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SBP asks banks to comply with prudential rules

KARACHI (April 02 2004): The State Bank of Pakistan (SBP) has explained that prudential regulations represented minimum standards that the banks needed to comply with, adding that the banks primary basis for lending should be the cash flows and not necessarily the collateral.

This was stated by SBP Joint Directors Shaukat Zaman and Inayat Hussain, while making a presentation on the new prudential regulations, which have become effective from January at the Aptma House here.

They said that the debt equity ratios were no longer in place, but the overall exposure limits of banks had been prescribed.

According to an All Pakistan Textile Mills Association (Aptma) press release, they said that the definition section had been separated to avoid different interpretations being used in different sections of the regulations.

Interest-based loans could now also be subordinated to equity. Equity holding of the banks in shares of companies had been restricted, they added.

They also explained that if a facility was rescheduled and performed well for one year, it could be upgraded in the bank's books as regular but immediately upon default would go back to its original classification category.

However, upon re-scheduling, the amounts should be taken out of the CIB report and put into re-structured category, they said.

In his welcome address, Aptma Chairman Waqar Monnoo praised the role of the SBP, particularly lauding its performance under the stewardship of its Governor, Dr Ishrat Hussain.

He highlighted the areas where the SBP had been particularly successful, ie bringing interest rates down, a well-managed foreign exchange policy, open door policy and other transparent policies.

The Aptma Chairman singled out the performance of the SBP in settling long outstanding NPLs without resorting to further litigation.

He also highlighted the role of textile industry in the country's economy, and said that the textile industry represented 67 percent of Pakistan's total exports, over 38 percent employment and 46 percent of the total manufacturing activity.

Monnoo explained that to meet the challenges of the forthcoming 2005 era of quota free world, “we at Aptma, would like to facilitate our industry's preparedness.

“As part of the post-2005 preparedness strategy, Aptma is identifying areas where the members would be held back in their investments through provisions of the new prudential regulations.

He then dilated upon the member's reservations with respect to the new prudential regulations, saying that the linkage of borrowers' equity to total borrowings in respect of the projects, which had negative or very low equity, could cause immediate problems in revival of such industry.

The factor had been reduced from 10 times to the new injected equity to three times, he said, adding this drastic reduction had brought a lot of recovering units to difficulty.

Similarly, the new provision in respect of accepting revaluation only for three years and that too only for the incremental value of the revaluation amount was thought to be too strict and would immediately start affecting project facilities, he added.

Financing against security of shares of group companies had been prohibited under the new regulations. This was also highlighted as an anomaly as one person could use the same shares as security, whereas another, who fell in the definition of group, could not, he said.

This inconsistency could encourage Benami shares being held, the Aptma chief said, suggesting that the banks should be given the discretion on whether to accept shares of group companies as security or not.

Monnoo said the change in the definition of current maturity would also lead to many companies becoming non-compliant, and added that the current ratio of 0.75 should not be at the discretion of the bank. It should be set as the minimum ratio.

The Aptma chief thanked the SBP for looking into the current CIB reporting system whereby one company's woes immediately affected another company if there was any kind of affiliation between the two companies.

The process of introduction of professionals in the top management was being seriously hindered as the professionals fell prey to CIB reporting even if they were a professional director or a simple shareholder, with an equity holding in excess of 10 percent.

The SBP officials explained the reasons and logic for the changes that had been made, and assured that they would put Aptma's points across to the seniors in the SBP.

They also clarified that revaluation would be used for the purposes of evaluating the value of the collateral and the new method prescribed was only for the purposes of equity calculation.

They further clarified that cotton, sugar and such crops came under the definition of seasonal financing, and said that some of the margin restrictions were being reviewed with a view to making them more relaxed.

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