MCB Bank Limited

Credit Handbook

Credit Handbook Section 1 Introduction

MCB Bank Limited

Credit Handbook

Section 1: Introduction
1.1 Risk Management Policy Framework 1.2 Credit Handbook 1.3 Scope of the Document 1.4 Maintenance and Upgrade 1.5 Credit Handbook Rollout Plan 1.6 Monitoring Effectiveness & Implementation 1.7 MCBs Credit Risk Initiatives 1.8 Miscellaneous

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1.1 Risk Management Framework

Credit Handbook

The following documents constitute the Risk Management Framework for the Bank as a whole: a) Risk Management Policy i. Integrated Risk Management Framework ii. Credit Policy iii. Market Risk Policy including liquidity management iv. Operational Risk Policy b) Risk Appetite Statement c) Credit Handbook d) Operational Risk Framework e) Market Risk Limits Policy f) Treasury and Investment Policy The above documents cover all the requirements of the SBP Policy Framework1, as well as address the required policy aspects under Basel II.2 As the Bank moves on with its implementation of Basel II the following additional policy documents are envisaged: a) Obligor Ratings Framework (Basel-II Credit Risk: IRB Approach compliant) b) Key Risk Indicator Framework The above listed documents primarily cover policy issues. However, this Handbook and some other documents (e.g. CRC Process Flows, SLA documents, etc.) deal only with procedural issues. 1.2 Credit Handbook

The Credit Handbook was launched in March 2008, which replaced previous Credit Manual and eliminated policy / procedural gaps identified as a result of the gap analysis conducted for Basel II Standardized Approach to Credit Risk. Since its rollout, a number of changes have been made to the Handbook as a result of ongoing review of the same. This is the updated and revised version of the Credit Handbook. Dissemination of this Handbook is mandatory across all levels in the bank and the document should be read in the context of the overall Risk Management Framework as described above. Including this section, the Handbook has seven self-contained sections. The procedural aspects contained in this Handbook can be amended by MCC. CRMD shall, however, be authorized to issue necessary clarifications/explanations where required. The importance of effective risk management on a bank-wide basis is necessitated as the bank embarks on a plan for business diversification and growth amidst increasing competition in the banking industry. Accordingly, the purpose of this document is to formalize the organization, authorities and processes for credit risk management at the bank. Additionally, the document aims to:
Communicated via SBP BSD Circular # 3 of 2007 dated April 4, 2007 For the standardized approach to Credit Risk, Internal Models approach for Market Risk and Basic Indicator Approach for Operational Risk.
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Credit Handbook

Assist all front office personnel in Branches, Regions, Circles and Principal Office to carry out their relevant credit related activities; and Provide a training guide for personnel to learn about the banks risk management policies and procedures.

The primary audience of this document includes the following: a) Individuals involved in the marketing of products that lead directly or indirectly to credit exposures. b) Individuals involved in approving and reviewing credit decisions. c) Internal Audit & Risk Asset Review Functions. d) Individuals involved in the monitoring of credit exposure and in making the contractual documents that evidence the terms of the credit exposure taken by the bank. It shall be assumed that the actions of the captioned audience are in line with the procedures and policies highlighted in this Handbook. Any unauthorised deviation can result in disciplinary action being initiated against the concerned individual depending upon the severity of the action concerned. 1.3 Scope of the Document

This document covers the policies and procedures relating to the credit risk management functions covering the following items: Credit Risk Management Guidelines Credit Risk Evaluation and Review Documentation & Collateral Guidelines Credit Risk Control Management of Deteriorating Credits Facility Structures Lending Operations in Sri Lanka

This document will also be applicable to the banks Sri Lanka branches, until a separate Credit Handbook is developed for Sri Lanka Operations, except to the extent that the Sri Lankan regulations require practices more stringent than those contained in the Handbook in which case former shall be used. For this purpose, a separate section 7 has been provided in this Handbook. 1.4 Maintenance & Upgrade

The basic responsibility for maintenance and update of this document resides with the Credit Risk Management Division (CRMD). The review and update of this document shall be an on-going process to ensure continuous alignment of the policies & procedures framework with the internal and external dynamics of Banks

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Credit Handbook

environment. Such factors may include developments, changes and trends in the banking industry and changes in economic, competitive or regulatory environment. CRMD shall formally initiate any modifications to this document. Proposals for amendments can also be made by senior management officials including the Group / Divisional Heads. However, such propositions shall be evaluated by CRMD prior to initiating the update process. This document, in its entirety, shall be reviewed on a periodic basis (at least once in two years) and updated, if required. However, it is anticipated that the next major revision to the document shall occur when the Bank moves over to the FIRB approach to Credit Risk. Whenever a change of a permanent nature is made to any credit procedure the relevant chapter of the Handbook should be updated, otherwise a new circular shall be issued by Credit Risk Management Division (CRMD) giving reference to the particular Chapter / Section / Subsection of the Handbook. The new circular may be filed in the Handbook just before the relevant chapter/section in order to keep the document comprehensive and updated. An updated version of this Handbook shall be available on the MCB Intranet portal under Risk Management link. 1.5 Credit Handbook Rollout Plan

The Handbook shall be disseminated to a bank-wide audience following approval of the competent authority. Given the extensive amendments/changes envisaged in the Credit Handbook, it is expected that all concerned officers shall review and understand the concepts and procedures and amendments made to the document to ensure smooth implementation of the same. After implementation of the new Handbook, any actions contravening this document will be highlighted under the post-facto policy. It should be noted that compliance with the Credit Handbook shall be the responsibility of the individual units respectively, and the role of Risk Management Group is purely to provide policy and procedural guidelines, without ensuring compliance of the same. Subsequently, Internal Audit and Risk Assets Review would monitor compliance with the requirements of this document. 1.6 Monitoring Effectiveness & Implementation

The Credit Handbook shall be continuously monitored with regards to implementation status and effectiveness of the various procedures. The implementation and effectiveness of Credit Handbook shall be measured and monitored on the basis of the following criteria: a) Monitoring of requests for exceptions being received by the Approval / Review authority. b) Problems being faced in the implementation process. c) Comments from the stake holders regarding effectiveness of the document.

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1.7 MCBs Credit Risk Initiatives

Credit Handbook

To conclude this section, we are giving a synopsis of the major projects being undertaken in the credit risk area, which will potentially have an impact on some of the procedures / policies highlighted in this document. While this list may not be exhaustive, it is being given here, in order to make the rest of the Bank aware of the general direction in which we are headed. MCBs goal as a bank is to achieve compliance with the Foundation Internal Ratings Based Framework for Credit Risk as per Basel II. While the Bank prepares itself for this eventual goal, the Bank has achieved compliance with the Standardised Approach to Credit Risk (simple approach). MCBs major initiatives in the field of credit risk that have already impacted or will impact this document are briefly discussed below: a) Use of ECAIs: The Bank plans on using External Credit Assessment Institutions (ECAI) ratings to primarily rate its Corporate-Large3 portfolio. The following general guidelines will be used in this regard: i. ii. ECAI ratings will be used wherever they are publicly available. ECAI ratings shall be solicited by the Bank for those customers who in the opinion of the management of the bank consume significant capital, or where by getting a rating, the associated benefit to the bank will be material. These ratings will be obtained by using the local rating agencies. The bank will initially allocate business to a number of rating agencies, by allocating ratings of particular portfolio slices to them. Subsequently, the bank can differentiate between the rating agencies on the basis of performance of their ratings, as well as on the basis of the working relationship formed with them. The use of ratings shall continue till such time that the Bank is allowed to use the FIRB approach to credit risk.

iii.

iv.

b) Evolution of a Risk Ratings system: This is an important area, which is evolving in the Bank over the last few years. It is expected that both the Approving Units and the Reviewing Units, will use this tool diligently and carefully, making subjective assessments where ever required. Notwithstanding, the final call for assignment of a risk rating lies with RMG. Internal Audit can change a risk rating post-fact on justifiable grounds. Going forward, the Bank shall be starting a special Risk Ratings project, to further refine its present risk rating systems4. c) Data Collection: Data availability and integrity are key issues without which it is impossible to measure risk, and thereby achieve compliance with Basel II. This is a challenge for the bank, and will remain so in the future, given the archaic state of our IT infrastructure and MIS systems. In light of

3The Corporate - Large category of Corporate asset (as per Basel II definition) class would include entities with Annual Group Sales exceeding PKR 3 Billion; while entities with Annual Group Sales of up to PKR 3 Billion shall be categorized as Corporate - Commercial. 4 One of the key outputs of this project will be an Internal Ratings Framework document

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the issues surrounding this area, the following factors need to be highlighted: i. As the integrity / quantity and timeliness of our data improves our estimates of Risk Weighted Assets (RWA) and Economic Capital will improve. Improvement in data collection may result in revisiting certain models, primarily risk rating models. Data collection is an activity that impacts the Banks compliance with Foundation Internal Ratings Based Approach to Credit Risk. The data is required on financials, qualitative factors such as industry, default data and ratings migration data. In the absence of a full-functional core banking application, RMG has retired its existing legacy software systems such as Credit Information File (CIF), Classified Advances System (CAS) and Agriculture Credit System (ACS) etc. Credit Risk Management Information System (CRMIS) has been developed and deployed by retiring legacy systems. The required data elements for effective risk management and Basel II purposes are being provided through CRMIS. Importance of data cleansing.

ii. iii.

iv.

v.

d) Credit Risk Control: An independent Credit Risk Control (CRC) Function is important as it provides a key control for lending activity being handled from the Branches. An operational CRC Division is important for proper collateral management, and ensuring compliance with approval conditions prior to disbursals. The bank aims to use CRC in the following manner: i. CRC will negotiate independent Service Level Agreements with the various business Units. While CRC will follow its own process flows5, the functions that it will perform for the various units, will be as agreed in the respective SLAs. Because of the absence of a bank wide core banking application, credit risk administration will operate at three levels in the organization. 1. Where CRC does not have coverage, CRC activities will be housed in the Marketing Unit / Branch. 2. Where CRC does cover a particular branch, but the concerned Branch does not have active requisite credit modules of Symbols, CRC will essentially follow manual process flows.6 3. Where the credit related modules of Symbols are active, and are being used by CRC. e) Risk Based Pricing: The pricing of credit is related to the quantum of credit loss that has two major components. The first is the expected credit loss, which is essential information for pricing and reserving purposes, the second component is the unexpected credit loss, or worst deviation from the expected loss at some confidence level. The pricing of loans should not only
As defined in the CRC Procedures Handbook This may also be applicable in cases where a particular branch has bandwidth constraints, and control over the credit related modules cannot be directly passed to CRC.
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ii.

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cover expected losses, but also the remuneration of the economic capital set aside to cover the unexpected loss, the risk premium. While the decision to price loans will be with the Business, Risk Management Group can comment on the return v/s risk equation. This capability of Risk Management in this regard, will gradually improve as the system of risk ratings and capital calculation improves. f) Software: The bank shall be using different software to improve its measurement of credit risk. The software deployed shall include: i. ii. iii. iv. v. Credit Risk Management Information System (CRMIS) Statistical Packages, such as SAS, MatLab etc. Regulatory Capital calculation and Portfolio Management Software. Rating calculation software. Symbols

The software used above shall vary in complexity, and may evolve from being EXCEL based to an off the shelf application. 1.8 Miscellaneous

While the previous credit manual contained a separate section on Agricultural Credit, the same was removed from this version as CBBG is in the process of formulating its own Agricultural Credit Manual. All procedures related to agricultural finance would be covered in this document. Until the time that CBBGs Agricultural Credit Manual is approved and implemented, the Agricultural Credit Section of the previous credit manual will remain in force. However, the credit approval / review authority for agricultural credit would continue to be governed as per Chapter 3.1 in Section 3 of this document and other circulars issued from time to time. Policies and procedures related to Islamic Banking are not covered in this document as these shall be covered under the IBG Manuals. However, as a stop gap arrangement, the procedures and policies laid down in this Handbook shall also be applicable to Islamic Banking except facility structure. The credit approval / review authority for Islamic Banking would continue to be governed as per Chapter 3.1 of Section 3 of this document and relevant circulars issued from time to time. Business Groups with mutual consultation shall designate an individual Product Manager for each funded or non-funded facility being offered by the Bank. The Product Manager shall be responsible for keeping records of changes / amendments made in the respective product, and ensuring necessary compliance. The Product Manager shall also be responsible for elevating amendments / waivers (if any) to the relevant approval authority. Internal Audit (IA) is responsible for checking compliance with the requirements of this Handbook. Additionally, IA is also responsible for the validation of systems / procedures mandated by the Handbook.

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Credit Handbook

Some operational procedure aspects are covered in this document, which shall necessarily be construed as guidelines only. This being the purview of Operations Group, all instructions (related to operational procedures) from the Operations Group shall take precedence over the contents of this document. Program-based lending shall generally follow the guidelines of their respective policies and manuals (if any). However, if an explicit reference to PPM lending is made and/or where a certain credit guideline is stated to be applicable on a bank-wide basis in Credit Policy and/or Credit Handbook, then the instructions mentioned in these two documents shall also be followed for program-based lending. Any deviation from the procedural requirements of this Handbook would require approval from Head RMG unless a specific approval level is mentioned in the Handbook. Head RMG shall also be authorized to delegate the approval authority for specific exceptions to procedural requirements as deemed appropriate.

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Credit Handbook

Credit Handbook Section 2 Credit Risk Management at MCB

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Section 2 Credit Risk Management at MCB

2.1 Guiding Principles for Credit Risk Management at MCB 2.2 One Obligor Principle and Customer Definitions 2.3 Procedure for Target Market and Risk Asset Acceptance Criteria 2.4 Portfolio Management and Stress Testing 2.5 Credit Risk MIS 2.6 Internal & External Credit Ratings

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2.1 Guiding Principles for Credit Risk Management at MCB

2.1.1 Defining Risk 2.1.2 Risk Management 2.1.3 BIS Guidelines for Risk Management in Banks 2.1.4 Lending Principles at MCB

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2.1.1 Defining Risk

Credit Handbook

Risk is defined as the potential for loss, either directly through loss of earnings or capital or indirectly through the imposition of constraints on an organization's ability to meet its business objectives. Such constraints pose a risk by limiting a bank's ability to conduct its on-going business or to take advantage of opportunities to enhance its business. The assessment of risk exposures can range from a simple high-low matrix to a complex statistical analysis that quantitatively estimates the probability of a loss occurring and the probable amount of the loss. Regardless of the sophistication of the measure, banks often distinguish between expected and unexpected losses. Expected losses are those that the bank knows with reasonable certainty will occur (e.g., the expected default rate of a credit card portfolio) and are typically reserved for in some manner. Unexpected losses are those associated with unforeseen events (e.g., sudden changes in the economic environment or government regulations); banks rely on capital as a cushion to absorb unexpected losses. 2.1.2 Risk Management Banks are in the business of taking risk and getting compensated for it. Risk management is the process by which a bank identifies, measures, monitors and controls its risk exposures to ensure that: Risks are understood Risks are within tolerances established by the Board of Directors Risk-taking decisions are consistent with strategic business objectives Risk-taking decisions are explicit and clear The expected return compensates for the risk taken Capital allocation is consistent with risk exposures and revenue expectations The bank's performance incentives are aligned with risk tolerances

Risk management encompasses all of the activities of the bank that affect its risk profile. These include decisions and actions to avoid, mitigate, transfer, insure against, put limits on or explicitly take risk. Risk management occurs "on the line" where the risk is created, as well as in independent risk review and control functions, at the highest levels of management, and at the Board level. The organizational structure through which risk management activities are conducted depends on the culture of the organization, the size and complexity of the business operations in question, the type of risk being taken and the materiality of possible adverse outcomes. Thus, the application of risk management techniques differs from bank to bank. Please refer to Risk Management Policy document for MCBs risk management organization structure. Overall risk management policies and tolerances should be set on a comprehensive, organization-wide basis by the Senior Management; and reviewed with, and where appropriate approved by, the Board. Policies and tolerances addressing risk identification, measurement, monitoring and control should be clearly communicated throughout the organization.

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To be effective, the risk management strategy must be consistent with the risk tolerance of shareholders as represented by the Board and Senior Management. To be enforceable, the risk tolerance must be communicated and embedded in the culture of the organization, so that risk taking remains within the established tolerances both for specific business lines and the overall business. 2.1.3 BIS Guidelines for Risk Management in Banks The bank specific guidelines issued by Basel Committee on Banking Supervision are structured around the following seven principles. A banks board of directors and senior management are responsible for ensuring that the bank has appropriate credit risk assessment processes and effective internal controls commensurate with the size, nature and complexity of its lending operations. A bank should have a system in place to reliably classify loans on the basis of credit risk. A banks policies should appropriately address validation of any internal credit risk assessment models. A bank should adopt and document a sound loan loss methodology, which addresses credit risk assessment policies, procedures and controls for assessing credit risk, identifying problem loans and determining loan loss provisions in a timely manner. A banks aggregate amount of individual and collectively assessed loan loss provisions should be adequate to absorb estimated credit losses in the loan portfolio. A banks use of experienced credit judgment and reasonable estimates are an essential part of the recognition and measurement of loan losses. A banks credit risk assessment process for loans should provide the bank with the necessary tools, procedures and observable data to use for assessing credit risk, accounting for loan impairment and determining regulatory capital requirements.

