviewed and all queries are settled. In case of R&MMG, review and sign the CLP (consult the credit manager / RM if necessary).Forward the CLP along with the below mentioned documents to the relevant Area Office for their approval or any further recommendation to a higher approval level. The process flow under Corporate Credit is as follows: 1) Prepares the CLP and submits the complete set to the Team Leader/Senior Relationship Manager 2) Reviews the CLP and ensures that it is complete in all respects. Signs the same and send it to the Area Manager Corporate. 3) Reviews the CLP and recommends it to Regional Manager-Corporate. Satisfies any query before forwarding the CLP set. 4) Reviews the CLP and recommends it to Group Head-Corporate. Satisfies any query before forwarding the CLP set onward. 5) Forwards the CLP with the recommendation to Head Office (Credit Group) RM Team Leader/SRM Area ManagerCorporate Regional ManagerCorporate Group HeadCorporate RM/Credit Manager RM/Credit Manager RM/Sanctioning Office RM/Sanctioning Office RM/Credit / BRANCH Manager Credit Manager / RM RM/Sanctioning Office
iv
vi
vii
viii Ix
Branch manager
Xi xii Xiii Xiv Xv
xvi
5. APPROVAL PROCESSING
5.1
a i
Approval Processing
Approval On receipt, review the CLP along with the documents attached. If there are any queries, refer these to branch for response. Area / Officer Credit Group
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PROCEDURE

ii Credit Officers in Area Office examines the CLP for any deficiency with regards to following Prudential Requirements Satisfactory credit worthiness Adequate Collateral Overall profitability of the account Errors in documentation if any financial Analysis including business cash flow assessment Area/Group Credit Officer
iii
After thorough check of all the areas mentioned above, Area Credit Officer prepares his recommendation note and submits it to Area Manager-RMM for his/her decision (approval/revision/decline) In case the proposal pertains to Level I as per discretionary powers, Area Manager signs the CLP and forward it Area Manager- at Head Office (Credit Group) who after credit investigation on his/her own part and satisfaction of any further query, approves/declines the limit. Once the limits are approved, sanction advice is made in accordance with the approval terms and conditions and the same is signed by the approving authority and sent to branch / business units. In case of decline, a decline memo is sent to the branch. In case the proposal pertains to higher level as per discretionary powers, Area Manager (RMM) recommends the CLP to Regional Manager RMM where Regional Credit Coordinator reviews the case and after thorough scrutiny and risk analysis, prepares his/her recommendation note for Regional ManagerRMM. On receipt of recommendation note by Regional Credit Coordinator, RM-RMM makes his/her decision and sends it to Regional Head-Credit When RM RMM recommends the proposal, proposal is passed on to Regional Head Credit. Credit Officers at HO after thorough examinations of the proposal on the same fronts as done by Area Office /Regional Office earlier, prepares his/her recommendation note and submits it to Regional Head-Credit for decision at Level-II (approval/revision/decline) Regional Head-Credit reviews the case after which the case is either approved or declined. In case of approval, sanction advice is prepared and sent to branch. In case of decline, a decline memo is sent if the limit exceeds the joint powers of Regional Head RMM and Credit (LevelII), then Regional Head-Credit recommends the CLP to a higher Level for approval If proposal falls within the limits of Level III then recommendation note is prepared by Credit Officer Regional Head-Credit recommends the note for joint approval by Group HeadRMM and Group Head-Credit(In case of proposals falling in Level-III) In case of approval/decline, sanction advice/decline memo is issued by Regional Head-Credit
Area Credit Officer Sanctioning Authority/ Credit Officer
iv
Area / Regional / Officer Credit Group
vi
Vii
RM-RMM Credit officer Credit Group/Regional Head Credit
viii
Regional Head Credit Regional Head Credit Credit officer Credit Group Regional Head Credit Regional Head Credit
Ix X Xi Xii
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PROCEDURE

Proposals above Level III are approved by level IV also known as Sub Committee-CCC. Recommendation note is prepared by Credit Officer and signed by RH-Credit for onward submission to Level-IV. Limits falling under the domain of Level-IV is approved / declined by the consent of the members of the subcommittee. Sanction Advice/Decline Memo is prepared by Sanction Advice Officer, jointly signed by Regional Head Credit and Group Head Credit and sent to branch. Credit Officer is responsible to take care of completion of all steps involved in the entire approval process i.e. from preparation of recommendation note till communication of decision to branch. Proposal exceeding the approval powers of Level-IV are raised to CCC (Central Credit Committee) and the remaining work flow is same as that of the Sub-Committee-CCC. Credit officer Credit Group
xiii
Xiv
Credit officer Credit Group
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PROCEDURE

Xv It is pertinent to mention here that all proposals that are raised to Level IV or CCC is routed through RMD (Risk Management Division) who as per their criteria of Evaluation give their comments on the said proposals before being forwarded to the relevant authority. After complete satisfaction of all queries, prepares and submits the recommendation note along with CLP set to Regional Head-Corporate Credit Approves/declines if CLP limit falls within his/her approval authority, else forwards it to Group Head-Credit (for Level-III) or CCC (for Level-IV & above cases) for approval In case of approval/decline, arranges the preparation of sanction advice/decline memo, gets it signed by Regional Head-Corporate Credit & Group Head-Credit and ensures its disposal to respective business unit (Corporate Branch) In addition to approval in the normal course of business, each level is responsible to review the approvals granted by a lower authority on monthly basis and satisfy any query in this regard. Credit officer Credit Group /RMD Area ManagerCredit Regional HeadCorporate Credit
Xvi Xvii
Xviii
Area ManagerCredit
Xx
Sanctioning Authority
5.2
i
Post Approval
Receive sanction advice/Decline Memo from approving authority (Area Office/Credit Group in case of R&MMG and Credit Group in case of Corporate Credit) The following set of documents will be sent to the Credit Administration Department(CAD) for further processing : Original Sanction Advice, CLP , Original BBFS, CIB , CFAF, legal opinion(if required) Valuation( if required), copy of chain of property documents ( if required) and all other documents as mentioned in sanction advice. Refer the CAD procedure for preparation of Offer letter Refer the Facility Guideline For documentation of all Charge documentation Receive offer letter along with set of all charge documents from CAD. Match the Offer Letter with the terms and conditions of the sanction and sign the same. Inform the customer over phone about the sanction, the offer letter that he has to accept, security documentation and formalities that are to be completed before availing the facility. If customer needs to have the offer letter collected by an authorized representative, wait for 2-3 days otherwise dispatch the letter via authorized courier company. Obtain signature of the mortgagor in his/her physical presence on the security documents. Sign the undertaking that customer has signed the security documents in his presence. Undertaking annexure attached. RM / Branch Manager / Credit Manager
iv
RM/BM/Credit Manager
v vi vii viii
CAD RM/Credit Manager RM/ BM/CAC/CAD
ix
RM/ BM x xi RM RM
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PROCEDURE
5.3
a i ii iii iv v vi vii
Lien/ registration
Pledge Mucadam is selected with the mutual consent of the customer and bank from the approved list of mucadam. In case operation of branch is not centralized, prepare letter in favor of muccadum for delivery of import documents. Goods are transferred to godown in the presence of muccadam and RM. Carry out Stock Inspection as per the requirement of sanction advice. Request outsource agency for stock inspection as per the condition of sanction advice. Ensure submission of stock report by Muccadam monthly or after any change of stock status. (Format stock report annexure attached-7.15) Issue Delivery Orders after recovering payment of advance from customers account as per the request of borrower. In case of centralized branch, CAD will issue the D.O. One copy of D.O will be handed over to customer and the other copy to be sent to muccadam by CAD (In case of centralized branch) and by branch (in case of decentralized operations). Release of good after adjustment of facility upon issuance of DO. Hypothecation Ensure that customer submits stock/receivable report regularly as per the requirement of sanction advice. Submit original stock/receivable report with DP calculation duly signed and verified, to CAC for their record. Keep one copy in customers file. In case value of Hypothecated stock is greater than Rs. 50.00M, carry out stock inspection through outsource agency quarterly. Marking of Lien in case TDR Financing (Lien on customer's account): If finance is to be allowed against marking of lien on deposit (TDR etc) or on customers account, then lien will be ensured. Registration of GPA Mortgage deed (In case of property registration) Token register mortgage, GPA will be carried out as per sanction requirement. Consult with approved lawyer for GPA and TRM registration Along with customer and lawyer, visit the registrar office for registration of GPA & mortgage deed.
RM/CAC/CAD RM RM/Macadam RM/CAD/CAC RM/CAD/CAC RM
RM/CAC/CAD
viii ix b i ii iii a i b i ii iii
RM RM
RM/CAC/CAD RM RM/CAC/CAD
RM/CAC/CAD
RM RM/BM RM/ lawyer
Page11
PROCEDURE

iv v vi c i ii v vi d i ii iii e i ii iii iv v f i g At the same time, i.e. after registration, obtain registration receipt from registrar. Deduct GPA registration charges as per vendor bill from customer account as per attached annexure and give the voucher to the operation officer for preparation of pay order after preparation, officer inform to the RM Authorize the entry and file the voucher in respective file Marking of Lien on DSC/SSC/regulatory income certificate: Visit National Saving Centre along with customer's request letter, original saving certificate and bank's letter for lien marking. Verify signature and confirm that concerned department has marked lien in favor of bank. Deduct service charges as per SOC from customer's account as per attached annexure Authorize the entry and file the voucher in respective file In case of Letter of Guarantee. Print the guarantee upon receipt of guarantee text form Centralized Guarantee Department. Hand over the LG duly signed by two authorized personnel of branch and receive acknowledgement. Retain one copy of acknowledgement and sent the other to Centralized LG Dept. Completion of Documents: Send complete set of documents to CAD after verification of customer's signature and registration or lien (if applicable) Place the office copy-bearing acknowledgement of the Department/Bank's representative in the relevant customer file. For review/ scrutiny of the documents refer the procedure of CAD. Receive deficiencies (if any) highlighted by CAD for rectification. Complete the formalities or rectify all deficiencies and send back to the CAD Customer requested for deferral If completion of formalities require extended time period, refer the case to approving authority for deferral or waiver as the case may be. Approval for deferral: Dispatch RM RM RM/ Cr.M/CAC/CAD BM/RM
RM RM RM/ Operation manager BM/RM
RM RM RM/Credit Manager
RM
RM RM/BM
RM/BM
Page12
PROCEDURE

i Approving authority will process deferral request and grant approval in terms deferral policy. Sanctioning Authority
Page13
PROCEDURE

h i ii iii iv v vi vii viii vi x xi xii Issuance of deferral Upon receipt of approval for deferral/waiver by branch, same will be forwarded to CAD For deferral procedure refer the procedure of CAD Customer should be informed the time period (deferral period) within which the documentation or any other formality is to be completed Note: In case of Clean documents (i.e. complete in all respects), DAC will be issued in place of Deferral Insurance Check for the requirement of insurance with respect to facility/security and approval terms In case of new customer, he/she should be requested to arrange insurance for the entire amount of facility After receiving the insurance policy, the same will be forwarded to CAD Seek confirmation through a letter to concerned Insurance company for the genuineness of the policy. After completion of all documents, forward the insurance policy along with covering letter to the CAD for the issuance of DAC For issuance of DAC, Safe custody, scanning of Documents, Limit feeding , disbursement, KIBOR re fixing and markup recovery refer the procedure of Credit Administration Department( CAD) Upon intimation of CAD regarding disbursement, inform customer and issue credit authority RM RM RM Credit Manager BM/Credit Manager
RM RM/CAC/CAD RM
RM
6. MAINTENANCE AND CONTROL

6.1
i
Maintaining of Record
Branch will maintain copy of all the record customer wise in respective files for record and future reference. RM
6.2
a i
Availment and Offering

Availment On approved sanction limit , upon utilization of security on timely basis issue the avaiment advice send one copy of availment to CAD for limit monitoring for (detail refer the procedure of trade). Copy of availment advice to be received from trade dept, deliver the same to the customer and hold one copy for monitoring the limit of customer on daily basis If the availed limit exceeds the approved limit due to fluctuation of exchange rate, advise the customer to arrange further security and inform the competent authority at H.O Offering ( Excess Over Limit)
trade
ii
RM
iii b
Page14
PROCEDURE

I In case customer requests for additional limit in existing facility for temporary basis when there is no cushion available in his limit, branch will request Area Office for approval on basis of Authorized Power, Area Manager will approve within his authority or recommends to higher authority. From offer letter to DAC issuance, process remains same. Forward approval of EOL to CAD along with all necessary documents for preparation of charge documents. After receiving all formalities or documents from branch, CAD reviews the same and completes all formalities and issues the DAC. After receipt of DAC at branch, send the copy of DAC to Concerned Department(trade etc, if required) and allows EOL Expired Limit Intimate the customer at least 45-60 days before the expiry of limit to obtain requisite documents for renewal of facility Submit the proposal for renewal of limit to their concerned Area Office Approves if limit falls within their purview or recommends the request to Regional Office-R&MMG. Remaining process of approval is same as mentioned under fresh approval RM/Credit Manager CAD-Review officer RM RM/Credit Manager
ii iii iv v c i ii iii
RM RM
Area Office
6.3
i ii
One Time Transaction (OTT)

If limit stands expired or fully utilized or the customer does not have a regular limit, then on customer's request, OTT can be processed to address urgent business needs of the customer. . All steps will be followed from approval till issuance of DAC as mentioned above
RM RM
6.4
i ii iii iv v vi a b
Monitoring and Maintenance of Diaries

Prepare an excel sheet where limit and outstanding should be incorporated for monitoring purposes and update it on daily basis In case of full availing of limit, branch will inform customer accordingly to avoid any further drawdown or issuance of cheque on the account Obtain stock report from the customer in terms of approval conditions Review and forward the same to CAD. Prepare excel sheet for expired limits, outstanding positions , expiry of insurance policies, status of stock report etc for monitoring purpose Monitor the Insurance coverage/Valuation of pledged/hypothecated stocks and Expiry of Limits etc. on frequent basis: Renewal of insurance: Arrange renewal of insurance by approved insurance company. Business visit: ensure regular visits to customer's business place in order to assess the actual business position. RM RM RM RM RM/BM/CAC/CAD /CMU RM/BM/CAC/CAD /CMU RM/Credit Manger/CAC/CAD RM
Page15
PROCEDURE

b c Visit report: Personally visit the stock as per requirement of sanction from time to time basis to verify stock position and submit the report to CAD. Valuation: Arrange valuation of mortgaged property (in terms of SBP PR) from the bank's approved valuator and deduct charges from customer's account as per procedure mentioned above RM RM/Credit Manger/CAC/CAD
6.5
i
CIB Request
Arrange fresh CIB on end of every quarter to identify any adverse trend RM/BM
7. OTHER ACTIVITIES
7.1
i ii
Recovery Of Advances
At quarter end, follow-up with the customer for recovery of markup as per terms of approval. Write a letter to customer for adjustment of mark up if it is not timely adjusted. Request to customer for the repayment of loan as per the condition of sanction advice
RM RM
7.2
i ii iii iv v vi
Renewal of Credit Facilities/revision

Branch to ensure that conduct of account is satisfactory in all terms while processing renewal of facilities. Contact the borrower to inquire about the renewal of existing / additional credit facilities. If yes, ask for request letter along with information on latest financial statements, type of facility required and current detail of borrowing from other banks. Intimate the credit manager about the same. The application of renewal is directed to the authority that has initially approved / sanctioned the proposal. Follow steps of Fresh Proposals as mentioned above from arranging the requisite documents i.e. ECIB, financials, BBFS, CFAF etc. till obtaining the approval from the appropriate approving level. Forward the approval along with all documents to the CAD RM RM
RM
AS APPLICABLE
7.3
Post facto Approval

If branch has done any activity due to omission which actually required prior approval from competent authority then post facto approval should be arranged at the earliest to keep the records straight and to avoid any audit objection. Such request should be sent to Area Office for their approval/recommendation as the case may be.
RM
7.4
i ii iii
Cancellation/ Adjustment of limit/Release of Security

In case customer doesn't want to continue the credit facility with the bank, branch will obtain request letter from the customer for cancellation of the facility. Branch will ensure complete adjustment of outstanding (principal plus markup) and/or any other charges which may be recoverable. The branch will confirm complete adjustment of all outstanding dues to CAD and will request them to release the security documents.
RM Credit Manager/RM Credit Manager/RM
Page16
PROCEDURE

Page17
PROCEDURE

iv v For release of security, please refer the CAD procedure. Obtain the acknowledgement form the customer for receiving the original security documents. RM/CAC/CAD RM
7.5
i ii iii iv v vi vii
Replacement of Security:
On the request of customer for change of security, obtain legal opinion for the new security. Complete all formalities regarding valuation, mortgage, visit and any other requirement as deemed necessary. Send the documents to the approving authority for replacement of security and arrange approval. Upon receiving approval, send the documents to CAD for replacement of security. Receive intimation from CAD (for detailed procedure for replacement of security, refer the procedure of CAD). As per schedule of charges deduct the charges from customer's account for all the above activities. Authorize the entry and file the voucher in respective file RM RM RM RM RM RM BM/RM
7.6
i ii iii iv v a i iii
SWAP
Receive the request from the customer for swapping of facilities. upon receipt, all steps from customer profile to approval will be same as above Liaison/ send a letter to the bank from where the security has to swapped. After receiving approval, send all the documents to Credit Administration Department for further processing Swapping policy as mentioned in the OM should be strictly adhered to. In case SWAP from BAL: Upon receipt of customer's request, prepare total liability sheet (CAD will prepare in case of centralized operations, branch will prepare in case of de centralized operations). Swap policy should be followed with respect to receiving payment/releasing security from/to the bank where the facility is to be swapped. RM RM/ BM RM RM RM
RM/CAD RM
7.7
A
Syndication
Role as a participant
Page18
PROCEDURE

i Receipt of invitation from the lead Bank for participation in a syndication transaction. RM
ii
Obtain Indicative Term Sheet (ITS) from the customer and after reviewing the same decide, in consultation with GH-CIBG, whether to consider the proposal or decline the same at the business end. If declined; a letter of regret is to be sent to the lead bank. If decided to continue, obtain necessary documents from the customer, including, among other things, the Information Memorandum from the Lead Bank, BBFS, other Company specific documents etc Proposal to prepared incorporating Company profile, Group profile, Project brief, Project feasibility, Technical consultant details, Industry analysis, Economic analysis, SWOT analysis, Risk analysis, Key investment considerations etc. Receipt of Approval for participation from the Credit Division via Sanction Advice; Convey Commitment for Participation to the Customer or Lead Manager via a Commitment Letter; Vetting of Legal Documents by Internal Legal Counsel; Confirmation of Perfection of Security by Transaction Legal Counsel; Execution of Legal Documents; Charge Registration with Companies Registrar Office (Securities and Exchange Commission); Receipt of Drawdown Notice from the Customer; Fulfillment of conditions precedent to disbursement; Submission of duly executed legal documents along with charge registration certificate to Credit Administration Department to expedite disbursement; Disbursement to the Customer; Principal Repayment & Markup Payment by the Customer; Periodic monitoring of project progress, Financial covenants and other milestones related to the project. Periodic monitoring of Security (determine whether security margin is being maintained); Leading in Debt syndication:
RM RM RM RM /Area/Region/Grou p
iii iv
vi vii viii ix x xi xii xiii xiv xv xvi xvii xviii B
RM RM RM /CAC/CAD RM/ CAC/CAD RM CAC/CAD RM CAC/CAD RM RM CAC/CAD RM RM RM RM/CMU RM/CAD RM
Page19
PROCEDURE

i ii iii iv v vi vii viii ix x xi xii xiii xiv xv xvi xvii xviii xix xx Identify clients needs with respect to the project being undertaken. Carryout initial due diligence of the project, including Company / Group background check, project viability, economic viability etc. Prepare Information Memorandum. Obtain Internal Credit approval to lead / participate in the project. Market the transaction by dispatching invitation letters / Indicative Term Sheet to investors / financial institutions (FIs). Assist the interested investors / FIs to obtain internal approvals. Obtain firm consents from investors / FIs. Appoint Transaction legal counsel / technical consultant (if required). Liaise between the legal counsel and participating banks to finalize the legal documentation. Confirmation of Perfection of Security by Transaction Legal Counsel; Execution of Legal Documents; Charge Registration with Companies Registrar Office (Securities and Exchange Commission); Receipt of Drawdown Notice from the Customer; Fulfillment of conditions precedent to disbursement; Submission of duly executed legal documents along with charge registration certificate to Credit Administration Department to expedite disbursement; Provide Certified True copies of all legal documents to the participating Banks and assist them in obtaining their respective disbursement authorizations. Liaise between bank and ensure Disbursement to the Customer; Recover Principal & Markup Payment from the Customer on respective due dates and distribute the same to the participating Banks on pro rata basis. Periodic monitoring of project progress, Financial covenants and other milestones related to the project. Periodic monitoring of Security (determine whether security margin is being maintained). RM RM RM RM RM RM RM RM RM/CAC/CAD RM/CAC/CAD RM/CAC/CAD RM RM RM RM RM RM RM RM/CMU RM/CAC/CMU
7.8
i
Blocking of limit/Earmarking:
In case one facility is allowed by blocking another facility, approval will be obtained from approving authority. BM
Page20
PROCEDURE

ii iii Upon receipt of approval, forward approval with documents to CAD for completion of formalities and issuance of DAC. After issuance of DAC limit will be blocked by CAD (In case of centralized branches) and by branch for decentralized operations. For further detail refer the procedure of CAD. RM/BM RM /Credit Manager/CAD\RM
7.9
i ii
Cheque Return
In case of CF facility, if cheque amount exceeds the facility, inform the concerned RM after return of cheque from CPU Contact the customer for their advice so that cheque may be cleared on arrangement of funds by the customer otherwise same is returned. Branch-Ops Manager RM
7.10
i ii iii iv v vi
Transfer of Facility ( with in Bank)

