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State Bank issues 'Master Circular' to work out bank's minimum capital

KARACHI (March 26 2003) : The State Bank of Pakistan on Tuesday issued a 'master circular' for the banks regarding calculation of minimum capital requirements.

The detailed instructions on the subject in a circular issued for ease of reference of banks have been consolidated in the form of this 'Master Circular'.

Banks have been advised to maintain minimum capital as laid down in the Annexure enclosed with the circular.

The circular issued by SBP.

INSTRUCTIONS ON CALCULATION OF MINIMUM CAPITAL

REQUIREMENTS BASED ON RISK WEIGHTED ASSETS
No banking company incorporated in Pakistan shall commence and carry on banking business unless it has a minimum paid up capital (net of losses) of Rs 1000 million.

Similarly, no banking company incorporated outside Pakistan shall commence and carry on banking business in Pakistan unless it has a minimum paid up capital (net of losses) of Rs 1000 million.

No banking company shall carry on banking business in Pakistan unless it maintains capital and unencumbered general reserves the amount of which is not less than 8 percent of the risk weighted assets of the banking company both on consolidated as well as on stand alone basis.

For the purpose, subsidiary companies engaged in banking and financial activities (excluding insurance) should be consolidated.

3. The capital and unencumbered general reserves for the purposes of the minimum requirement of 8 percent of risk weighted assets shall mean and include:

A. Equity:

Fully paid up capital/capital deposited with SBP*

Balance in share premium account

Reserve for Bonus Shares

General Reserves as disclosed on the balance-sheet

Unappropriated/unremitted* profits (net of accumulated losses, if any)

* in the case of foreign banks operating in Pakistan.

Supplementary Capital:

General Provisions or Reserves for loan losses

Revaluation Reserves

Undisclosed Reserves

Subordinated debt.

The computation of the amount of Equity and Supplementary Capital shall be subject to the following limitations and restrictions:

The sum total of the different components of the Supplementary Capital will be limited to the sum total of the various components of the Equity.

While calculating the amount of equity the followings shall be deducted:

Book value of intangible assets such as goodwill, etc.

Shortfall in provisions required against classified assets irrespective of any relaxation allowed by the State Bank.

Besides, investments made in the equity of subsidiary companies engaged in banking and financial activities (excluding insurance) which are not consolidated, will also be deducted from the equity in the consolidated Group balance sheet.

iii. Subordinated debt will be limited to a maximum of 50 percent of the amount of equity and will also include rated and listed subordinated debt instruments (like TFCs/Bonds) raised in the capital market.

To be eligible for inclusion in the supplementary capital, the instrument should be fully paid up, unsecured, subordinated as to payment of principal and profit to all other indebtedness of the bank including deposits, and should not be redeemable before maturity without prior approval of the SBP.

Further, the bank should also have maintained the Minimum Paid up Capital as prescribed by SBP from time to time.

iv. The banks before issuing any subordinated debt instruments (like TFCs/Bonds), to qualify for inclusion in supplementary (Tier-II) capital, will be required to obtain approval of the State Bank.

The Appendix-II to this circular contains rules relating to unsecured subordinated debt instruments which shall form part of this regulation relating to calculation/other requirements on minimum capital.

vi. General Provisions or Reserves for loan losses shall include only such provisions which are not created against identified losses and are as such freely available to meet unidentified losses.

These provisions or reserves will be limited to maximum of 1.25 percent of risk assets.

Undisclosed Reserves will be permitted to be included in the Supplementary Capital despite being unpublished, provided they appear in the internal accounts of the banking company and have basically arisen out of the earnings of the banking company duly certified by the External Auditors and are accepted as such by the State Bank.

To be eligible to be shown as part of the Supplementary Capital, the Undisclosed Reserves should not be encumbered by any provision or known liability and should be freely available to meet unforeseen losses.

Revaluation Reserves shall be the Reserves created by revaluation of fixed assets and equity instruments held by the banking company.

The assets and investments must be prudently valued fully taking into account the possibility of price fluctuations and forced sale.

Revaluation reserves reflecting the difference between the historical cost book value and the market value will be eligible up to 50 percent for treatment as Supplementary Capital subject to the condition that the reasonableness of the re-valued amount is duly certified by the external auditors of the banking company.

5 CALCULATION OF MINIMUM CAPITAL REQUIREMENTS
(A) The banking companies shall calculate MCR for their respective On- Balance Sheet assets by applying the weights.