2.1.4 Lending Principles at MCB Based on the guidelines provided by the Basel Committee (as reproduced above), MCB has identified the following principles for the management of risk across the bank, within all its business lines and within specific risk categories: Integration of risk management Business line accountability Independent risk reviews Contingency planning

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A brief description of each of these principles is given below. Integration of risk management

Credit Handbook

To ensure that interactions among risks are identified, understood and managed as appropriate, risks should not be evaluated in isolation. The analysis required to aggregate and highlight risks across the entire organization shall be done at the Risk Management Group. Purpose: To ensure that risk is managed consistently across the organization, and that the interactions of various risks and the associated impact are understood and considered when strategic and tactical decisions are made. Different risks interact with each other and may compound or offset each other (e.g., the impact of operational risk on credit risk or the interrelationship of market risk with credit risk.) Some business activities require an integrated approach from the start (e.g., collateralized derivative trading); other activities are very specialized and can be managed almost in isolation. The risk management process should recognize and reflect risk interactions in all business activities as appropriate. This requires having a structure in place to look at risk interrelationships across the organization. Business line accountability Business lines should be accountable for managing the risks associated with their activities within established tolerances, as well as for the results, both positive and negative, of taking those risks. This accountability should exist notwithstanding the presence of one or more support functions dedicated to risk management activities. Purpose: To ensure that the people who make business decisions understand the risks they are taking; incorporate that understanding into their decision making in order to achieve acceptable risk-adjusted returns; and are held accountable for the associated gains or losses. Those closest to the business in question are best positioned to identify the risks in the business, provided there is adequate independent review and control, and an incentive structure that encourages risk identification and management responses by the line. In organizations with staff or support personnel dedicated to risk management activities, there may be a tendency for the business lines to assume that risk management is someone else's job, that the line is responsible only for such goals as sales and customer service. Because line personnel, more than anyone else, understand and appreciate the risks of the business, such a lack of accountability can lead to problems. To understand the risk/return trade-off, profits and losses should be attributed to specific risk-taking activities and evaluated in view of the risks being taken. It is important to scrutinize profits as well as losses, because unusually high profits can be a signal that there is a problem. Profit and loss (P/L) analysis and other performance measures should be conducted independent of the business lines in order to maintain the integrity of the analysis. Going forward, to make sure that

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P/L targets are consistent with risk tolerances, a risk analysis would be included in the budget planning process. Independent review Risk assessments should be validated by independent review functions with resources, authority and expertise sufficient to assess the risks, test the effectiveness of risk management activities, and make recommendations for remedial action. Purpose: To ensure that those who take or accept risk on behalf of the institution are not the only ones who measure, monitor and evaluate the risks. While institutions may organize and structure the review function in different ways, the key is independence. The review functions should have the authority, expertise and corporate stature to be unimpeded in identifying and reporting their findings. The results of their reviews should be reported to business units, Senior Management and, where appropriate, the Board. Contingency Planning Risk management policies and processes to address potential crises and unusual circumstances should be in place and tested as appropriate. Purpose: To ensure that the organization is prepared to identify and deal with unusual situations in a timely and effective manner. Stress situations to which this principle applies include all risks of all types. Examples of contingency planning activities include disaster recovery planning, public relations damage control, litigation strategy, responding to regulatory criticism, and unwinding positions in light of global financial crises. Contingency plans should be reviewed regularly to ensure they encompass reasonably probable events that could impact the company. Plans should be tested as to the appropriateness of responses, escalation and communication channels and the impact on other parts of the institution.

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2.2
2.2.1 2.2.2 2.2.3 2.2.4 2.2.5 2.2.6 2.2.7 2.2.8 2.2.9

One Obligor Principle and Customer Definitions

One Obligor Principle Group Definition Customer Definitions/ Asset Class under Standardized Approach Exposure Aggregation under One Obligor Principle Group Exposure Control Point (GECP) and Subsidiary Account Manager (SAM) Use of CRMIS for Capital Calculation under the Standardised Approach One Customer - One ID Credit Risk Management Information System Assignment of Asset Classes

2.2.10 Regulatory Capital Calculation for Credit Risk

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2.2.1 One Obligor Principle

Credit Handbook

At a counterparty level, One Obligor Principle refers to the banks ability to identify and aggregate all facilities of the borrower on a bank-wide basis (whether in loan book or treasury book) irrespective of the systems in which the exposures reside or the location from where the borrower is serviced in respect of a particular facility. This principle will be achieved by developing a procedural framework for counterparty exposure identification and aggregation under this section. In relation to a counterparty group, this principle is based on the assumption that the performance of an entity forming a part of a group of inter-related entities may be influenced by positive or negative results of one or more parts thereof. The ultimate purpose of one obligor principle is to determine the total exposure on a group including all un-drawn facilities. One obligor exposure would be used to (a) assess the credit risk of the entity / group on a bank-wide basis; (b) provide basis of customer exposure aggregation for capital adequacy purposes under the Standardised Approach to SBP Basel II Framework; (c) determinate appropriate approval / review level / process for exposure to the entity / group and; (d) help ensuring compliance with regulatory requirements relating to per party limits as well as monitoring of internal limits assigned to customers. The above-mentioned principle may also facilitate better input in business planning and strategy (e.g., Top 10 Customers/ Groups etc.). In relation to capital calculation under the Standardised Approach, this section covers the customer identification, exposure aggregation and capital calculation processes while aspects pertaining to external credit ratings are duly covered in section 2.6 to this Handbook. 2.2.2 Group Definition In order to aggregate exposure to all related entities (and ensure compliance with one obligor principle), MCB defines Group as an inter-related set of companies and / or persons with a high degree of dependency due to direct or indirect interest by the same shareholder or group of shareholders. The definition of a group according to Prudential Regulations of the State Bank of Pakistan (SBP) is as follows. 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. For this purpose: (a) Subsidiary will have the same meaning as defined in sub-section 3(2) of the Companies Ordinance, 1984 i.e. a company or a body corporate shall be deemed to be a subsidiary of another company if that other company or body corporate directly or indirectly controls, beneficially owns or holds more than 50% of its voting securities or otherwise has power to elect and appoint more than 50% of its directors.

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(b) Control refers to an ownership directly or indirectly through subsidiaries, of more than one half of voting power of an enterprise. (c) Substantial ownership / affiliation means beneficial shareholding of more than 25% by a person and / or by his dependent family members, which will include his/her spouse, dependent lineal ascendants and descendants and dependent brothers and sisters. However, shareholding in or by the Government owned entities and financial institutions will not constitute substantial ownership / affiliation, for the purpose of these Prudential Regulations. In addition to the mandatory criteria provided by SBP, MCB would consider the following general guidelines/ criteria while determining a group relationship. However, it is reiterated that there is an element of subjective judgement involved in arriving at grouping decisions and Business Groups are free to propose groupings. However, Risk Management and Internal Audit & Risk Assets Review group shall be the final decision making authority in this regard. Beneficial shareholding of more than 25% by a person and / or by lineal ascendants and descendants, brothers and sisters (even though not necessarily dependent family members). Control over election of a majority of directors. Exercise of a controlling influence7 over management or policies. Common proprietorship / partnership / directorship by a person, and / or by his / her dependent family members, which will include his / her spouse, dependent lineal ascendants and descendants and dependent brothers and sisters. However, ownership / directorship in or by Government owned entities and financial institutions (where such nomination is due to extension of credit) shall be exempted. In case of Private Sector public limited companies exemption to be allowed by the relevant sanctioning authority in the following instances: o Directors holds related professional / technical qualifications and who are full time paid employees of the company and the position of the director is held owing to their professional and technical capabilities provided such person is not closely related (children / parent / siblings) to sponsors /owners of a company.

7 To illustrate the point: A company owns less than 50% shares of another company (an affiliate) but exercises management control. For e.g., company ABC holds 30% shares of company XYZ, but the rest of the shares are widely held by individuals and institutions which may or may not have a proportionate representation on the board, i.e., effective management control is with ABC. A company ABC, owns 20% of shares directly in company XYZ, but has majority or controlling interests in other companies DEF and GHI, who in turn (say) own 20% and 15% shares, respectively, in XYZ, and as such ABC has effective control over of 55% of voting stock of company XYZ. In addition to the above, there can be instances where controlling influence is exercised in the absence of direct or indirect shareholding. Such cases shall be categorized as Group exposures through subjective evaluation.

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o

Credit Handbook

Share holdings in the name of such director or in the name of his or her close relatives as defined above does not exceed 1% / any other notional percentage of paid-up shares of the company and no further share is beneficially held in his or her name. A certificate from the Company Secretary to this effect to be placed before the competent authority allowing the waiver and kept in banks record. Any other basis, on a case to case basis.

Common key management / persons involved in framing financial & operating policies or running the business (e.g. same Company Secretary or Chief Financial Officer etc.) Financial interdependence: o o Either counter-party has guaranteed repayment of liabilities of the other. Either has provided interest free and unsecured loan (other than trade related) in excess of 10% of the equity, to the other. One is the holding company of another as per the section 3 (2) of Companies Ordinance 1984 or have common holding company. Entities having common premises (unless exempted by RMG). Interdependent business Evidenced by substantial business transactions.

o o

Any other basis (including material inter-company agreements) on the basis of which two entities may be considered to be of the same group by the business initiating units. Credit / other Group may also do so under intimation to the Head of concerned business group with approval of Group Head Risk Management.

2.2.3 Customer Definitions/ Asset Classes under the Standardised Approach For capital adequacy purposes, banks borrowers shall be categorized into the following Basel-II asset classes under the Standardised Approach: Sovereign Public Sector Entity (PSE) Bank / DFI Corporate Retail Residential Mortgage Past Due Loans

The respective definitions of these asset classes are as follows.

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Sovereign The sovereign asset class is represented by the exposure to the central government, provincial government or the central bank of a country. This includes domestic sovereign entities as well as foreign sovereigns which are subject to different risk weights. In addition, certain PSEs may be treated as sovereigns for lower risk weights the names of which may be separately notified by the Government, as mentioned in the SBP Basel II Framework. Public Sector Entity (PSE) The PSE asset class includes exposure to an entity, which is owned or controlled by central or provincial government or any entity categorized as PSE by SBP. Bank / DFI Financial institutions falling within the definition of Bank/ DFI under the local regulations and institutions, which are declared as such by SBP. Corporate Corporate asset class includes exposure to any proprietorship, partnership or limited company that is not a PSE, Bank8, DFI, or a borrower within the definition of regulatory retail exposures (please see below). For capital adequacy purposes, the term also includes insurance companies and securities firms. Under Standardized Approach (as per SBP Basel II Framework), SMEs not fulfilling the conditions of the regulatory retail portfolio would also be considered as Corporate. For the purposes of ascertaining the appropriate level of Credit Approval / Review Authority and the relevant credit approval process / formats, the Corporate asset class shall be sub-divided into two categories, i.e. Corporate - Large and Corporate - Commercial. The Corporate - Large category of Corporate asset class would include entities with Annual Group Sales exceeding PKR 3 Billion; while entities with Annual Group Sales of up to PKR 3 Billion shall be categorized as Corporate Commercial. Retail The exposure to an individual person or persons or to a small business; and is in the form of revolving credits and lines of credit (including credit cards and overdrafts), personal term loans and leases (e.g. instalment loans, auto loans and leases, student and educational loans, personal finance) and small business facilities and commitments. Mortgage loans are not included in this category. To be eligible the total exposure to a single person; - Should not be more than Rs. 75 million in case of both consumer loans and small business loans; - Should not be more than 0.2% of total (gross) retail portfolio of the bank/DFI.

This would also include MDBs not eligible for 0% Risk Weight according to SBP guidelines.

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Past due retail loans are to be excluded from the overall regulatory retail portfolio when assessing the granularity criterion of 0.2% specified herein, for risk-weighting purposes. Moreover, all public limited companies incorporated under Companies Ordinance, 1984 or any other statute will not be treated under Retail, regardless of their exposure. Residential Mortgage Loans fully secured against residential real estate. It includes loans provided to individuals for the purchase of residential house / apartment. The loans availed for the purpose of making improvements in house / apartment / land shall also fall under this category. Loans secured by residential real estate for business purposes and loans secured against commercial real estate do not fall under mortgage loans. Past Due Loans In addition to above-mentioned specific asset classes, past due loans are treated as separate asset classes and subject to distinct risk weights as mentioned in the SBP Basel II Framework. An exposure shall be considered past due in whole if markup/ interest on it or principal is overdue as per Prudential Regulations as amended from time to time. 2.2.4 Exposure Aggregation under One Obligor Principle Regulatory capital calculation under the Standardised Approach to credit risk requires the bank to aggregate all exposures and assign asset classes subject to distinct risk weights. For certain asset classes (i.e. Bank, Corporate etc.), risk weights shall be subject to the external ratings assigned by recognised External Credit Assessment Institutions (refer to section 2.6 of this Handbook) while other asset classes will be subjected to fixed risk weights (such as retail and residential mortgage) as prescribed under the SBP Basel II Framework. In the above respects, the bank will ensure that: All the required data fields/ functionalities are available in the various systems Adequate interfaces/ mapping are created amongst various systems at the bank to facilitate exposure aggregation Mechanism is developed and implemented for maintaining data integrity and quality on an on-going basis Exposures are correctly assigned to their respective Basel II asset classes under the Standardised Approach.

2.2.5 Group Exposure Control Point (GECP) and Subsidiary Account Manager (SAM) Whenever the bank deals with a customer and its related entities (Group as defined above) at more than one location, or when the customer deals with different

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business units within the bank it is important to designate a unit to take on primary responsibility for managing the relationship. This function is critical for having all possible marketing and credit synergies. The designation of a unit would also ensure accountability for credit process on an overall Group basis. Group Exposure Control Point (GECP) GECP RMs will be the single point of origination for all credit requests of the entire customer group. They will be responsible for evaluating the strength of the Group and ensure that all the risks are adequately covered in the group relationship. They will monitor and manage exposure limits assigned to the customer group and they will also be responsible for ensuring that all corporate developments, especially changes in the shareholding pattern that result in any change in group relationships are duly communicated to Credit Risk Reporting & Systems Department (CRRS) for necessary updating (according to both MCB and SBP criteria). Subsidiary Account Manager (SAM) SAMs will be responsible for counter-parties within the customer grouping. All SAMs within the customer grouping shall have dotted reporting lines to the GECP in relation to account management and exposure monitoring. Prior to new credit applications, SAMs shall check with the GECP In-charge on availability of limits. In addition, all account reviews within the group must be coordinated with the GECP In-charge and the GECP In-charge is required to signoff on Group Position Sheets accompanying all credit requests. All updates on corporate developments must be provided to GECP as well as CRRS. In order to ensure that account managers are fully aware of their customers status, SAMs will be responsible to provide these updates in a timely manner. The above-mentioned responsibilities should also be incorporated in the relevant job descriptions. 2.2.6 Use of CRMIS for capital calculation under the Standardised Approach Pending full implementation of core banking solution SYMBOLS across the bank to capture the credit exposures and considering banks inability to provide firm implementation timelines for deployment of modules with all the required data fields/ functionalities etc., ) and that not all lending exposures are captured in SYMBOLS (e.g., CAMS and CTL are being used to record consumer finance and credit card exposures respectively), the Bank is using Credit Risk Management Information System as a secondary data source (which captures domestic credit exposure). Regulatory Capital Module in CRMIS is being used to calculate regulatory capital for credit risk as per SBP guidelines. The detailed processes for assignment of customer/ group IDs, exposure aggregation, marking of asset classes and capital calculation (including the use of CRMIS and RCM in these respects) are covered in the subsequent paragraphs.