Upon receipt of customer's request of transfer of facility from one branch to another branch , obtain approval by following the steps of approval as mentioned above, from respective authority Send approval to CAD for preparation of offer letter and documentation in the name of new branch Upon receive of offer letter and documents, obtain sign on the same by following the steps mentioned above and send to CAD for their Review. Obtain clearance/disbursement certificate from CAD for transfer of facility (principal with Mark up)( in case of de-centralized operation) In case of centralized operation, CAD transfer the facility(principal with Mark up) ( refer the CAD guideline) Transferor branch forward the credit file to the transferee branch and notify them about the details of the facility as well as all outstanding transactions and dealings
RM RM RM RM CAD RM/CAD
8. SUPERVISION AND WATCH LISTING OF ACCOUNT

i ii iii iv v vi vii On the day of maturity, BM/RM must try to pursue the customer for the payment of any recoverable amount inclusive of principal and/or markup etc. Prepare reminders for the customer by advising overdue status of the facility. (Send further reminders if facility remains overdue). Overdue reminder together with the copies of overdue advices sent to the customer and visit reports (if any) will be filed separately from current facilities. Maintain a customer wise record for all follow-up calls\reminders\visits. Review overdue files daily in relation to customers account and make rigorous follow-ups with the customer. Customer should be reported as watch list account if payment is not received despite various reminders. (There are multiple criteria for calling the account as watch list, please refer OM). Add customer detail in monthly watch list statement for monitoring and submit the same to area, region and credit group for monitoring purpose. In case, debts which are persistently past due or which are felt to be doubtful of recovery in full are classified and referred to in all correspondence as Bad and Doubtful Debts by branch. RM
RM RM
RM RM
RM
Page21
PROCEDURE

viii ix x Follow the steps mentioned bellow for Bad and Doubtful Debts update overdue mark up rate in the system for markup calculation Authorize the entry RM/ Operation manager BM/RM
8.1
i a b c d ii
Downgrading of customer
If a customer has been downgraded from IV or V, take immediate steps to determine the customers position and the action required to protect the banks position. The following measures must be considered immediately: Ensure steps to be taken to reduce exposure or prevent increased exposure (e.g. further withdrawal of credit limit to be stopped). Check the conduct of customer's or its group concerns account with other branches (where the customer and/or its allied concerned may be availing credit facilities). Check that all security documents/charge forms are complete and in order. Higher offices in the Business Group be informed about the downfall of customers account. Further investigations on the banks exposure should be carried out, covering the following studies/information 1) Facilities Availed, 2) Determination of borrowers liability/ outstanding, 3) Analysis of all Related Security Factors , 4) Spot Checks of Company's premises, 5) Causes of Business failures/downfall 5) Position of stocks & receivables. After completing the above exercise, the borrower should be called to discuss the matter with the Bank. The meeting should be held in a cordial atmosphere. On the basis of facts established through investigation and subsequent discussion with borrower, various measures should be carried out. Minutes of meeting held with delinquent customers must be recorded, under signatures of negotiating officer / executive and placed in the relevant customer / credit file. A copy of the same may be endorsed to controlling executives / office, which shall monitor the progress in the remedial management. Evidence of such meeting and review must be on the file for subsequent reference RM
RM/Credit Group RM / Credit Group / CMG RM/CAD RM RM
iii
RM / Credit Group / CAD /CMG RM / Credit Group RM / Credit Group
iv v
vi
RM / Credit Group
8.2
i a b c
Other remedial actions

After immediate action has been taken in terms of the above formal corrective action plan; target dates must be established. This may involve: A restructuring program, with financials and cash flow forecasts being closely monitored. Obtaining new or additional security. Renegotiating the terms of credit facilities. RM / Credit Group RM / Credit Group RM/Credit Sanctioning Authorities RM
Page22
PROCEDURE

d e f Seeking take-out by another financial institution. Encouraging changes in management if incumbents have shown that they are not able to take appropriate actions. Requiring sale of the business. RM / Credit Group RM / Credit Group RM / Credit Group
Page23
PROCEDURE

9. REPORTING OF IRREGULAR BAD AND DOUBTFUL DEBTS

i Before becoming any account overdue past ninety days (NPL accounts), all security documents and collaterals supporting the credit shall be reviewed and all deficiencies shall be removed. Such a review shall be completed within 15 days of transferring the account to watch-list category. In case valuation report of any PBA approved valuator (as per SBP requirement) is not available in record, a fresh forced sale valuation of mortgaged properties / pledged stocks shall be obtained before classification. Monitor further facility utilizations in the accounts and consider blockage of the utilized lines depending upon the situation. Obtain fresh credit checking and CIB report in order to verify the position of customers outstanding over dues with other banks / institutions. Analyze latest financial position of the borrower vis--vis his overall liabilities in order to determine his capacity to settle the obligations. The mortgaged properties / hypothecated / pledged stocks and place of business of the borrower shall be personally visited by the branch manager and / or area manager. Visit reports duly signed by the branch manager and respective area manager shall be kept on record for review of management/internal audit/RMD/external auditor/central bank inspection. RM / CMG
RM / CMG
ii Iii Iv V Vi
RM/BM/CMG RM RM/Sanctioning Authority/CMG
RM RM/CAD/CMG
Vii
9.1
I Ii Iii
Report the Case to Head Office

Prepare NPL in monthly NPL basis and submit the same to area and region office Further report those account which may become NPL in future in expected NPL statement Arrange meeting of customer with area/ regional manager for early adjustment / rescheduling or restructuring of loan RM RM RM/BM
9.2
I Ii
Restructuring/ Rescheduling of loan

Upon customer's request, forward the request of rescheduling/ restructuring to area for onward submission to region office and credit group for approval by following the steps of approval mentioned above. Upon receipt of approval same will be forwarded to CAD for preparation of charge documents and all processes as mentioned above.
RM/SAM BM/Credit Manger
9.3
i Ii iii iv V
Default Customers
Send reminders to customer's given address via register mail. Record the Return mail in customer's file. Discuss the matter with senior credit officials. Inform lawyer about the account behavior and send all the necessary documents as required by the lawyer for the preparation of legal notice Upon receipt of legal notice from lawyer send the same to the customer and retain one copy in file. BM/Credit Manger BM/Credit Manger BM/Credit Manger Regional Head Credit / Group Head Credit / SAM BM/Credit Manger/SAM
Page24
PROCEDURE

Vi If customer agrees to adjust the loan in writing it will be informed to Area/Regional office. Adjust the liability by following the adjustment of facility steps mentioned above also monitor the repayment status regularly and same will be updated in monthly NPL statement. In case no response is received from the customer, send the IOM along with the complete credit file including all follow-ups, call reports, visit reports or reminders to the concerned SAM centre. It should accompany a memo signed by the Business Group Heads/Regional Managers specifying the list of documents attached. SAM will process writing off the loans as per SAM procedure. BM/Credit Manger/SAM
vii
Regional Manager/Group Head (Business) SAM
viii
9.4
i
Suspension of mark up
Pass necessary transaction for suspense of markup as per instructions of SAM. BM
10.
i ii
EOD ACTIVITY AT BRANCH

