SBP announces exposure limit reduction process for banks

KARACHI (January 20 2009): As part of banking reforms, the State Bank of Pakistan has provided a roadmap for banks to increase their capital and reduce their exposure limits. According to international standards, bank exposure to a single entity has been limited to 25 percent.

Unlike the developed world, where a holding company is regarded as a single entity, SBP has limited bank's exposure to a group of companies to limit common stakes. As per the roadmap, banks are already required to increase their capital, in phased manner, during the next five years. At the same time, they have to reduce their exposure to the single entities (groups).

Sources said that SBP's move would further strengthen the banking system and would help reduce risks. The SBP has issued circular BPRD No 1, which has amended the Regulation No R-1 of Prudential Regulations for Corporate and Commercial Banking regarding limit on exposure to a single person. Now, the SBP has decided to revise the limit on exposure to a single person and groups in a phased manner over the next five years.

Overall a group's exposure limit would be reduced by 25 percent during the next five years, while a single person limit would be reduce by only 5 percent. In the first phase, SBP has announced five percent cut in total outstanding limit (fund and non-fund based) on exposure to a group from the 50 percent to 45 percent of bank's or DFI's equity (as disclosed in the latest audited financial statement) by the end of December 2009.

The banks and DFIs have to reduce total outstanding (fund and non-fund-based) exposure limit to groups at 40 percent as on December 31, 2010, 35 percent by the end of calendar year 2011, 30 percent as on December 31, 2012 and some 25 percent exposure limit as on December 31, 2013.

Similarly, fund-based outstanding limit on exposure for group would be 35 percent as on December 31, 2009 and 2010, 30 percent at the end of calendar year 2011, 25 percent as on December 31, 2012 and 2013. For the single person, total outstanding (fund and non-fund) exposure limit as percentage of bank's or DFI's equity, the SBP has announced no change for the next four years, and it would stand at 30 percent till December 31, 2012.

However, as on December 31, 2013 it would be reduced by 5 percent to 25 percent from 30 percent. In addition, fund-base exposure limit for single person would stand at 20 percent till December 31, 2012, while it would be increased by 5 percent to 25 percent as on December 31, 2013.

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