Prudential Regulations for SMEs

7/30/2019 Prudential Regulations for SMEs

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Prudential Regulations for SMEs

2012


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Definitions Equity of the Borrower includes paid-up capital,

general reserves, balance in share premium account,

reserve for issue of bonus shares and retained

earnings/ accumulated losses, revaluation reserves

on account of fixed assets and subordinated loans.

Revaluation reserves will remain part of the equity for

first three years only, from the date of asset

revaluation

Any subsequent revaluation will be for a period of three

years and only incremental amount will be added to equity

Revaluation to be done by valuers approved by PBA.

No parallel calculation required if revaluation reserves

appear in audited financials of the company


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Definitions

Exposure means financing facilities whether

fund based and/or non-fund based and

includes:

Forced Sale Value (FSV) means the value

which fully reflects the possibility ofprice

fluctuations and can currently be obtained by

selling the mortgaged/pledged assets in aforced/distressed sale conditions.


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Group means persons, whether natural or

juridical, if one of them or his dependent family

members or its subsidiary, have control or hold

substantial ownership interest over the other Subsidiary50% or more ownership

Control 50% or more ownership through subsidiaries

Substantial ownership / AffiliationShareholding of

more than 25%

Liquid Assets


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Liquid Assets

are the assets which are readily convertible intocash without recourse to a court of law and mean

encashment/realizable value of governmentsecurities, bank deposits, gold ornaments, goldbullion1, certificates of deposit, shares of listedcompanies which are actively traded on the stock

exchange, NIT Units, certificates of mutual funds,Certificates of Investment (COIs) issued byDFIs/NBFCs rated at least A by a credit ratingagency


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Liquid Assets:

Guarantees issued by domestic banks/DFIs whenreceived as collateral

Guarantees issued by foreign banks, the issuing banksrating, should be A and above or equivalent.

Medium and Long Term Facilities

mean facilities with maturities of more than one year

and Short Term Facilities

mean facilities with maturities up to one year


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PBA means Pakistan Banks Association

Readily Realizable Assets

mean and include liquid assets and stocks pledged

to the banks/DFIs in possession, with perfectedlien duly supported with completedocumentation.

Secured

means exposure backed by tangible security andany other form of security with appropriatemargins


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Subordinated Loan

means an unsecured loan, extended to the

borrower for a minimum original maturity period

of 5 years

Documented by an agreement

To be disclosed in the audited financials


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Clean Exposure

Means exposure secured against personal

guarantee of owners of SME


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Type of organization Total assets excluding

land and building

Net sales as per audited

financials

Trading / Service Concern less than Rs. 50 Million Not exceeding Rs. 300 M

Manufacturing Concern less than Rs. 100 Million Not exceeding Rs. 300 M

Small and Medium Enterprise means an entity, ideally not a public

limited company, which does not employ more than 250 persons and meets the

following criteria:


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Tangible Security

means readily realizable assets (as defined in

these Prudential Regulations), mortgage of land,

plant, building, machinery and any other fixedassets.


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R 1 SOURCE AND CAPACITY OF REPAYMENT

AND CASH FLOW BACKED LENDING

Banks/DFIs shall specifically identify the sources

of repayment and assess the repayment capacity

of the borrower on the basis of assets conversion

cycle and expected future cash flows.

Condition of borrowers industry Identify key drivers of business and risks/

mitigants


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Projected Cash flows of SME are required

Assumptions must be documented

If SME is not able to prepare cash flows then bank toassist it in its preparation and not decline the loan on

this basis

R 2 Personal Guarantees

PG of all owners of SME are required

Exception Facilities secured against liquid assets

Nominee Directors of a limited company


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R 3 Limit on clean facilities

Limit on clean exposure (against PG) of SME

Total (fund based and non fund based) Rs 3 Million

Fund based Rs. 2 Million

Declaration from SME that, in aggregate, it is not

breaching this limit

Clean exposure to SME will not include credit cardand personal loan allowed to sponsors


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R 4 Securities:

All facilities must be appropriately secured to thesatisfaction of Bank except for relaxation in R 3.

R 5 Margin Requirements: Banks/DFIs are free to determine the margin

requirements on facilities provided by them totheir clients taking into account the risk profile of

the borrower Margin restrictions on shares / TFCs 30% as per

Corporate PRs


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R 5 Margin Requirements:

100% margin on import of caustic soda

SBP may change the margin requirements any

time

Restrictions in para 1A of R-6 of Corporate PR will

apply


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R 6 PER PARTY EXPOSURE LIMIT

Maximum exposure of a bank / DFI on single SME

not to exceed Rs. 75 Million.