BM / RM BM
Get all the financing statements of GL for CF, TOD, EOL etc. and vouchers/transactions reviewed by the Branch Manager at the end of the day. System generated deposit statement should also be reviewed by branch manager.
10.1
i
Reporting
Status of credit limit report should be sent to Area/Region on monthly basis as per annexure attached.
10.2
i
Entries checking
Recheck all the entries the following day to identify any error. If discrepancy found in any entry, inform BM for rectification or reversal of the same. inform RM for reversal or correction of entry Reverse the entry as highlighted by Accounts department/BM Account Department of branch' Account Department of branch' BM RM BM/Credit Manager/ Operation Manager
ii iii iv
Authorize the entry and sign the voucher.
10.3
i
File maintaining
Maintain customer wise credit file by updating all documents on daily basis RM
Page25
FACILITY GUIDELINE
1. CONSUMER CREDIT
Consumer Banking Group
Various facilities are available for lending to consumers, which are briefly discussed below. For more details please refer to the Consumer Credit manual. 1.1 Credit Cards Credit cards are a mode of clean, non-transaction based financing wherein the borrower can utilize up to a specific amount according to his requirements on revolving basis until the expiry of the limit. Principal/mark-up recovery is on monthly basis. The limit assigned to a borrower is based on their income, debt burden and credit history. 1.2. Home Finance In home finance, the bank disburses a long term loan to the borrower for the purpose of purchase/construction of residential property. The loan is usually secured against mortgage over the property purchased. Principal/mark-up repayment schedule is drawn up as per the Banks policy. 1.3. Car Finance/Leasing The bank can also finance the purchase of a personal vehicle. This is a financial lease transaction, whereupon the bank makes payment on behalf of the borrower to the automobile vendor. The borrower retains the use of the vehicle, but the title of the vehicle remains in the name of the bank as security up till the full adjustment of the liability by the borrower Staff loan. As per policy, the bank allows various types of loan to its employees on low markup rates. This includes personal loans, house loan, conveyance loan, furniture loan etc.
2. COMMERCIAL CREDIT
Commercial credit involves lending to the various types of borrowers as defined above for the purpose of meeting various business capital requirements. The commercial credit facilities offered by the bank are mostly generic, designed to meet various types of requirements of the borrowers. Further, from time to time, specialized products are offered by the bank, which are based on these facilities but have special features and terms that are designed to facilitate a more specific type of borrower or business requirement. In case of proposal and approval of any credit facility, the following need to be defined: Limit (i.e. the maximum funds available under the facility). Tenor/Expiry (the duration for which the facility will be available for availment) Pricing (the commission or mark-up rate charged to the customer for availment) this may be defined as per applicable Schedule of Charges or may be specified by the approving authority. Also there may be additional charges for delayed payments). Method of Repayment (the time or schedule of repayment of disbursed funds).
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FACILITY GUIDELINE
Security/Collateral against which the facility is to be secured, through which the bank may recover its funds and costs in case of default by the customer
The commercial credit facilities of the bank may be divided into two types: Funded facilities: Where actual funds are disbursed by the bank against future repayment Non-funded facilities: Where the bank substitutes its creditworthiness for that of the customer in various situations. Actual funds are only disbursed in case of certain predefined situations (which is why such facilities are termed as Contingent Liabilities for the bank, i.e. the banks liability to make payment is contingent upon some situation), and there is also a pre-defined method of repayment of the banks funds by the customer.
It should be noted that a non-funded facility is not necessarily less risky than a funded facility, and the risk needs to be determined on the basis of the borrower, market conditions and security/collateral held, as discussed in the relevant section. General Procedural Guidelines for Financing The following general procedural guidelines should be adhered to while allowing credit facilities: a. Adhere to terms of the approved Sanction Advice, policies, procedures & documentation as laid down in the CREDIT ADMINISTRATION MANUAL as well as circulars/ instructions issued by Operations Group from time to time. Any instructions contained in the circulars referred in this document are subject to amendment as issued from time to time by Competent Authority. b. Ensure at all times that each particular facility is utilized strictly for the purpose mentioned in the Sanction Advice/CLP. c. Communicate immediately to the Credit Group any event that may negatively affect the on-going operations of the company and / or negate the terms and conditions of the Sanction Advice. d. Ensure that BAL policies and procedures, as communicated from time to time, and rules and regulations of State Bank of Pakistan and Provincial / Federal Governments, in force from time to time, are strictly adhered to at all times. e. Audit objections, if any, are to be completely rectified. A report on the status of outstanding audit objections should be accompanied along with all the future recommendations for the customers. f. Ensure that all warranty conditions in respect of insurance policy are fully complied with at all times adequate insurance to cover the full replacement value of Assets at the location charged to the Bank i.e., pledged & Hypothecated stocks & other fixed/movables assets (plant & machinery, building etc) assigning Bank Alfalah Limited as the mortgagee against the (prescribed) risk. In case any risk is excluded from insurance coverage against pledge of goods at the request of the borrower, necessary/ prescribed undertaking indemnifying the bank for any adverse situation arising there from should be obtained. g. The limits that remains unutilized for more than 60 days after the date of sanction, requires revalidation from approving authority. h. Re-fixation of KIBOR on applicable benchmark. i. KIBOR to be linked with tenor of Finance j. All documents as specified in PR to be acquired i.e., BBFS, CIB, latest audited financials etc. k. Latest audited financials should be furnished to the approving authority at the time of fresh approval or renewal/enhancement/revision of the credit facility. Business Lines should ensure to obtain quarterly, half yearly and annual financial statements within one (1) month of the same being published by the Customer. l. Recovery of fee / charges should be as per latest Schedule of Charges or as approved. m. For Islamic mode of financing, Business Group to ensure that the facility/ security is Shariah compliant & as per bank policy
Page2
FACILITY GUIDELINE
n. CIB report is to be obtained on quarterly basis for record & review. o. A declaration to be obtained from borrowers stating that they have not obtained clean financing exceeding Rs 2 million from financial institutions in aggregate.
For sake of organization, each type of facilities as categorized above will be discussed separately as follows:
3.
CLASSIFICATION OF FACILITIES
3.1. Funded facilitates The funded facilities as defined above may be divided into the following based on tenure/usage: 3.1.1 Short-term/Working Capital Facilities These are facilities which are designed to meet the short-term or working capital needs of the customer, i.e. for financing of various current assets. The tenure is usually less than one year, and the customer may roll over the liability several times within the approved limit during that period, depending upon their cash conversion cycle. The available short-term/working capital facilities are as follows: Current Finance (CF-Hypo) Cash Finance (CF-Pledge) Short-term Term Finance (TF) Post-Import Finance Facilities: o Finance Against Trust Receipt (FATR) o Finance Against Imported Merchandise (FIM) o Payment Against Documents (PAD) o Acceptance Export Finance Facilities (including both SBP-ERF and banks own source): o Finance Against Packing Credit (FAPC) o Finance Against Foreign Bills (FAFB) o FE25 Financing o Export Refinance Part-I/II Negotiation/Discounting of Bills o Local Bill Purchase (LBP) o Foreign Bill Purchase (FBP)
3.1.2. Long-term/Capital Expenditure Facilities These facilities are designed to meet the long-term or capital expenditure requirements of the customer, i.e. financing of various fixed assets. As such, the repayment period is usually spread over several years depending on the amount of the loan and the capacity of the borrower. The following long-term facilities are available at BAL: Term Finance (TF) Lease Finance
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FACILITY GUIDELINE
3.2 Non-Funded facilities
There are two basic types of non-funded facilities that may be availed by customers: Letter of Credit (LC) Letter of Guarantee (LG)
Details, including sub-types, may be found in the relevant sections. 3.2.1 Short term Facilities
a. Current Finance CF is a facility under which the bank allows the customer to draw funds in excess of the credit balance in their account up to a specific amount (limit) through any number of transactions. The customer may avail this facility at any time throughout its validity. The facility is a revolving advance, i.e. the customer may borrow, repay and borrow again, funds up to any amount according to their working capital needs. Mark-up is charged on daily basis on the outstanding amount at each day-end, and is recovered on quarterly basis (mark-up calculation is dealt with in the appropriate section). There is no schedule for principal repayment. If the facility is not renewed upon expiry, the borrower must immediately adjust the entire outstanding amount along with any mark-up remaining. Possible Securities Hypothecation over stocks and/or receivables or all current assets of the borrower
Ideally, some collateral in the form of mortgage/charge over some fixed asset should also be obtained, having sufficient value to cover the entire approved limit. Monitoring/Precautions Current Finance facility is the most difficult with regards to monitoring, because the bank cannot check the utilization of the funds withdrawn by the customer. The facility is considered to be a nontransaction-based facility, because the bank does not disburse funds to finance specific, known transactions, but according to the demands of the borrower, through cheques written on the account. The funds can be mis-utilized as follows: - Finance losses of company - To buy fixed assets - For partly funding expansion program - To finance bad debts - To finance obsolete inventory - Drawings of proprietor/partners/directors - Lend money to associates/subsidiaries Therefore, the following precautions need to be taken: a. The customer should not be allowed to use the funding for long-term financing needs, as it is strictly for working capital financing. b. The funds should be utilized only in the approved manner, i.e. not for associated concerns,
Page4
FACILITY GUIDELINE
other business ventures or personal uses. Accordingly, the following monitoring measures should be taken: a. Each drawing should be made taking into account the following: a. The approved credit limit is not breached. b. Customer has sufficient drawing power (DP) for the withdrawal. b. Turnover in the account should be monitored on periodic basis to ensure that it matches the customers cash conversion cycle. The following may be considered as general guidelines for minimum account turnover: a. 4 times of the limit for manufacturing concerns b. 6 times of the limit for trading concerns c. Clean-up: In most cases a clean-up clause is included as per terms of approval. As per this clause, the customer has to adjust the entire liability or a proportion thereof for a specific number of days during the validity of the limit. The terms of the clause are calculated on the basis of the cash conversion cycle of the customer. Compliance of the clean-up clause should be ensured to verify proper utilization of the funds. In cases where clean-up is not possible due to the nature of the business cycle of the customer, the total turnover needs to be monitored even more strictly. d. Transactions in the customers account should be monitored from time to time in terms of amount and source/recipient of funds. Furthermore, cash transactions should be discouraged as they make monitoring even more difficult. e. No disbursement is to be made against an expired limit. f. Accrued mark-up is treated separately, and if payment is delayed, late-payment charges are separately deducted. Charging of mark-up on mark-up is prohibited by SBP. g. In cases where finance is allowed only against hypothecation of stocks/receivables of the company on pari passu and the company is availing facilities against hypothecation of stocks/receivables from other banks also, monthly statements/list of stock and receivables are to be obtained that should include a bank-wise break-up of outstanding amounts with the total value of stocks and receivables there against to be kept in file. h. Stock Inspection of the hypothecated stock is to be undertaken by the Business Group on a quarterly basis and report thereof should be placed on file. Moreover, stock inspection by Banks approved surveyors/ valuators is to be undertaken as per Circular Letter # CD/SAA/3265 dated 15.08.2005. i. Realization of receivables charged to BAL should be monitored closely. Any slow moving / long outstanding receivables are to be highlighted and excluded from the total value of receivables for calculating total value of receivables as well as current assets. j. In-house receivables (Due from Associated Undertakings) are to be excluded from the total receivables amount for calculating total value of receivables. b. Cash finance
Under this type of facility, funds are disbursed against pledge of an approved commodity. An amount net off a certain margin is disbursed in the CF account of the customer. Requirement of margin varies for different kinds of goods. Funds can be released against pledge of commodities and/or liquid securities (shares etc.). Delivery of goods is allowed against payments for which Deliver Order (DO) is issued for each payment which is required to be adjusted within the stipulated period (generally 90-180 days) alongwith proportionate markup.
Page5
FACILITY GUIDELINE
Possible Securities Pledge of shares Pledge/lien over liquid securities (as defined in SBP PRs) Pledge of various commodities (e.g. wheat, cotton, oilseed/oilcake, rice, sugar etc.)
In case of commodity financing, the following measures need to be taken: a. In cases where SBP policies are in place for various commodities, they should be followed strictly b. Disbursement/adjustment needs to be specifically according to the approved policy for that commodity or as per terms of approval c. Each drawdown should be allowed against a fresh quantity of the commodity d. The bank should take care not to become involved with hoarding e. Precautions for pledge of commodity as mentioned in the Security section should be strictly followed. c. General Conditions for Pledge of Stocks It is to be ensured that stocks under pledge are kept under lock and key of BALs approved muccadam at all times, unless otherwise approved. It is to be ensured that the muccadam submits report of Pledged Stock on monthly basis or on each movement in stock (delivery/receipt) on prescribed format duly signed by muccadam and countersigned by client. Stock inspection of the pledged stock is to be undertaken by the Business Group on a monthly basis and report thereof should be placed on file. Moreover, stock inspection by banks approved surveyors/ valuators is to be undertaken as per Circular Letter # CD/SAA/3265 dated 15.08.2005. Stock report also to be obtained after issuance of Delivery Order. It is to be ensured that the pledged stock is stacked in a proper manner providing easy accessibility and facilitates counting / valuation of the goods. Goods charged/ pledged to the bank are to remain completely insured at all times with proper fire fighting arrangements, if required by the insurance policy. An indemnity on banks legally approved draft (attached as Annexure) should be obtained from the borrower if waiver of insurance of various risks of (Riots, Strike & Damage (RSD), Burglary, Atmospheric Damage, and Earthquake) is approved for pledged goods by competent authority. (Such waivers should be approved for selective customers on case to case basis.) Strictly monitor maintenance of minimum margin requirements, especially the top-up and sell-down conditions.
Open Pledge Open pledge is to be allowed within boundary walls of the customers factory premises. It is to be ensured that insurance policy clearly mentions that the goods are under open pledge. It is to be ensured that waterproof material (tarpaulin) is always available to cover the stock under open pledge and the stock is kept at an elevated level from ground. Pledge in rented premises Pledge of stocks at third party premises should be allowed only after completion of all legal formalities/undertaking required in connection with shifting of stocks i.e. letter of disclaimer from owner of premises, letter of access and letter of awareness etc. Pledged stock must be under lock and key of BALs approved mucaddam. All charges in respect of rented premises will be borne by customer. Owner of the godown must unconditionally state that Bank has the first right over the pledged stocks.
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Insurance policy should be obtained for pledged stocks at rented premises and must mention location of premises. Legal opinion on rent agreement must be obtained to ensure safety of banks interest.
For Leased Units Business Group to hold on record valid registered lease deed, duly vetted & cleared by BAL approved lawyer. If the leased factory is not part of security package of the above facilities, Branch to obtain latest NEC/Search Certificate and ensure that the leased factory is free from encumbrances. Business Group to hold on record Letter of access & Disclaimer from owners of leased factory, on BALs standard format. Business Group to hold on record Sales Tax Certificate in the name of client showing as lessee. Business Group to hold on record Valid Excise Certificate in the name of client showing as lessee. Business Group to obtain monthly paid electric bill for every unit, for effective monitoring.
4.
FINANCING AGAINST COMMON COMMODITIES
Business Groups/CACs should adhere to the following guidelines when allowing Cash Finance against pledge of different commodities Phutti a. Drawing power to be calculated on the basis of market price. Minimum margin to be 15% or As per Sanction Advice. b. Rate List from Market to be received and kept on record. c. Deadline for complete clean-up of facility is March 31st each year. No drawdown to be allowed w.e.f. 1st March and outstanding should be fully adjusted by 31st March. d. Open pledge of phutti stored in shape of heaps kept on raised platform within factorys boundary walls. For complete protection from rain, ginning factories must have tarpaulin. e. Conversion from phutti to ginned cotton should be precise. Yield to be determined on each pick by Area Office and must be agreed by Mucaddam and to be communicated to the branches. f. Plant visit by CAD Manager/Credit Manager once in a season. Visit report to be sent with renewal CLP. If not received Sanction Advice not to be released. g. Factory visit by Branch/Credit Manager before start of ginning operation. h. Inspection of pledged stock to be outsourced on quarterly basis. Cotton a. Each financing allowed against pledge of cotton (both local cotton as well as cotton imported through BAL) to textile units must be adjusted within 210 days maximum. b. Financing against pledge of imported raw cotton to be valued at invoice value. c. Drawing powers for CF (Pledge/local cotton) to be worked out on rates published by Karachi Cotton Association after keeping approved margin. (For Textile & Ginning approved margin over KCA rate or Market Price whichever is lower) d. Finance against imported cotton may be allowed throughout the year, subject to the condition that facility will be utilized for the retirement of LC documents under BAL LCs only. e. The facility is to be utilized for procurement of new local cotton for fresh cotton season. f. Deadline for complete clean-up of facility is September 30th each year. However, for ginning units, clean-up deadline is June 30th. It is to be ensured that clean-up period is enforced before allowing fresh disbursements under all limits against pledge of goods. For ginning unit, Branch to ensure gradual reduction in outstanding from 31st March. The outstanding must be reduced by minimum
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30% within 45 days from 31st March and should be fully adjusted by 30th June. If outstanding is not reduced within 45 days as per desired level, Branch to follow up with the customer under advice to Credit Group. g. Open pledge of cotton bales kept on raised platform (known as Pharr) within factorys boundary walls. h. In order to ensure pledge of cotton of fresh season, Mark (known as Marka) is mentioned on the bale showing year of crop, lot number, bale number, name of company produced the bale. i. Legal undertaking from ginning units that they will strictly adhere to all insurance warranties. j. Legal undertaking from ginning units to authorize the Bank to make payment of premium for renewal of the insurance policy on their behalf if renewal PPR is not submitted by them 3 days prior to expiry of insurance policy. k. Inspection of pledged stock to be outsourced on quarterly basis. Cottonseed a. Limit expiry to be 31st March. Maximum tenor 30 days. b. Open pledge of cottonseeds stored in shape of heaps. If oilseeds are purchased from outside, it must be in bags and should be weighed. c. Drawing power to be calculated on the basis of market price. Minimum margin to be 25% or as per Sanction Advice. d. Rate List from Market to be obtained and kept on record. Oilcake a. Limit expiry to be 31st August. b. Pledge of oilcake in covered godown. Quantity of oilcake is estimated by the size of Godowns space. 1 cft. is equal to 11 kgs. c. Drawing power to be calculated on the basis of market price. Minimum margin to be 25% or as per Sanction Advice. d. Rate List from Market to be obtained and kept on record. e. An undertaking from ginners/oil expellers to be obtained that they will not involve in price speculation/oilcake future trade. Yarn a. Pledge Yarn to be stacked in easily identifiable quality-wise batches. b. It is to be ensured at all times that, in case of spinning mills, exposure against pledge of yarn not to exceed 25% of the Current Finance Cotton limit. For composite / weaving mills this percentage is to be decided on case-to-case basis. c. Each particular draw-down against yarn should be adjusted within 90 days maximum from the date of draw-down. d. Drawing power to be calculated on the basis of market price. Minimum margin to be 10%. Cloth a. Grey fabric is to be completely replaced if the liability under pledge remains outstanding for more than 60 days. b. Drawing power to be calculated on the basis of market price. Minimum margin to be 10% or as per terms of sanction. Wheat (by products of wheat) a. Drawing power is to be calculated on official support price of wheat or the market price, whichever is less. Minimum margin to be 10% or As per Sanction Advice. b. It is to be ensured that proper fumigation specific for wheat is carried out periodically in the godown for safe keeping of the stock. c. Deadline for complete clean-up of facility is January 31st each year or as per SBP requirement. d. Open pledge of wheat must be in pyramid shape.
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e. SBP rules regarding wheat financing should be adhered. Paddy a. DP to be calculated on the basis of market price. Minimum margin to be 25% or as per terms of sanction. b. Drawing for purchase of paddy may be allowed upto March 31st each year c. Complete clean-up of facility by April 30th each year or As per Sanction Advice. Rice a. Drawing power to be calculated on the basis of market price or cost price, whichever is lower and retaining margin. b. Business Group is required to undertake inspection of pledged stock twice during the season through an independent rice expert / valuators to ascertain the quality of pledged rice in hand. c. It is to be ensured that proper fumigation specific for rice is carried out periodically in the godown for safe keeping of the stock. d. Muccadams to declare the quality of rice in the stock report in order to help in ascertaining the Drawing Power. e. Deadline for complete clean-up of facility is August 31st each year Or specific approval is held for exporters f. Packing of finished rice in bags stored in 50- 100 KGs or specific for export orders Sugar (by products of Sugar like molasses, ethanol etc.) a. Pledge of refined sugar should be accepted in bags of standard weight (50 KGs.) b. Pledge is acceptable in godown within mills premises. c. Disbursement under Current Finance for procurement of Sugar Cane to be allowed only after commencement of cane crushing for the season. d. A minimum of seven days clean-up period is required before the start of next crushing season. e. Deadline for complete clean-up of facility is October 31st each year Drawing power/ margin requirements SBP Instructions Financing Against Shares Shares are riskier than debt as they have a residual interest in the company. Therefore, upon liquidation/winding up, they will get repaid after all other claims against the company have been settled. There are various levels of liquidity of shares. Firstly, shares that are regularly traded on the Stock Exchange are most liquid. Secondly, shares that are listed but not actively traded on the Stock Exchange are less liquid. Lastly, shares that are not listed on the Stock Exchange are the least liquid. The State Bank of Pakistan does not allow financing on the security of unlisted shares. The Prudential Regulations allow financing against shares that are lodged with the Central Depository System (CDS). Under this system, the physical share certificates are replaced with residual holdings. The CDS offers a more secure and efficient system than the previous physical share system for settling and pledging shares. The market price of shares listed on the Stock Exchanges fluctuates considerably, which requires adequate margin. The price of non-actively traded stocks may not reflect the inherent value of the shares. Financing against shares shall be allowed at Stock Exchange Branches only except where special permission is granted by Competent Authority.
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Business Groups/CACs are responsible to adhere to the following guidelines while allowing financing against pledge of shares: DP to be monitored on daily basis. Branch to ensure that the beneficiary of the facility is absolute owner of the shares so pledged or has the necessary mandate to pledge the shares as security for availing financing facility from the Bank. Fresh disbursement to be made against shares of 30/100 index and / or as approved and communicated from time to time. Branch to avoid concentration on few companies scrips and portfolio to be diversified by accepting shares of other approved companies by H.O from time to time under pledge. Exposure covered by pledge of shares of any company should not exceed 20% of exposure Exposure against the shares of listed companies shall be subject to minimum margin of 40% for brokers and 50% for non-brokers of their current market value or as per the Sanction Advice. Branch to obtain CDC Statement of the customer on a regular basis to monitor utilization of facility for the purpose same was approved. Any shortfall in shares value to cover margin requirement to be replenished immediately. Compliance of SBP Regulations should invariably be ensured.
4.1.
Short term TF
Since a CF facility presents monitoring issues as mentioned above, in certain cases it is more advisable to grant transaction-based working capital finance in the form of a revolving shortterm TF line. In this case, finance is granted against documented transactions, such as invoices of credit sales or work orders for consignments etc. which the customer has to adjust within a certain fixed tenor. The limit itself is, however, revolving, and the customer can again obtain financing against amounts adjusted, up till the expiry of the limit.
4.1.1.
Import Financing
Post-import finance Post-import financing is a type of working capital financing availed when the customer imports certain items, but does not have sufficient cash to pay the exporter at that point in time. Therefore the bank pays the exporter on behalf of the importer (customer) at that point in time. The customer/importer then repays the bank according to the terms of the facility, i.e. maximum tenure allowed to the customer, along with pre-specified mark-up. Post-import facilities are usually granted to customers on shipments against LCs opened with the bank, and are usually proposed along with or as sub-limits of LC limits. However, in certain cases, upon approval, they may be allowed against collection documents as well. However, post-import finance is usually not allowed for LCs opened with other banks except with prior approval for that specific transaction. There are two types of post-import finance, which are availed depending upon the requirement of the customer: i. Finance against trust receipts In this type of import financing, the bank makes the payment to the exporter on behalf of the importer (customer), and then releases the documents of the goods to the customer. The customer, in return, signs a Trust Receipt, thus legally undertaking to hold the documents, the goods they represent, and the sales proceeds thereof in trust for the bank, and to repay the
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banks liability within the stipulated time period. Basically this allows the customer to obtain custody of the goods prior to making payment, so that the customer may utilize or sell the goods and generate proceeds there-against for adjustment of the liability. It is important to note that the goods released under a trust receipt must be fully insured by the customer and the Bank reserves the right to inspect, repossess and if necessary, dispose of the goods at anytime. Types of FATR: FTRs in respect of L/C documents under this facility, the Bank is required to deliver documents of title to goods imported under L/C, to the customer to enable the latter to obtain goods prior to payment and the customer undertakes to hold the documents. The goods represented thereby and the sale proceeds thereof in trust for the bank. There are very obvious risks in permitting a customer to deal with goods in this way. A customer having in his custody, goods released to him against a trust receipt can fraudulently sell them or pledge them to a third party, leaving the holder of the trust receipt only the right to sue for breach of trust. FTR facilities should therefore be granted to undoubted importers against established credit lines. It is important to note that the goods released under a trust receipt must be fully insured by the customer and the Bank reserves the right to inspect, repossess and if necessary, dispose of the goods at anytime. FTRs in respect of collection documents-FTRs are granted only in respect of collection documents routed through the Bank's branches. This facility is restricted to selected customers with satisfactory account relationship and is governed by the following safeguards: Facility to be allowed with prior approval of the Head Office only to prime customers. Branches should be satisfied that the collection bills have genuine underlying trade transactions (consider Deletion). Branches are also required to ensure that the facility is used for the customer's regular line of business. The facility should be given as a separate FTR line under the import line (i.e. FTR for collection documents) as distinct from FTR sub-limit under import (L/C) line.
Note: All precautions stipulated in respect of FTRs against L/C documents are applicable to this type of business as well.
Monitoring/Precautions Letter of Trust Receipt should be obtained for each individual transaction allowed. FATR to be allowed only for retirement of import bills under sight L/C opened by BAL. Depending upon risk criteria, reasonable margin is to be obtained for FATR.
ii.
Finance against imported merchandise (FIM) Under FIM, financing is availed against pledge of the imported goods with the bank. The
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importer obtains custody of the goods by adjusting the FIM liability through full or partial payments during the approved tenure of the facility. Mark-up is recovered for the amount and duration of the outstanding liability upon adjustment of the FIM. In case of unpaid charges on over-due PAD, the same are transferred to a separate FIM account and adjusted by the customer along with mark-up due on the FIM. Forced FIM takes place when a customer is unable to retire an overdue PAD beyond a certain number of days, in which case it might be converted into a FIM even if the customer does not have an approved FIM line. In such cases the Forced FIM should preferably be cleared before further LCs are established or other financing disbursed. Locally Purchased Goods In exceptional cases branches may grant facilities, subject to approval from Credit Group against locally purchased goods, provided maximum care is exercised to ensure that: the goods are marketable the value stated in the invoice is correct by making independent market inquiries about the unit price.
As far as possible the entire quantity should be examined to ensure the genuineness of the goods and their quality. Monitoring/Precautions FIM is only to be allowed for goods imported through BAL at invoice value or as per terms of sanction. Each individual transaction under total FIM limit must be adjusted within the maximum tenor of the facility as mentioned in the Sanction Advice. The facility should be adjusted from the sale proceeds of the imported goods. Stock inspection of the pledged stock is to be undertaken by the Business Group on a monthly basis and report thereof should be placed on file with a copy to concerned CAC. Moreover, stock inspection by banks approved surveyors/ valuators is to be undertaken as per Circular Letter # CD/SAA/3265 dated 15.08.2005. Stock report for the pledged stock is to be obtained on a monthly basis and upon issuance of DO or as otherwise required by the Sanction Advice. Goods charged to the bank are to remain completely insured at all times, even while in transit. FIM is usually not approved for the entire amount of the shipment, and a certain margin is also approved, which should be recovered from the customer prior to creation of FIM. Margin / Drawing Power is to be based on invoice value/landed cost / market price of the goods, whichever is lower or as per terms of sanction. Since the banks exposure is secured against pledge of goods, their market value should be independently ascertained by the bank, and all precautions with respect to pledged goods need to be taken, as discussed in the appropriate section. Customs clearance of goods to be handled by BAL approved clearing agents. Clearing of goods from customs and transportation to an approved warehouse should take place immediately, and all charges (including warehouse rent, mucaddam charges, insurance, electricity rates and taxes of the warehouse, customs duty and taxes on the goods; clearing and transport charges and demurrage if applicable) should be recovered from the customer.
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Pledge of goods in custom-bonded warehouse is allowed under special circumstances and will require prior specific clearance from the approving authority. Extra caution needs to be taken in cases where FIM is allowed against local goods (i.e. inland LCs or collection documents).
iii. Payment against Documents under sight L/C (PADs) Import documents received under sight letters of credit are lodged in PAD, and are released upon payment from the party. Import documents shall be checked strictly in terms of the letter of credit to ensure that there is no discrepancy. In case of a discrepancy in the documents, the negotiating bank must be immediately advised by telex/cable regarding such discrepancy and dealt with accordingly. In case of import documents received without discrepancies, the amount of the bill plus charges, if any, claimed by the negotiating bank, would be converted into Pak Rupees at the exchange rate prevailing on the date of lodgment. iv. DA BILLS The facility arises when the Bank has already handed over the documents to the importers against their acceptance of usance bill, which means they may already have taken custody, and / or disposed of the imported goods. Such facility is allowed only to reputable clients and / or backed by collateral. The Bank has in its possession only the accepted usance bill / draft for which payment by the importers is awaited. However, it is our Banks policy that the goods against such accepted bill shall remain under Banks pledge / control unless the customer has an Acceptance limit which is usually backed by T/R. Whether or not the importers make the payment, the Bank is bound to provide reimbursement, as per terms of L/C, to the correspondent negotiating bank on the date of maturity already conveyed to them. The importers may make payment of the accepted DA Bill either: within the maturity date, or after maturity date. The DA Bills may be retired on maturity through any of the following means: Through debit to the customers account if there is adequate credit balance / limit remaining, Through Acceptance facility backed by Trust Receipt facility, or Through FIM limit against pledge of relevant Imported merchandise.
Special precautions
The Bank should ensure that: a. The importer has duly accepted the Draft / Bill of Exchange duly stamped upon presentation. b. Branch has diarized and communicated the date of acceptance and maturity to the correspondent bank. c. The importer should be reminded at least 10 days before maturity date to arrange payment of his accepted bill within the maturity period. d. In case goods are pledged with the Bank, goods will be cleared through Banks approved clearing & forwarding agent and delivery through orders issued against cash receipts.
Export finance facilities (SBP-ERF/OWN SOURCE)

