SBP issues new Prudential Regulations for corporate, SMEs and consumer sectors

Published on 10/29/2003

KARACHI (October 29 2003): The State Bank of Pakistan on Tuesday issued three new separate Prudential Regulations for Corporate Banking, SME Financing, and Consumer Financing which will be effective from January 1, 2004.

The SBP Deputy Governor, Tawfiq A Husain, announced this at a news conference held at SBP head office in Karachi on Tuesday.

He said that this would enable the banks and development finance institutions to prepare themselves for complying with the new Prudential Regulations, and added that these Regulations had been finalised after extensive and intensive consultations with all major stakeholders, particularly the banks.

The SBP Deputy Governor said the Prudential Regulations provide great flexibility to banks and DFIs for SMEs financing.

He said that up to March, 2003, loans given to SMEs amounted to Rs 162 billion, to Corporate sector Rs 549 billion, Agriculture sector Rs 123 billion, Consumer Rs 26 billion and other sectors Rs 195 billion.

He said that after the new regulations, SMEs would perform much better and, by the March next year, loans figures would be different.

He said a task force is working on margin financing and a draft would be put on website within four weeks for inputs from related sectors and individuals.

Regarding the banking sector, he said that currently the private sector controls 60 percent market and after privatisation of Habib Bank it will be 80 percent.

He said the previous Prudential Regulations were designed for a predominantly public sector banking system and geared more for wholesale/commercial banking.

Furthermore, the significant growth in Consumer Banking and SME financing had necessitated the development of separate Prudential Regulations for them, he added.

Tawfiq said with the appointment of experienced and effective Board of Directors and professional management of all banks, more discretion and flexibility is being given in the new Prudential Regulations to the banks.

He said that previous Prudential Regulations had co-mingled different requirements.

Therefore, these have been segregated into four different sections in the new Prudential Regulations. These are: Risk Management; Corporate Governance; Know Your Customer; and Anti-Money Laundering and Operations.

The Deputy Governor said that the State Bank has recently issued detailed guidelines on Risk Management for banks which are broader in nature and are meant to guide banks and help build up their internal capacity to prepare for Basle II Accord.

It is the intention that as effective risk management capabilities are developed and implemented by the banks and, as the corporate governance improves to the desired level, these Prudential Regulations will gradually be replaced with the Risk Management Guidelines.

The Risk Management Guidelines are of advisory nature, cover the broader and policy parameters, and allow bankers greater discretion in all areas of operations.

He said that State Bank is also encouraging and promoting self-regulation through more transparency and greater disclosure.

In this respect, substantial disclosure requirements have already been prescribed by State Bank to assist the stakeholders in making informed decisions.

In order to improve the quality of information being provided to general public and the stakeholders, State Bank is actively working with the banks and DFIs and their External Auditors.

According to the Prudential Regulations, the minimum requirement for consumer financing banks and DFIs will establish separate Risk Management capacity and prepare comprehensive consumer credit policy duly approved by their Board of Directors.

For every type of consumer finance activity, the bank or DFI will develop a special programme including the objective and qualitative parameters for the eligibility of the borrower.

Banks and DFIs have also been told to develop comprehensive recovery procedures for the delinquent consumer loans. Banks and DFIs desirous of undertaking consumer finance will become member of at least one Consumer Credit Information Bureau.

Banks and DFIs will prepare standardised sets of borrowing and recourse documents for each type of consumer financing.

Banks and DFIs will ensure the aggregate exposure under all consumer financing facilities at the end of first year and second year of the start of their consumer financing does not exceed 2 times and 4 times of their equity, respectively.

"The Banks and DFIs should ensure that the loans have been properly utilised by the SMEs and for the same purposes for which they were acquired or obtained," said the Prudential Regulations for SMEs.

The Banks and DFIs should develop and implement an appropriate system for monitoring the utilisation of loans, it added.

Courtesy of Business Recorder