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2.2.7 One Customer - One ID

Credit Handbook

In order to get an overall view of the individual customer / group across the whole bank and to effectively automate the exposure aggregation process, it is imperative that there be one single pivot point. In order to achieve this, a framework for assignment of unique customer ID (explained in the Appendix I to Chapter 2.2) has been developed. This would ensure accurate aggregation of exposure across various systems and hence correct assignment of customers into Basel-II asset classes. Group Identification To get a consolidated view of credit risk on a group level, it is imperative to aggregate credit facilities to a group of related borrowers. These may be independent legal entities according to SBP PRs, and/or with different legal ownership, but from the bank's point of view they are sufficiently interdependent so that the performance of one may have a direct or an indirect impact on the other. Assignment of Group IDs (GID) In order to aggregate group exposures, it is important to develop a framework for assignments of group IDs which can take care of the complex inter group relationship of different companies and is robust and flexible enough to cater to all the different requirements which may arise from time to time. Considering the above facts, a framework has been developed, the details of which are given in the Appendix II to Chapter 2.2. Group ID9 Management It will be the responsibility of Data Control & Validation Unit (DCVU) within CRRS to allocate and manage Group IDs and to ensure group data integrity so that accurate data is available for analysis and decision making purposes. DCVU after getting information from business units/ credit review will incorporate the related GIDs in the account profile and will also have the discretion to modify the group details of an account as and when required after getting confirmation from credit review. Groups will be reviewed on quarterly basis in order to capture any change / update in group compositions. It will be the responsibility of the Business Units / Credit Review to report any new relationships among different accounts / changes in existing group compositions to CRRS immediately upon identification, irrespective of the decided review period, so that the changes can be made in CRMIS on time to ensure accurate / updated group compositions. Credit Review will be the final authority in case of disputes on grouping / de-grouping. Roles and Responsibilities for assignment/use of GIDs It is not possible for only one department to accurately assign GIDs. For proper checks and balances and to ensure data integrity, following are the responsibilities of different departments: RMs / Business Units: Credit Initiation Customer group is to be identified at the time of exposure initiation based on the prescribed Group Identification Criteria.

Operational details shall be covered separately in CR-MIS Documentation

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When initiating any credit proposal Business Units will confirm whether it is an existing or a new relationship and Credit Review will sign off on it. In case of new group relationship, Business Unit will submit information of such relationship based on prescribed Group Identification Criteria corroborated/ supported by tangible evidence e.g., corporate/ shareholding structure, directorship, guarantee information etc.

CRRS: Validation Compile a bank-wide list of counterparty group relationships, duly identifying the customers forming part thereof, based on the information provided by Business Units. Concurrence to the list shall be obtained from Credit Review. In case of any dispute regarding group composition Credit Review shall be the final authority. Set up GID Database into CRMIS based on approved listing of group relationships. Update any new/ modified Group codes in the approved list of group relationships considering the information provided by Business, and communicate any errors identified based on the knowledge of such relationships and review of documentary supports. They should re-circulate the amended list to all concerned. Going forward, group database to be made available to Business, Credit Review, CRC and nominated RMs.

2.2.8 Credit Risk Management Information System Credit Risk Management Information System is an in-house developed application to capture counter party credit exposure at branch level. The system has been designed keeping in view SBP guidelines and best practices. CRMIS will be used for capturing and aggregation of credit exposure till the time that core banking solution (SYMBOLS) is fully implemented with complete functionalities at bank-wide level. The following system related aspects will be addressed for effective exposure aggregation across the bank: CRMD shall maintenance. be responsible for adequate system administration and

CRMD will ensure appropriate designing of CRMIS including provision of necessary data fields, specifications and functionalities as required for assignment of CID and GID and accurate customer exposure aggregation. Such data fields/functionalities, as far as applicable, should also be ensured in the other related lending systems at the bank.

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ITG will, in coordination with CRMD and related Business Units, ensure integration/ detailed (field-to-field) mapping of CRMIS with other systems (like CAMS, CTL, HRMS, CMRMM etc.). CRMD will decide on the mandatory data fields in CRMIS i.e. the fields that would have to be filled in by the data entry personnel in all cases. This will primarily represent information that would be required to enable correct classification of customers into their respective Basel II asset classes under the Standardised Approach. The list of such fields, together with the input controls, will be set out in the CRMIS documentation which all the concerned employees will be required to follow. Appropriate validation checks shall also be incorporated on key fields (e.g., mandatory fields, access controls, data entry/ validation checks e.g., range checks, limit checks and format checks etc.) in order to prevent incorrect entries e.g., random numbers or junk data etc. and restrict unauthorised entries. As a minimum, it should be ensured that CRMIS captures all the lending data at the bank either by direct data feed or through interfaces with other systems so that interfaces with capital calculator can be minimised to the most possible extent. For this purpose, data pertaining to overseas operations, staff loans etc. shall be adequately captured in CRMIS, going forward. It should also be ensured that lending data aggregated is both for the on-balance sheet exposures (both limit and outstanding) and off-balance sheet exposures (both limit and utilised). Further operational details, including the description of data fields/ system features/ specifications, system/ data flows together with related controls etc., in relation to the above will be covered in CRMIS documentation.

Data Quality/ Integrity The respective Business Units will be responsible to ensure that all the related data (financial as well as non-financial) is completely and accurately captured/ updated in the systems (e.g., CRMIS, SYMBOLS, CAMS, CTL etc.) and that aggregated exposures are in agreement with the general ledger. They will also be responsible for any special data entry population/ cleansing/ reconciliation exercises (in relation to both the new/ existing fields in CRMIS/ other systems) taken to ensure availability of complete and accurate data, as required for calculation of capital under the Standardised Approach and the advanced approaches, going forward. In cases where outside services are sought by the bank in relation to any such special exercise, these Business Units will continue to assume ownership of data pertaining to their business as captured/ fed by the special teams into the systems. In any case, they would remain responsible to ensure data capturing and availability of complete and accurate data going forward once required data is captured/cleansed with outside assistance as of a cut-off point in time. Going forward, the bank will also develop a mechanism for data exceptions noted by MIS Officers/ CRMD / CRC to affect the performance appraisal/ audit rating of the concerned Business Unit.

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Reconciliation between CRMIS and GL balances

Credit Handbook

Following shall be considered in relation to reconciliation between CRMIS and GL balances: Branches/ Business Units shall be responsible to ensure that aggregated exposure as per CRMIS matches with the GL for all type of exposure and accrued mark-up and difference, if any, is duly supported by proper reconciliation. Differences will be identified by MIS Officers at the circle offices, productwise, for each branch falling within that circle CRRS will monitor the differences and issue instructions for compliance Assignment of Asset Classes

2.2.9

Necessary features have been built in the system for identification of Basel asset classes based on set of rules supported by detailed mapping of relevant fields with Basel asset classes. The mapping will be adequately documented and will become part of the CRMIS documentation. Going forward, the bank will consider introducing separate field in Treasury system and assign Business Units to capture the information based on detailed understanding of such asset classes provided to them. CRRS shall ensure that PSE exposures are correctly categorized as per SBP issued guidelines and relevant lists. 2.2.10 Regulatory Capital Calculation for Credit Risk

CRMD has developed Regulatory Capital Model (RCM) for accurate calculation of capital requirement for credit risk under the Standardised Approach. RCM has all the required data fields/ functionalities. RCM has all the required inputs as necessary for aggregating exposures, assigning correct asset classes to the aggregated exposures, applying related risk-weights for calculating risk-weighted assets and capital required. Following specific functionalities has been included in RCM: Automated tagging/ filtering of exposures as per the Basel asset classes based on set criteria. Automated tagging/ filtering of retail exposures to the relevant portfolios (i.e. regulatory retail portfolio/ claims secured by residential property) based on set criteria. Monitoring of exposures, in order to re-categorise these exposures between different asset classes (mainly retail to non-retail and vice versa) in the event of change in the set categorisation criteria Output categorised exposures to the capital calculator for use in calculating the capital charge required

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Ability to increase/ decrease number of criteria, and to modify existing criteria for exposure categorisation

Further operational details, including the description of data fields/ system features/ specifications, system/ data flows together with related controls etc., in relation to the above is covered in RCM documentation. Monitoring of Customer and Group Limits CRMD will calculate per party limit under the Prudential Regulations, based on the information provided by FCG and disseminate such limits bank-wide. Going forward, the bank will develop a mechanism for monitoring of exposures by CRC on a periodic basis using relevant systems. In this connection, necessary features shall be introduced and CRC will be provided access to the systems to use it for the said purpose. Since this is dependent on system enhancement (capabilities of Symbols CL and LM module), same shall be implemented with the approval of Group Head RMG as soon as the above mentioned features are made available in Symbols CL and LM module after its full implementation in all branches. Role of Internal Audit Internal Audit shall be responsible for reviewing the structure, systems and process, aggregation of customers exposures, assignment of asset classes and the calculation of capital. They will also update the Internal Audit Policy/ Guide to specifically include audit/ review of policies, procedures and guidelines for exposure identification, aggregation and categorisation (including criteria for such identification and capture of required information into the systems).

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2.3

Procedure for Target Market and Risk Asset Acceptance Criteria

Introduction Suggested Key Components / Elements of Business Strategy

2.3.1 2.3.2

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2.3.1 Introduction

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Target Market (TM) identification is a key component of business strategy formulation process. This chapter deals with the procedural level details for development of Target Market studies and Risk Asset Acceptance Criteria. 2.3.2 Suggested Key Components / Elements of Business Strategy Target Market (TM) Industry Sector Studies The Target Market (TM) identification process is an integral part of the strategy formulation phase of the Bank and shall be conducted at the business group level. The objective of this process is to develop a focused approach for each business group to meet the targets / objectives. The TM, in this context, shall highlight the acceptable profile of prospects / customers to which the Bank markets products bearing an element of credit risk. For identifying TM, Bank shall focus its efforts, by ascertaining: the countrys economic development; the characteristics of industrial / economic sectors that the Bank wants to target and the growth / earnings potential; the risks specific to those sectors, cyclicality and the stage of the cycle; the critical success factors specific to those sectors; the forecasted short term / long term trends in the targeted sectors, and the micro and macro-economic factors influencing the same; differentiating the high value clients in those sectors; and The specific short term / long term business opportunities for the Bank, based on the needs of the identified clients, in the respective sectors.

Risk Asset Acceptance Criteria (RAACs) RAACs represent the minimum conditions under which the Bank is prepared to enter into transactions bearing an element of credit risk. Accordingly, only those clients that exceed the defined RAACs benchmarks shall be targeted in the Business Units marketing effort. RAACs are normally set by benchmarking for the critical success factors associated with the industry sector. Categories in RAACs can cover the following: Customer size (in terms of market share, revenue, equity, etc.) Customers financial condition (ratios relevant to industry / market, regulatory requirements)

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Management / Ownership structure

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Any other relevant factor deemed appropriate by the business group for the specific industry / market (shall flow from the industry critical success factors identified as a part of the TM study)

Business Units will be responsible for conducting target market (TM) studies in accordance with the prescribed process, which will highlight both products and client segments to be marketed and develop Risk Asset Acceptance criteria. RAACs shall be developed by businesses in consultation with RMG. Any violations/ deviations/ exceptions shall be approved by the President / Group Head Risk Management. TM / RAACs - Scope of Application The Banks credit portfolio is diversified across a large number of economic / industrial sectors. RMG shall undertake industry studies (and consequently business groups shall establish specific TM and RAACs) for each industrial sector where the banks exposure is 10% or higher, or on a need basis. As a rule, cash / near-cash collateralized exposures would be excluded from TM / RAACs criteria. TM is a continuous process and high risk industries may be reviewed more frequently as and when required. Deviations Any deviation from the approved RAACs would require approval as per the Group Head Risk Management notified approval matrix. The relevant business group would elevate a memo giving details of the deviation approval requested as well as justification for the same. An annual report containing details of all such deviations approved by the President shall be communicated by the businesses to RM&PRC through Group Head Risk Management. Product Programs Products covered under product programs contain their own TM / RAACs in the program document (i.e. the PPM) and shall be approved as part of the PPM. Target Market and RAACs Guidelines Step 1: Identification of Target Industries / Sectors Target market studies identify key economic sectors keeping in view the following: Major industrial sectors of the economy and their contribution to GDP. Growth trends and sources of growth across various industrial sectors.

o o

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o o

Market size and segmentation of the various key sectors of the economy. Government priorities and regulations based on following: Strategic importance to the country (export based, import substitution, etc.) Amount spent on acquiring products / services of the type that the Bank offers Credit quality and industry stability

Step 2: TM Studies and Industry Analysis The target market process starts with an analysis of the political and macroeconomic conditions of the country wherein various macro-economic factors are required to be analysed. The next step is to undertake a detailed structural, financial and competitor analysis of each target industry to identify the key success factors for above average performance in the specific sector. This would be achieved through completion of detailed industry studies on the selected sectors. The studies should contain analysis and conclusive recommendation, focusing on: Industry structure, dynamics, competition and trends Key management skills required in the industry Key success / risk factors The role of government in the industry SWOT analysis

One of the deliverables of this process would be a list of names acceptable to the bank. A detailed format for conducting industry studies is attached as Appendix I to Chapter 2.3. Step 3: Establish minimum criteria that must be met by selected TM names Industry RAACs should be recommended, establishing the minimum pricing, product offering, and security / documentation requirements and the maximum per borrower limit.

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2.4

Portfolio Management Stress Testing

Portfolio Management 2.4.1.1 2.4.1.2 2.4.1.3 2.4.1.4 Introduction Framework Concentration Management Credit MIS

and

2.4.1

2.4.2

Stress-Testing 2.4.2.1 2.4.2.2 2.4.2.3 2.4.2.4 2.4.2.5 Introduction Stress-Testing Techniques MCBs Approach Roles, Responsibilities and Timelines Industry Best Practices

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2.4.1 Portfolio Management 2.4.1.1 Introduction

Credit Handbook

Credit portfolio of a bank is typically the largest asset and the main source of revenue; while at the same time, it is one of the greatest sources of risk to a banks safety and soundness. Due to lax standards, poor portfolio risk management or weakness in the economy etc., a bank may face major losses/ failure. Credit Portfolio Management is the process by which risks that are inherent in the credit portfolio are managed and controlled. The main objective of MCBs Credit Portfolio Management is to manage risk at portfolio level. The key parameters that impact the credit risk of a portfolio are: Underlying credit risk Exposure positions (concentration) Default correlation 2.4.1.2 Framework

The Risk Management Framework of the bank would involve identifying, monitoring, measuring and controlling credit risk. To achieve this goal it is imperative to manage the credit portfolio in such a way to optimising credit risk. The main objective of MCBs Credit Portfolio Management function is to understand credit risk at portfolio level on the basis of consistent criteria. This involves calculating the banks exposure and monitoring limits in line with its credit risk policies and goals. Following are various activities that shall be catered by the Credit Portfolio Management Function: Defining a Portfolio Set limits and manage concentrations ex-ante and post-ante Establish objectives and measure performances Aggregating credit risk of an obligor

Aggregation of credit risk is vital to compare risks on a bank-wide basis. For this, the bank manages credit risk at a central point and calculates the same across businesses, regions, groups and different obligors based on consistent criteria. Standardizing risk measures in the long run would involve implementing a valuation framework so that all the products and risks can have an economic value, so as to compare products and risks. Internal rating framework once developed shall complement Portfolio Management and enable bank to calculate PD (Probability of default), LGD (Loss given default) and EAD (exposure at default).

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Going forward, Credit Portfolio Management function will be strengthened within RMG by implementing an appropriate portfolio management system to cater portfolio management requirements. 2.4.1.3 Concentration Management

The banks management shall apply exposure caps and risk tolerance limits to appropriate sectors and individual borrowers. Senior management shall also periodically evaluate each lending units business and marketing plans for lending policies related to new target market / product-mix and underwriting criteria. Credit Portfolio Management involves looking at the entire segments of the portfolio (groups of loans with similar risk characteristics) and defining tolerance levels. In addition, LPM shall also segment the portfolio in a number of different ways - for example by loan type, industry, geography, structure, collateral, tenor, risk of default or loss, etc. Managing concentrations and setting limits are one of the primary objectives of MCBs portfolio management function. Limit setting process should take into account banks strategy, risk appetite, competitive advantage, systems and level of diversification. While these variables should be kept in mind while setting limits, it would involve setting limits in respect of following: Industry-wise Obligor-wise Obligor Group-wise Customer categories (as identified under Prudential Regulations) Regulatory portfolio limits

Some of the most significant parameters are explained below: Industry-wise: A limit on the maximum amount of credit facilities that can be extended to borrowers in a particular industry should be in place. The amount should be decided in consultation with the Business Representatives with input from Portfolio Management and Credit Review and would be finalized by the Group Head WBG, CBBG, RMG and the President. Obligor-wise: The maximum amount of credit facilities (within regulatory limits) extended to any single borrower regardless of the industry and type should also be in place. The amount should be decided in consultation with the Business Representatives and Credit Review and would be finalized by the Group Head WBG, CBBG, RMG and the President. Limit setting and the determination of the bank's exposure should be done in light of past record, changing financial structure of the entity, equity of borrower and collateral. This limit setting has the advantage of overcoming the problem faced when the obligor has multiple functions covering many sectors/industries. This holds for both; large corporate entities and SME's (Small and medium size enterprises).