Export financing takes place where the business of the customer involves export, and exportrelated transactions are financed. In such cases, it is expected that the financing will be automatically-adjusted through realization of the export proceeds within the stipulated time
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period, in which regard the SBPs time-limit for realization of export proceeds serves as the maximum that may be allowed. Export Finance Facilities may be disbursed through the banks own funds (known as Own Source) or the banks funding may be refinanced through the SBP by means of the SBPs Export Refinance Facility. Details of the ERF system are provided at the end of this section. There are two export finance facilities: v. Finance Against Packing Credit (FAPC) Packing Credit is extended against future exports allowed to exporters against valid export letter of credit/firm order. It is applicable to items not eligible under the concessionary Export Refinance Scheme of the Government. The usual reason for advances against exports is to enable the merchant to buy and pack/manufacture merchandise pending shipment of the goods and negotiation of the relative bills, hence the expression "Packing Credit". This may include expenses like Freight Charges, Clearing Forwarding Charges, Duty, Handling Charges, Purchase of Goods, Packing Requirements etc. The LC/Firm Order against which FAPC is to be availed should be checked at the outset for the following: Whether goods are permissible for export or not Any clause or condition mentioned in the export order / L/C, is difficult to fulfill due to: o Export Trade Regulations o Foreign Exchange Regulations A very careful check to be kept on the price of exported goods in the International Market. Tenor of the bill and that of the L/C is to be taken into account. Documents of title of goods to be received directly from the clearing agents as per instructions contained in the Foreign Exchange Manual. FAPC is adjusted from Export Proceeds. A certain percentage is to be kept as Margin as per the approval of the competent authority. The facility should be made available against Export L/Cs / Contract for commodities / countries not on negative list. Each individual loan under Packing Credit limit should be adjusted within 180 days maximum or as otherwise specifically allowed by SBP. Proceeds of FAPC (Refinance) should not be utilized for creation of deposit. Financing under FAPC must not be allowed against firm export contracts of a buyer against whom export bills are already overdue.
While extending packing credit, the following aspects should be kept in view: Advances should not be granted to enable a merchant to speculate. To prevent this, the merchant should exhibit and lodge with the bank a Letter of Credit or other evidence of a definite order for the goods (e.g. Purchase order/ firm contract etc.) A Letter of Credit in itself is not "security" and it need not even constitute evidence of a firm order. However, with reliable customers a Letter of Credit assists in deciding whether or not a Packing Credit advance should be given. Care should be exercised to ensure that the money is used for proper purposes. The facility should be adjusted through the export proceeds. Regular scrutiny of the borrower's current account is essential and is usually very useful. Frequent inspections should be carried out where the merchandise (raw materials/finished goods) is stored and brief details recorded in a register. The inspection should be used to
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ensure that the borrower is capable of executing the order within the given time frame. If not, request for extension in the validity of export order/export L/C must be submitted well in advance. It may be desirable for forward exchange to be booked when the advance is granted. Finance against Foreign Bills (FAFB) Under this facility, financing is allowed against export bills that are drawn against L/C or Contract and are sent for payment through the banks counters on documentary collection basis. (Documentary collection referring to the fact that the export bills are sent along with documentary evidence of shipment, i.e. documents of title to the exported goods. The term documentary bills is used for Bills of Exchange accompanied by the relevant documents of title to goods.) They may be DA or DP Bills, or against Usance or Sight LC. In this case the bank does not purchase the bill, i.e. take up ownership, but extends financing against the bill as primary security, so that the proceeds of the bill have been earmarked for adjustment of the financing. The financing is granted for a maximum period as described in the UPC-600 in case of DP/Sight bills, and the tenor of the bill in case of DA/Usance Bills. Mark-up is charged on daily basis on outstanding amount. Precautions FAFB (Under LC) to be secured against Lien over clean export bills drawn against irrevocable L/Cs issued by banks cleared by FIG and it should be ensured that the export bills and documents are in accordance with the terms of the LC. FAFB (Under Contract) to be secured against Lien over export bills under contract. Countries on negative list of Financial Institutions Group (FIG) should be cleared by FIG. For bills drawn against firm contract, creditworthiness report of the importer must be obtained and it should be ensured that it is satisfactory. Good track record in terms of previous transactions with the same importer is an important consideration. For FAFB (LC), in case of delay of more than 7 days in realization of export bills from the due date under FAFB, further utilization of the facility should not be allowed against bills of the same buyers, without the clearance of approving authority. For FAFB (Contract), in case of delay of more than 15 days in realization of export bills from the due date under FAFB, further utilization of the facility should not be allowed against bills of the same buyers. Adequate margin must be held as per approved terms. No finance to be allowed against in-house export bills. vii. FE-25 FINANCING FE 25 Financing uses the banks foreign currency deposits held under the FE 25 account scheme. This facility is classified as a working capital facility and is allowed to exporters and importers, with a maximum tenor of 180 days from the date of shipment, or as otherwise stipulated by State Bank of Pakistan. The USD amount is converted into PKR at the rate prevailing on that day, and lent. The borrower has to return the loan in USD or equivalent interbank for imports, or from export proceeds realized in the case of exports. At the time of repayment, the importer is allowed to purchase USD from Treasury and repay the loan. Exporters can pay in PKR or through realized export proceeds. Financing against FE 25 is allowed in accordance with the State Bank of Pakistans Circular on FE25 and its particulars are subject to change as per the State Bank of Pakistans guidelines.
vi.
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viii. SBP Export Refinance Facility (ERF)
ERF is a special facility by SBP aimed at encouraging exporters by offering them financing at low mark-up rates. The ERF facility is disbursed through commercial banks, and each bank must undertake its own risk analysis on the borrower and obtain sufficient securities by its own standards, because in case the customer defaults, the bank has to repay the SBPs funds through its own source and then proceed for litigation against the customer for recovery. For this scheme, the SBP periodically announces an ERF rate, over which the bank can charge a spread. These rates are typically very low. When financing is disbursed under the ERF scheme, the bank then provides documentation to SBP and applies for refinance, upon which the SBP then reimburses the banks disbursed amount. This amount is to be repaid to the SBP when the export proceeds are realized, or a maximum of 180 days. By this reason, the banks own funds are not stuck in this financing, and the bank does not incur a loss on cost of funds. Bill Purchase/Discounting Bill purchase/discounting takes place when the borrower makes a shipment against an LC or contract, and needs immediate cash realization of proceeds (i.e. the bills) for business purposes. In such cases, after verifying that the shipment documents are in accordance with the terms of the LC/contract, the bank deducts mark-up from the amount of the transaction (i.e. discounts the bills) and advances the remaining amount to the borrower with the understanding that when the bills are realized under the terms of the LC or contract, they would be used to settle the liability. An undertaking obtained from the borrower ensures that in case payment is not received from the LC opening bank or purchaser of goods on time, the bank may obtain the payment from the borrower. There are two main types of bill purchase:
Local Bill Purchase (LBP) It is when both the seller and buyer are located in the same country. In such cases, the transaction would usually be in Pak Rupees, so that the amount of mark-up/charges would be deducted from the amount of the bill.
Foreign Bill Purchase (FBP) It is in cases where the buyer and LC opening bank are located in a foreign country. In such cases, the transaction amount will usually be in foreign currency. Payment will be made to the borrower usually in Pak Rupees, and the banks margin will be incorporated in the exchange rate given to the borrower.
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The following guidelines should always be followed: a. For LBP (Documentary), facility should only be allowed against bills of LC issuing banks rated at least A by credit rating agency on the approved panel of SBP and clearance by FIG. b. LBP (Documentary) is subject to compliance of Treasury & Financial Institutions Group Circular No. OPRN/146/TFIG/CB-OPS-8/2009 dated 17.08.2009. c. In such cases, in addition to the borrower, the bank is taking risk on either the LC opening bank in case of shipment against LC, or the purchaser of the goods in case of shipment against contract. Therefore, the bank or purchaser should be scrutinized prior to the transaction. The Financial Institutions Department (FID) provides information on credit-worthiness of LC opening banks and such exposure should be taken only according to their guidelines. In cases of exposure on the purchaser, credit worthiness report of the same should be obtained beforehand. In cases where earlier transactions with the same purchaser resulted in delayed payments, the bank should not allow bill purchase. d. All requirements of the International Division/FIG and UCP600 or any latest addition thereof, to be strictly followed for FBP. e. Guidelines provided in our Circular letter No. CD/SHM/167 dated 13.01.2006 for Foreign bills purchased (Documentary) should be adhered. f. The terms of the LC or contract should be clearly understood, and it should be ensured the LC is valid and irrevocable, and that the shipment documents are in conformity. Discrepant documents should not be purchased unless the customer has a limit for the same and has satisfactory credit history. g. If charges are recoverable from the seller of the goods, these should be deducted upfront. If they are on account of the purchaser of the goods, they should be appropriately claimed. h. Reimbursement instructions in letters of credit shall be carefully studied before negotiating/discounting of documents/ i. All requirements of the SBP FE manual/circulars and the banks foreign exchange policy should be strictly followed.
4.2. Long term facilities

4.2.1. Term Finance Term Finance refers to funds made available to a customer for a fixed period, usually more than 1 year, for the purpose of investment in fixed assets/capital expenditure. TF is usually disbursed in lump-sum, but disbursement may be divided into tranches scheduled according to requirements of a project undertaken by the customer. Repayment schedule is fixed prior to disbursement-taking the form of either one single payment, or, more often, a schedule of installments starting after a grace period. The repayment schedule is calculated on the basis of cash flows and capacity of the customer. The amount of TF should be commensurate with the requirement of the customer, and should be calculated meticulously. Further, TF in case of new projects is especially risky, because the
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cash flows through which repayment will be made are not already established. Since funds are disbursed directly to the customer, the business unit needs to monitor the customers premises to ensure that the funds are being utilized as approved. Further, TF exposure should always be collateralized against mortgage/charge over property or other fixed assets with sufficient coverage for the exposure. In addition to the usual scenario mentioned above, short-term facilities such as CF or FATR may have to be restructured as TF when the customer is unable to adjust them as planned. 4.2.2. Lease finance Lease Finance facility is offered to the customer in cases where Plant & Machinery, Vehicles or other similar fixed assets are to be financed. It is differentiated from TF (above) in that the funds are disbursed directly to the vendor, and the title of the leased asset remains in the name of the Bank till full adjustment of the LF. Repayment schedule of the LF is pre-determined, usually in the form of periodic installments, and may include a prior grace period. LF may be collateralized as well, depending upon the amount of exposure and the riskiness of the borrower. Sometimes, the customer purchases the assets and requests to avail financing on post purchase basis. In that case, the lease finance can be allowed on Sale and Lease Back Basis. Following are the general guidelines for both types of lease finance facilities:
Direct Lease (Vehicles) Quotation of the vehicle to be leased in favor of BAL must be obtained from an authorized dealer by the Branch before disbursement. Disbursement to be made in favor of vehicle manufacturer only (branch must ensure that the payment instrument i.e. Demand Draft etc. along with booking/purchase order is directly handed over to manufacturer/authorized dealer by the branch authorized representative and acknowledgement by the manufacturer/authorized dealer confirming its receipt and booking/delivery of vehicle in favor of BAL must be obtained at the time of handing over the payment and the same to be placed with legal documents). Withholding tax under section 153 of Income Tax Ordinance 2001 would be deducted from the disbursement/paid by the client to branch before disbursement unless valid tax exemption certificate is provided by the manufacturer/supplier.
Direct Lease (Plant & Machinery) (In case asset is to be locally purchased) Quotation of the asset to be leased in favor of BAL must be obtained from an authorized dealer/supplier by the Branch before issuance of purchase order. - Branch will issue purchase order in favor of the dealer/supplier. Upon issuance of the purchase order the dealer/supplier will deliver the asset to be leased to the premises of the lessee. The lessee will confirm satisfactory delivery of the asset in writing to BAL along with a request letter to make payment to the dealer/supplier, thereupon the disbursement may be made to the dealer/supplier. - Withholding tax under section 153 of Income Tax Ordinance 2001 would be deducted from the disbursement/paid by the client to branch before disbursement unless valid tax exemption certificate is provided by the manufacturer/supplier. (In case asset is to be imported by BAL).
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Proforma Invoice of the asset to be leased in favor of BAL must be obtained from an authorized dealer/supplier by the Branch. - Agency agreement to be executed by the client along with other legal documents - Bill of lading to be endorsed (for clearing purpose only) in favor of BAL approved clearing Agent only. Sale & Lease Back Basis NOC from all existing charge holders having charge over all present and future, fixed and movable fixed assets (except land & building) of the company (if any) to be obtained by the Branch before disbursement for sale and lease back of the subject assets (for companies only). - Sale invoice for the purchase price of the asset in favor of BAL by the customer should be obtained before disbursement. - The financing amount should be based on invoice value / market value (as per valuation report) whichever is lower. - Valuation report of asset to be leased having minimum value equivalent to lease amount to be obtained before disbursement.
General Conditions for All Direct Lease (Vehicle + Plant & Machinery) + Sale & Lease Back The title of leased asset is held exclusively in the name of BAL. Funds to be disbursed only after completion of all documentation / security formalities (applicable for Sale & Lease back Only) The lessee is responsible for all insurance obligations of the leased asset, which should be insured as per Sanction Advice. Taxes, excise duty and other duties levied by the Central / Provincial Government or any other Government or regulatory agencies are not included in the lease rental payment and should be paid by the lessee during the entire term of the lease as and when levied or on BALs first demand. In case any post dated cheque is returned unpaid on presentation on its due date, Business Group should immediately stop further drawdown / facility availment (if facility not fully availed) and inform Area / Regional Office accordingly. Lease Key Money will be adjusted against residual value at the end of the lease term subject to satisfactory payment of all lease liability. Immediate inspection of the leased asset (other than private vehicles) to be conducted by the Business Group upon delivery / installation of leased asset. Business Group must ensure the tagging of BALs stickers / plates on the leased asset and take photographs (photographs must cover BALs ownership stickers / plates). Copy of the Inspection report along with the photograph should be placed on record. Monitor the leased asset (other than private vehicles) by conducting periodic inspections after every six months and take photographs (as mentioned above). Copy of the Inspection report along with the photograph should be placed on record. Price of the asset to be leased should be independently verified by the Business Group from different and multiple sources.
(For further details on LF, please consult LF Manual) 4.3. Non-funded facilities
4.3.1. Letter of Credit (LC) A Letter of Credit (LC) is a mode of payment for imported goods, in which the bank acts as intermediary to ensure that the transaction is carried out according to the terms of the contract between the two parties. An LC is a conditional guarantee issued by the bank in favour of a
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specified beneficiary (exporter), on behalf of the banks customer (applicant/importer), which states that a certain sum will be paid at a specified time against presentation of title documents of goods in favour of the bank, subject to the condition that they are compliant with all requirements stated in the LC. It should be noted that the bank is concerned only with the documents presented, not with the actual underlying goods. The usual documents required include commercial invoice, certificate of origin, transport documents as per the mode of transportation used, and any other documents which may be required by the importer and stated in the terms of the LC. Further, an LC is undertaking by the bank itself, so if the documents are deemed compliant with the terms of the LC, then the bank must make the payment against them to the exporter, regardless of whether and when the importer makes the payment to the bank. This is the aspect of LC that necessitates strict risk analysis of all such transactions. Broad classification of L/C: LCs are mainly classified into two types: Sight LC: In this case the payment is to be made immediately upon receipt of the compliant documents. The draft is drawn on sight, and merely serves as receipt for payment. From a banks point of view, this type of LC is somewhat more secure, as the documents of title to the imported goods are handed over to the importer only upon payment for the goods, or after the document is retired through a post-import facility, for which stronger security is usually held. Usance LC: For such cases, payment is to be made at a particular, certainly determinable date. Usually the date is set at a certain number of days after the date of the Bill of Lading of the shipped goods. In such cases, the draft serves as the acceptance of the shipment and the consequent liability by the importer, which is held by the exporter as a receivable. Thus, in such cases, the importer takes possession of the documents to title of the goods against the accepted draft, before payment becomes due. The Usance LC entails a sub-type of exposure known as acceptance. This is the amount for documents which have been handed over to the importer against accepted drafts, for which payment has not yet become due. In this scenario, the risk is greater because the bank holds neither the documents nor the payment; adequate security must be held against the amount of acceptance exposure. Often, in case of ULC lines, the amount of the acceptance line is approved as a smaller sub-limit. Other LC types are used for particular types of transactions, such as where the sales contract determines a particular advance amount to be paid to the exporter, or where the exporter must buy some or all inputs from a secondary seller on the basis of the original LCs. However, these are created by adding clauses to the primary types of LCs as mentioned above. It should be noted that the SBP has strict regulations with regards to the types and tenors of LCs allowed, so these should be fully complied when issuing another type of LC. General Guidelines for establishment of Letter of Credit - No fresh LCs to be established if any overdue liability under PAD/post import financing remains outstanding for more than 15 days, unless approved by approving authority. However, if goods are
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perishable/semi-perishable in nature, retirement of documents immediately upon arrival of ship/vessel/aircraft. Further, transactions may be allowed where trade overdues are less than 03 days and the business unit Head / Branch Manager gives confirmation in writing that overdues will be settled within 07 days. However, Regional Manager/Group Head of respective business line to take necessary steps/action for adjustment of trade overdues after lapse of extended (7 days) period. Satisfactory Credit Report on beneficiary must be held as required under SBP guidelines. Guidelines provided in Credit Division Circular # CD/SFH/266 dated 19.02.2001 should be adhered.
Charter Party Bill of Lading While establishing LC with Charter Party bill of lading/ documents clause following points should be analyzed: - LC facility to be allowed to highly reliable and valued customers for bulk import of commodities such as sugar, edible oil, steel, fertilizer etc. - Charter vessel should be hired by supplier of goods - Marine insurance should clearly cover shipment by chartered vessel. Inland LC/IULC - Documents under inland LCs must include Goods Receipt Notes (GRN) indicating that goods received are according to specification 4.3.2. Letter of Guarantee (LG) A Letter of Guarantee (LG) is an irrevocable written undertaking by the bank (issuer of the guarantee, guarantor or surety) in favour of another party (the beneficiary) on behalf of its customer (applicant) to the effect that in case a certain pre-defined obligation is not met, the bank will pay a specified sum of money to the beneficiary upon a simple written demand. Thus there is no immediate disbursement of funds upon the issuance of the guarantee, and the liability of the bank is contingent upon defined circumstances/conditions. The bank is substituting its own credit rating for that of its customer. Since guarantees are legal/contractual documents issued on behalf of the bank, they must be vetted by the Legal Department before being signed by the banks authorized representatives. However, certain key points must be ensured in the text of the guarantee: Guarantees should not be issued with validity exceeding 12 months (excluding guarantees issued favoring utility companies) unless specifically approved. The guarantee must define the maximum amount of the banks contingent liability. It should be ensured that the consequent liability of the bank should not exceed the guarantee amount. All guarantees issued by BAL should have specific amount and expiry date by which time the claims are to be lodged. Open ended guarantees to be issued only against approval of competent authority. The guarantee must define the maximum duration of the guarantee, and specify that it will terminate earlier if the specified obligation is met by the applicant (although SBP has authorized banks to issue open-ended guarantees, they are only used in specific circumstances). Also it must specify that notice of termination of the guarantee will be effective immediately upon its receipt by the beneficiary. In case of LGs issued in favor of SSGCL and SNGPL, branches should obtain paid gas bills on a monthly basis from all such borrowers on whose accounts subject LGs are issued. This will facilitate in close monitoring of the risk of non-performance of such LGs i.e. an increased chance of gas bills not being paid.
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SBP Prudential Regulation R-7 specifies that all guarantees issued by banks must be fully secured (with some exceptions where up to 50% waiver of this condition may be applied, provided 20% cash margin is held, are given in Annexure III. In general, the bank holds the counter-guarantee of the applicant in each and every case. Cash margin is determined on the basis of risk evaluation of the borrower, while the remaining exposure may be collateralized. Based on their purpose, there are several different types of guarantees. A list of the major types is as follows: Bid Bond Issued in connection with a tender whereby the bank undertakes to pay the beneficiary, a fixed amount if the applicant withdraws his obligation after the acceptance of a tender. It is an undertaking on behalf of a contractor to pay a specific amount if obligations under the contract are not duly discharged These are issued in case of advance payment for construction or supply contracts and undertake that the sum advanced will be repaid as per terms of contract Undertaking for return of goods or cost thereof, or submission of relevant Bill of Lading when received, in cases where an Importer needs to obtain release of goods from a Shipping Company while Bill of Lading has not yet been received For securing credit facilities availed by the applicant from another institution Enable applicants cars to enter foreign countries for limited periods without payment of customs duty Cover the cost of containers released by shipping companies for transportation to customers warehouses Cover value of tickets provided on credit to travel agents for sale by them To secure import duty leviable on goods released without payment of duty due to various reasons, such as re-exported goods To secure the immediate payment of disputed amount, if so decided by Court Secure payment of gas bills
Performance Bond Advance Payment Guarantee Shipping Guarantee
Financial Guarantee Automobile Guarantees Container Guarantee Guarantees favouring IATA Guarantees favouring Collector of Customs Guarantees favouring Courts Guarantees Securing Gas Charges Security Deposit Bond Back to Back Guarantee
Issued in lieu of security deposit for various uses Issued against a guarantee by another Financial Institution
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For further details on Guarantees, please consult Operational Manual Letter of Guarantee ref. BAL-OM-CR-002 and Working Instructions/Controls and Reviews Letter of Guarantee ref. BAL-WI-CR-002. I. Shipping guarantee
Release of goods received under SLC/ULC through Shipping Guarantee. Shipping Guarantee is a facility where Bank indemnifies and guarantees the shipping company for the release of goods to the buyer/importer without the presentation of the original Bill of Lading / Airway Bill. Situation arises when goods have reached their designated destination but shipping documents are yet to arrive. Therefore Shipping Guarantee enables the customer to take delivery of the goods before the receipt of the bill of lading / airway bill. It is an indemnity that the bank executes jointly and severally with its customers in favor of the shipping company. Benefits: 1. Importer can take delivery of goods immediately. 2. Importer will not have to incur demurrage and warehousing charges. 3. Enables the importer to sell the goods without delay in order to get benefit of market opportunities, reduce the capital occupied and improvement in cash flows. Operational Modalities: Shipping Guarantee is not a regular limit, but as a matter of practice and banking norms, it is approved on case to case basis. When applying for shipping guarantee, the importer is required to submit: a. The application for shipping guarantee; b. Letter of shipping guarantee; c. Duplication of invoice; d. Duplication of bill of lading / Airway bill. When the original Bill of Lading / Airway bill arrives, the importer is required to substitute the Shipping Guarantee with bill of lading at the shipping company and return the shipping guarantee back to the issuing bank for cancellation. Branches may encounter the following four (04) scenarios: Scenario # 1: To allow Shipping Guarantee under SLC against 110% cash margin but not less than 100% for valued customers (Where no credit facility/package is approved). Under this scenario Shipping Guarantee may be authorized/ issued. Scenario # 2: To allow Shipping Guarantee under SLC by blocking approved FIM facility: In this case sufficient cushion is to be available in FIM facility at least for the value of import documents at the time of issuance of Shipping Guarantee, and that our approved mucaddum is to release the goods either directly or under its active supervision, and then take these goods into possession / pledge immediately upon clearance, duly insured. Scenario # 3: To allow Shipping Guarantee under SLC by blocking approved FATR facility: In this case sufficient cushion is to be available in FATR facility equivalent to Shipping Guarantee amount and Trust Receipt is to be executed / obtained in this regard prior to execution of Shipping Guarantee.
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Scenario # 4: To allow Shipping Guarantee under ULC against availability of acceptance limit. In this case sufficient cushion should to be available in acceptance facility equivalent to Shipping Guarantee amount and Trust Receipt should to be obtained in this regard prior to execution of Shipping Guarantee. Customer should submit an undertaking that he will accept the bill of exchange upon arrival of shipping documents at bank counter without delays and without any condition. Conditions: While allowing shipping guarantee under scenarios 2&3, approving authorities should ensure that customers have satisfactory record with BAL. Shipping Guarantee must be redeemed immediately or within 15 days upon receipt of original shipping documents. Non-adherence to this condition must be brought into the knowledge of Credit Group. Customer to keep BAL fully indemnified at all times from and against all claims, demands, costs, proceedings and expenses of whatsoever nature (including solicitor and client costs) which the Bank may incur or suffer in respect of the goods or the Shipping Guarantee or the breach of any warranty or undertaking therein. Under acceptance arrangement, maturity calculation to be carried as per LC terms. Limits should be valid and no overdues in the account to exist. Clean DAC is available on the record for the existing credit facility (ies).
TF/LG - Assignment Financing against assignment of Bank Guarantees can be allowed on acceptance and confirmation of having noted our assignment (Lien) by LG issuing bank. Beneficiary of the Guarantee (i.e. our customer) will provide us original Bank Guarantee issued in its favor and will also provide Bank an unconditional and irrevocable assignment of Bank Guarantee in our Banks favor (on letter head of the company duly signed and stamped by authorized signatories). Beneficiaries (Customer), in addition, provide copy of an irrevocable and unconditional assignment of payment/authorization to collect payment under Bank Guarantee in favor of Bank (BAL) (again on letter head of company duly signed/stamped by authorized persons/signatories). This unconditional and irrevocable authorization to collect payment under Bank Guarantee in favor of the Bank (BAL) is addressed to LG issuing bank. LG discounting is actually a receivable financing. The credit facility can be used to finance the receivables under Bank Guarantee issued by Scheduled Banks of Pakistan. For TF/LG facility against assignment of receivables under Letters of Guarantee issued by local banks, Business units to ensure compliance of following conditions:- LGs issued by A rated banks. Clearance should be obtained for accepting guarantee of Banks from our Financial Institution Group. - That payment under guarantee to be assigned in favor of BAL. The financing to be allowed on acceptances and confirmation of having noted our assignment by LG issuing bank. - Notice of assignment to be given / notified to the person/ firm on whose behalf LG has been issued and the LG issuing bank and their acknowledgment obtained - Authenticity of guarantee should be confirmed prior to disbursement of facility. It should be unconditional, irrevocable and vetted by BALs approved lawyer. - Borrower/customer to undertake to remain liable, notwithstanding the assignment for payment of the guarantee amount. - The guarantee should be of specific amount and shall contain claim lodgment date. - The facility is subject to compliance of Treasury & Financial Institutions Group circular no. OPRN/146/TFIG/CB-OPS-8/2009 dated 17-08-2009.
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II. REVERSAL OF EXPIRED GUARANTEES Guarantees that are issued by the bank can be categorized into the following: 1) Open Ended Guarantees 2) Fixed Term Guarantees Open Ended Guarantees The continuing or open-ended guarantees do not contain a predetermined expiry date. These guarantees create a continuing obligation on a guarantor to pay, on request of the beneficiary, all the sums payable under the guarantee, not exceeding the amounts guaranteed. Open-ended guarantees can be issued. However, branches should avoid issuing open-ended guarantees and should only issue them when it is absolutely imperative for business consideration. All open ended guarantees issued must contain a clause stating the address on which the notice of discontinuation or any claim under the guarantee is to be served in order to avoid any misdirection of the notice. If the customer informs the Bank that he has fulfilled all obligations under the contract towards the beneficiary guaranteed under the letter of guarantee, the customer should be asked to arrange for return of the original guarantee duly cancelled/discharged by the beneficiary, or obtain a letter from the beneficiary stating that all obligations owing to the beneficiary have been either fulfilled or discharged (i.e. a notice of discontinuation). The liability under open-ended/continuing guarantees will not be reversed nor will the security/margin held against the guarantee be released unless; (i) The original instrument of guarantee is returned duly cancelled by the beneficiary OR (ii) A letter is obtained from the beneficiary stating that all obligations owing to the beneficiary have been either fulfilled or discharged (Notice of discontinuation/Notice of discharge) (iii) The authenticity of signatures appearing on the Notice of Discontinuation /Notice of discharge is verified. Note: The signatures of the beneficiary with stamp in discharge/cancellation of the guarantee is a must and in case of a guarantee without discharge of the beneficiary is being returned, liability there against will be reversed and securities/margin released/refunded only after obtaining confirmation from the beneficiary in writing These instructions apply for the return of fixed terms guarantees as well. The authenticity of signatures, as stated in (iii) above must also be complied with. III. EXPIRED GUARANTEES A considerable amount of our guarantee portfolio consists of letters of guarantee, the validity of which has expired. However, the original guarantees, duly discharges by the beneficiaries have not been returned to the bank. If after a thoroughly check, it is confirmed to the bank that guarantee is no longer effective, the bank may release the security /margin of the customer held by the bank in respect of the said guarantee. a. Role of Centralized LG Department The process of LG issuance has been centralized at Bank Alfalah Ltd. in order to facilitate the branches/units by handling all the operational issues at a centralized point. Now relationship
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managers/credit officers are responsible to market the customers and arrange necessary approvals from competent authority for issuance, amendment or reversal of expired LG liability while the operational issues for these transactions are handled by LG Centralized Department. The liability is parked and reversed at LG Centralized Department whereas the security and documentation issues are handled by Centralized Administration Department. b. Reason for Non-reversal To reverse the liability of a guarantee, it is a necessary requirement that the original guarantee is received back duly discharged by the beneficiaries or a separate letter of release/discharge is received from them. Guarantees where the beneficiaries are mostly government/semi government departments, state owned enterprises and government autonomous bodies, who despite completion of the underlying projects/accomplishment of obligations, hesitate in releasing the guarantees. c. Guidelines To overcome these issues and reduce the number of expired guarantees, as far as possible, the following guidelines should be followed: Maintenance of a Due Date Diary A due date diary should be maintained to record the expiry date of each guarantee issued. Recording of Claims To ascertain the correct position of the exposure under a guarantee, it is required that claims received whether formal or final, made on pre-printed formats or otherwise should immediately be recorded in a register or on a stand alone computer and the following details should be recorded: - Date Claim Received - Amount of Claim Received - L/G Number - Date of issue - Amount of L/G - Issued on behalf of - Name of beneficiary - Expiry date - Action taken - Date claim settled Review of Expired Guarantees The evaluation for the purpose of reversing the liability or releasing the security will depend upon the terms of the guarantee. LG Centralized Department should specifically look for any ambiguity in the validity period of the guarantee, in the terms and conditions of the guarantee and any amendments of the guarantee. The following are some of the things they should specifically review when evaluating the guarantees effectiveness: a) The validity period of the guarantee has expired b) The period for lodging a claim in terms of the guarantee, if it is longer than the validity period of the guarantee, has also expired. c) The terms and conditions of the claim do not include any continuing obligations on our bank after expiry of the guarantee d) No claims whether made on pre-printed formats or otherwise have been received by the branch e) If any claims, which are not valid or not in accordance with the terms and conditions of the guarantee have been received, and the same have been rejected.
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f) Claims, if any dishonored have been rightly rejected g) No litigation or other proceedings are pending in respect of the guarantee Legal Opinion If the LG Centralized Dept. is unsure as to whether the guarantee is still effective or not, the matter may be referred to the legal division, head office/banks approved lawyers for a legal opinion Maintenance of Status Quo The liability against the following types of guarantees shall not be reversed: a) Where any terms and conditions of the expired guarantee suggest that the payment obligation of our bank under the guarantee is continuing, even after its expiry date b) Where claims whether formal or final, made on pre-printed formats or otherwise have been received by the branch/LG Centralized. c) Where it appears that the guarantee has any outstanding amount/disputed claim/settlement request or an extended pay option d) Where any legal notice has been received or any court proceedings is in progress in respect of the guarantee. Confirmation of Non-Effectiveness If it is confirmed by the LG Centralized Dept. or the Legal Divison HO/ Legal advisor in the case of ambiguity, that the guarantee is not effective any longer, they may proceed for completion of the undermentioned formalities and approval of Credit Group, Head Office for reversal.
iv.
Follow-up of expired guarantees

