SBP redefines Prudential Regulations

ISLAMABAD (April 14 2004): The State Bank of Pakistan (SBP) has redefined Prudential Regulation Rules for banks, DFIs and NBFIs, by virtue of which current maturities of long-term debts have been included in the definition of current liabilities.

As per revised criteria, current liabilities ratio (current ratio) of the borrowers is to be 1:1 at the time of fresh exposure/ enhancement/ renewal of loans.

The SBP in its order said that under para (1) Regulation -V of Prudential Regulations for banks and Rules 8 of Rules of Business, current maturities of long term debts would be included in the definition of current liabilities.

Regulation R.5 relates to linkage between financial indicators of the borrower and total exposure from financial institutions.

It said: “While taking any exposure, banks/DFIs shall ensure that total exposure (fund-based and non-fund based) availed by any borrower from financial institutions does not exceed 10 times of borrowers equity as disclosed in its financial statements (obtained in accordance with para 2 of Regulation R-3), subject to the condition that the fund based exposure does not exceed 4 times of its equity as disclosed in its financial statements. However, where equity of a borrower is negative and the borrower has injected fresh equity during its current accounting year, it is eligible to obtain finance not exceeding 3 times of the fresh injected equity provided the borrower shall plough back at least 805 of the net profit each year until such time that it is able to borrow without this relaxation. In exceptional cases, banks/DFIs may allow seasonal financing to borrowers, for a maximum period of six months”.

It further said: “It's expected that at the time of allowing fresh exposure/enhancement/renewal, the current assets to current liabilities ratio of the borrower shall not be lower than 1:1. However, in exceptional cases, banks/DFIs may relax this ratio upto 0.771 if they are satisfied that appropriate risk mitigants have been put in place or the ratio has been adversely impacted due to the nature of the business of borrower”.

For the purpose of this regulation, subordinated loans shall be counted as equity of the borrower. Banks/DFIs should specifically include the condition of sub-obtained loan in their offer letter. The subordination agreement to be signed by the provider of the subordinated loan, should confirm that the subordinated loan will be repaid after that Bank's/DFI's prior approval.

This regulation shall not apply incase of exposure fully secured against liquid assets held as collateral. Export finance and finance provided to ginning and rice husking factories shall also be excluded from the borrowings (exposure) for the purpose of this regulation.

Where the banks/DFIs have taken exposure on exceptional basis as provided in para 1 & 2 above, they shall record in writing the reasons and justifications for doing so in the approval form and maintain a file in their central credit office containing all such approvals. The exceptions approval file shall be made available to the inspection team of State Bank during the inspection.

While granting/renewing financing facilities. NBFIs shall ensure that the current assets to current liabilities of the borrower must not be lower than 1:1. Current maturities of long term debt not yet due for payment may be excluded from the current liabilities for the purpose of calculating this ratio. Less rental receivable within the next twelve months as disclosed in the notes to the annual audited accounts shall be treated as current assets for the purpose of calculating this ratio.

Fresh/additional facilities in the form of long-term debts shall be provided on the basis of a debt-equity ratio not exceeding 60:40. However, where a different debt-equity ratio has been laid down by the Government, the ratio laid down by the government shall apply. For the purpose of this rule subordinated loans shall be counted as equity of the borrower.

The total exposure of an NBFI to any single person shall not at any point in time exceed 30 percent of the NBFI's unimpaired capital and reserves subject to the condition that the maximum outstanding against fund based financing facilities do not exceed 20 percent of the unimpaired capital and reserves.

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