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Obligor Group-wise: Group limits are covered under prudential regulations of the State Bank. Internal group limits will be established to restrict the bank's exposure on a per party basis. The amount should be decided in consultation with the Business representatives and Credit Review and would be finalized by the Group Head WBG, CBBG, RMG and the President. 2.4.1.4 Credit MIS

The effectiveness of the banks Credit Management Function process largely depends on the quality and availability of management information systems (MIS) and many of the advancements in effectively managing the credit portfolio will be the direct result of the robust MIS. The Credit Portfolio Management function at MCB would continue to evolve over time and would endeavour to generate the following MIS for senior management/ RM&PRC subject to the availability of adequate systems and data: Portfolio reports including trend analysis business wise, industry wise, NPL analysis, new relationships etc. Stress-testing Reports Projection on a portfolio level Sensitivity analysis Limit Reports Portfolio concentration analysis Analysis of credit risk inherent in the loan portfolio

2.4.2 Stress-Testing 2.4.2.1 Introduction

Stress testing provides a way to quantify the impact of changes in a number of risk factors on the assets, liabilities and P&L of a financial institution. Stress tests are primarily designed to quantify the impact of possible changes in economic environment on the financial system. The system level stress tests also complement the institutional level stress testing by providing information about the sensitivity of the overall financial system to a number of risk factors. These tests help to identify structural vulnerabilities and the overall risk exposure that could cause disruption of financial markets. Stress-Testing definition Stress-testing refers to a range of techniques used to assess the vulnerability of a financial institution to exceptional but plausible shocks. 2.4.2.2 Stress-Testing Techniques

Simple Sensitivity Analysis It measures the change in the value of portfolio for shocks of various degrees to different independent risk factors while the underlying relationships among the risk factors are not considered.

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Scenario Analysis It encompasses the situation where a change in one risk factor affects a number of other risk factors or there is a simultaneous move in a group of risk factors. Scenarios can be designed to encompass both movements in a group of risk factors and the changes in the underlying relationships between these variables (for example correlations and volatilities). Stress testing can be based on the historical scenarios, a backward looking approach, or the hypothetical scenario, a forward-looking approach. Extreme Value / Maximum Shock It measures the change in the risk factor in the worst-case scenario, i.e. the level of shock which entirely wipes out the capital. MCBs Approach

2.4.2.3

MCB would adopt a phased approach to implement stress testing guidelines for the credit portfolio. In the first phase, the Bank will comply with minimum SBP criteria and design/construct stress tests according to the SBP documentation. In the second phase the bank will adopt international best practices as it is going forward with the implementation of advanced internal ratings approaches under the SBP Basel II Framework. Phase 1: Adoption of SBP Guidelines The Banking Supervision Department of SBP has given a set of detailed guidelines namely Stress Testing Guidelines 2005 in BSD Circular no.5 of 2005. It deals with all of the different approaches, methodologies and framework for stress testing. Scope of SBP Stress Testing Guidelines The scope of the stress test is limited to simple sensitivity analysis. Five different risk factors namely; interest rate, forced sale value of collateral, non-performing loans (NPLs), stock prices and foreign exchange rate have been identified and used for the stress testing. Moreover, the liquidity position of the institutions has also been stressed separately. The tax-adjusted loss arising from the shocked position will be adjusted from the capital. The revised CAR will then be calculated after adjusting total loss from the risk-weighted assets of the bank/DFI. Phase 2: Capacity enhancements for Industry Best Practices / Basel-II Criteria With the adoption of Basel II advanced approaches it is expected that the Bank would have the necessary data in place to carry out stress tests according to international best practices. This would require MCB to use sophisticated portfolio management models to deal with the multi-variable stress tests. 2.4.2.4 Roles, Responsibilities and Timelines

MRMD shall be responsible for conducting stress testing and reporting the results as per SBP prescribed timelines and parameters for consolidation and onward submission to SBP. The results of these periodic stress testing exercises shall be reported to the senior management and RMPRC (on as and when required basis).

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2.4.2.5 Industry Best Practices

Credit Handbook

The following is the methodology / steps that will be followed, once MCB has the system functionality, in order to conduct detailed stress analysis that would contribute towards development of our Banks strategy in response to macro and micro economic shocks. Defining the scope of the analysis Future scope of the analysis will depend upon the nature of risks to be analysed and on data availability. The greater the amount of data that will be available the greater would be the scope of stress test that we will be able to conduct. Designing and calibrating macroeconomic stress scenarios This will depend upon type of risks to be analysed (e.g. market, credit, interest rate, liquidity, etc.), whether single or multiple risk factors are to be stressed, what parameter(s) to stress (prices, volatilities, correlations), by how much (based on historical or hypothetical scenarios) and over what time horizon. All of these factors have to be decided upon after analysis of availability of original data. Use of a wide range of risk factors and incorporating multiple shocks allow for more realistic predictions as compared to ad-hoc sensitivities of single parameters. Shocks can be calibrated to the largest past movement in the relevant risk variables over a certain horizon or be based on historical variance. Assessing system vulnerability to specific risk factors The impact of macroeconomic shocks on the stability of the financial system can be measured using econometric analysis. This would help us to assess financial sector vulnerabilities over time and identify country or Bank specific factors. Integrating the analysis of market and credit risks Changes in macroeconomic fundamentals or in asset prices may directly affect the market value of banks assets and liabilities. Moreover, large swings in asset prices can lead to significant volatility in debt-to-income ratios for both households and firms. The impact of asset price shocks on the solvency of banks obligors and, in turn, on the credit quality of banks portfolios, represents a primary source of concern in the analysis of systemic risk. In fact, a given macroeconomic shock can lead to both market losses and to changes in the credit quality of the obligors (which implies potential mark-to-market losses in the loan book). Aggregation and interpretation of results The information obtained from the analysis of individual financial indicators needs to be combined for an integrated assessment of the overall vulnerability of the financial system to any given stress scenario. Correlations and interlink ages among the risks faced by individual institutions should be captured to provide a holistic view.

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2.5
2.5.1 2.5.2 2.5.3

Credit Risk MIS

Introduction Credit Risk MIS at MCB The Way Forward

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2.5.1 Introduction

Credit Handbook

A management information system (MIS) is a system or process that provides the information necessary to manage an organization effectively. MIS is viewed and used at many levels by management. It should be supportive of the institution's long term strategic goals and objectives. An institution's MIS should be designed to achieve the following goals: Provide a system for recording and aggregating information. Support the organization's strategic goals and direction. Reduce expenses related to labour-intensive manual activities. Enhance communication among employees.

2.5.2 Credit Risk MIS at MCB The bank needs a comprehensive information system that can cope with the varying information needs of the management for planning, policy making, and decision support, while ensuring its consistency, comparability, integrity and accuracy. In order to achieve the above stated objectives bank has upgraded legacy systems by redesigning and integrating them into One Mother System namely Credit & Risk Management Information System (CRMIS) using latest software tools. CRMIS has not only helped in resolving data integrity issues but has also reduced errors and reworks. This has also improved the data quality and is a more reliable source of information for different user groups engaged in processing, monitoring and managing the credit portfolio. CRMIS project has achieved following high level objectives: A point-in-time database for customer information Complied with the Basel-II Accord and other regulatory requirements. Decreased errors and reworks and increased productivity. Provided improved access to data needed for decision making. Improved data quality so that it can be used as a reliable source of information. Generated a series of reports to meet diversified user requirements and provide facility to export data for customized reports. Reduced manual preparation of regulatory returns by automating the tasks and incorporating such reports into this system.

Data flow and job scheduling is given at Appendix-I to Chapter 2.5. 2.5.3 The Way Forward CRMIS is essentially a system dependent upon manual punching and works as disintegrated standalone application. In order to overcome these shortcomings the bank has decided to implement a fully functional core banking solution with all

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required functionalities and data fields. Going forward all modules of SYMBOLS will be implemented. Till that time CRMIS will be used a stop gap arrangement and requirements for managing credit risk will be met through CRMIS. Upon completion of Symbols deployment CRMIS will be retired and banks MIS structure will be shifted on SYMBOLS.

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2.6 Internal and External Credit Ratings

2.6.1 Introduction 2.6.2 Conventional Approach 2.6.2.1 Existing Formats

2.6.3 Basel-II Credit Risk Standardised Approach (External Credit Ratings of Borrowers)

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2.6.1 Introduction

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Risk rating is an essential tool for effective identification, measurement and monitoring of credit risk at the counterparty level. Rating systems measure credit risk and differentiate various credits by the magnitude of credit risk that they pose to the bank. It allows the banks management to monitor changes and trends in risk levels. For rating a credit, banks develop their own internal rating systems and / or rely on External Credit Assessment Institutions. With only few External Credit Assessment Institutions (ECAIs) available in Pakistan, more often than not it is the internal rating system of a bank that rates a particular credit. Banks across the industry are developing more robust internal rating systems in order to increase the precision and effectiveness of credit risk measurement and management process. This trend will continue as banks expand the scope of internal ratings to include allocation of regulatory capital for credit risk in accordance with Basel Committee on Bank Supervisions Internal Ratings Based approach to capital allocation. This chapter covers the following topics. Traditional approach to internal ratings (presently used at MCB) Use of external ratings for Basel-II capital calculation (to comply with the BaselII Standardized approach for Credit Risk)

Going forward, the bank will develop internal rating templates in accordance with the provision of the SBP Basel II Framework during its transition to the FIRB Approach to credit risk. In this regard, the bank will develop Credit Risk Modeling function within CRMD appropriately manned by personnel of required specialized skill and competence. This function shall be responsible for the design or selection, implementation and performance of the banks internal rating systems jointly with the Business Units. 2.6.2 Conventional Approach Presently, the bank uses two different formats for internally rating its customers; one for Corporate - Commercial customers and the other for Corporate - Large customers. These formats have been discussed in detail in the later sections of this chapter. All Credit Proposals are required to be accompanied by the respective customer ratings on the relevant formats. All changes to the existing templates shall be authorised by Group Head Risk Management. The methodology / approach followed for development of existing internal rating templates for both Corporate - Commercial and Corporate - Large customers is similar. Some key aspects of the methodology are given below.

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The selection of variables (e.g. financial ratios, management information, etc.) included in the template is based on subjective assessment only. The decision to whether include or exclude a variable is not based on any statistical analysis conducted on historical data. The final output of the template is a customer rating on a numeric scale (ranging from 1 to 7 for Corporate - Commercial customers and from 1 to 12 for Corporate - Large customers). Each numeric rating has a subjective description (detailed in later sections of this chapter). The methodology does not involve back-testing of the template on sample data (from actual customers) to ascertain the accuracy of the models output. Since the methodology is purely subjective, output of the existing rating template does not directly relate to the following. o Loan pricing decisions (though effort has been made to relate internal ratings of Corporate Large customers with a pricing grid, as explained in detail in later chapters) Decisions on allocation of capital for a specific credit (only more sophisticated and back-tested internal rating models can determine the amount of capital to be allocated for any specific credit, which the bank envisages to develop under the FIRB Approach to credit risk, going forward). Existing Formats

2.6.2.1

The two existing rating formats are discussed in detail as follows. Credit Risk Ratings: Corporate - Commercial Customers The Credit Risk Rating scorecard for Corporate - Commercial Customers had been developed after taking into account the fact that financial and other disclosure requirements of this sector are not as elaborate as the Corporate - Large sector and there are critical data integrity issues. Hence, the level of reliance placed on financial information is lower compared to the scorecard for the Corporate - Large sector. Scales / Grades There are following seven grades for rating Corporate - Commercial customers.
Risk Rating I: Superior High and stable profitability, liquidity and debt coverage ratios with high networth. This is expected to continue in the long run as well. Financial performance not expected to fluctuate substantially by changes in the business cycle. Ready access to financial markets with ability to absorb severe disturbances in economic and financial markets. Very Good Strong financial position (sales, operating margins, net worth, etc.). This is not expected to deteriorate in the near future; however, financial performance may

Risk Rating II:

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fluctuate slightly with changes in the business cycle. Ready access to financial markets with ability to withstand major financial market disturbances. Risk Rating III: Good Overall stable financial performance (sales, operating margins, etc.) with high networth but susceptible to adverse economic movements, industry changes and business cycles. Has access to financial markets under all circumstances with ability to withstand long-term market disturbances. Acceptable Financials are reasonable enough to provide assurance in stable conditions. Operating performance can fluctuate as a result of competitive or economic pressures and cyclical trends of industry & business. Risk elements exist. May have difficulty in absorbing short-term market disturbances or financial volatility. Marginal Marginally acceptable / overall weak financial performance. Market volatility can cause problems therefore warrants more than normal level of supervision. Performance subject to economic and market stability. Absorption of Short-term market disturbances or financial volatility will be difficult. Watch-list Imminent warning for weakness. Warrants more than normal level / frequency of monitoring and reporting to management. Any adverse market disturbance / financial volatility will put the relationship in distress. Classified Regulatory classification

Risk Rating IV:

Risk Rating V:

Risk Rating VI:

Risk Rating VII:

Application All Corporate - Commercial customers for both funded and non-funded facilities shall be rated. The relevant branch / relationship team shall work out the Credit Risk Rating (CRR) of each customer at the time of processing the Credit Proposal for the first time; updating / review of customer ratings shall be a continuous process and is the responsibility of business. All updated / reviewed ratings shall be immediately communicated to the relevant credit approval / review authority along-with the appropriate reasons for down-grades / up-grades. The relevant credit approval/review authority shall have the authority to finalize / change the CRR of any customer as assigned by the branch / relationship team. The approval/review authority must, however, advise the relevant branch / relationship team in case any change is made to a customers CRR. During their respective reviews, Audit and RAR shall have the authority to revise the CRRs of customers with due justification, in cases where, in their opinion, customers internal rating, as assigned by the branch / relationship team, does not represent the true risk profile of the counterparty. All credit proposals and other internal credit related correspondence must clearly indicate the customers CRR. Individual customers within a certain group may qualify for different CRRs on the basis of their distinct risk profiles. In such cases, an appropriate CRR for the group shall also be determined. This will be done as follows.

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The CRR of the group shall be the weighted average CRR of individual accounts/ limits within that group. In case there is even one VI or below rated name in a group, the group would not qualify for a rating above IV.

CRRs should not be shared with the borrowers. Ratings review will be an on-going task. However, as a minimum, the ratings shall be reviewed and updated, where applicable, on an annual basis. In case of borrowers on watchlist or being high-risk, the frequency shall be increased to at least bi-annually. For the purpose of informed rating reviews, Business Units should ensure obtaining and updating, on a periodic basis, latest information available including that of borrowers financial and operational condition, security structure, change in ownership, non-compliance of SBP instructions etc. Whenever any material information on the borrower comes to light, new ratings must always be assigned. The Format to be used for ascertaining the CRRs of all Corporate - Commercial customers and the Security Class List to be used for the purpose are contained in the Appendix I to Chapter 2.6. Credit Risk Ratings: Corporate - Large Customers In comparison to the scorecard for rating Corporate - Commercial customers, a more comprehensive Credit Risk Rating template is applicable to the banks Corporate - Large customers. The template for Corporate - Large customers is based on assessment of both qualitative and quantitative factors. Relatively elaborate financial variables have been incorporated in the template keeping in view the fact that Corporate - Large customers have more extensive financial disclosure requirements as compared to Corporate - Commercial customers. Scales / Grades There are twelve grades for rating Corporate - Large customers.
Risk Rating I: Exceptional Extremely high and stable profitability, liquidity and debt coverage ratios with high net-worth. This is expected to continue in the long run as well. Financial performance not expected to fluctuate substantially by changes in the business cycle. Ready access to financial markets with ability to absorb severe disturbances in economic and financial markets. Superior Strong financial position (sales, operating margins, net worth, etc.). This is not expected to deteriorate in the near future; however, financial performance may fluctuate slightly with changes in the business cycle. Ready access to financial markets with ability to withstand major financial market disturbances. Very Good Overall stable financial performance (sales, operating margins, etc.) with high networth but susceptible to adverse economic movements, industry changes and business cycles. Has access to financial markets under all circumstances with ability to withstand long-term market disturbances.