Letters to the Beneficiary On the next working day after the expiry date, a letter should be sent to the beneficiary (as per Annexure-A) If there is a period provide in the guarantee for lodgment of claim, this letter should be sent on the next working day after expiry of the claim lodgment date. Where the guarantee has been issued through a correspondent/branch (issuing branch) against counter guarantee of the branch, a letter should be sent to the correspondent/branch (issuing branch (as per Annexure-E) Letter to the Applicant Customer Simultaneously, a letter should be sent to the applicant customer (as per Annexure-B) Where the expired guarantee has been issued on behalf of and against counter guarantee of a correspondent bank/branch (requesting branch) they should be advised to pursue their customers (applicant) to contact beneficiaries for return of the original guarantee (Refer Annexure-F) Reminders If the original guarantee instrument is not returned, a reminder should be sent to the beneficiary (as per Annexure-C) as well as to the applicant (As per Annexure-D) Postal/Courier Receipts The letters/reminders sent to the beneficiaries/applicant customers should be mailed per courier or registered post and the postal/courier receipts filed in the respective file. Letters of Indemnity If even after lapse of thirty days from the date of dispatch of the notice and reminder, no response is received, the customer may be contacted for providing Indemnity on an Rs.100/- stamp paper as per approved format (Annexure-G)
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Verification of Signatures On receipt of the Indemnity as per approved format, the signatures of the customer should be verified. Safe Custody of Indemnity The original indemnity should be held in safe custody. A photocopy of the indemnity should be retained in the respective file. v. Approval For reversal of liability and release of margin/security held, approval from the Head Office should be obtained In this regard, branch in coordination with LG Centralized should forward their requests duly recommended by Area Managers/Regional Managers. The following documents should accompany the requests: i. The expired guarantee ii. Its subsequent amendments, if any iii. Letters/Notices sent to the beneficiaries iv. Relevant Postal/Courier Receipts v. Reply, if any, received from the beneficiaries and/or applicant customers In case where guarantee has been issued by a correspondent bank against counter guarantee of the branch or where guarantee has been issued at request of and against counter guarantee of a correspondent bank, the copy of swift messages/correspondence exchanged with the correspondent should be attached. The branch in their request should provide details of all amendments issued, all documents attached to ensure that there are no missing amendments/correspondence. The branch should also advise the response (if any) received from the beneficiary and / or applicant customer or otherwise confirm that no response has been received to their various letters/messages. vi. Reversal of liability After completion of the above procedure/formalities and passage of 30 days from the date of dispatch of notice/reminder, the liability of the guarantee may be reversed if Credit Group has given its approval for reversal. Margin/Security, if any held may be refunded/released. Centralized LG Department will process reversal of liability under expired guarantees itself where security held exclusively covers exposure against expired LG and there is no stuck-up liability against the customer and/or any of its group concern at BAL. LG Centralized Department will seek clearance from Credit Group for reversal of liability under expired guarantees only if other credit facilities are available to the customer (or its allied group concerns) from BAL. Request for reversal of liability under expired guarantee should invariably be submitted by business lines on attached format (Annexure-H)
4.4.
Seasonal financing (PR, R-5)

For the purpose of PR (R-5), the seasonal financing falls in following categories: Wheat -Only for millers Cotton -Phutti for ginning mills Cotton Bales -For spinning units Working Capital Finance to Sugar Mills -Only for purchase of sugar cane
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The facility of seasonal financing for procurement of the commodities shall not be allowed/ extended to the traders.
4.5.
Syndication / Consortium Financing

a) When large amounts of financing are involved, it is common for a number of banks to take up portions in financing of a project. b) This becomes necessary, when the amount of credit exceeds the lending limit of the principal bank as per SBP Prudential Regulations. Bank may also participate in such activity when it is prudent to spread the risk amongst a number of banks. Arrangements in which a principal lending bank pulls its fund alongwith one or more other banks which are not a party to the original agreement are called Consortium Agreement. When the borrower deals with more than one bank all of which are party to the credit agreement, it is called syndication. In all syndications/ consortiums the bank should not take a subordinate position to other members of the syndicate/participants and the securities should be shared on a pari passu basis without preference or priority of one or more banks. c) The important clauses which the agreement should cover are specified below: i. ii. iii. iv. v. The name of the bank selling the participation as well as the names of the participating banks and their respective shares in financing the project should be indicated. A participation certificate issued by the lead bank to each participant should indicate its share and the promissory notes held by the lead bank. The lead bank confirms to the participating banks that it has received their written consent to the terms of the participation arrangement. The advance notice which the lead bank must give should be specified as well as the type of funds required and the place and time at which funds are to be made available. The lead bank has the responsibility of disbursing funds among the participating banks after receiving payments from the borrower. The means of disbursement should be specified. The agreement should specify the rate at which each participating bank will share in all transactions, advances, payments, and reductions of commitment. The responsibilities of the lead bank towards the participating banks should be specified. Generally, the lead bank is required to assure others that it will use the same degree of care in handling the finance as it does for credit facilities independently allowed by it. Additionally, the other banks will probably want the lead bank to provide them with copies of relevant documents pertaining to the finance agreement and to notify them in case of default. The participants will usually agree to reimburse the lead bank for out of pocket expenses related to its administration of the finance to the extent those expenses are not covered by the borrower. As syndicated finance documents are non standard in nature, such documents should be prepared/reviewed by the Legal Department, Head Office or Banks approved local legal counsel.
vi. vii.
d) It is common for the participating banks to appoint one bank (lead bank) to act as an agent for them in administering the finance agreement. If there is to be an agent bank, the agreement should state the name of the bank which has been appointed. The names of the partner banks should be indicated as well as the share of all the banks. This information would be included in the "preamble". The other important clauses which the agreement should cover are mentioned below: i) Each bank, which is a party to the agreement, commits itself to allow credit facilities, regardless of the failure by any other partner bank to fulfill its commitment. This should be included in the section on commitment.
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ii) If there is an agent or managing bank, the agreement should specify that funds received as payment from the borrower will be disbursed properly to the partner banks. This should be included in the section on payments
iii) The agreement should specify in what manner documentation (including financial statements) should be made available to the partner banks. This should be included in the sections on conditions of lending and furnishing of financial information. iv) If one of the banks has been appointed agent, the agreement should contain provisions regarding the extent of its responsibilities. This section of the agreement should state which bank has been appointed agent and that other banks have authorized the agent to act on their behalf. The agent is given the right to delegate duties to its employees and to seek advice of legal counsel. The exculpatory provisions should indicate the extent to which the agent may be held liable for its actions in administering the credit facility. The agent is authorized to rely in good faith on information received from the borrower. The partner banks agree to indemnify the agent should it suffer any loss or damages related to its acting as agent. v) Holders of stipulated percentages of notes or commitment must give approval before these actions may take effect and include such items as requirements for approval of amendments, waivers and taking action in case of default. vi) If partner banks are to be allowed to transfer or assign their commitments, the conditions for doing so must be specified. If such transfers are prohibited, it should be indicated in the finance agreement. It is usually stipulated that the agreement may be executed in any number of counter- parts, all of which, when taken together, will constitute a fully executed agreement. Each bank should have a copy executed by the borrower, the agent (if any), and itself.
4.6.
a)
Contract Finance
When financing contracts, the main concerns by the banks on the contractors net worth are as follows: i) The standing of the employer who has to pay the contractor. ii) The terms of the contract. iii) The contractor's ability to execute the work properly and within stipulated time frame. vi) Viability of the quoted price and adequacy of the financing amount being sought. v) The contract is framed to be irrevocable without the banks consent and is acknowledged by the employer. vi) Overall profitability and viability of the contract. The following conditions apply to proposals for contract finance, unless managers have obtained specific exemption from the Head Office. i. All payments must be irrevocably assigned to the Bank duly acknowledged by the principal i.e. employer or the main contractor (where such an assignment is not possible, especially in the case of Government related contracts, dispensation of assignments should be authorized by the approving authority). ii. The contract must be studied and contentious points discussed with the contractor. iii. The Bank must hold a copy of each contract. iv. Preferably a separate account should be opened for each contract. Such an account could be titled XYZ Firm - ABC project/Contract. v. Copies of the project status and payment certificates approved by the consultants of the project should be lodged with the Bank so that a close watch can be kept on payments "in the pipeline".
b)
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vi. For contracts in excess of RS. 50.00 Million a control account should be kept for each contract starting with the contract price and showing variations added and payments authorized, so that at any time the branch can produce a statement of:
Contract price (as amended by variations) Work completed and paid for Work measured and to be paid for Work in progress (not measured) Retentions by employer Balance of contract price By maintaining a control account, it is possible to control advances on a descending scale as the contract value runs off, thus ensuring that the Bank is not left with an advance representing either the retention money (which the contractor should finance from his own resources) or a loss on the contract. vii) Note: All the related guarantees should be fully / adequately secured i.e. Performance Bonds, Bid Bonds and Advance Payment Guarantees Separate files containing the under noted documents should be maintained for each contract: Copy of the contract. The contractor's cash flow projection. Copies of any variation orders. Copies of letters assigning payments irrevocably to the bank duly acknowledged by the principal i.e. employer or main contractor. (Originals should be lodged with other security documents in safe custody). Copies of payment certificates bearing evidence of approval by the consultant. Details of the control account starting with the contract price.
Pricing and Mark-up Banks engage in lending activities for the central and basic drive to earn a profit on their advances. Pricing determines the earning by the bank on the advances made by it. This section gives an overview of pricing, how it is calculated in various situations, and how appropriate pricing is determined. It should be noted that with effect from 1st July, 1985, the entire banking system in Pakistan switched to the Non-Interest Based (NIB) system, and all concepts and calculations are presented accordingly. Requests from customers for improvement / concessions in pricing should not be considered as a matter of routine. Such concessions must be justified by adequate business considerations as discussed in this section. Any request for reduction in pricing should be accompanied by strong justification and estimates of projected profitability. Definitions and Concepts Key Pricing Considerations Stages in Determining Pricing
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Mark-up Treatment for Classified Advances
5.
DEFINITIONS AND CONCEPTS

