Trade bodies comments invited on draft regulations for small and medium enterprises

KARACHI (June 22 2003) : The State Bank of Pakistan (SBP) has invited comments from trade bodies on the draft Prudential Regulations for Small and Medium Enterprises (SMEs) before finalising the regulations.

In the preface, Muhammad Kamran Shehzad, Director, Banking Policy Department, has said that the SBP will closely monitor the situation on an ongoing basis and work proactively with banks to make SMEs financing a success.

During this process, “we will keep on reviewing regulatory framework to ensure that any impediment is immediately removed, while ensuring that banks observe due prudence and necessary monitoring of their SME loan portfolio”.

The Small and Medium Enterprise (SME), in Part-A of the regulations has been defined as an entity, not being a public limited company, which does not employ more than 250 persons (if it is a manufacturing concern) and 50 persons (if it is trading/service concern) and also fulfils one of the following criteria:

— A trading/service concern with total assets, excluding land and buildings, up to Rs 30 million.

— A manufacturing concern with original value of total assets, excluding land and building, up to Rs 50 million, and

— Any concern (trading, service or manufacturing) with net sales not exceeding Rs 300 million as per latest financial statement.

In Part-B of the regulations, in order to encourage cash flow based lending, banks are allowed to take clean exposure, ie facilities secured solely against personal guarantee, on an SME up to Rs one million.

The maximum exposure of a bank on a single SME shall not exceed Rs 50 million.

The total facilities (including leased assets) availed by a single SME from the banks and financial institutions should not exceed Rs 150 million provided that the facilities, excluding leased assets, shall not exceed Rs 100 million.

It is expected that SMEs approaching this limit should have achieved certain sophistication as they migrate into larger firms and should be able to meet the requirements of Prudential Regulations for Corporate/Commercial Banking.

Before taking any exposure exceeding Rs 0.5 million, the banks shall obtain credit report from Credit Information Bureau (CIB) of State Bank of Pakistan. The banks should give due weightage to the credit report relating to the borrower and his group obtained from the CIB of SBP.

The banks are free to take exposure wherever they deem fit, keeping in view their risk management practices and criteria.

However, banks shall record reasons and justifications while taking exposure on defaulters.

The banks should ensure that the loans have been properly utilised by the SMEs, and for the same purposes they were acquired for.

The banks should develop and put in place an appropriate system for monitoring the utilisation of loans.

A bank shall not take any exposure on an SME in which any of its director or his family member, major shareholder holding 5 percent or more of the share capital of the bank, its chief executive or his family member, or an employee is interested.

In addition to the time-based criteria, subjective evaluation of performing and non-performing credit portfolio shall be made for risk assessment and, where considered necessary, any account including the performing account will be classified, and the category of classification determined on the basis of time-based criteria shall be further downgraded. Such evaluation shall be carried out on the basis of creditworthiness of the borrower, his cash flow, operation in the account, that sector's/industry's conditions and prospects, adequacy of the security inclusive of its realiseable value and documentation covering the advances.

Besides the specific provisions, the banks shall create general provision equal to one percent of the outstanding balance of financing facilities at the end of the year.

The banks are encouraged to make arrangements for the working capital requirements at the time of rescheduling/restructuring to ensure the smooth operations of the business being reschedule/restructured.

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