CREDIT:

A contractual agreement in which borrower receives something of value now and agrees to repay the lender at some later date. When a consumer purchases something using a credit card, they are buying on credit (receiving the item at that time, and paying back the credit card company month by month). Any time when an individual finances something with a loan (such as an automobile or a house), they are using credit in that situation as well.

BASIC FUNCTIONS OF BANKING: The basic functions of banks consist of two major functions on which the entire working of banks depends. Following are the basic functions of a bank which a bank has to perform for sustaining his flow of work: 1. Accepting deposits 2. Lending available funds Role of Banks: The bank plays an important role for successfully performing these basic functions. Custodian of Depositors Money Being a Custodian / Amanatdar bank has to exercise due prudence / vigilance in making a lending decision to ensure that lent or loaned not lended funds could be received back within the stipulated time frame. Credit Principles: Ascertain the customers character for integrity& willingness to repay Lend according to the customers capacity and ability to repay Contingency Planning for Possible default Extend credit only if the bank can sufficiently understand and manage the risk Build & Maintain a diversified portfolio Purpose to be in line with the customers occupation / nature of business The purpose of facility (the assets to be financed) should be held as security. Funds must be utilized for productive purposes and not for speculative, un-desirable activities such as hoarding.

The security (primary / collateral) offered to cover the finance should posses the following features Readily realizable and of steady / increasing value. Marketability / storability of goods offered as security. Durability of assets charged to the bank Bank has unhindered access to Security. Ensure active participation in complete credit process Credit Process includes the following; Credit Presentation Credit Approval Loan & Security Documentation Account Handling/ Monitoring

Optimum Risk & Reward Risk Spectrum Credit Risk

Credit risk is the risk that risk obligation will not be repaid on time and in full as expected resulting in a financial loss . Contingent Lending Contingent lending risk is the risk that potential customer obligations will become actual obligations and will not be repaid on time (e.g L/Cs BGs) Direct Lending Risks Direct lending risk is the risk that actual customer obligations will not be repaid on time Issuer Risks

Issuer risk is the risk that the market value of a security or other debt instrument that we hold as security may change. Liquidity Risk Liquidity risk is the risk that bank may be unable to meet its financial commitments to depositors when due (Assets & Liability Management) Documentation Risk

Documentation risk is the risk that the documentary evidence on which we depend to enforce our rights under contracts or transactions may not be complete or enforceable.

Credit Investigation Knowledge of a customers creditworthiness is essential before taking any lending decisions and also helps to minimize the risk of default. Such information is required at all times, especially at inception/ renewal of credit facilities and is to be monitored continuously 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 non-financial data, such as business / marketing strategy, management quality, technology employed, etc. In addition, information should also be obtained about the industry, competitors, customers, suppliers and regulatory and economic environment as these 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 the minimum requirements before making lending decisions such as the Credit Information Bureau Report and Borrowers Basic Fact Sheet. There can be no one source that could provide all such information as accumulation of market intelligence is a time consuming process and requires access to varied information sources. The subject matter being of paramount importance requires careful attention at all levels. This section covers the following: Borrowers Basic Fact Sheet Credit Worthiness Report (Local) Credit Information Bureau (eCIB) Report Call Report Directors Search And Charges Search Reports Bankers Report Forms and guidelines for compiling these reports are provided in the attached

Appendices.

Borrowers Basic Fact Sheet

Requirement: It is a regulatory requirement of the State Bank of Pakistan. Required for: As per Regulation # 3 (for Corporate & Commercial) and 8 (for SME) Banks / DFIs shall not approve and / or provide any exposure (including renewal, enhancement and rescheduling / restructuring) until and unless the Loan Application Form (LAF) prescribed by the banks / DFIs is accompanied by a Borrowers Basic Fact Sheet under the seal and signature of the borrower as per approved format of the State Bank of Pakistan Purpose: To acquire basic information on the Borrower for initiation of a relationship or monitoring after disbursement. Prepared by: Borrower and countersigned by bank official. To be regularly obtained & with each Loan Application or Renewal request.

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, minimising the risk of default and effective monitoring after disbursement of funds. Branches should ensure that BBFS and LAF should not be older than one month from the date of credit proposal. Thus Branches should ensure that Borrowers Basic Fact Sheet (BBFS) is obtained from all borrowers, and authenticated by a bank official who should 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. The format prescribed for Borrowers Basic Fact Sheet for corporate/ commercial/ SME and for individuals/ consumers are provided by SBP as part of prudential regulations.

Creditworthiness Report (Local)

Requirement: At least once for every new relationship Required for: All new local borrowers. Purpose: To provide Credit Worthiness / Business Information Report on the borrower. Prepared by: 1) Any Officer of the proposing Branch for proposals below PKR. 5.000M. 2) Enlisted Credit Report Preparing Agency (CRPA) for exposures of Rs.5.000 M and above. (Services of CRPA may also be utilized for CPs within 1 above if approved by G.M. & above).

NOTE: This is up to the discretion of Business Manager to arrange Credit Report from enlisted Credit Report Preparing Agency in case the exposure is below PKR 5.000M 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, the officer needs to focus on the 5 Cs of

credit (character, cash flows, collateral, capacity, competition). Additionally, different sources of information have to be tapped including some of the following: Interview with principals and / or key officials of subject company after visit to the factory or place of business / office. Trade suppliers feedback on payment by the subject. Knowledge of competitors. Financial statements of accounts / Balance Sheet. Banks own record. Market Report. Suggested Format (Appendix I to Chapter 3.2) is attached. By Credit Report Preparing Agency (CRPA): In case of fresh borrowers where fund based and non-fund based facilities of PKR 5.000M and above are involved, branches shall send Request for Local Business Information/ Credit Worthiness Report / local credit report to enlisted CRPA. In addition, the following reports may also be obtained from enlisted CRPA. Market Reputation Check These reports are prepared without contacting the borrower and are helpful where credit information is required in respect of suppliers, customers and general market reputation of client. SME Credit Report (detailed report) This is a detailed report which provides general information, business information, management structure and style. SME reports may be obtained in cases where detailed credit information is required. The CRPA credit worthiness report shall, as a minimum, cover the information prescribed for such reports as prepared internally by the Bank. In case of SME, effort should be made to obtain Credit Worthiness Report from

their respective associations as well. In following cases credit worthiness report would not be required; All MNCs Corporate Large Customers (qualifying the criteria defined for Corporate client)
Relevant Business Group Head jointly with Credit Head of the respective Group shall be authorized to waive the requirement on a case to case basis. Relevant Business Group Head may delegate this authority at Business Head level if deemed appropriate.

However the bank check has to be arranged by the concerned business units from the existing bankers of MNCs and Corporate clients. For all other customers following criteria should be used for obtaining the credit reports; Local Credit Reports PKR 5 M & above SME Credit Report PKR 10 M & above Credit Worthiness shall also not be required in case Banks exposure on fresh customer is secured against 100% cash collateral. In such cases, Branch Manager / Officer shall prepare the credit report as per format Appendix I to Chapter 3.2. Detailed guidelines for obtaining these reports are provided in Chapter 5.6 of this Handbook.