Principal The actual amount of funds disbursed by the bank to the borrower is known as the principal. Mark-up It is the profit charged by the bank over and above principal, so that the amount to be repaid by the customer is higher than the principal. Mark-up is the usual method used by banks of recovering profit from the borrower. Mark-up is determined on the basis of an unambiguously determinable percentage of the principal, known as the mark-up rate, which is charged on the basis of the period of time for which the advance remains outstanding (see Tenor). Various terms of payment of the mark-up by the borrower are possible, such as monthly, quarterly, yearly, or lump-sum at a pre-determined point in time. Both mark-up rate and terms of payment are determined and agreed upon by the bank and the borrower before the disbursement of funds. Unrealized Mark-up In cases where the payment of mark-up is agreed-upon to be of a frequency longer than one month, mark-up is still calculated on the advance on monthly basis. However, this mark-up is treated as unrealized until the pre-determined time for payment of the mark-up by the borrower, whereupon it is either realized or becomes overdue. Cost of Funds The funds that the bank lends out to borrowers are not its own, but are either provided by the shareholders (the equity of the bank) or lent to the bank by depositors. In either case, those who provide these funds to the bank expect a reasonable rate of return on them, at least equal to the return available to them from other uses of their funds. This return that the bank has to pay to its sources of funds is known as the cost of funds. This implies that whatever profits the bank earns on its advances need to be higher than this cost of funds, or the bank will incur a loss on the advance, and the reason of giving the advance in the first place will be defeated. Tenor Tenor is the time period for which the banks funds remain outstanding with the borrower. The customer is charged on periodic basis, so increasing the tenor increases the amount of profit to be charged to the customer. Grace Period In installment-based finance, sometimes the borrower is allowed a certain period following the disbursement of the loan during which the borrower does not have to pay any installments, and the repayment schedule starts only after that period. Such a period is called grace period. While the customer does not have to make principal repayments, mark-up may be payable during the grace period depending upon the pre-determined terms of the financing. In any case, since the banks funds
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remain outstanding during this period, the borrower will pay mark-up on it at one time or another as per payment terms decided. Mark-down In certain cases, the profit amount is recovered up-front from the customer this applies especially to bill discounting. In such cases the profit amount is known as mark-down.
5.1. Key Pricing Considerations

When determining pricing for a particular borrowing transaction, the following factors need to be considered: i. Cost of Funds As discussed above, cost of funds is the profit that has to be paid by the bank to the providers of the funds that it lends out. Therefore, cost of funds is the minimum threshold for pricing, at which point the loan will not be profitable but will break even with the cost of providing it. ii. Market Rates While cost of funds determines the minimum possible pricing, in general pricing is determined to be in equilibrium with market rates, i.e. what mark-up rates other Financial Institutions are charging for similar customers on similar transactions. The bank must ensure that it provides competitive rates in relation to the market. iii. Borrower Risk and Relationship Analysis of the borrower plays a key role in determining pricing. In general, higher pricing should be charged with increasing borrower risk. Borrower risk is in general determined by the verifiable past financial performance and credit history of the borrower. Furthermore, where the bank wishes to develop its relationship with low-risk and profitable customers, lower rates may be offered to these customers. iv. Type of Financing/Transaction Risk While determining pricing, the nature of the transactions should also be considered. Since long-term financing entails the banks funds remaining outstanding for longer periods, such financing poses higher risk and so should be charged higher pricing. Further, CF lines should be charged higher pricing compared to transaction-based financing due to the nature of the risk. v. Business Strategy of the Bank In cases where the bank wishes to target the business of certain industries/sectors as having high profitability or low risk, lower pricing may be offered to these customers as a way of cultivating these relationships.
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. Mark-up Treatment for Classified Advances As per SBP Prudential Regulations, unrealized mark-up on classified accounts is not to be included in the Banks income, but is recorded separately as a memorandum, except when it is paid by the borrower in cash. In cases where some unrealized mark-up has already been included in income prior to the classification of the account, this part of income must be reversed, and the unrealized mark-up should again be recorded as a memorandum as mentioned above. Further, in cases where an advance has been de-classified following rescheduling/restructuring, unrealized mark-up cannot be included in the Banks income until 50% of it has been realized in cash. Fixed Vs. Floating Rate In case of fixed rate, structure markup rates are fixed for the period of finance whereas in case of a floating rate structure, markup rate is pegged to a yardstick market rate which ensures that the lenders spread remains intact irrespective of the way yardstick rates move. For example it could be x% over LIBOR, T-Bill rate, KIBOR etc. Pricing of Loans on KIBOR Basis As per SBPs BPD Circular # 01 dated 21st Jan, 2004, the Karachi Inter Bank Offer Rate to be used as the benchmark rate (w.e.f. 01.02.2004) for determining pricing/markup rate for all rupee Corporate/Commercial lending as defined in the Prudential Regulations. The benchmarking was done with a view to encourage transparency, promote consistency in market based pricing and improve management of the market risk undertaken by banks. SBP and PBA issued following instructions to banks for benchmarking their lending rates to KIBOR: KIBOR has been defined as the Average rate, Ask Side, for the relevant tenor, as published on Reuters page or as published by the Financial Markets Association of Pakistan in case the Reuters page is unavailable. The banks and the borrowers will be free to decide the relevant tenor of KIBOR and the spread over KIBOR at their discretion. KIBOR will be set for the lending facility on the date of drawdown or on the markup reset date. The offer letters from the banks to their clients should clearly indicate the KIBOR tenor, agreed spread, frequency of revision etc. Note: Re-setting of KIBOR must be done according to the agreed /matching KIBOR tenor which ranges from one week to three years. The requirement to use KIBOR as the benchmark rate is not applicable for the following: Export Finance Scheme (EFS) of the State Bank of Pakistan Consumer Financing and SME Lending, as defined in SBP Prudential Regulations Term Finance Certificates/Commercial Papers approved by the Securities and Exchange Commission of Pakistan (SECP) and/or submitted to any Stock Exchange prior to January 31, 2004 and All Time Loans with agreements executed before January 31, 2004. However, if the pricing is renegotiated, the pricing of such loans will need to be benchmarked to KIBOR within the available tenors.
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The financing rates under EFS will continue to be determined as pr instructions issued by the Banking Policy Department of the State Bank of Pakistan. 6. SBP GUIDELINES FOR PRICING OF LENDING PRODUCTS AND LOAN DOCUMENTATION SBP has advised the Banks/DFIs to make proper disclosure of the lending and deposit rates of all consumer products offered by them including information of whether the rate is fixed or floating, tenor of benchmarking (KIBOR or any other rate plus a pre-defined spread) used and frequency of re-pricing. In order to ensure transparency in the pricing and documentation of loans, the following guidelines should be strictly adhered to: Business Groups shall clearly indicate in the loan documents whether financing is on fixed rate or floating rate basis. In case of fixed rate loans the rate shall not be increased during the tenor of the loan. In case of floating rate loans, Business Groups will clearly specify the margin over the benchmark (KIBOR or any other rate). Also the Business Groups will not increase margin during the tenor of the loan. Business groups should clearly spell out the pricing (KIBOR or any other benchmark rate plus a pre-defined margin not changeable to the detriment of the borrower during the term of credit) and the re-pricing frequency in their loan documents. In case of re-pricing, the rate will change only if there is a change in the benchmark rate (KIBOR/other benchmark) over the tenor of the loan. The loan agreement should not contain the clauses/stipulation to change the rate unilaterally. All charges, other than markup, including fees/prepayment penalties etc. to be recoverable by business groups should be determined and clearly disclosed to the customers at the time of entering into agreement. All such charges shall be locked and their upfront full disclosure shall be made and agreed with the customers in the loan agreement. A complete amortization schedule should be provided to the customer along with the facility offer letter showing the breakup of principal and markup to be paid by the customer over the life of the loan/finance or till the next re-pricing date for fixed and floating rates respectively. In case of resetting/revisiting the floating rates, a new amortization schedule should be issued to all existing customers informing them about the new rates on loan/finance which should be determined in line with the benchmark agreed at the time of lending. A statement showing outstanding position of principal and markup should be issued to the customers on half yearly basis or more frequently as per banks internal policy. The loan and other documents obtained from the customers should be duly filled in at the time of signing of the loan agreement. Any negotiation with the customers for restructuring/rescheduling of a loan/facility should be done in writing and in a transparent manner in accordance with the duly approved policy of the bank.
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1. INTRODUCTION
Collateral / Security is another critical component with respect to the credit process. Banks primarily take collateral / security against finances given to borrowers to fund repayment (second way out), should cash flows (first way out) become short / unavailable. The collateral / security could be in the form of First exclusive charge, senior to all other lenders; First pari-passu charge; Pledge and exclusive charge; Equitable and legal charge; Standby letter of credit / bank guarantee; Corporate or personal guarantee. The collateral / security should match the purpose, nature and structure of the transaction; it should reflect the form and capacity of the obligor, its operations and the business and economic environment. The critical collateral / security related components with respect to the credit process have been summarized in this section. Main reason for the bank to take collateral / security- Following are the main reasons for a bank to take collateral / security:a) To fund repayment, should cash flows become short / unavailable b) To diversify means of repayment in order to provide flexibility in disposal c) To satisfy regulatory requirements d) To prevent assets from being otherwise encumbered e) To improve the Banks rights with respect to lenders f) To allow the Banks financial or psychological leverage in negotiation g) Securing the financing for the repayment of bank principal along with mup. List of accepted securities approved by the bank- Following is the list of accepted securities approved by the bank:a) Lien on deposits b) Pledge of Stocks / goods c) Hypothecation charge on fixed assets and current assets other than company (Sole Proprietorship and partnership) d) Hypothecation charge on fixed assets and current assets for Private and public limite companies e) Hypothecation of charge on Plant and Machinery and other spare parts. f) Equitable / Token Register Mortgage of land and building g) Personal Guarantee of Directors / Proprietor / partner h) Title of leased assets i) Lease Key Money j) Guarantee- Bank Guarantee, Cross Guarantee grp. companies, Guarantees of Parent Co. k) Lien over inland Letter of Credit l) Lien over inland bills m) Assignment of Salary n) Assignment of Receivables o) Lien over import documents p) Lien over export documents q) Bank charge on agriculture land r) Joint registration of tractor s) Trust receipt for Agri Equipment t) Post dated cheques u) Assignment of Bank Guarantee v) Lien over staff benefit
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Instances are aplenty where the banks have to face colossal losses due to imperfect security documentation. Hence to safeguard the interest of the Bank, security documentation covering the advance should be perfect in all respects. For regular monitoring of completion of security documents, guidelines on securities/collateral documentation have been prepared in addition to respective cad policy for compliance. As a general policy, the Bank essentially lends against cash flow, i.e., the cash flow is the primary means of repayment. Collateral is taken as a secondary way-out, in case cash flow is insufficient or become unavailable.
2. TYPES OF SECURITY
Securities are classified according the legal nature of the right or charge created on the property/asset. Thus a security can either be: Charge: When an asset property is identified as a security against a facility in an agreement or document creating a borrowing relationship, a charge is said to have been created. This charge can either be registered formally or remain unregistered. A registered charge obviously provides a higher degree of security. It can also either be a Hypothecation charge, where possession of property/asset remains with the borrower or a charge on pledged goods, in which case the assets /goods are held with the lender/Bank. Charge can be further classified according to its ranking, in the event of default or liquidation. Thus it can either be First charge in case a lender's right of appropriation of the property in the event of default/ liquidation is prior to any other lender's right. Similarly there can be Second or Subsequent charges according to the ranking of their rights on the charged assets. A second or subsequent charge holder would be entitled to recover its dues only after the First Charge holder's dues are settled. Charge can also be classified as a Sole charge, where only one lender has the charge on the ' borrower's property or a Joint charge where more than One lenders hold charge on the assets. In case of a joint charge, the charge holders may have different rankings as first, second or subsequent charge holders or they may all have a first charge on the same property; this is called a Joint Pari-passu charge, in which the lenders have equal rights on the property but shared in proportion to their credit facilities. In Joint Pari Passu one agreement jointly signed by the all participants Banks registered with Security Exchange Commissions of Pakistan. (SECP). Charge, in which lender obtains NOCs from other charge holders (Banks) and register with Security Exchange Commissions of Pakistan. (SECP) accordingly. Charge can also be a Fixed or specific charge on a particular/identified asset, e.g. Mortgage on a house or a Floating charge, i.e. on a particular kind of asset moving or floating from the assets of that kind that may be replaced .e.g. a Hypothecation on stocks of raw material. As the raw materials are consumed off and replaced by other raw materials purchased, the charge floats from the sold raw materials to the newly acquired raw materials automatically.
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Lien: is a right or Charge on the asset arising out of mere possession or custody of borrower's goods with the lender. A lien can be a Specific Lien i.e. a lien or charge given on a particular asset or a Particular Lien which arises from a particular transaction, e.g. a carrier's lien on the goods carried by him against the freight charges payable to him. There can also be General Lien, which arises out of general dealings between two parties, e.g. the Banker's General Lien, which is an implied lien on all the accounts/assets of the borrower that come into a banker's possession. Of course the Banker's General Lien is also subject to certain exceptions and conditions under the law which will be discussed in relevant sections. Pledge: is really a bailment of goods as a security for credit facilities. In case of Pledge of Goods exclusive possession of goods passes to the lender with the intention of placing them under pledge with the lender. This possession could either be through actual delivery of goods or through delivery of the documents of title to the goods.
Hypothecation: In case of Hypothecation, the charged assets remain in the custody and ownership of the borrower. While the bank holds a charge on the assets and the borrower is accountable to the bank for the sale proceeds of the goods on which hypothecation charge is created.
Mortgage: is a transfer of interest in a property, generally an immoveable property, to constitute a security against credit facilities. e.g. mortgage on real estate property. A mortgage can be by actual transfer of interest by registration of a mortgage in the lender's name or by registering an intention to create a legal mortgage or what is called the Equitable Mortgage. in which the intention to create mortgage is established by deposit of original title documents with the lender. Collateral may be taken in any of a number of forms, for instance: 1. first exclusive charge, senior to all other lenders 2. first pari-passu charge (where the prior charge holders, by issuance of No Objection Certificates (NOCs), agree to share pro-rata the collateral under charge 3. Inferior charge 4. pledge and exclusive charge (which confers physical possession of assets carved out of the assets charged to other lenders) 5. equitable or legal mortgage, i.e., any of a number against real property or fixed assets 6. Standby letter of credit bank guarantee 7. Corporate or personal guarantees (supported by the statement of the guarantor)of types of claims personal net worth. Collateral should match the purpose, nature and structure of the transaction; it should reflect the form and capacity of the obligor, its operations, and the business and economic environment. Collateral may include the assets acquired through the funding provided, i.e. stock, receivables, or export bills, as well as cash, govt. securities, other marketable securities (such as shares), current assets, fixed assets, specific equipment, and commercial and personal real estate.
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3. ATTRIBUTES OF A GOOD TANGIBLE SECURITY

There are certain qualities, which a good tangible security should possess. Some of the important attributes are: a) Marketability As security is obtained for the purpose of meeting an emergency in the event of default by the borrower, the main consideration should be its ready reliability or marketability (including considerations of "distress / forced sale values"). Security in the form of cash, term deposit, and bank guarantees investments in Government Schemes. (e.g. SSC/DSC etc.) are considered better forms of security in view of their ready reliability as opposed to jewellery, precious stones owing to their increased susceptibility to volatile market fluctuations. However, no general rule can be laid down in this regard. Each case has to be decided by the Manager keeping in view the intrinsic worth of the business, reputation of the customer etc., while determining the security that is acceptable. b) Easy ascertainment of value The value of the security should be easily ascertainable. Articles that are rarely quoted or are so highly specialized that the value thereof cannot be ascertained without referring to an expert should generally be avoided. c) Stability of Value Security offered should provide reasonable stability in value and should not be prone to violent fluctuation in prices other than liquid security (as discussed in (a) above). Although it is the usual practice to maintain reasonable margin on security value to take care of the volatility in prices, violent fluctuation will call for frequent adjustment of margins and hence may not be cost effective. d) Durability A security should be reasonably durable. Easily perishable items like raw foodstuff, spices etc. do not constitute good security and should be avoided. e) Ascertainment of Title/Easy Transferability of Title The customer's title to the security should be easily ascertainable and undisputed. It should be verified if there are any other interests in the security such as prior charges or encumbrances. Particularly in respect of security by way of properties, adequate care should be taken to establish clear title and it should be ensured that the Bank can enforce its charge on the property e.g. mortgage charge on a rented / self occupied residential property cannot be easily enforced and therefore constitutes a weak security. Also, the transfer of title in Banks favour on a security should not be difficult if the occasion so demands it. Security documentation obtained by the Bank should be adequate to facilitate such transfer. f) Liability: The security should not involve the bank in any liability. A striking example is the case of partly
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pain-up shares, which if transferred in the bank's name as security. May involve the bank in the liability for calls on the unpaid face value. Another example is immoveable property where taxes are heavily in arrears. g) Storability: Where the security is in the form of commodities these should be such as do not present undue storage problems. Certain types of chemicals are classified as hazardous goods and cannot be stored in the same godown as other non-hazardous goods. Certain types of commodities require storage at definite temperatures otherwise they deteriorate. h) Transportability Finally, the security should be in such form as to facilitate it's transport to other centers, if necessary for sale purposes. Modes of transport should be by road, by air, and by ship. i) Yield If a security is a source of steady income, it is considered desirable as it affords an automatic source of repayment of capital and mark-up either wholly or in part. For example, if the security consists of highly marketable shares on which regular dividend is received or a property with steady rental income, the Bank can take a mandate to collect the dividends/rentals and appropriate them in reduction from time to time of the funded exposure. Note: In actual practice, hardly any security possesses all the desirable attributes mentioned above and defects do exist in the securities which are sometimes covered by taking a higher margin or insisting on other safeguards, such as supplemental security.
Margin The difference between the value of the security and the amount upto which the borrower can draw is known as margin. Margin on securities is maintained as a cushion against fluctuation in value of securities. This can occur due to a shortage, which may not be discovered by inspection or shrinkage in value, which may arise on account of the nature of goods charged or adverse shift in its demand. Again, if a customer commits default in payment of the Bank's dues, the Bank may have to take steps to sell the security after giving an appropriate notice to him. In case of forced sale, the security is not likely to fetch its full value. To provide for such eventualities, the Bank keeps a margin. The percentage of margin depends upon a number of factors including the Bank's perception of ready marketability and likely fluctuation in the value of the security. The value of security less margin is known as Drawable Limit or Advance Value. Lending Value of Securities Financing against securities, lending value are as follows: a) Land and property secured by legal mortgage: Margin Up to 60 to 70 % of the valuation of a recognized professional surveyor or as per approval. Machinery, equipment and motor vehicles secured by legal mortgage / floating charge: Margin Up to 40% of the valuation of a professional, independent surveyor or as per approval. Hypothecation of goods through registration of a fixed/floating charge through RJSC as per SBP guidelines.
b)
c)
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d)
Dividend bearing quoted shares: Margin Up to 50% of quoted market price or as per approval (subject to regulatory requirements). In the case of companies, which have been established less than five years ago, the advances must be restricted to 50 % of the market price or 80% of the book value of shares whichever is lower. Banks and borrowers own shares will not be acceptable as security.
e)
Pledge of readily marketable non-perishable merchandise in bank's control: up to 20% of invoice value or market value, whichever is lower or as per approval. Advance against Bank's own term deposit/ Certificate of Deposit / Floating Rate Note: up to 75% of deposit amount or as per the approval of competent authority in accordance with BALs policy/margin requirements Note: The above lending value percentages are in accordance with the SBP rules and schedule of discretionary powers, provided to all branches, by the Head Office, which are subject to change from time to time.
f)
4. CATEGORIZATION OF SECURITY / COLLATERAL/ SECURITY RISK RATING