Risk Rating II:

Risk Rating III:

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Risk Rating IV:

Credit Handbook

Good Financially & operationally stable for medium term, but susceptible to cyclical trends of industry and business. Concentration of business risk - by product or by market - may be present. May have ready access to financial markets under normal market conditions. Has ability to withstand short-term market disturbances. Satisfactory Financials are reasonably sound and have some margin of protection. Operating performance can fluctuate due to competitive or economic pressures and cyclical trends of industry & business. Risk elements exist but near term performance of no concern with ability to withstand short-term market disturbances. Acceptable Financials are reasonable enough to provide assurance in stable conditions. Operating performance can fluctuate as a result of competitive or economic pressures and cyclical trends of industry & business. Risk elements exist. May have difficulty in absorbing short-term market disturbances or financial volatility. Marginal Marginally acceptable / overall weak financial performance. Market volatility can cause problems therefore warrants more than normal level of supervision. Performance subject to economic and market stability. Absorption of Short-term market disturbances or financial volatility will be difficult. Watch-list Imminent warning for weakness. Warrants more than normal level / frequency of monitoring and reporting to management. Any adverse market disturbance / financial volatility will put the relationship in distress. Overdue But Not Classified 21-days past-due. Substandard Regulatory classification. Doubtful Regulatory classification. Loss Regulatory classification.

Risk Rating V:

Risk Rating VI:

Risk Rating VII:

Risk Rating VIII:

Risk Rating IX: Risk Rating X: Risk Rating XI: Risk Rating XII:

Application All Corporate - Large customers for both funded and non-funded facilities shall be rated. The relevant branch / relationship team shall work out the Credit Risk Rating (CRR) of each customer at the time of processing the Credit Proposal for the first time; updating / review of customer ratings shall be a continuous process and is the responsibility of business. All updated / reviewed ratings shall be immediately communicated to the relevant credit approval / review authority alongwith the appropriate reasons for down-grades / up-grades. The relevant credit approval/review authority shall have the authority to finalize / change the CRR of any customer as assigned by the branch / relationship team. The approval/review authority must, however, advise the relevant branch / relationship team in case any change is made to a customers CRR. During their respective reviews, Audit and RAR shall have the authority to revise the CRRs of customers, with due justification, in cases where, in their opinion,

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customers internal ratings, as assigned by the branch / relationship team, does not represent the true risk profile of the counterparty. All credit proposals and other internal credit related correspondence must clearly indicate the customers CRR. If in the opinion of the relevant branch / relationship team, the CRR assigned by the template is required to be upgraded; the branch / relationship team should elevate the case along-with detailed justifications to Group Head Risk Management through the relevant business Group Head. Group Head Risk Management shall evaluate the case and shall decide the matter jointly with the President. The President and Group Head Risk Management shall have the joint authority to approve such cases. In any case, CRR cannot be upgraded by more than one scale / grade. Individual customers within a certain group may qualify for different CRRs on the basis of their distinct risk profiles. In such cases, an appropriate CRR for the group shall also be determined. This will be done as follows. The CRR of the group shall be the weighted average CRR of individual accounts/ limits within that group. In case there is even one VIII or below rated name in a group, the group would not qualify for a rating above VI.

CRRs should not to be shared with the borrowers. Ratings review will be an on-going task. However, as a minimum, the ratings shall be reviewed and updated, where applicable, on an annual basis. In case of borrowers on watchlist or being high-risk, the frequency shall be increased to at least bi-annually. For the purpose of informed rating reviews, Business Units should ensure obtaining and updating, on a periodic basis, latest information available including that of borrowers financial and operational condition, security structure, change in ownership, non-compliance of SBP instructions etc. Whenever any material information on the borrower comes to light, new ratings must always be assigned. The Format to be used for ascertaining the CRRs of all Corporate - Large customers is contained in the Appendix I to Chapter 2.6. It must be ensured that the above-mentioned templates are used consistently across the bank for rating of relevant entities. Business Units dealing in different types of exposures shall use the applicable templates, as the case may be. This will ensure consistency and uniformity in rating assignment. In case of projected information, rating assignments must be based on conservative view of such information as there are difficulties in forecasting future events and the influence they will have on a particular borrowers financial condition and the fact that data available in most cases is limited.

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Credits with deteriorating ratings should be subject to additional oversight and monitoring, for example, through more frequent visits from credit officers and inclusion on a watch-list that is regularly reviewed by senior management. Credit Risk Rating: FIs, Securities Firms and Insurance Companies Previously FIs, Securities Firms and Insurance Companies were exempted from the requirement of internal rating, on account of pending development and implementation of FIRB compliant rating models. In order to ensure compliance with regulatory instructions during the intervening period, the following shall be applicable: 1. Internal rating template for Corporate-Large customers shall be used for internal rating of Securities Firms. 2. Publically available external ratings of FIs and Insurance Companies by JCRVIS and PACRA shall be used as a proxy for internal rating (for credit decisions and SBP reporting purposes) as per mapping conveyed through CRMD circulars. In case an FI / Insurance Company is rated by both JCR-VIS and PACRA, the lower rating grade shall be used. 3. Credit Risk Rating of foreign banks operating in Pakistan (HSBC Bank Middle East Limited, Deutsche Bank AG, Citibank NA, Barclays Bank PLC and Bank of Tokyo-Mitsubishi UGJ Limited etc. ) shall be 1 (Exceptional). Business Groups shall monitor the rating (S & P, Moodys and FITCH-IBCA) of these banks and any downgrade shall immediately be reported to RMG. Any revision in Credit Risk Rating of the above mentioned Banks shall be approved by MCC. 4. All credit proposals and other internal credit related correspondence on FIs, Securities Firms and Insurance Companies should clearly indicate the internal and external ratings (for FIs and Insurance Companies) of the obligor. 5. External ratings of FIs are available on SBP website and are periodically updated, while rating of Insurance companies are uploaded by JCR-VIS and PACRA on their websites. For reference the latest available ratings of FIs and Insurance companies have already been circulated through CRMD circular. It must be ensured that that CRR of all customers, including FIs/ Securities Firms/ Insurance Companies, are reported as part of the monthly CRMIS data. 2.6.3 Basel-II Credit Risk: Standardized Approach (External Credit Ratings of Borrowers) For the purpose of capital calculation for Credit Risk under the Basel-II Standardized Approach, risk weights are assigned individually to both the onbalance sheet and off-balance sheet exposures: a) either on the basis of credit risk assessments of counterparties as performed by an External Credit Assessment Institution (ECAI) recognized as eligible by SBP for capital adequacy purposes, or

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b) As specified by SBP (based on exposure type).

Credit Handbook

SBP had issued a policy document dated July 1, 2005 outlining the eligibility criteria for recognition of ECAIs and has recognised PACRA, JCR-VIS and ratings scores of External Credit Agencies for this purpose. The recognition to these ECAIs has initially been granted for a period of two years and SBP will review their performance and may extend the recognition for further period as deemed fit. Banks are required to risk weight all their on and off balance-sheet exposures (certain exceptions apply, as detailed in Section 2.4 Risk Weights On BalanceSheet Exposures of SBP Basel II Framework). While all rated exposures (as well as all exposures assigned specific risk weights by SBP) carry risk weights in the range from 0% to 150%, all unrated exposures carry risk weights in the range from 20% to 100% (please refer the Appendix II to Chapter 2.6). For all off balance-sheet exposures, SBP specified Credit Conversion Factors (please refer the Appendix II to Chapter 2.6) are to be applied to arrive at the relevant Credit Equivalent figures before assigning the respective risk weights. Further, there are certain Basel-II eligible collaterals (please refer the chapter on Collateral Management Guidelines) available for Credit Risk Mitigation (the concept of Credit Risk Mitigation is introduced in the later part of this chapter) for the purpose of capital calculation. External Ratings External Credit Assessment Institution - Basic Definition The basic definition of an ECAI according to SECPs Credit Rating Companies Rules, 1995 is given below. Credit Rating Company means a company which intends to engage in or is so engaged primarily in the business of evaluation of credit risk through a recognized and formal process of assigning rating to present or proposed loan obligations of any business enterprise. Issuer versus Issue Ratings The definitions of issuer and issue ratings are given below. Entity (Issuer) rating Entity rating signifies the level of investment risk and the capacity and / or willingness of an entity to meet its debt obligations to senior unsecured creditors. Instrument (Issue) rating Instrument rating covers all non-equity instruments including TFCs (long and short term), convertibles, debentures, redeemable certificates. It gives a snapshot of the risk profile of the instrument based on the terms of the instrument.

Selection of ECAIs and Use of ECAI Ratings Previously, two ECAIs, namely PACRA and JCR-VIS, as recognized by SBP, are working in Pakistan; and there is a very small number of rated issuers and issues.

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Currently, ratings assigned by the international rating agencies namely Fitch Ratings, Moodys and Standard & Poors (S&P) can also be used. The entity ratings of these international rating agencies can be used for the purpose of risk weighting the foreign currency exposures either in Pakistan or outside Pakistan. However, where ratings by the local rating agencies are not available for exposures in Pakistan Rupees, ratings by these international rating agencies can be used. The banks decision to choose ECAIs and solicit and use the ratings of those ECAIs for capital calculation shall be governed by the following basic principles: Selected ECAIs should be recognized by the State Bank of Pakistan. Any one of the SBP recognized ECAIs may be used for externally rating a particular exposure. The list of approved ECAIs shall be incorporated into the systems for appropriate selection by the data entry personnel. Group Head Risk Management shall be the competent authority to select an ECAI and decide on whether to solicit a rating or not. For the purpose of capital calculation: o In case unsolicited rating is available, it shall be used for capital calculation In case unsolicited rating is not available, the decision on whether to solicit and use a rating shall be taken by the Risk Management Group. However, in case both solicited as well as unsolicited ratings of eligible ECAIs are available, the solicited ratings shall be used.

It will also be ensured that external assessments for one entity within a corporate group cannot be used to risk weight other entities within the same group. In case of multiple assessments for a particular claim made by the ECAIs, guidelines set out in the SBP Basel II Framework will be followed. Domestic currency ratings shall be used for exposures denominated in domestic currency while foreign currency ratings to be used for foreign currency exposures. In relation to assignment/ applicability of ratings to short-term and long-term claims, the bank shall use: o Short-term issue specific/ issuer ratings for short-term claims of the bank for the counterparties prescribed by the SBP Basel II Framework i.e. banks (local & foreign) and corporates (with certain prescribed restrictions). Long-term issue specific ratings for claims which are investment in such issues Long-term issue specific or issuer ratings i.e. high and low quality credit/ issuer assessment, for unrated claims (claims which are not an investment in rated issues) satisfying certain criteria as prescribed under SBP Basel II Framework

o o

In respect of exposures abroad, the bank will use the ratings assigned by ECAIs recognised by the respective supervisors of the jurisdiction.

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In case of multiple assessments, if there are two assessments by ECAIs chosen which map into different risk weights, higher risk weight will be applied. If there are three or more assessments with different risk weights, the assessments corresponding to the two lowest assessments should be referred to and the higher of these two risk weights will be applied. No additional recognition of risk mitigant will be allowed in respect of claims for which issue specific rating will be used. The frequency for external ratings to be obtained shall be annual.

For further details on use of external ratings, please refer to Section 2.3 Use of Ratings of SBP Basel-II Framework Mapping of Ratings Scales of ECAIs with SBP Rating Grades Two tables (Long-Term and Short-Term) providing mappings between SBP Rating Grades and rating Scales of various ECAIs as mentioned above as prescribed by the State Bank of Pakistan are produced below. Long Term Rating Grades Mapping:
SBP Rating Grade 1 PACRA AAA AA+ AA AAA+ A ABBB+ BBB BBBBB+ BB BBB+ B BCCC+ and below JCR-VIS AAA AA+ AA AAA+ A ABBB+ BBB BBBBB+ BB BBB+ B BCCC+ and below Fitch AAA AA+ AA AAA+ A ABBB+ BBB BBBBB+ BB BBB+ B BCCC+ and below Moodys Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 and below S&P AAA AA+ AA AAA+ A ABBB+ BBB BBBBB+ BB BBB+ B BCCC+ and below

2 3 4 5 6

Short Term Rating Grades Mapping:

SBP Rating Grade S1 S2 S3 S4 PACRA A-1 A-2 A-3 Others JCR-VIS A-1 A-2 A-3 Others Fitch F1 F2 F3 Others Moodys P-1 P-2 P-3 Others S&P A-1+, A-1 A-2 A-3 Others

The bank will ensure that the relevant systems have necessary data fields/ capabilities to capture the external ratings so that the relevant information could be retrieved into capital calculator and risk weights assigned based on such ratings. The above-mentioned tables shall be duly incorporated in the capital

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calculator so that assignment of risk weights can be duly automated. The business units will also be required to capture all publicly available (unsolicited) and/ or solicited ratings made by SBP approved ECAIs into the systems while the data shall be subject to validation by CRMD in accordance with a mechanism set out in section 2.2 of this Handbook. Credit Risk Mitigation (CRM) Where an exposure is secured by eligible collateral that meets the prescribed criteria and minimum requirements, banks are allowed to reduce their exposure under that particular transaction by taking into account the risk mitigating effect of the collateral for the calculation of capital requirement. In this regard there are two approaches: i) Simple Approach; and ii) Comprehensive Approach. Under the Standardized Approach, the bank has exercised the option of using Simple Approach for CRM whereby limited financial collaterals are available for capital relief. The bank is in the process of acquiring a Collateral Management System (CMS) which is expected to be in place in the future and to be used going forward when the bank would be performing parallel run under the FIRB Approach (alongside performing Standardized Approach capital calculations) when additional requirements of the Comprehensive Approach to CRM would become applicable. The data requirement for the simple approach to CRM shall be met by CRMIS and Capital Calculator. Under the simple approach to CRM, in case the risk weight of the counterparty is higher than the risk weight of the available eligible collateral10, the risk weight of eligible collateral replaces the risk weight of the counterparty in whole or in part provided that there is no currency or maturity mismatch11 between the exposure and the collateral. The risk weight on the collateralized portion is subject to a floor of 20%. The remainder of the claim is assigned the risk weight of the counterparty. The 20% floor for the risk weight of collateralized portion is relaxable up to 0% provided that the exposure and the collateral are denominated in the same currency, and the collateral is either cash / deposit receipt or is in the form of Sovereign / PSE securities eligible for a 0% risk weight, and its market value has been discounted by 20%. For further details, please refer Section 2.6 Credit Risk Mitigation of SBP Basel-II Framework. Where guarantees or credit derivatives are direct, explicit, irrevocable and unconditional, and the banks fulfil certain minimum operational conditions relating to risk management processes outlined in the SBP Basel-II Framework,

10 Eligible collateral for CRM under Simple Approach is covered in detail in the Chapter on Collateral Management Guidelines 11 Simplified Standardized Approach criteria as detailed in the SBP Basel-II Framework

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they may take into account benefit of such credit protection in calculating capital requirements. A range of guarantors and protection providers is recognized. A substitution approach is applicable. Thus only guarantees issued by or protection provided by entities with a lower risk weight than the counterparty leads to reduced capital charges since the protected portion of the counterparty exposure is assigned the risk weight of the guarantor or protection provider, whereas the uncovered portion retains the risk weight of the underlying counterparty. For further details, please refer Section 2.6 Credit Risk Mitigation of SBP Basel-II Framework. Capital Charge Calculation Capital Charge = Risk Weighted Assets (RWA) X 8% (minimum) For non-collateralized transactions, RWA is calculated by multiplying the exposure amounts with the relevant Risk Weights of the counterparties. For collateralized transactions, RWA is the sum of non-collateralized and collateralized RWAs; where non-collateralized RWA is calculated in the same manner as detailed above and collateralized RWA is calculated by multiplying the exposure amounts with the relevant Risk Weights of collaterals subject to certain conditions set out in Section 2.6 Credit Risk Mitigation of the SBP Basel-II Framework. Example A term loan of PKR 100M to a Corporate - Large rated BBB+ secured against shares of a company listed on KSE rated AA with a first draw-down of PKR 60M and second draw-down of PKR 40M after six months.
Limit O/S Un-utilized Committed Collateral Total Exposure Risk Weighted Asset Required Capital

Basel-I Scenario - Risk Weighted Assets calculated on the basis of type of exposure by a predetermined %age. No mitigation available due to collateral except for Cash and Govt. Guarantees. Only O/S amount is relevant for the purposes of ascertaining exposure amount. 100M 60M 40M 40M 120M 60M 100% 4.80M

Basel-II Scenario (with Collateral info) - as per Standardized Approach RWA calculated on the basis of Borrower Asset Class. Mitigation due to Deposit (COD/TDR, etc.), Gold, Debt and Equity Securities, Units of Mutual Funds, Guarantees is allowed subject to certain conditions, i.e. capturing details of collateral, legal enforceability, etc. RW of Counterparty can be replaced by RW of Collateral. 100M 60M 40M 40M 120M 100M 20% 1.09M O/S + Committed RW of Counterparty is 100% and RW of Collateral is 20%

Basel II Scenario (without Collateral info) 100M 60M 40M 40M

120M

100M

100%

5.44M

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Credit Handbook Section 2 Appendices

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Framework for assignment of unique customer ID

Credit Handbook
Appendix-I to Chapter 2.2

The unique Customer ID (CID) would be assigned on the basis of following parameters: For individuals: o CNIC No. o In cases where CNIC is not available, old NIC No. However, the bank will endeavour to seek information of CNIC so that the same can be consistently used across the bank as the standard unique CID for individuals). o Passport No. only in exceptional cases where both CNIC No. and old NIC No. are not available e.g., foreign individuals. For other asset classes: o SBP Borrower Code o NTN (National Tax No.) o SECP Registration No. Name of Client: This identifier shall be used only in exceptional cases where the bank does not have any of the above-mentioned information available for the related asset classes (potentially in the cases of sovereigns and PSEs etc.).