Total facilities of an SME from all financial

institutions should not exceed Rs. 150 Million

such that facilities excluding leased assets should

not exceed Rs. 100 Million.


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R 7 AGGREGATE EXPOSURE OF A BANK/DFI

ON SME SECTOR

should not exceed the following limits


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R 8MINIMUM CONDITIONS FOR TAKINGEXPOSURE

CIB report

While considering proposals for any exposure (includingrenewal, enhancement and rescheduling/restructuring)exceeding such limit as may be prescribed by State Bank ofPakistan from time to time (presently at Rs 500,000/-),banks/DFIs should give due weightage to the credit reportrelating to the borrower and his group obtained from a

Credit Information Bureau (CIB) of State Bank of Pakistan.

Exposure on defaulters after recording reasons andjustifications

Exposure excludes net liquid assets


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CIB SME association may be contacted to ascertain character

and creditworthiness of borrower

Audited financial statements Must be obtained when exposure exceeds Rs. 10 M for analysis

and record

Chartered accountant or Cost and Management accountant (CMA)may be the auditor

CMA cant audit financials of public limited companies or privatelimited companies which is a subsidiary of public limited company

This requirement may be waived when exposure does not exceedsRs. 10 M.

When facilities are 100% backed by liquid assets financials signedby borrower are sufficient


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BBFS (Borrower Basic Fact Sheet)

Required for all exposures (including renewal,

enhancement and rescheduling/restructuring)

Loan application form must be accompanied by

BBFS

Seal/Stamp and signature of the borrower are

required on each page of BBFS Individual borrowers and sole proprietorship

concerns are exempt from requirement of stamp


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R 9 Proper Utilization of Loan

The banks/DFIs should ensure that the loans have

been properly utilized by the SMEs and for the

same purposes for which they wereacquired/obtained.

The banks/DFIs should develop and implement an

appropriate system for monitoring the utilization

of loans.


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R 10 RESTRICTION ON FACILITIES TO

RELATED PARTIES

Facilities to related parties are not allowed.

The bank/DFI shall not take any exposure on a

SME in which any of its director, major

shareholder holding 5% or more of the share

capital of the bank/DFI, its Chief Executive or anemployee or any family member of these persons

is interested.


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R 11 CLASSIFICATION AND PROVISIONING

FOR ASSETS

Guidelines in annexure III to be followed for

provisioning (Time based criteria)

Classification Determinant Treatment of Income Provisions to be


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Classification Determinant Treatment of Income Provisions to be

made

Substandard Mark up or Principal

overdue by 90 days

Un realized income

to be kept in

memorandum

account. Amount

taken to income to

be moved to memo

account

25% * ( Outstanding

Principal liquid

assets upto 75%

FSV of stocks,

machinery and

mortgaged

properties)

Doubtful Mark up or Principal

overdue by 180 daysSame as above

50% * ( Outstanding

Principal liquidassets upto 75%

FSV of stocks, machy

and mortgaged

properties)

Loss Mark up or Principal

overdue by 365 days

Trade bills not

adjusted within 180

days

Same as above

100% * (

Outstanding Principal

liquid assets Upto

75% FSV of stocks,

machinery and

mortgaged

properties)


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Please refer to BSD circular of Oct 2011


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R - 11

Subjective evaluation of performing and non-performing credit portfolio shall be made for riskassessment.

Even performing account may be classified.

evaluation shall be carried out Criteria for subjective evaluation:

credit worthiness of the borrower

its cash flow

operation in the account adequacy of the security, inclusive of its realizable value

documentation covering the advances.


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The rescheduling/restructuring of non-

performing loans shall not change the status

of classification of a loan/advance etc. unless

the terms and conditions of rescheduling/

restructuring are fully met for a period of at least

one year (excluding grace period, if any)

At least 10% of the outstanding amount isrecovered in cash


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The unrealized mark-up on loans (declassified

after rescheduling/restructuring) shall not be

taken to income account unless at least 50%

of the amount (Profit) is realized in cash

Any short recovery (cash) of profit will not

change status of account if (10% principal has

been recovered and terms have been met for1 year)


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In CIB rescheduled / restructured loans not tobe reported as default.