OBJECTIVE
To assign risk weighting to each security class based upon inherent risk as well as realizable value of the security
TYPE OF CATEGORIZATION
A: The basis of these classifications (Cat A and Cat B) is to differentiate between securities where in case of necessity, the Bank can proceed to realize them without depending on the borrower's cooperation and those where such automatic recourse is not available. To classify security into different group considering their inherent risk
B:
A: Security Categorization Based on Realizable: Security is categorized as follows: CATEGORY A: Tangible and realizable security. CATEGORY B: Non-tangible and realizable security. a) CATEGORY A: Tangible and realizable security Securities that are easily saleable and for which the bank holds undisputed title are considered in this category. The bank can comfortably lend against such securities by fixing 25% (or in accordance with the internal policies/SBP regulations whichever is higher) as a net off margin and which are identified as follows: Lien marked on both foreign currency deposit & local deposits with the bank. lien on Government securities. Guarantees by the Central Government ( i.e. Sovereign Guarantees)
i. ii. iii.
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iv. v. vi. vii. viii. ix. x. Equitable / registered legal mortgage over property of sufficient value. Value to be assessed by a banks approved firm of surveyors. Irrevocable financial guarantees issued by other banks in our banks favour. Fully paid shares of listed companies charged to the bank and in the bank's possession or held with CDC under bank's lien. Charge registered with the Security & Exchange Commission of Pakistan (SECP) & over assets both fixed and current, of the borrowing company. Lien on Export Bill(s) strictly in compliance to the letter of credit. Pledge of non-perishable goods of sufficient value. Documents of title to goods sent direct to the bank, where bank is the consignee and where goods will be released only against our endorsement. To avoid possible losses, which may be realized in a forced sale situation, 25% of this type of risk, should be categorized as "B". However, if the type of goods to be imported are perishable (such as fresh vegetables, fruits, flowers etc.) or of a specialized nature (Such as goods imported for a specific project which are not readily saleable in the local market), and goods of large volume where storage is difficult to arrange for (such as tires etc.) then such security must be categorized as CAT "B". Back to back LCs issued by Banks, within the approved inter-bank lines. Debenture charge over a limited liability company's assets (subject to registration of charge with Security & Exchange Commission of Pakistan (SECP). CATEGORY B: Non-tangible and realizable security Securities that are not easily acquirable by the bank in case of need and hamper the recovery process are considered in this Category. These securities are obtained by way of hypothecation of goods and raw material, which is, kept in the borrowers premises although periodic inspection of stock is conducted by the bank. Pledge of partly finished goods / precision parts etc. are also considered here. Some of such securities are listed below: Personal guarantee of the borrower. Corporate guarantee of a respectable bank subject to bank risk approval from Head Office. Goods or other assets not under the Bank's control [such as in case of packing credit advances/Special LCs (Sight/DA)]. Goods dispatched by rail, road or air where the bank does not have control over the goods. Assignment of sums due to the borrower, subject to registration of charges by RJSC Security & Exchange Commission of Pakistan (SECP). Security in case of clean and D/A bills purchased (except those drawn under documentary credits issued by banks within the approved inter-bank lines). Guarantees Issued. The portion covered by margin (if any) would be categorized as Cat 'A'. All guarantees require prior approval from appropriate Credit Authority. All guarantees should be restricted to a definite period and amount.
xi. xii.
b)
i. ii. iii. iv. v. vi. vii.
B: Security Categorization Based on Inherent Risk: Frequency of Reporting Risk Management or RM Credit approving Authority must reassess, whenever a review event (frequent overdues, deferrals, material adverse change in the company or industry) occurs, and if appropriate the same or review event must be amended. The outcome of the review, including details of major issues to resolve, should be recorded. Where there is a downward movement in a review event, the relevant Business Unit and RM/Risk Manager will determine the required course of action, which may include issues to be addressed with the customer.
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The maximum review period will be as per the credit policy & procedure, minimum annually. The following security classes have been identified which would be subject to review with the changing market dynamics: Class I: Deposit (Rupee/FCY) with BAL US$ Bonds, Federal Investment Bond, Treasury Bill, National Saving Certificate, discharged & under lien, and Government guarantee Class II: Certificate of Investment, Deposit, guarantee of A -rated Financial Institution Approved global banks. (F.I)
Class Ill: Certificate of Investment, Deposit, guarantee of FI Approved of local Banks (other than class II). Class IV: Certificate of Investment, Deposit, guarantee Fl-DFIs / NBFCs. Shares / TFCs / Certificates of Mutual Fund NIT Units Class V: Token/ Registered Mortgage Pledge of goods financed by BAL Lien on import documents under Sight LCs. Class VI: Equitable Mortgage Hypothecation of stocks and receivables Hypothecation over plant & machinery Others (Trust Receipts etc.) (3 RD party security would be reflected by adding a prefix 'T') A risk-scoring model is prepared which would generate risk weighted exposure limits as a product of facility amount and security weighting. The proposed criteria would be applicable to all type of Credit Line Proposal (CLPs) . The Relationship Manager would be responsible for matching facilities with their respective security classes and determining the weighted risk score. CAD/Credit Risk Department would then be responsible to route the CLP to the appropriate Credit Committee based on the Risk weighted score instead of the proposed exposure amount. MIS would be developed to reflect all security fields for necessary reporting and monitoring.
Margin requirements as per security approved by the bank- Following is the list of margin requirement by type of security which is as per bank policy or sanction advice
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No. 1 2 3 4 5 6 7 8 9 10 11 Description Hypothecation of stocks and receiveables Hypothecation of plant and machinery Mortgage of properties (land & building) Pledge of raw cotton (local & imported) Pledge of imported goods under LC Export bills financed under LC Finance against bank guarantees Shares of quoted companies Against pledge of exportable stocks Life insurance policies Special dollar bonds / govt securities bank deposits Margin 25% 40% 40% 10% NIL NIL NIL 15% 35% 20% 10% 10% Remarks On assessed market value by banks approved valuators On KCA daily published rates If import duty & other govt. levies to be paid by the importers If guarantee provides payment for mark-up also If mark-up not covered under guarantee As per SBP Prudential Regulation On surreneder value of life insurance policy Or as per regulatory authority requirement whichever is higher
Assignment of collateral to certain facilities To attach/ assign the collateral to the certain facilities. Certain assignment rules are to be used. The assignment rules determine how much of the bank valuation of the collateral item should be assigned to a particular facility. A rule is specified whenever each item of collateral is assigned. Each loan or account can be assigned any number of items of collateral, using various combinations of the assignment rules. Similarly, each collateral item can be assigned to any number of loans or accounts. The rules will be applied to each collateral item as described below.
There are three available rules: Assign required collateral only: Attachment of One Collateral with single Finance account Assign full bank value of collateral: Attachment of collateral with those finances whom payments have been made on constant basis. Assign percentage of bank value of collateral: Attachment of one Collateral with various Finance account with Percentage
5. Security Consideration
Prudence invites attention towards the borrowers will to pay back the credit facilities extended to them. The will although unseen can be ascertained by the borrowers market creditability, professional expertise and business related advances. The Bank, as per SBP Prudential Regulation can finance on a clean bases upto a certain limit. Any amount exceeding such a limit, will be fully secured as far as possible with most liquid security. Security is meant to be an insurance against an emergency in case the advance fails to perform. Therefore to ensure their enforceability, the documents must be properly completed, signed, stamped, witnessed and registered where required as per local requirements. Proper finance and security documentation are vital for ensuring the overall safety of lending by the Bank. Such documentation establish clearly the liability of the borrower and the guarantor (where applicable), the various covenants of the lending including charge on security and the circumstances under which the advance can be recalled. Lack of proper/inadequate documentation can expose the
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Bank to unnecessary risk and severely limit the Bank's ability to proceed against the borrower and/or guarantor to recover its dues if the advance fails to perform. In obtaining security, the Business relationship manager must keep the following aspects in view: a) Availability of security should not be the prime consideration for granting a facility. Basic viability of each facility proposal and the repayment capacity of the customer independent of the security (viz. internal cash generation/contracts proceeds etc.) must be independently established. Legal implications of each type of security should be kept in mind while accepting any security. The formalities required for the creation of the security must be completed. The value of the security should be determined, through banks approved property valuator/surveyors. Thereafter, whenever so considered necessary, at more frequent intervals. The object of the exercise is to ensure that there is no deterioration in the value of the security, which will call for immediate corrective measures by way of additional security, reduction in Bank's exposure etc. The Bank's charge over a security must be supported by proper documentation as prescribed by the Bank. Where so necessary, (like pledge of goods, floating charge over goods / receivables etc.), periodical declarations from the customer showing the details and value of the security should be obtained. The security under the Bank's charge but not in Bank's possession (as in case of hypothecation) should be inspected according to the prescribed intervals laid down by the Head Office from time to time. Where the Bank is providing documentary credit or similar facilities the Bank should obtain possession of the goods, say by way of pledge, this requirement should only be waived in the case of customers of undoubted standing and with the prior approval from appropriate credit authority. In such cases, the Bank should obtain from the borrower a monthly stock report giving full particulars of the goods. When there is a frequent turnover of goods, e.g. building materials, foodstuff etc. it will be prudent to obtain daily/ weekly stock reports for better monitoring. It must be ensured that the stocks are turning over and that build-up of inventories is in line with the business norms. Where the stocks are financed by the Bank and / or form part of the Bank's security, periodical stock inspection must also be conducted without exception. No security should be released without checking with the Credit Division to ensure that no other liabilities exist against the customer at other branches. This is subject to change as per our policy guidelines in connection with release of security. The documents requirement varies according to the legal requirements in each territory. It is to be ensured that only documents prescribed and approved by the Head Office/Legal counsel are obtained. If there is any confusion should seek guidance from the Legal Department, Head Office. Disbursement of facilities against partial documentation should not be allowed. In case of partnership concerns, the documents should have been signed by all the authorized partners. Additionally, the partnership deed/agreement should be carefully studied to ascertain the responsibilities and liabilities of each partner. Such a precaution is necessary as disputes among partners can adversely affect the Bank's legal recourse if the partnership agreements are not watertight. In case of any doubt about any clause(s), legal opinion from Legal Department, HO/approved lawyers should be sought.
b)
c)
d)
e)
f)
g)
j)
k)
Page10
SECURITY GUIDELINE
l) m) Adequate care will be taken to ensure that the documents are executed correctly. Security documents may be divided into three main legally recognized classes: Mortgages of property Charge registered on receivables (floating charge) Personal Guarantee/ securities and Assignments Mortgages of property, in order to be enforceable have to be registered with the concerned land office (e.g. KDA, DHA, LDA etc.) Charges on receivables have to be duly registered with the SECP in case of Private and limited companies. Personal Guarantee /securities and assignments to be enforceable should be executed by a person having capacity to contract and whose identity could easily be established in the courts as a person who did sign the document(s) to avoid any allegation of forgery. Therefore, such documents should be sufficiently witnessed to preempt such an allegation. It is always preferable that the NIC number should be taken and the document to be witnessed by local offices at the time of signature. All documents exceeding one page should have the full signatures of the customer(s) on all pages of such documents. In case of a single page document where both sides contain printed terms and conditions it would be necessary to obtain full signature of the customer on both the sides of the document. On the last page it is preferable that the signatory writes his/her name in full below the signature. However, in all cases the name of the signatory should be typed below. All documents should be dated and the date column on the documents should not be kept blank. All blanks in the documents should be filled and completed. No comments should be made by Bank officials on the original letters/documents received from the Bank's customers. All letters/documents should be kept clean to avoid any dispute regarding their validity in the event they are required to be presented in the court as evidence. In case of illiterate customers, for male Right Hand Thumb Impression (RHT) and for female Left Hand Thumb Impression (LHT), should be affixed on the documents which should be witnessed by two Bank officials. Also a declaration in Urdu should bear the required thumb impressions, pronouncing that the illiterate customer has been informed of the obligations/liabilities under the borrowing agreement with the bank. This declaration should be witnessed by witnesses from the banks and the customers side. As regards ladies testimony in Court, there is no difference between a lady and a man for giving evidence before a civil court. The difference is maintained before the Sharia Court only. It is important to note, in this connection, that all banking matters come under the jurisdiction of the Civil Court. Finance and security documents obtained on borrowing accounts should invariably be reviewed by the Audit Division on regular intervals. Documents may also be reviewed at an earlier date if it is considered necessary for a specific account. However, at the time of renewal a set of fresh finance & security documents should be obtained.
o)
p)
q)
r)
s) t)
u)
v)
w)
Page11
SECURITY GUIDELINE
x) A Disbursement Authorization certificate DAC, should be obtained from the Credit administration department (CAD) the documents should be updated or new documents obtained if there is a significant change in the constitution of the borrowing customer which affects legally the Bank's position as a creditor vis-a-vis the customer. Similarly while allowing increased/ additional facilities on a permanent basis it should be ensured that the documents are updated. In any case, a letter from the borrower requesting for the temporary facility with an approximate date of regularization must be kept on record. Loan and security documents should be held in safe custody under joint custodianship and access thereto should be restricted. Usually, the access should be confined to CAD.
y)
z)
Creating Enforceable Charge Legal opinion to be obtained on the property from the Legal Department, Head Office/ bank approved lawyers certifying that the title of the property to be mortgaged is CLEAR and effective mortgage can be created, thereby, enabling the Bank to exercise an indisputable right of recourse in case of any default. The charge should be registered, when required, with following offices. Land /Revenue Authorities Sub Registrar Office (property) Registrar of the SECP Security exchange commission of Pakistan( If Limited Companies) Cooperative societies Documents of Title: Documents required to be kept in Bank's safe custody at all times include: The Original Title Deed/Sale Deed. No Objection Certificate (NOC) to create mortgage on the property from concerned authorities, where required. Non Encumbrance Certificate Completion Certificate. SI TE Plan/Akse-Shajra Any other documents advised by the Advocates of the Bank. Bank's lien / mortgage on the property should be notarized in the land records of the concerned authorities. NEC Unencumbered Prior Charges duly vacated. Third Party Mandate. Original Title/Sale Deeds. Completion of Legal Formalities/Documentation for Pledge/Charge/Mortgage. Proper Stamping of Title/Sale Deeds. Appropriate Approvals/No Objection Certificate Authority to Sell/Dispose off in event of default. Events of Default clearly/specially defined. Clearance of all dues/ Levies Search Certificate
Page12
SECURITY GUIDELINE
6. IMPORTANT LEGAL CONSIDERATIONS:

Some important legal considerations that should be kept in mind while obtaining any security are discussed in this section. (a) Mortgage of Immovable Property (usually, Land & Buildings). Registered or Equitable Mortgage: Primary or Secondary Mortgage. Sole or Pari-passu. Rights of Occupier of the Property. Salability without the intervention/permission of a Court. Search for prior/existing charges. Memorandum of Deposit of title deeds is a must in case of an Equitable Mortgage. Registration of mortgage charge within 21 days in case of a limited company, as required by SECP of the Companies Act. Rights and obligations in case of Simple Mortgage. Mortgage by Conditional Sale, Usufructuary Mortgage, English Mortgage, Equitable Mortgage to be taken into consideration. (b) Pledge at Goods. Pledge Vs Mere Possession of Goods. Exclusive possession is essential. It may be through delivery of the documents of title to the goods. Pledge has the right to issue for recovery, of dues or to sell the pledged goods. In either case pledge has the right to claim the full value of dues, regardless of the sale proceeds of the pledged goods. Ensure suitable sign boards and Guards outside store/warehouse. Periodical Stock Reports and Physical Verification is to be obtained. (c) Pledge of Shares / Securities. Quoted Shares and securities on Stock Exchange. Marketability & Market Value. SBP's Margin requirement to be fulfilled. Transfer Deeds duly signed & verified by the company whether fully Paidup or not. Memorandum of Deposit of shares/stocks is a must to establish an equitable mortgage. Shares shall be deposited in banks CDC account (d) Hypothecation. Ownership and possession remains with the borrower. Whether permitted under the law. Whether underlying goods have enough value. Supported by stock reports/physical verification. Registration of Hypothecation Charge. Borrower should have valid title to the goods pledged or sufficient interest in it, entitle him to hypothecate. (e) Trust Receipt. Proper legal vetting of the "Trust Deed. (f) Charge. Gives a priority on assets charged to the charge holder over the other creditors. May be registered or unregistered. May be specific/fixed or floating. Registration of Charge, where so required. Priority of Charge; whether it is a first. Subsequent, exclusive or pari-passu charge. (g) Debentures. Powers of the company to issue debentures. Formalities for execution/registration. Marketability.
Page13
SECURITY GUIDELINE
(h)
Assignment of Debt. Creditworthiness of Borrower's debtors. Due dates of Repayment. Ageing.
(i)
Lien on Deposits. Letters of Lien & Set-off required. Third party Letters of Lien & Set-off where necessary. Precautions in case of joint account holders.
(J)
Life Insurance Policy. Creditworthiness of the Insurance Company and record of settlement of claims. Legally valid Assignment / Endorsement in Bank's favour. Officially confirmed Surrender Value. Upto date payment of Premium & Validity. Enforceability in case of suicide or capital punishment should be checked. There should be an insurable interest of the borrower. The notice of charge, signed by the borrower and the bank must be sent to the insurer to avoid risk of second charge.
(k)
Bankers General Lien.
This charge is in direct charge in which other bank securities and pledge in favour of our bank. Securities with a Bank are under an pledge. Therefore the bank is authorized to sell the securities to recover its dues after giving a reasonable notice.. "Bankers must undoubtedly have a general lien on all securities deposited with them as bankers by a customer. Unless there be an express contract, inconsistent with the lien".
7.
MODES OF CHARGE
Charging a security means making it available as a cover for an advance. The method of charging should therefore, be legal and perfect. It is important that the charge is completed and all the relevant formalities are complied with, so that in case of default by a borrower the security is available to the Bank. It should, however be borne in mind that whatever form the charge may take, the Bank does not become the absolute or exclusive owner of the security, the Bank has only certain defined rights in it, until the debt is repaid.
Registration of Charges:
a. Before accepting fixed property under charge of the Bank, a search Report/ certificate from the Registrar of Documents or with SECP and Relevant Authority should necessarily be obtained to assess the status of encumbrance. b. In case of equitable mortgage, intimation by letter should be given to the relevant authority that the property in question is under lien of the bank, whose duly acknowledge copy should be held along with the relevant property documents. In case of Registered Charge the same shall be registered with the Registrar of Documents. c. In case of equitable mortgage or where the Registered Mortgage is for the amount which is less than the exposure or expected exposure, a Irrevocable General Power of Attorney along with
Page14
SECURITY GUIDELINE
Memorandum Deposit of Title Deeds (MOTD) and customer Personal Guarantee should be obtained giving full authority to deal with the property. d. In case of Limited Companies, besides the above applicable guidelines, Banks exposure should be necessarily registered with the SECP, before taking up any exposure but necessarily within 21 days of allowing any disbursement. e. Where facility is allowed to Limited/ Private limited Companies against pledge of goods/stocks/any other assets, the same is to be additionally secured by floating charge on current assets for limit value duly registered f. A the time of registration of charge, the concerned CAD officer should prepare a covering letter, addressed to the Registrar of Joint Stock Companies / Securities and Exchange Commission of Pakistan and attach the following documents: i. ii. iii. iv. v. vi. vii. viii. Original paid challan of SECP (of the prescribed fees) Affidavit by the customer Relevant Forms (FORM-10 (For Creating Fresh charge )/ FORM-16 ( For amendments/ deletion/ addition.) Photocopy of Memorandum confirming deposit of Title Deeds (if applicable) Photocopy of Agreement to Create Legal Mortgage (if applicable) Letter of Hypothecation (if applicable) Letter of Hypothecation of Moveables/ Receivables / Fixed assets and Book Debts (if applicable) When a customer request after full and final adjustment of liability to release a charge from Security Exchange Commission of Pakistan, bank deposit FORM 17 in SECP for satisfaction of charge.
Deposits all above mentioned documents as per security documents with SECP and receive confirmation from Registrar of Joint Stock Companies (RJSC) / SECP Issue Registration of charge Certificate. Bank file the confirmation in the respective customer file..
Following are the securities that require registration with the Registrar, Security exchange commission of Pakistan (SECP)/Corporate Law authority (CLA) companies under Sec 12 I of the Companies Ordinance 1984 : a) Mortgage/charge for the purpose of securing any issue of Shares and debentures.
b)
Mortgage/charge on any hypothecation of immoveable property wherever situated or any I nterest therein. Mortgage / charge on any Book debts/ Receivables of the company. Mortgage / charge not being a pledge on any moveable property (Stocks/ Goods). A floating charge on the undertaking or the property of the company including Stock-in- trade.
c) c) i)
g)
Mortgage / charge on goodwill, on patent, or license under a patent, on a trade mark, or on a copy-right, or an Iicense under a copyright.
Page15
SECURITY GUIDELINE
h) Mortgage / charge or other interest based on agreement for the issue of any instrument in the nature of redeemable capital. Mortgage / charge or other interest based on a Musharika/Murabaha agreement. Mortgage / charge or other interest, based on hire-purchase, or leasing agreement for acquisition of fixed assets. Mortgage / Charge on hypothecation of Plant and Machinery and spare parts.
i) j)
k)
Registrations must be affected within 21 days of the creation of the charge, not of the date of the advance secured by the charge. In this connection it trust be remembered that the date of execution is not necessarily the date the instrument hears, but the date when it actually signed. Although it is the Company's duty to effect registration, in practice bankers usually register the charge either directly or through solicitors. This is permissible by Sec 129 which says that registration of any such charge may be effected on the application of any person interested therein. The section further empowers the lender to charge the borrowing company with the registration fees. The prescribed particulars of the charge together with a copy of the instrument must be filed with the Registrar who then issues a certificate of registration (Section 127) stating the amount secured and such certificate is conclusive evidence that the requirements of Sec 121-125 as to registration have been complied with. This certificate should be filed with the security documents and lodged in the bank's safe custody. Unless the registration of the charge is effected within 21 days of its creation, the effect will be serious for the lending banker for it will be void against the liquidator or any creditor of the company, and all the remedy the banker will have to be issue the company immediately as unsecured creditors. Furthermore, a subsequent charge, through having express notice of your prior unregistered charge at the time he takes his security, will prevail over your charge. Charge Registration has not been effected within 21 days, the High Court may grant relief and extend the time of registration if satisfied that the omission was accidental, inadvertent or not likely to prejudice any creditors. Application to the Court would appear to be the best course to pursue. To destroy an unregistered mortgage and to start a fresh with a new charge is a doubtful method unless the advance in question has been paid off. The cancellation of the charge is effected by enrolling a memorandum of satisfaction with the registrar. This must be done by the company in 21 days from the date of payment giving a statutory declaration by 'a director and secretary of the company as to the truth of the Memorandum and Article of Association. The Registrar will then notify the bank as mortgagee that he has received a memorandum of satisfaction for registration and thus give you an opportunity to object if it is not in accordance with the acts of the case. Apart from this delay in filling the required documents with the registrar attracts penalize charges. In case of assets under pari passu, charge details of total such assets, charges thereon and total Bank borrowings there against should be obtained on monthly basis evidencing coverage of exposure by prescribed securities. FRAUDULENT CONVEYANCE Particular care must be exercised when the conversion of a customer's business into a limited/ private limited company is followed by a request for accommodation for, if a trader transfers his assets and liabilities to a limited/Private limited company without the consent of each and every one of his creditors, the transaction may be interpreted as a fraudulent conveyance. A fraudulent conveyance is not
Page16
SECURITY GUIDELINE
necessarily a dishonest transaction, but one that defeats or delays a man's creditors and does not imply a dishonest motive or a state of insolvency. Such a conveyance is an act of bankruptcy, and if within 3 months of its date a petition and a receiving order results. The trustee's title will relate back to the time of the conveyance and invalidate the transaction. This will mean that the sale of the assets by the trader to the company can be set aside and such assets will revels to the official assignee, rendering void and valueless any shares and debenture or charge given by the newly constituted company to the bank.
8. HYPOTHECATION
Hypothecation means the charging of property to a creditor while the property itself remains in the possession of the debtor or at least does not pass into the creditors possession. It is a kind of charge on Stocks of goods in the possession of a debtor may be hypothecated to the banker and in the Letter of Hypothecation the debtor undertakes: 1. To pay-in the proceeds of sales of such goods to his current account with the banker 2. To have the stocks adequately insured (against Theft. Fire. Riots and Civil Commotion etc.) With risk coverage and usual Bark clause incorporated in the Insurance policy. Under the terms of the Letter of Hypothecation, the bank has the right at its discretion, to take possession of goods and thereafter to treat it as a pledge. The Bank may take over possession of the goods and, after giving reasonable notice to the borrower, may arrange to sell them in order to recover its advance. There are, however, practical difficulties in obtaining possession of hypothecated goods from a reluctant and uncooperative borrower. Further. By the time the bank decides to exercise its right to take possession, the bulk of the stock may already have been disposed off to meet the pressing demands of other creditors. In view of the fact that such facilities could be easily misused by the borrower through pledge of the same goods to another bank or disposal of the goods without accounting for the proceeds, such facilities are only to be granted to borrowers of undoubted financial standing and integrity or otherwise collaterally secured.
Precautions:
1. It is necessary to verify ownership by CAD. Verification and valuation should be recorded by CAD. 2. Ascertain that no debenture, incorporating a floating charges has been issued and outstanding. 3. Letters of Hypothecation duly stamped signed and verified by authorized person of CAD should be kept on record. 4. Where the borrower is a Private / Public limited company- all matters including registration of the charge with SECP is required. 5. Stock reports /statements duly signed by the customer must be submitted MONTHLY by the borrower and kept on record by CAD Officer. 6. Adequate margin. As stipulated, must be maintained. 7. Comprehensive Insurance in favour of the Bank to be obtained.
Page17
SECURITY GUIDELINE
8. The branch manager should visit the borrower's premises at least quarterly to inspect the hypothecated stocks and record the fact in the Godown Inspection Register and prepared the visits report to keep in the file. 9. Hypothecation is not considered a good mode of security. However, branches may propose advance against this security only for well established and reputed businesses. 10. Branches will ensure that the stocks and other assets are fully insured against normal risks and the policy does not contain lien of other banks. A confirmation to this effect should be obtained from the customers in periodical stock statements. 11. Check any clause added in Memorandum and Articles of Association/Partnership Deed for creating charge over company/firms assets. 12. Obtain Board Resolution to create charge over stock and authorizing directors/persons should be nominated in Form-29 registered with SECP (Security & Exchange Commission of Pakistan) to sign documents on behalf of the company. 13. Banks charge and security documents duly signed by the authorized signatory (ies) mentioned in the Board Resolution/ Partnership Deed and sole proprietor certificate to be obtained. 14. Registered ranking/pari passu/floating/fixed charge over stocks, as per Sanction Advice, with SECP. 15. Obtain certificate of Registration of Charges. (For companies). 16. File with SECP Joint Letter of Hypothecation signed by all consortium/ participants banks for registration of Joint pari passu charge. (For companies) by CAD Officer. 17. Alternately, Relationship Manager obtain NOCs from all consortium / / participants banks and submit along with Letter of Hypothecation to SECP for registration of joint pari-passu charge. (For companies). 18. For creation of ranking and / or supplemental charge over a specific item of assets of the company and in addition to the existing charge respectively Follow instruction as mentioned in Mode of charges h. 19. Personal guarantees of sole proprietor/partners/directors as per State Bank of Pakistan circulars issued from time to time. 20. Periodical stock statements (as per Sanction Advice) should be obtained by the CAD Officer. In addition to this inspection shall be conducted by the CRMD on quarterly basis or as per the policy. 21. Periodical inspection of hypothecated stock (as per Sanction Advice) to be carried out by CAD. In addition to this inspection shall be conducted by the CRMD on quarterly basis or as per the policy. 22. Insurance policy in the joint names of the Bank and the borrower with mortgage and other Risk Coverage clauses mentioned in the Sanctioned Advice should be obtained by CAD.
Page18
SECURITY GUIDELINE
23. Obtain original premium payments receipts of Insurance shall be obtained by the CAD and copy o f the same shall be submitted to CRMD. PROCEDURE Hypothecation of goodsFollowing process needs to be followed with respect to hypothecation of goods:i) The concerned officer at the respective CAD centre receives the letter of the customer (from the respective RM) containing details of hypothecated goods along with stock report of hypothecated goods and insurance policy The letter to be pledged. ii) The officer should scrutinize the stock report to ensure that the description and value of goods is in accordance with the description and value of sanction advice and that the complete address of the place where the goods have been stored is clearly mentioned. He should also check if the insurance policy has been taken from an approved company and is in BALs favour. In case of any discrepancy, the officer should contact the RM to get the same rectified. The officer should then forward the original stock report with a photocopy of the insurance policy to the officer designated for control of hypothecated goods advising him to inspect the goods. He should also file the customer letter, duplicate copy of stock report, photocopy of insurance policy and copy of memo evidencing receipt of insurance policy for safe custody in the customer's file and also file the original stock report and photocopy of insurance policy in the stock report file maintained customer wise.
9. GUIDE LINES PROPERTY PLANT & MACHINERY /EQUIPMENT

The Business Group is to ensure that Valuation of the asset is conducted through Banks approved valuators and certificate to the effect is placed on file. The Business Group must personally visit the asset and be satisfied with the evaluation before allowing disbursement. A Visit Report should be placed on file accordingly. In case the valuation is below the value assumed at the time of sanctioning of facilities, the same should be immediately reported to the credit sanctioning authority. The Business Group is required to undertake fresh valuation of the plant and machinery after every three years. Branches are advised to ensure strict compliance. Any deviations from these guidelines shall be viewed very seriously and shall warrant disciplinary action. Detailed list of plant and machinery that is being placed under BALs charge should be obtained from the client. In case the company is availing facilities against charge over fixed assets from other banks also, than statement of fixed assets (based on book value of assets) is to be obtained that should include a bank-wise break-up of outstanding amounts with the total value of charge there against. Comprehensive Insurance of Plant & Machinery should be obtained with Risks coverage including Bank Mortgage clause.
Page19
SECURITY GUIDELINE
10. Government Securities (DSCs, SSCs, RICs etc.)
1. Original instruments duly marked under lien are obtained. 2. The issuing branch/ National saving center should mark the lien of the lending branch on the certificates and should incorporate on the certificates Under Lien of Bank AlFalah Limited Branch under their stamp and signatures 3. The certificate should be duly discharged by the owners and their signatures should be verified by the issuing bank / national saving centre. 4. Where certificates have been issued by the other bank and/or National Saving Center, it is to be ensured that the Banks lien has been marked on the instrument(s) and signature(s) on Letter of Pledge, Lien and Authority for Shares, Stock and Securities is (are) verified. 5. Relevant charge and security documents are obtained.
Page20
CREDIT MONITORING
Annexure B
WATCH LIST PARAMETERS

Sr. 1. 2. ORIGINAL CMG PROPOSAL Watch List Parameters Placement in Watch List Violations of Prudential Regulations Repayment Status : a. b. c. d. Installment of principal not received Mark-up not serviced Delayed adjustment of EOL/TOD Non-clean up facility as per sanction requirement 60 days after due date 60 days after due date On expiry of approved period Immediate TOD-7 days. 30 days (instead of Immediate) 30 days after due date 60 days after due date 60 days after due date 60 days after due date EOL-15 days after due date/TOD-7 days 30 days after due date Immediate CREDIT GROUP Immediate except where SBP approval is in place. BUSINESS UNITS CMG - REVISED Placement / Parameters Immediate except where SBP approval is in place.
3.
Security-related deficiencies : a. Critical deficiencies in securities/documentation Significant shortage in pledged stock/pilferage Excess over DP / adverse change in security value No Insurance / expired insurance Beyond deferral approval Deferrable deficiencies : Beyond 2nd time deferral Immediately - In case of No Deferral And Beyond Deferral Due Date - In case of Deferral Allowed Immediate Within one week (instead of Immediate) 15 days (instead of 30 days) Further there must be a system to have information one month before expiry of insurance reporting to CMD. Also a procedure may be devised to pay premium in case borrower fails to insure. Six months after last DO Within one week 15 days
b. c. d.
Immediate Immediate 30 days
e.
No / slow movement in pledged stock
Three months after first disbursement or last DO. In case of perishable goods on expiry of the period mentioned in approval by approving authority.
4.
Financials : a. Non-availability of Financials 3 months after date of Bal Sheet Within 4 months from date year ended but not later than one month from the date of finalization of balance sheet by chartered accountants 6 months after Bal. Sheet. Limited Cos.: 04 months from year-end; but in any case not later than one month from the date of publication of balance sheet. Others : 03 months from year-end;
Page1
CREDIT MONITORING
b. Persistent adverse financial indicators Examples may be given as per old risk grading system (Composite Credit Appraisal) please refer below Financial Indicator Increasing Risk Factor Working Capital Sales & Profitability Trend (Sales, Margins & Operating Cash Flow) Payment Information on Long Term Debts / Debt to Net Worth Previous Positive & declining Balanced & Declining Present Negative Negative Immediate Examples may be given as per old risk grading system (Composite Credit Appraisal) please refer below Financial Indicator Increasing Risk Factor Previous Positive & declining Sales & Profitability Trend Balanced & Declining (Sales, Margins & Operating Cash Flow) Working Capital Payment Information on Long Term Debts Debt to Net Worth Present Negativ e Negativ e
Rescheduling/ Restructuring 70:30
Default 80:20
Rescheduling/R Default estructuring 70:30 80:20

ORIGINAL CMG PROPOSAL
Sr. Watch List Parameters Placement in Watch List
30 days of grant /60 days of expiry. Immediate next quarter The word non-approval may be replaced with unapproved Debit/credit summation less than the limit amount and/or 25% of the approved limit not cleaned up by the borrower quarterly for at least two days 30 days of last validity
Annexure B
Page 2
CREDIT GROUP BUSINESS UNITS CMG - REVISED
5.
Non-approval / renewal of Limit(s)
Unauthorized facility 7 days from disbursemnt Renewal of Limits : 30 days after expiry Debit/credit summation less than the limit amount and/or 25% of the approved limit not cleaned up by the borrower half-yearly for at least two days
6.
No / low turnover in the account
Delete :Pls refer 2(d) above)
7.
Borrowers Status : a. Death of proprietor, partner, principal sponsor Dispute among sponsors/partners Litigation against borrower adversely impacting BAL Cessation of business Immediately information Immediately on information Immediately on information Immediately information on on If there is an issue or adverse legal opinion b) Death of proprietor, partner, principal sponsor and / or mortgagor Death of proprietor, partner, principal sponsor and mortgagor Immediately on information Immediately on information Immediately on information Immediately on information
b. c. d.
Page2
CREDIT MONITORING
8. Overdues/rescheduling/restructuring reported in CIB by other banks Past Due Trade Bills Any other material weakness / subjective criteria Immediately information on Overdues may be defined (as per our internal policy or SBP) 45 days after due date Immediately on information
9. 10.
60 days after due date Immediate
45 days after due date Immediate

Annexure B
Page 3
ORIGINAL CMG PROPOSAL
Notes 1. Watch List Accounts Statement will be prepared by the Branch on quarterly basis generally based on a combination of two or more parameters mentioned above. Watch List Accounts Statement will be prepared by the Branch on quarterly basis generally based on any one parameter mentioned above Watch List Accounts Statement will be prepared by the Branch on quarterly basis generally based on any of the one parameters mentioned above The Watch List Statement must be reviewed by the respective Area Managers/Regional Manager-Credit. It must be ensured by the Branch Manager/Area Manager/Regional ManagerCredit that all accounts that qualify for Watch List status are included. If it transpires that an account has been directly classified without first having been placed in the Watch List will be viewed very seriously. If the Branch / Area Manager/Regional Manger-Credits feel that the conduct of any account is not satisfactory and it may lead to delinquency, though the account does not fall under the above Watch List parameters, the same should still be included in the List. Where an account qualifies for Watch List
CREDIT GROUP
BUSINESS UNITS
CMG - REVISED
2.
The Watch List Statement must be reviewed by the respective Area Managers/Regional Manager-Credit. It must be ensured by the Branch Manager/Area Manager/Regional Manager-Credit that all accounts that qualify for Watch List status are included. If it transpires that an account has been directly classified without first having been placed in the Watch List will be viewed very seriously.
3.
4.
5.
If the Branch / Area Manager/Regional Manger-Credits feel that the conduct of any account is not satisfactory and it may lead to delinquency, though the account does not fall under the above Watch List parameters, the same should still be included in the List.
6.
Where an account qualifies for Watch List status as per the given
Page3
CREDIT MONITORING
parameters but Branch/Area Manager/Regional Manger-Credits are sure that the customer would not default, they may exclude the account from Watch List, substantiating the reasons for not placing the account under Watch List account. status as per the given parameters but Branch/Area Manager/Regional MangerCredits are sure that the customer would perform, they may exclude the account from Watch List, substantiating the reasons for not placing the account under Watch List account. In case an account is not included in Watch List of the following quarterly, reasons for its deletion must be conveyed to the Credit Monitoring Group
7.
In case an account is not included in Watch List of the following quarterly, reasons for its deletion must be conveyed to the Credit Monitoring Group
Page4

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CREDITS

SYSTEMS, POLICIES & PROCEDURES GROUP TECHNOLOGY & OPERATIONS

- Credits Operations Manual - Procedure

CREDIT OPERATIONAL MANUAL

CHAPTER 1 INTRODUCTION TO MANUAL OVERVIEW

CREDIT OPERATIONAL MANUAL

CREDIT OPERATIONAL MANUAL

Banking tribunal ordinance

CREDIT OPERATIONAL MANUAL

CHAPTER 2 CREDIT ROLE & KEY PERFORMANCE INDICATORS (KPI)

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STRUCTURE OF CREDIT GROUP - HEADOFFICE

Regional Head North Retail & Middle Market

Regional Head South Retail & Middle Market

Regional Manager Corporate and International Operations

Area Credit Managers

Area Credit Managers

Area Credit Managers

RESPONSIBILITIES OF GROUP HEAD CREDIT

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RESPONSIBILITIES OF REGIONAL HEAD CREDIT

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ROLE OF REGIONAL HEAD (QUALITY ASSURANCE DEPARTMENT)

ROLE OF AREA MANAGER-CREDIT

ROLE OF CREDIT OFFICER/ RELATIONSHIP MANAGER

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For detailed discretionary powers of CIBG, see attachment (Annexure -C, D, E)

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Joint Approving Authority

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Consumer Banking Group

Financial Institution Division (FID) / CIBG & RMM

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Islamic Banking Group/ CIBG & RMM

Rural Finance Division (RFD)

Key Performance Indicators (KPI)

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II. III. IV.

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CHAPTER 3 TYPES OF CUSTOMERS & EXPOSURE LIMIT

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FOREIGN CONSTITUENT i) Official ii) Business iii) Personal

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Attested copies of CNICs of all directors

Documents Required i. Memorandum of Association (MOA)

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31-12-2010 31-12-2011 31-12-2012 31-12-2013 same group.

CHAPTER 4 SECTION-A CREDIT LINE PROPOSAL Page26

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CREDIT INFORMATION BUREAU (CIB) REPORT

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Maximum Maximum 60 days 90 days