General Procedure CNIC No. (Old NIC No. in cases where CNIC is not available) shall be used where the Constitution Type is Individual, Sole Proprietorship or Un-registered Partnership. NTN will be used for registered partnerships and other Private Sector entities. SBP Borrower Code/ SECP registration will also be checked (if available) for data consistency. For foreign individuals their Passport No. will be the basis. The client name will be used in such cases where CNIC/NIC, NTN, SECP Registration No. etc. are not available. This is most common in the case of Federal and Provincial Government entities and Local Bodies. Due diligence and care will have to be exercised by the data entry personnel in such cases to avoid any complications in accurate exposure aggregation applying client name as unique CID for exposure aggregation. The banks source systems will have appropriate data fields to record such standardised customer identifiers so that consistency in exposure aggregation can be maintained across such systems. The responsibility for entering data in such fields shall rest with the business units while data integrity in case of CRMIS shall be reviewed by dedicated MIS Officers within CRRS (For details of such data validation structure/ mechanism, please refer to paragraphs detailing exposure aggregation process). With respect to exposures captured in CRMIS, system will generate and assign a unique customer ID to each client based on the above criteria.

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Framework for assignment of Group ID (GID)

Credit Handbook
Appendix-II to Chapter 2.2

There will be two tags one will show grouping on the basis of SBP criteria and the other will show grouping on the basis of internal MCB criteria. Provision shall be there for assigning multiple Parent IDs to a single entity. This will cater for any kind of complex grouping structure. The structure in tabular form is given below: Customer ID Customer Name Parent ID Group ID Group Name Basis Grouping* of

* SBP and/or Internal The last field Basis for Grouping will be a text field containing an explanation for underlying basis for grouping. The operational details in relation to CRMIS, including the description of system features/ specifications, system/ data flows together with related controls etc. will be covered in CRMIS documentation

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Industry Study Guidelines

Credit Handbook
Appendix I to Chapter 2.3

Some of the suggested topics that are required to be covered while compiling industry studies include the following. Background, Importance and Scope Topics to be covered include the following: Industry importance / contribution to overall economy of the country Industry structure and number of companies operating Total annual sales, production, imports, exports and other relevant statistical data Short to medium term financial performance (historical and expected trends) Industry growth trends / forecasts Industry viability / competitiveness in a regional / global framework Peer group analysis

Competition (from other Financial Institutions) The analyst will need to make an assessment of other banks / FIs activities within the target industry. This should include number and depth of individual relationships, areas of product competence, target niches / products and credit appetite. The objective here is to identify the level of competition that will be faced when serving this industry and potential in terms of untapped niches. Industry Financial Benchmarks and Critical Success Factors The detailed industry study, apart from other things, will enable the analyst to identify minimum financial benchmarks and critical success factors applicable to the particular industry being analysed. Existing and potential customers in the industry can be screened against these objective measures to determine their acceptability or otherwise. Industry Analysis A list of the points that should be considered in an industry analysis is provided below. Market Analysis o Nature of Products /Services o Demand Supply Situation o Sales Pattern o Any other factor Distribution Channels

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Buyer / Supplier Analysis Competition o Production Capacity o Market Share o Barriers to Entry o Barriers to Exit o Any other factor Industry Financial Performance o Sales growth rate o Gross margin o Net margin o Current ratio o Gearing ratio o Interest coverage ratio o Days receivable, payable, inventory o Any other factor Regulatory Environment o Import / Export duties o Financing schemes o Tax exemptions o Any other factor

Credit Handbook
Appendix I to Chapter 2.3

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Credit Handbook
Appendix I to Chapter 2.5

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Format for Corporate - Commercial CRR
Customer 1. Branch

Credit Handbook
Appendix I to Chapter 2.6

Equity Base Over Rs.100M Rs.51M - Rs.100M Rs.21M - Rs.50M Rs.5M - Rs.20M Below Rs.5M 2. Profitability (50% of the earned score if financials are un-audited) Profitability for the last 3 Years (With improving trend) Profitability for the last 3 Years (Without improving trend) Profitability in the last 1 Year only Loss in the last 1 Year 3. Ownership Structure Public Limited Company (Listed) Public Limited Company (Un-Listed) Private Limited Company Partnership / Proprietorship / Other Personal Account 4. Relationship Client over 10 Years Client 5 10 Years Client 1 5 Years New Client (less than 1 Year) 5. Security (For Total Facility) - Please refer the Security Class List Class-I Class-II Class-III Class-IV Class-V 6. Prudential Compliance / eCIB Report (including Group Companies) Current Ratio Yes No F.B. Borrowing, 4 Equity or Less Yes No Total Borrowings, 10 Equity or Less Yes No eCIB Report (Overdues) No Yes Yes (Over 1 Year) 7. Mark-up / Repayments Overdues None Exceeding 45 Days Exceeding 60 Days Exceeding 90 Days Exceeding 180 Days Exceeding 1 Year Exceeding 2 Years 8. Restructuring in the past 5 years No Yes / One Yes / Two 9. Security / Documentation Shortfalls No Yes 10. Negative Comments by Internal, External, SBP Auditors / CRC No Yes Total Score

Score 100 80 50 40 00 100 80 50 00 100 70 50 30 00 100 70 30 00 100 70 50 30 00 100 00 100 00 100 00 100 00 -100 00 -25 -50 -100 -200 -300 -400 00 -100 -200 00 -100 00 -100

Weightage 10%

10%

10%

10%

20%

5% 5% 5% 5%

20%

20%

10% 10%

Assigned Rating

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Risk Rating 1 2 3 4 5 6 7 Total Score Above 69 Between 58 and 68 Between 47 and 57 Between 26 and 46 Between 5 and 25 Below 5 Regulatory Classification

Credit Handbook
Appendix I to Chapter 2.6

Name & Signatures of Initiating Official

Name & Counter-Signatures of CO/ SCO

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Corporate - Commercial Security Class List for CRR
Class-I

Credit Handbook
Appendix I to Chapter 2.6

Lien on PKR / FCY Deposits with MCB / other Banks (in case of other Banks, prior allocation from FID required) Registered: CDNS Securities (DSCs, SSCs, etc.) / other Govt. Securities / Bonds Pledge of Shares / TFCs (for TFCs, compliance with SBP PR criteria to be ensured) Bearer Bonds Financial Guarantees from local / foreign Banks (prior allocation from FID required) Discounting / Finance against clean export documents drawn against LCs of Top 1,000 Int'l Banks IBP against authenticated acceptance of LC opening bank (prior allocation from FID required) Pledge of local / imported raw material / goods Lien on import documents under LC (Sight / DA - with pledge arrangement) for raw material (net of Cash Margin, if any, which would qualify as Class-I above) IBP against clean documents drawn under LCs of other Banks (prior allocation from FID required) Discounting / Finance against clean export documents drawn against LCs of Int'l Banks other than Top 1,000 with prior allocation from FID Hypothecation of raw material / goods / machinery Finance against Contracts / discrepant documents drawn against LCs Duly accepted Bills of Exchange Trust Receipts Mortgage of commercial / residential / agricultural real estate (held as sole security) Lien on import documents under LC - Other than raw material (net of Cash Margin, if any, which would qualify as Class-I above) All others

Class-II

Class-III

Class-IV

Class-V

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Credit Handbook
Appendix I to Chapter 2.6

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Credit Handbook
Appendix II to Chapter 2.6

SBP Risk Weights for Balance Sheet Exposures The risk weights for on balance-sheet exposures, as set by SBP, are as under.
Exposure Type a b c d Cash and Cash Equivalents Claims on Government of Pakistan (federal or provincial governments) and SBP, denominated in PKR. Foreign Currency claims on SBP arising out of statutory obligations of banks in Pakistan Claims on other sovereigns and on Government of Pakistan or provincial governments or SBP denominated in currencies other than PKR. External Rating Risk Weight 0% 0% 0% 0% 20% 50% 100% 150% 100% 0% 20% 50% 100% 150% 50% 20% 50% 100% 150% 50% 20% 50% 100% 150% 50% 20% 50% 150% 20% 20% 20% 50% 100% 150% 100% 75% 35%

1 2 3 4,5 6 Unrated 1 2,3 4,5 6 Unrated 1 2,3 4,5 6 Unrated 1 2,3 4,5 6 Unrated 1,2,3 4,5 6 Unrated 1 2 3,4 5,6 Unrated

e f

Claims on Bank for International Settlements, International Monetary Fund, European Central Bank, and European Community Claims on Multilateral Development Banks

Claims on Public Sector Entities in Pakistan

Claims on Banks

Claims, denominated in foreign currency, on banks with original maturity of 3 months or less

j k

Claims on banks with original maturity of 3 months or less denominated in PKR. and funded in PKR. Claims on Corporates (excluding equity exposures)

l m n

o p q r s t

Claims categorized as retail portfolio Claims fully secured by residential property (Residential Mortgage Finance as defined in SBPs Basel-II Guidelines) Past Due loans: 1. The unsecured portion of any claim (other than loans and claims secured against eligible residential mortgages as defined in SBPs Basel-II Guidelines) that is past due for more than 90 days and/or impaired will attract risk weight as follows: where specific provisions are less than 20 per cent of the outstanding amount of the past due claim; where specific provisions are no less than 20 per cent of the outstanding amount of the past due claim; where specific provisions are more than 50 per cent of the outstanding amount of the past due claim. 2. Loans and claims fully secured against eligible residential mortgages that are past due for more than 90 days and/or impaired 3. Loans and claims fully secured against eligible residential mortgage that are past due by 90 days and /or impaired and specific provision held there-against is more than 20% of outstanding amount Listed equity investments and regulatory capital instruments issued by other banks (other than those deducted from capital) held in banking book Unlisted equity investments (other than those deducted from capital) held in banking book Investments in venture capital Investments in premises, plant and equipment and all other fixed assets Claims on all fixed assets under operating lease All other assets

150% 100% 50% 100% 50% 100% 150% 150% 100% 100% 100%

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Off Balance-Sheet Exposures

Credit Handbook
Appendix II to Chapter 2.6

The total risk weighted assets with respect to credit risk of OBS (off balancesheet) exposures is the sum of risk-weighted assets for market related and nonmarket related OBS transactions. The market related transactions include i) interest rate contracts, ii) foreign exchange contracts, iii) equity contracts, and iv) other market related contracts. The non-market related off balance-sheet exposures includes direct credit substitutes, trade and performance related contingent items and other commitments. The risk weighted amount is calculated by multiplying the notional amount by CCF (Credit Conversion Factor) to convert into on balancesheet equivalent and then multiplying the resultant figures with the appropriate risk weight of the counterparty.
Nature of transaction Credit Conversion Factor (CCF) 100%

Direct credit substitutes Any irrevocable off-balance sheet obligation which carries the same credit risk as a direct extension of credit, such as an undertaking to make a payment to a third party in the event that a counterparty fails to meet a financial obligation or an undertaking to a counterparty to acquire a potential claim on another party in the event of default by that party, constitutes a direct credit substitute (i.e. the risk of loss depends on the creditworthiness of the counterparty or the party against whom a potential claim is acquired). This includes potential credit exposures arising from the issue of guarantees and credit derivatives (selling credit protection), confirmation of letters of credit, issue of standby letters of credit serving as financial guarantees for loans, acceptances on trade bills, securities and any other financial liabilities, and bills endorsed under bill endorsement lines (but which are not accepted by, or have the prior endorsement of, another bank). Performance-related contingencies Contingent liabilities, which involve an irrevocable obligation to pay a third party in the event that counterparty fails to fulfil or perform a contractual non-monetary obligation, such as delivery of goods by a specified date etc. (i.e. the risk of loss depends on a future event which need not necessarily be related to the creditworthiness of the counterparty involved). This includes issue of performance bonds, bid bonds, warranties, indemnities, and standby letters of credit in relation to a non-monetary obligation of counterparty under a particular transaction. Trade-related contingencies Contingent liabilities arising from trade-related obligations, which are secured against an underlying shipment of goods for both issuing and confirming bank. This includes documentary letters of credit issued, shipping guarantees issued and any other traderelated contingencies. Lending of securities or posting of securities as collateral The lending or posting of securities as collateral by banks. This includes repurchase/reverse repurchase agreements and securities lending/borrowing transaction. Other commitments (a) Commitments with certain drawdown. (b) Commitments (e.g. undrawn formal standby facilities and credit lines) with an original maturity of: (i) one year or less. (ii) over one year. (c) Commitments that can be unconditionally cancelled at any time without notice (e.g. undrawn overdraft and credit card facilities providing that any outstanding unused balance is subject to review at least annually) or effectively provide for automatic cancellation due to deterioration in a borrowers creditworthiness.

50%

20%

100%

100% 20% 50% 0%

The credit risk on off balance-sheet market-related transactions is the cost to the bank of replacing the cash flow specified by the contract in the event of counterparty default. This will depend, among other things, on the maturity of the contract and on the volatility of rates underlying that type of instrument.

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Appendix II to Chapter 2.6 The Credit Equivalent Amount (CEA) can be determined by the following two methods. Current exposure or original exposure method (with prior approval of SBP) in case of interest rate and foreign exchange contracts Current exposure method in all other cases

For further details; please refer Section 2.5 Risk Weights Off Balance-Sheet Exposures of SBP Basel-II Framework.

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Credit Handbook Section 3 Credit Process

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Credit Handbook

Section 3 Credit Process

3.1 Credit Approval / Review Authority 3.2 Credit Investigation & File Maintenance 3.3 Credit Proposal 3.4 Credit Pricing 3.5 Credit Approval and Facility Acceptance Processes 3.6 Product Program Manual Framework

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3.1 Credit Approval/ Authority

3.1.1 Introduction 3.1.2 Scope 3.1.3 Philosophy 3.1.4 Credit Approval v/s Credit Review

Review

3.1.5 Post-Fact/ As Done Credit Approvals 3.1.6 Hindsight Review

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3.1.1 Introduction

Credit Handbook

This section delineates the Banks credit authority delegation process which forms a part of the overall credit process of the Bank. Credit authority is delegated to officers/executives with the necessary experience, judgment and integrity to properly evaluate the risks and rewards involved in the approval and review of credit transactions. Regulatory Requirements State Bank of Pakistan circular on Corporate Governance within Banks12provides guidance on credit approval / review policy of banks. Following key areas have been kept under consideration while preparing this policy: a) Risk Management should be responsible for the independent review of the Credit Approval Process. b) The Board of Directors should not be involved in day to day activities involving credit review or approval. 3.1.2 Scope This section is applicable to all lending activity in the bank that is not governed under program lending. 3.1.3 Philosophy Individuals not offices will be given credit approval / review limits. The authority delegation process would include assessment of the individual through a formal testing process (Credit Skills Assessment Test by OMEGA or in-house developed tests), personal evaluation and interview. Details in this regard shall be issued through CRMD circulars from time to time. In line with SBP regulations on the subject, there are two streams of Credit authority: a) Credit Approval Authority; and b) Credit Review Authority. Credit Approval Authority is vested in the Business Groups, while Credit Review Authority is vested in Risk Management Group. The underlying theme for such separation is that the business or risk taking units process the Credit Approval, while the Risk Management Group reviews the same on pre-fact basis. Risk Management Group does not have any revenue goals; therefore its review is completely independent, as the Risk Management Groups reporting line is independent (to Risk Management & Portfolio Review Committee). Four Eyes Principle Four eyes principle would be implemented for all credit approval levels. Credit proposals should not be approved without the formal consent of at least two authorized individuals i.e. one having Credit Approval Authority and other having Credit Review Authority.
12

BPRD Circular No. 03 dated 23.04.2007

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Credit Handbook

Credit Approval authority holders will not be allowed to carry out transactions within their limits without obtaining prior sign-off from the relevant Credit Review authority, respectively. Such actions shall be deemed Post-Facto and be dealt with as per Post Facto policy. 3.1.4 Credit Approval v/s Credit Review Credit Approvals will be processed by the Business Units taking the risk. All approvals require Review Sign-off prior to becoming effective. As per international best practices, the bank intends to institutionalize a procedure for resolution of disputes between Credit Approval and Review authorities, if any. On an exceptional basis, in the event of an un-resolved difference of opinion between Credit Approval and Credit Review authority, the issue would be elevated to the next higher level of Review Authority13. The reporting line of the review organisation is independent of the business units as this function reports to the Group Head Risk Management who in turns reports functionally to the Risk Management & Portfolio Review Committee of the Board of Directors. The ultimate Review Authority is Management Credit Committee (MCC). No approvals will be communicated to customers until the relevant review authority has signed-off. Any conditions imposed by the relevant review authority will over-ride the approval given by the business.