===================================================================================  Assets                                                                     % Weight  ===================================================================================  a)  Cash (including approved foreign currencies and gold bullion)         0 percent  b)  Balances held with scheduled banks and banks abroad. (Be       they term deposits, Certificates of Deposits or money at call)       20 percent  c)  Claims on the State Bank, the Federal Government, the Provincial       Governments, and other Central Banks                                  0 percent  d)  Claims on or Guaranteed by banks of international repute       incorporated in G-10 countries                                       20 percent  e)  Claims covered by cash collateral, or guarantee of the Federal       Government or of the State Bank.                                      0 percent  f)  Loans to staff  0 percent  g)  Claims on domestic entities owned or controlled by the            0 percent, 10      Federal Government                                                  percent, 20                                                                        percent or 50                                                                           percent as                                                                     may be prudently                                                                    determined by the                                                                     banking company.  h)  Loans fully secured by mortgage of residential or      commercial property                                                  50 percent  i)  Loans and advances including bills purchased / discounted      (less cash margin, government securities held and deposits           100 percent      of the party held under lien with flawless documentation)      to private sector entities  j)  Investments in shares and other capital instruments of companies      set up in the private sector                                        100 percent  k)  Fixed assets (land, building, equipment, furniture & fixture,      stationery) net of depreciation                                     100 percent  l)  Other Assets                                                        100 percent  j)  Investments in shares and other capital instruments of      companies set up in the private sector                              100 percent  k)  Fixed assets (land, building, equipment, furniture &       fixture, stationery) net of depreciation                            100 percent  l)  Other Assets                                                        100 percent  ===================================================================================

NOTES: All claims are to be assigned the highest risk weightage (100 percent) unless a lower risk-weightage can be specifically assigned to them.

Netting may be done only in respect of assets where provisions for depreciation or for bad and doubtful debts have been made.

Assets which have been deducted from equity pursuant to Paragraph 4(ii) above will have a weightage of '0'.

The amounts of cash margins, deposits and government securities so deducted at A (i) above shall be shown by way of foot-notes under parts 'B' and 'C'.

“G-10 Countries” include the following countries:

Belgium, France, Canada, Germany, Italy, Japan, Netherlands, Sweden, Switzerland, United Kingdom and USA.

(B) For the purpose of calculating MCR in respect of exposure under various Off-Balance-Sheet transactions, the banks shall apply credit conversion factors as indicated below to the different types of Off-Balance-Sheet transactions.

The credit conversion factors will be multiplied by the weights applicable to the corresponding On-Balance-Sheet transaction based on the credit risk involved in the Off-Balance-Sheet exposure.

===================================================================================  Off-Balance-Sheet transaction                             Credit conversion factors  ===================================================================================  a)  Loan Repayment Guarantees and Acceptances (less Cash Margin)        100 percent  b)  Purchase & Resale Agreements (Reverse REPO) other      than those effected through SGL of State Bank                       100 percent  c)  Performance Bonds, Bid Bonds, Warranties and similar       instruments (less Cash Margin & Government Securities held)          50 percent  d)  Revolving Underwriting commitments                                   50 percent  e)  Standby Letters of Credit & Other Standby Facilities with an      original maturity of over one year, and other Letters of Credits     (less Cash Margin & Government Securities held)                       50 percent  f)  Outstanding foreign exchange contracts                                3 percent  ===================================================================================

NOTES: Foreign exchange contracts with SBP may be subjected to 'Zero' risk weight and those with banks to 20 percent risk weights.

All outstanding sale and purchase contracts will, however, be taken into account and no netting off will be done. The outstanding foreign exchange contracts with SBP and banks will be shown separately.

6. SUBMISSION OF RETURNS
Every banking company shall submit to the State Bank a half-yearly return (both on consolidated as well as on stand alone basis) on the format given in the enclosed Appendix-I within a period of three months from the close of each half year ending 30th June / 31st December.

The return should be certified by the external auditors of the banking company and duly signed by its authorised signatory (ies).

7. PENALTY FOR NON-COMPLIANCE
A banking company failing to meet the minimum capital requirements shall render itself liable to levy of penalty under the relevant provisions of the Banking Companies Ordinance, 1962.

ii. A banking company failing to submit the half-yearly return within the stipulated time or submit a wrong statement shall also render itself liable to levy of penalty under the Banking Companies Ordinance, 1962.

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