Default subsequent to rescheduling /

restructuring: Loan will again be classified in the same category

prior to rescheduling / restructuring

Unrealized profit taken to income to be reversed

Banks may subjectively further downgrade theaccount


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At the time of rescheduling/restructuring,banks/DFIs shall consider and examine therequests for working capital strictly on merit,

keeping in view the viability of the project/business and appropriately securing theirinterest etc

Separate monitoring of such loans to be done.They may be classified on the strength of theirown terms and conditions


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Factors to be considered with making

provisions:

benefit of 40% of Forced Sale Value (FSV) of the

pledged stocks and mortgaged residential,commercial and industrial properties (building

only) held as collateral against NPLs for three

years (This 40% amount has been revised)

FSV of Land 4 years, Separate valuation must be

available


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Banks may avail the benefit of FSV subject to

the following conditions:

Additional impact of profitability from using FSV

will not be used for paying cash or stock dividend.

Head of Credit must determine that FSV is

calculated accurately

Party-wise details of such cases must bemaintained on file for verification by SBP


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Misuse of FSV benefit:

Any misuse of FSV benefit detected during

regular/special inspection of State Bank shall

attract strict punitive action

Timing of creating provisions:

Quarterly (Evaluation and provisioning)


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Reversal of provisions: In case of cash recovery, other than

rescheduling/restructuring, banks/DFIs may reverse specificprovision held against classified assets, subject to thefollowing: i) In case ofLoss account, reversal may be made to the extent

that the remaining outstanding amount of the classified asset iscovered by minimum 100% provision.

ii) In case ofDoubtful account, reversal may be made to theextent that the remaining outstanding amount of the classified

asset is covered by minimum 50% provision. iii) In case ofsubstandard account, reversal may be made to the

extent that the remaining outstanding amount of the classifiedasset is covered by minimum 25% provision


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Netting off liquid assets is allowed

Provisioning done by SBP can only be reversed

with prior permission of SBP.

External auditors will confirm that the

requirements of classification and provisioning

have been met


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Annexure IV UNIFORM CRITERIA FOR

DETERMINING THE VALUE OF PLEDGED

STOCK AND MORTGAGED PROPERTIES

REGULATION (R-11)

Please refer to BSD circular of Oct 2011


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Benefit of FSV

O C O G


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Annexure IV UNIFORM CRITERIA FOR DETERMINING

THE VALUE OF PLEDGED STOCK

AND MORTGAGED PROPERTIES REGULATION

Only liquid assets, pledged stock, plant &

machinery under charge, and property having

registered or equitable mortgage shall be

considered for taking benefit for provisioning

Hypothecated assets and assets with second

charge and floating charge shall not be

considered for taking the benefit forprovisioning.


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Annexure IV

Valuation by PBA approved valuer

FSV must be mentioned

All assumptions must be mentioned

Comprehensive valuation

Full scope valuation in first year and desktop

valuation in subsequent years. Full scope

valuation is valid for three years


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Annexure IV

For amount exceeding Rs. 100 M desktopvaluation to be done by the same valuer whoconducted full scope valuation.

For amount less than Rs. 100 M desktopvaluation can be done by the bank or anyother PBA approved valuer.

Desktop valuations to be used only foradditional provisioning and not for reducingprovisioning requirements


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Annexure IV

If borrower does not allow the bank to enter theirpremises then full scope valuation conducted assuch will not be acceptable for provisioningbenefit.

SBP may check valuations on random basis andany unjustified differences in the valuations ofbanks / DFIs and State Bank of Pakistan shall

render the concerned bank/DFI and evaluator topenal actions including, inter alia, withdrawal ofFSV benefit.


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Annexure IV Assets to be considered for valuation:

Liquid assets: Valuation determined by the bank / DFI itself and verified by the

external auditors.

Value of shares at market value at balance sheet date

Shares must be registered with CDC

Mortgaged Property, and Plant & Machinery under Charge Would be acceptable as done by the valuer

Pledged stock valuation should not be more than six months old, at each balance

sheet date.

The goods should be perfectly pledged,

the operation of the godown(s) or warehouse(s) should be in thecontrol of the bank/DFI and

regular valid insurance and other documents should be available.

In case of perishable goods, the evaluator should also give theapproximate date of complete erosion of value.

Documents

Prudential Regulations for SMEs