Delegation of Approval / Review Authority to Individuals The Board of Directors shall advise the credit approval / review authority of the MCC and the same shall be unlimited (subject to regulatory requirements). Approval / Review structure and powers, including amendments, at various levels below MCC shall be decided by MCC. Credit approval/review powers at various levels shall be communicated through RMG circulars. 3.1.5 Post Facto / As Done Credit Approval Any action in violation of approval/review terms or Credit Handbook will constitute post-facto. As a policy matter, Post Fact credit approvals are discouraged and shall only be allowed as exceptions requiring adequate recording of the reason(s) for allowing such exceptions. Post Fact credit approvals are required when initial approval is not obtained from competent authority before the excess drawings / violation of approval terms / the Credit Handbook or credit portfolio strategy. If expired facilities are allowed for usage without obtaining extension from competent authority, and outstanding are not frozen, this action will be deemed to be post-facto at the time of renewal. In the event the business feels that they are
13

However, it cannot jump a level. Any jumping of levels will be reported to RMPRC.

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unable to meet a particular term of approval on a timely basis, then the time to raise the issue is at the time of approval rather than the next annual renewal. All post facto approvals are required to be approved/ reviewed at the original approval/ review level. Post Fact approvals should be obtained as soon as post fact action is detected. Any post fact transaction detected by CRCD shall be reported to concerned branch by CRCD, CRCD shall have the authority to block limits if post fact approval is not obtained within 60 days from date on which same was conveyed to Branch by CRCD. Details of all Post facto/ as done cases must be reported to SCO for review on monthly basis. The submission shall include relevant details of the transaction, reasons for allowing the transaction and the names of the involved field officials. Post-Fact approvals detected by Credit Review division shall also be reported to relevant SCO. It shall be the responsibility of the relevant SCO/Division Head Credit Review to report Post Fact transactions to Group Head RMG on monthly basis. SCO / Division Head Credit Review may report individual transactions to GH RMG keeping in view the severity of breach of credit discipline. GH RMG shall have the authority to recommend further action on such instances. Group Head RMG shall identify and report Post-Fact approvals involving a material breach of credit discipline to the President, Relevant Business Group Head and HR on quarterly basis. Post-Fact approvals shall not result in an automatic suspension of the credit powers of relevant officials. President shall be the final authority to take a decision on suspension of powers or any other action deemed necessary. 3.1.6 Hindsight Review A system of checks and balances has been instituted to ensure consistent application of the banks credit policies. In this regard, a hindsight review process is in place whereby proposals reviewed / approved at each review / approval level are reviewed again at a higher level. The procedure and guidelines for this process are circulated by CRMD from time to time. Implementation responsibility of this policy rests with each approval / review level for the level below it.

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3.2

Credit Investigation & File Maintenance

Credit Files Credit Investigation 3.2.2.1 3.2.2.2 3.2.2.3 3.2.2.4 3.2.2.5 3.2.2.6 3.2.2.7 Borrowers Basic Fact Sheet Credit Worthiness Report (Local) Credit Information Bureau (eCIB) Report Call Report Directors and Asset Charges Search Report Bankers Report Issuance of Bankers Credit Report

3.2.1 3.2.2

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3.2.1 Credit Files

Credit Handbook

Credit files not only include all correspondence with the borrower but should also contain sufficient information necessary to assess financial health of the borrower and its repayment performance. The information should be filed in an organized way for ease of review by all concerned. The business units would retain and maintain credit files. Confidentiality The information contained in credit files includes information released to the Bank by borrowers as a result of the lending relationship and may be of a confidential nature. Accordingly, adequate controls need to be in place to restrict access to the credit files for only those personnel who are authorised to use and maintain credit files. Therefore, all credit files shall be placed in locked cupboards / cabinets with access only to the authorised personnel. Under no circumstances should the files be kept overnight by the CO/RM, in their desks/cabinets. Guidelines for File Maintenance The business units shall be required to maintain an appropriate credit file for each borrowing client. Proper filing of credit related material is essential to ensure that required information is easily accessible and maintained in good order. Organisation and Retention Given below, are the various sections in a standard credit file and the retention period of various documents. The retention period pertains only to the current file; record removed from the credit file would be placed in archives and is not to be destroyed. All record to be arranged in chronological order with latest coming first.
File Section SECTION 1 Approvals / Minutes / Sanction Advice Approval for PR relaxation from SBP Approving Authorities Comments Credit Proposal/ Basic Fact Sheet / Credit Worthiness Report/ Group Summary Sheet /Credit memos Approved Remedial Plans / Restructuring / Earmarking / deferrals Retention Period Approvals 1 Year for working capital and till full adjustment for term loans. 2 years 1 Year for working capital and till full adjustment for term loans 1 year for working capital and till full adjustment for term loans

1 year

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Classification / watch listing SECTION 2 Documentation checklist 1 year Security 1 year

Credit Handbook

Documentation review / Security Check List / Need basis (Min. 3 year) Legal Opinion / Valuation of Fixed Assets. SECTION 3 BIR / Call Reports / Site Visits / Facility Advice Letter (copy only) SECTION 4 Last twelve months Correspondence

Client correspondence / Internal Correspondence / SBP Correspondence / Lega Need basis Correspondence SECTION 5 Reports SBP eCIB Report Bank Credit Report Audit Comments Stock Inspection Report / Stock Statement Press Clipping Search Reports SECTION 6 Financial spreads Interim financials Need basis (Min. 1 Year) Need basis (Min. 1 Year) Need basis (Min. 1 Year) 1 Year 1 Year 1 year Financials 1 Year 1 Year

NOTE: For all Term Loans, the related documents are required to be retained in the file till full and final adjustment.

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3.2.2 Credit Investigation

Credit Handbook

Knowledge of a customers creditworthiness is essential before taking any lending decisions and also helps to minimize the risk of default. Such information is required at all times, especially at inception/ renewal of credit facilities and is to be monitored continuously during the course of the banking relationship. The ambit of credit investigation is pervasive, covering not only specific financial information about the existing / potential customer but also non-financial data, such as business / marketing strategy, management quality, technology employed, etc. In addition, information should also be obtained about the industry, competitors, customers, suppliers and regulatory and economic environment as these factors can significantly impact the creditworthiness of a customer. The State Bank of Pakistan, realising the vital importance of such information, has also laid down the minimum requirements before making lending decisions such as the Credit Information Bureau Report and Borrowers Basic Fact Sheet. There can be no one source that could provide all such information as accumulation of market intelligence is a time consuming process and requires access to varied information sources. This chapter explains the information needs for credit investigation. The subject matter being of paramount importance requires careful attention at all levels. This section covers the following: Borrowers Basic Fact Sheet Credit Worthiness Report (Local) Credit Information Bureau (eCIB) Report Call Report Directors Search And Charges Search Reports Bankers Report

Forms and guidelines for compiling these reports are provided in the attached Appendices. 3.2.2.1
Requirement: Required for:

Borrowers Basic Fact Sheet

It is a regulatory requirement of the State Bank of Pakistan. As per Regulation # 3 (for Corporate & Commercial) and 8 (for SME) Banks / DFIs shall not approve and / or provide any exposure (including renewal, enhancement and rescheduling / restructuring) until and unless the Loan Application Form (LAF) prescribed by the banks / DFIs is accompanied by a Borrowers Basic Fact Sheet under the seal and signature of the borrower as per approved format of the State Bank of Pakistan To acquire basic information on the Borrower for initiation of a relationship or monitoring after disbursement. Borrower and countersigned by bank official. To be regularly obtained & with each Loan Application or Renewal request.

Purpose: Prepared by:

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The basic fact sheet provides minimum information, (such as the legal name, address, details of ownership & their network, management financial limits etc.) required for entertaining a credit relationship request and has been mandated by SBP for Banks and Financial Institutions. The collection and analysis of adequate information on the prospective borrowers help in expeditious credit processing, minimising the risk of default and effective monitoring after disbursement of funds. Branches should ensure that BBFS and LAF should not be older than one month from the date of credit proposal. Thus Branches should ensure that Borrowers Basic Fact Sheet (BBFS) is obtained from all borrowers, and authenticated by a bank official who should places his/her signature on last page and affix his/her initial on other pages of BBFS and shall mention his / her name, designation and employee number in the space provided for the counter signature. The format prescribed for Borrowers Basic Fact Sheet for corporate/ commercial/ SME and for individuals/ consumers are provided by SBP as part of prudential regulations. 3.2.2.2
Requirement: Required for: Purpose: Prepared by:

Creditworthiness Report (Local)

At least once for every new relationship All new local borrowers. To provide Credit Worthiness / Business Information Report on the borrower. 1) 2) Any Officer of the proposing Branch for proposals below PKR. 5.000M. Enlisted Credit Report Preparing Agency (CRPA) for exposures of Rs.5.000 M and above. (Services of CRPA may also be utilized for CPs within 1 above if approved by G.M. & above).

NOTE: This is up to the discretion of Business Manager to arrange Credit Report from enlisted Credit Report Preparing Agency in case the exposure is below PKR 5.000M By Banks own officer: Borrowers Business Information/ Credit Worthiness report identifies the applicants place of business, ownership pattern, latest history, operational information, back ground of sponsors, banking information, overall net wealth and resources, details of current investigations based on visit to borrowers premises, feedback from competitors and bankers, market reputation reports and the standing of the customers etc. While undertaking a credit investigation, the officer needs to focus on the 5 Cs of credit (character, cash flows, collateral, capacity, competition). Additionally, different sources of information have to be tapped including some of the following:

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Interview with principals and / or key officials of subject company after visit to the factory or place of business / office. Trade suppliers feedback on payment by the subject. Knowledge of competitors. Financial statements of accounts / Balance Sheet. Banks own record. Market Report.

Suggested Format (Appendix I to Chapter 3.2) is attached. By Credit Report Preparing Agency (CRPA): In case of fresh borrowers where fund based and non-fund based facilities of PKR 5.000M and above are involved, branches shall send Request for Local Business Information/ Credit Worthiness Report / local credit report to enlisted CRPA. In addition, the following reports may also be obtained from enlisted CRPA. Market Reputation Check These reports are prepared without contacting the borrower and are helpful where credit information is required in respect of suppliers, customers and general market reputation of client. SME Credit Report (detailed report) This is a detailed report which provides general information, business information, management structure and style. SME reports may be obtained in cases where detailed credit information is required.

The CRPA credit worthiness report shall, as a minimum, cover the information prescribed for such reports as prepared internally by the Bank. In case of SME, effort should be made to obtain Credit Worthiness Report from their respective associations as well. In following cases credit worthiness report would not be required; All MNCs Corporate Large Customers (qualifying the criteria defined for Corporate client) Relevant Business Group Head jointly with Credit Head of the respective Group shall be authorized to waive the requirement on a case to case basis. Relevant Business Group Head may delegate this authority at Business Head level if deemed appropriate. However the bank check has to be arranged by the concerned business units from the existing bankers of MNCs and Corporate clients. For all other customers following criteria should be used for obtaining the credit reports; Local Credit Reports SME Credit Report PKR 5 M & above PKR 10 M & above

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Credit Worthiness shall also not be required in case Banks exposure on fresh customer is secured against 100% cash collateral. In such cases, Branch Manager / Officer shall prepare the credit report as per format Appendix I to Chapter 3.2. Detailed guidelines for obtaining these reports are provided in Chapter 5.6 of this Handbook. 3.2.2.3 Credit Information Bureau (eCIB) Report
Requirement: Required for: It is a regulatory requirement under Prudential Regulation (PR) While considering proposals for any exposure (including renewal, enhancement and rescheduling / restructuring) exceeding such limit as may be prescribed by State Bank of Pakistan from time to time, banks / DFIs should give due weightage to the credit report relating to the borrower and his group obtained from Credit Information Bureau (eCIB) of State Bank of Pakistan. eCIB report shall be obtained for all sorts of exposures irrespective of any amount. (Although SBP condition of obtaining eCIB report is for exposure exceeding PKR 500,000/- after netting-off the liquid assets held as security). It must also be ensured that eCIB report at the time of approval/ disbursement should not be older than one month. In case of credit proposal of a group concern, eCIB of other group members companies should be obtained. For processing of credit requests of Partnership concerns, eCIB of all individual partners of a partnership concern shall also be obtained in addition to eCIB of partnership concern (registered). To have a clear picture of total exposure of a borrower and group with its present status from all Banks and Financial institutions. Credit Information Bureau of the SBP on request. Till receipt of next report and minimum of every 3 years.

Purpose: Prepared by: Retention Period:

SBPs Credit Information Bureau SBP has established a Credit Information Bureau with the purpose of making available to Banks and Non-Banking Financial Institutions (NBFIs), on request, the exposures and overdues of borrowers with Banks and NBFIs. This enables the Banks and NBFIs to take into account the exposure of the borrowing enterprises or group at the time of considering extension of Fund Based and Non-Fund Based facilities. Prudence demands that Banks and NBFIs should not over expose themselves to any borrower or group. As per Prudential Regulation, Banks are required to give due weightage to eCIB report while considering any financing proposal. SBP has fully implemented the new system of eCIB from April, 2006, after running it parallel with the old system for about a year. After implementation of the new system, financial institutions are now generating separate credit information report in respect of all consumer and corporate borrowers irrespective of the size of outstanding amount of exposure. Following two types of eCIB reports are provided by Credit Information Bureau: Corporate Credit Information Report

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Consumer Credit Information Report

Credit Handbook

Corporate Credit Information Report The aforesaid report provides credit information of the following borrowers (other than individuals and sole proprietorships): Private Limited Companies Public Limited Companies-Unlisted Public Limited Companies-Listed Registered Partnership Concerns

The aforesaid report covers the following aspects: Company Profile Code Name Present Address Previous Address Consolidated Credit Exposure Outstanding Liabilities Fund Based Non Fund Based Amount under litigation Writes Offs (During last five years) Overdues Past Due 90 Days Past Due 365 Days Date & amount of Recovery No of times Rescheduling/ Restructuring during last five years. Group Entities of the Borrower Code Name of Entity Credit Enquiries Enquiring Financial institute Enquiry Date Remarks Consumer Credit Information Report The aforesaid report provides credit information of the following borrowers: Sole Proprietorship concerns (in the name of Sole Proprietor) Individuals

The aforesaid report covers the following aspects: Consumer Profile Name Father / Husbands name Gender Date of Birth Employed / Elf Employed Businessman / Professional

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NIC (Old & New) NTN # Passport # Current & permanent Residential address Name & Address of the employee business

Credit Handbook

Credit Details Product Term Loan / Evergreen Facility Limit Position date Present balance Minimum Amount Due Overdues: 30, 60 & 90 days Facility Date Maturity renewal date Secured / Unsecured Security / Collateral Credit History during last 12 months Write Off Date of Recovery of Written Off Amount No of time account went into overdues by 30, 60 & 90 days. No of time payments were made late by 15, 20, 29, & 30 days. Credit Enquiries Enquiring Financial Institution Enquiry date Remarks Definition of overdue and default as per Credit Information Bureau is appended below: Overdue means any amount payable or owed by the customer to the Bank, whether by way of Principal, mark-up or to meet obligations under any instruments, which is delayed or in respect of which the maturity is past beyond the period agreed between the Bank and the customer by 90 days up to a maximum 364 days or which the bank has to per force incur to safeguard its interest or fulfil its commitment and 90 days have elapsed since incurring such payment. Default or Due for 365 days or more means any amount payable or owing by the customer to the Bank, whether by way of principal, mark up or to meet obligations under any instruments, which is delayed or in respect of which the maturity is past beyond the period agreed between the Bank and the customer by 364 days and above or which the bank has to per force incur to safeguard its interest or fulfil its commitment and 364 days have elapsed since incurring such payment.

Business Units will send their request generated from the CRMIS data to CRRS on the basis of which CRRS will arrange eCIB through an on line system .

