Prudential regulations issued for NBFCs

The Securities and Exchange Commission of Pakistan (SECP) has issued prudential regulations for non-banking finance companies (NBFCs) adding anti-money laundering requirements in the existing regulations after consultations with stakeholders.

Etrat H Rizvi, Commissioner (Specialised Division), announced the issuance at a press briefing here on Wednesday.

The SECP has consolidated the regulations for all NBFCs, which were earlier regulated under diverse classifications. A few changes in the rules for facilitation of business activities had been introduced, said Etrat.

The entities which now fall under NBFC rules are companies of investment finance, investment banks, mutual funds, discount houses, housing finance, leasing companies and venture capital in addition to previously regulated leasing and modaraba companies' business.

The SECP has issued the regulations in exercise of powers conferred by the Companies Ordinance, 1984. These rules would come into effect immediately.

Etrat said prudential regulations were necessitated pursuant to the amendments in the Companies Ordinance, 1984, whereby all existing NBFIs, with the exception of Modarabas and development financial institutions (DFIs) have been re-classified as NBFCs and are being regulated by SECP w.e.f. November 15, 2002. The objective behind the issuance of these regulations is to introduce a uniform set of regulations for all NBFCs to improve their effective risk management capabilities and to promote corporate governance in the non-bank financial sector.

The Commissioner said that these regulations have been finalised after extensive consultations with various industry associations, namely Leasing Association of Pakistan (LAP), Investment Banks Association of Pakistan (IBAP), Modaraba Association of Pakistan (MAP).

He said that to bring harmony and uniformity within the financial sector, these regulations were also discussed with the SBP.

The Prudential Regulations for NBFCs have been divided into four segments.

Part-I contains a comprehensive set of definitions for non-banking finance companies, covering all their activities / functions.

Part-II lays down guidelines for Risk Management in respect of corporate borrowers and individual borrowers.

Part III covers the regulations pertaining to the operation of NBFCs.

Part IV encompasses the 'Know Your Customer' (KYC) and anti-money laundering issues.

He clarified that Parts II & III of these Regulations shall not apply to NBFCs operating solely or in any combination therein, as asset management company, investment advisor or a venture capital company. However, Part IV shall apply to all NBFCs.

Salient features of the Regulations include the followings:

— Definition of group has been introduced along with exposure limit of 50 percent of NBFC's equity to a single group provided that fund based exposure does not exceed 35 percent of NBFC equity.

— Margin requirements against facility to be granted by NBFCs have been reviewed and the same have been reduced.

— A separate set of Regulations for housing finance facilities to individuals has been incorporated to promote the housing finance sector.

— Criteria for provisions for non-performing assets of NBFCs have been reviewed and conditions for reversal of provisions have been included.

— In order to prevent the criminal use of NBFCs for the purpose of money laundering and other unlawful activities, a separate section has been introduced. Further, a fit and proper test for appointment of directors and chief executive of NBFCs along with requisite information has been incorporated.

The new set of Prudential Regulations is being circulated to all concerned quarters and has also been placed on SECP Website for the information of general public.

The Commissioner (Specialised Companies) said that Prudential Regulations for Modarabas shall be notified within this month for which consultations with Modaraba Association of Pakistan and stakeholders have been completed.

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