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Confidentiality

Credit Handbook

As per State Bank of Pakistans BSD/SU-61/101/5886/2003 dated 14/11/2003 All financial institutions are advised that the eCIB reports are meant for their internal use and copies thereof should not be provided to third parties. Furthermore, please also circulate necessary instructions among your branches/concerned staff advising them that (i) credit reports should not be disclosed to any party without prior written approval of SBP, and (ii) they should not refer their clients to SBP but to facilitate and properly guide them, clearly indicating to them as to which financial institution has reported their name as defaulter, so that they can approach them accordingly. 3.2.2.4
Requirement:

Call Report
It is mandatory to prepare Call Report for regular clients with CRR ranging from 1-4 after every two months and with CRR 5-6 on a monthly basis. All exposures for any amount where borrowers having continued relationship or in cases of renewal of facilities. The purpose is to provide the latest information about business performance and discuss issues and the financial arrangements and needs of the customer. It is prepared by Credit Officer / Relationship Manager or any Officer calling upon the client after paying visit to office and factory and having discussion with the concerned Executive(s)/ Director(s). The report must be countersigned by his/her supervisor. The Officer, before visiting, prepares a list of objectives of call/visit and seeks written approval of Branch Manager/Chief Manager/ Unit Head / Corporate Head / Group Head. Till receipt of next report, minimum 3 years.

Required for: Purpose:

Prepared by:

Retention Period:

Call reports are prepared following site visit(s) of the clients office and factory/mortgaged assets where the clients core business activities actually take place. A call report should be prepared even after a telephone call provided the discussion was material and is required to be documented. As a general guideline a call report may cover the following items: Companys latest operating performance (sales and profitability) not already mentioned in the Credit Proposal. Industry situation Demand and Supply dynamics for the clients and industrys products and services and inputs for services Future plans, etc., including potential requirements for incremental facilities. Current issues and problems in the account. Information on competitors strengths and weaknesses. New projects expected to come on stream in the customers business. Any other issue needing urgent attention. Comments on any issue mentioned in the last Credit Proposal. Regulatory and taxation changes and their impact such as General Sales Tax, Import duties etc.

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Current economic environment and its impact on the companys performance.

The suggested format for Call Report is enclosed (Appendix II to Chapter 3.2). Please note that call report may be prepared on a free format capturing the required information and can be disseminated through e-mails. 3.2.2.5
Requirement:

Directors and Asset Charges Search Report

Directors search (Form-29) shall be obtained for fresh financing, renewal and is also required when there is a change in directorship of the company. Charges Search to be obtained in case of financing to all limited companies (fresh, renewal, enhancements etc.). These can be obtained from the Office of Securities & Exchange Corporation of Pakistan.

Required for: Purpose: Prepared by: Retention Period:

All exposures on limited companies for Fund Based and Non Fund Based facilities. To check the correct names of directors of the company and the total charges created on the Asset of the companies by other Banks / FIs. Enlisted companies after obtaining the desired information from SECP. Till receipt of next report, minimum every 3 years.

Both Directors Search & Charge Search of encumbrance of assets of limited companies (both private & public) is a public record and available on application to SECP on prescribed forms and payment of the required fee. Form 29 / Form A of the company ordinance provides details of changes in directorship and photocopies of these should be obtained from customers bearing attestation of SECPs office. Obtaining of charge search report is compulsory before allowing any fresh financing / enhancement whether Fund based or non-fund based. These are provided by SECP in chronological order in which various bank / lenders get their charge registered at or get the same released. Assets Charge reports from SECP need to be analysed date wise, asset-wise (Fixed & current etc.), Bank-wise as well to ascertaining the status/ranking of our charge. Thereafter, before allowing any financing facility to limited companies it should be ensured that Banks charge for the desired asset Category with SECP has been registered, after obtaining NOC from Senior Creditors, if applicable. Request for registration of Fresh charge is filed on Form 10 along with copy of relevant security / Hypothecation agreement letter and affidavit relating to documents / IBs submitted. Whereas, request for Modification of Pari Passu charge are filed on Form 16 along with relevant supplement security agreement / letter and affidavit as per above.

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3.2.2.6 Bankers Report
Requirement:

Credit Handbook

To be initiated at least once for a new solicitation of PKR. 5.000 M and above where a customer has banking relationships with other Banks / Financial Institutions. All fresh exposures for PKR. 5.000M and above or where felt necessary. To know their dealings and payment behaviour with other Banks. To be obtained from other Banks. Till receipt of next report , minimum every 3 years

Required for: Purpose: Prepared by: Retention Period:

For fresh borrowers applying for credit accommodation of Rs.5M and above, Bankers report must be obtained from their present as well as previous banks, directly by branches. The purpose of this report is to ascertain their credit worthiness and to know about their dealings and payment behaviour with other banks. The suggested format for obtaining Bankers Report is enclosed (Appendix I to Chapter 3.2). 3.2.2.7 Issuance of Bankers Credit Report Where a branch receives a request from other bank asking for customer credit report of any of its customer, the same can be issued on the format attached as Appendix IV to Chapter 3.2). The confidential credit report shall be issued by branch/ relationship manager, countersigned by his/ her Regional/ Unit Head. This report shall be issued within 15 working days of receipt of request.

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3.3
3.3.1 3.3.2 3.3.3 3.3.4 3.3.5 3.3.6 3.3.7 3.3.8 3.3.9 3.3.10 3.3.11 3.3.12 3.3.13 3.3.14 3.3.15

Credit Proposal
Introduction Objective Initiation of Credit Proposal Credit Proposal Package Temporary / One-off Transactions: ShortForm Credit Proposal Approvals on E-mails Earmarking of Limits NOCs (No Objection Certificates) Credit Risk Ratings Prudential Regulations Checklist Calculating Yield of Account Credit Limit Review Legal Documentation Facility Advising Letter (FAL)/ Sanction Advice (SA) Financed Organization Type (FOT)

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3.3.1 Introduction

Credit Handbook

The Credit Proposal process is a key activity in the credit cycle. The concerned branchs marketing staff, normally the Credit Officer / Relationship / Branch Manager, collates information on the existing / potential customer. The information is compiled in a standard format, suitable for credit sanctioning authority to take credit decisions. The credit initiation level shall determine the appropriate approval / review level for the proposal. However, credit review can change the proposed level based on its interpretation of the credit approval / review policy. 3.3.2 Objective

The purpose of this chapter is to: Streamline the process flow of credit proposals for all customer categories; Formalize the process for collecting necessary information; Highlight when standard or abbreviated credit proposal is appropriate; Provide guidance for completing the credit proposal; Provide guidance for earmarking of credit limits; Provide guidance for issuing of NOCs; and Provide guidance for processing cases of excess over limit. Initiation of Credit Proposal

3.3.3

A Credit Proposal (CP) should be initiated two months prior to expiry date of related facilities by the initiating officer in case of existing customers and should reach the relevant credit approval/review authority at least two to three weeks before expiry. Before originating the CP, the initiating officer must ensure a detailed meeting with the customer to ascertain the clients banking requirements. Requirement must be in line with the customers current business needs and resources. Such a meeting will minimise interim requests for enhancement and / or changes in limits. The following points must be considered for any renewal / fresh facility being proposed: Ascertain the customers integrity as well as capacity and willingness for repayment. Way out in the event of possible default. Extend credit only if the bank can understand and manage the risk. What type of funding is appropriate? What are the customers cash and operating cycles? What is the purpose of borrowing? It should be in line with the customers occupation / nature of business. The asset to be financed shall normally be held as primary security. The asset(s) (primary / secondary) offered to secure the finance should be evaluated on the basis of the following:

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o o o o Realizable and of stable value.

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Marketability / storability of goods offered as security. Unhindered access to security by the bank. Maturity of collateral, if any, should be equal to or more than the validity of corresponding facility.

The banks security position should normally not be inferior compared to any other lenders for the same type of facility, i.e. if a bank has granted facilities to a customer against a first charge, we must also have a first charge (ranking Pari Passu) to be able to lend to the same customer. The value of security to provide acceptable margin to the exposure. Viability of industry and other matters that may adversely influence customers performance. Where a customer has foreign trade limit(s), the mechanism for related Foreign Exchange Booking Limit (FEBL) shall be followed. Funds must be utilized for productive purposes and not for speculative, undesirable activities such as hoarding. The Branch Credit Officer / Relationship Manager before undertaking processing of Credit Proposal, besides usual scrutiny, shall ensure the following: Relationship Manager/Branch shall arrange the LAF, BBFS and eCIB, review the same, ensure completeness and forward these documents to concerned Credit Approval/Review Authority along with credit proposal. The Relationship Manger/Branch shall counter sign the BBFS along with his/her name. It must also be ensured that each page of BBFS is duly signed by authorized signatory of the borrower. In case of joint stock companies, the Bank holds a certified copy of the Resolution passed by BOD of the company, which authorizes such borrowing and offers security of the specified assets of the company. Borrowing powers of the company must be checked in Memorandum and Articles of Association (in case of joint stock companies) and Partnership Deeds (in case of partnerships). The Bank holds latest eCIB report, Local Credit Worthiness Report and Foreign Buyer Report, as applicable. The Credit Officer/Relationship Manager has completed Call Report with respect to visit of customer premises (factory and / or office) and property held as security. The documentation of the securities held is complete and the relevant debtors and stock report have been obtained. Search Report of Director and Charges on Assets is obtained and ensure that their findings are acceptable to the Bank. All searches when completed should be reviewed by the Branch Manager and Relationship Manager. Review the comments of Audit, SBP, and External Auditor and ensure that all issues raised have been taken care of. If any issue remains un-resolved, these

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must be documented in the CP along-with action plan and timelines for rectification. The purpose for which finance is being obtained is specified in loan application and subsequently in Approval of Finance and Sanction Advice.
While processing the credit proposal, the relevant Credit Review Authority shall also review LAF, BBFS and eCIB and shall ensure that these documents are in order. Credit Review Authority shall intimate concerned Relationship Manager/Branch for any rectifications if required. Credit Review Authority shall ensure that eCIB is not more than one month old at the time of approval. On receipt of Approval of Finance, the Relationship Manager/Branch shall forward the documents (LAF, BBFS and eCIB Report) to CRC for their review and safe custody. No disbursement shall be made till entire satisfaction of CRC regarding completeness and accuracy of the documents i.e. LAF, BBFS, and eCIB.

3.3.4

Credit Proposal Package

All Credit Proposals including enhancements, reductions, annual reviews and other requests affecting the facilities and/or their structure shall be prepared on Form SF-86/ CP Package. The prescribed Form SF-86/ CP Package and its related guidelines are circulated by CRMD, which shall be strictly adhered to and financing shall not be allowed until and unless credit processing has been done on the prescribed format. The formats of CP Package for Corporate Large Customers and for Corporate Commercial customers along-with guidelines for completing the same are enclosed as Appendix I and II to Chapter 3.3 respectively. Furthermore, projected Cash-flow Statement (for the next 12 months in case of working capital financing and up to the date of final repayment / expiry in case of term facilities) with its assumptions recorded in writing and cash operating cycle of the borrower must be analyzed in case of all customers. Efforts must also be made to identify the drivers of borrowers business and its risk mitigants. NOTE: For Corporate Large Customers the prescribed Format of CP Package must be used irrespective of the fact that CP is generated from WBG, CBBG or Islamic Banking Group. For Corporate Commercial clients parked in WBG, the same format prescribed for Corporate Large customers must also be used. Financial Spreads are also required to be accompanied with the Credit Proposal of following clients; Corporate Large (irrespective of the fact that CP is being originated from WBG, CBBG or Islamic Banking Group) Corporate Commercial availing facilities from WBG.

For all group accounts, the Group Exposure Sheet (part of the CP Package) shall be signed by the relevant GECP Corporate Head / General Manager. Credit Proposals of all Group accounts should have the same expiry and must be elevated in one lot to the relevant review authority.

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Details of all deposit accounts (both demand and time deposits) of borrowers / prospective borrowers shall be provided with all Credit Proposals as per suggested format Appendix III to Chapter 3.3. Furthermore, all Credit proposals shall be accompanied by Brief Client Setup Sheet available in the report menu of CRMIS, as an integral part. The Path to extract CRMIS report is as follows: Reports------------> Brief Client Setup Sheet The Brief Client Setup Sheet shall be duly signed by Credit Manager / Relationship Manager and Branch Manager/ Unit Head, while relevant Credit Approval / Review Authority shall verify / cross check the data fields of the report so as to ensure that all fields are properly filled in. 3.3.5 Temporary / One-Off Transactions: Short Form Credit Proposal

In case of urgent need of a regular customer, it may be necessary to override the elaborate requirements of Credit Proposal. In such cases, the short form Credit Proposal may be used. Such approvals must be taken on an exceptional basis only. In addition, under no circumstances a temporary / one-off transaction is to be approved that would violate the State Bank of Pakistans Prudential Regulations or any other regulatory requirement. Temporary / one-off transaction approvals may be obtained on Short Form Credit Proposal, as per the format given in Credit Proposal Temporary Accommodation [Appendix IV to Chapter 3.3]. The approval process for temporary / one-off transaction is the same as that for regular CPs. 3.3.6 Approvals on E-mails

The field is allowed to elevate urgent credit requests on email, and the credit sanctioning authorities are also allowed to approve the same via email. All requests on e-mails must, as a minimum, contain the following information: Complete details of the existing approved facilities, i.e. limit, present o/s, pricing, margin, security, etc.; Group details and exposure; and Transaction details and rationale. Confirmation that all regulatory documents have been obtained i.e. Application of Finance, BBFS (not required for consumer lending cases), eCIB (where applicable) etc. The originating units and relevant approval/ review authority shall maintain a record of such approvals and requests in the form of hard copies. The hardcopies retained on record should include complete chain of e-mails for future reference and audit purpose.

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Branch/ Business Unit shall ensure that only urgent requests are forwarded to relevant approval/ review authority through emails. 3.3.7 Earmarking of Limits

Introduction At times, it may be convenient to accommodate an unanticipated / one-off request from a customer for enhancement in a specific facility by sub-allocating or earmarking of another facility without an increase in overall exposure to the company / group. Earmarking of facilities should, however, be treated as an exception, as excessive use of this flexibility reflects poor facility structuring.
Earmarking at Business Group Head level is restricted under certain circumstances. Relevant Business Group Head may allow earmarking of credit facilities in the following scenarios: Shorter to longer maturity transactions (term loans shall not be allowed by Business Group Head) Blocking of an existing limit for a fresh facility (earmarking of non-Fund based to allow fund based facilities shall not be allowed by Business Group Head) Blocking the limits to allow availment in one of the group account (subject to no over-dues in both group accounts and security documentation is complete as per Legal Satisfaction, otherwise earmarking shall not be allowed by Business Group Head) and cross-guarantee recourse is held (for limited liability companies, Memorandum and Articles of Association of the relevant companies must permit these arrangements). Period of proposed earmarking (for NFB facilities only) goes beyond expiry of limits (issuance of financial guarantees favouring FIs shall not be allowed by Business Group Head) For approval level beyond relevant Business Group Head, relevant Business Group Head shall also be authorized to allow establishment of Deferred Payment LCs under the approved limits of DA LCs.

Relevant Business Group Head may delegate this authority at Business Head level if deemed appropriate. All other restrictions as mentioned above shall apply.

However, earmarking cannot be approved at Group Heads level in the following scenarios: Higher to inferior security position. Non-Fund based to fund based. Earmarking of a specifically approved facility (single transaction). Post-shipment for pre-shipment facilities.

Conditions The facility being earmarked is effective, i.e. all security or documentation is in place or adequate documentation is taken for the proposed transaction. Also, all

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regulatory or other requirements for the transaction being executed should be in place. No earmarking shall be allowed in classified accounts or in accounts where there are overdues. If such earmarking is necessitated, the same would be approved at the original approval level. Earmarking arrangement should not be more than 90 days for fund-based facilities and for more than one transaction for non-fund based facilities. The non-fund transaction may be allowed for more than 90 days provided the tenor is not more than the tenor allowed for similar transaction in the already approved lines, or tenor allowed under the Group Heads CA/RA for similar facilities, whichever is longer. Earmarking / interchange of limits under the aforesaid authority must be processed on format prescribed as per attached Appendix V to Chapter 3.3, a copy of which must be immediately forwarded to SCOs Office for record. Earmarking / interchange of limits requests are also allowed through emails, for which free format can also be used.

Documentation Aspects Earmarking / cross transfer of one limit to another within same legal entity or between / among various units of a Group may warrant additional / supplemental documentation or charge forms sign-off requirements.
1. 2. 3. Promissory Note (P.N.) Mark-up Agreement / Letter of Lien Property Documents Fresh or Supplement Promissory Note is required, where there is increase in exposure over an approved limit or Fresh limit is created by blocking another limit. Fresh or Supplement agreements with new re-purchase price and/or schedule of items under our lien may be necessary. Obtaining of fresh memorandum of deposit of title deeds for further charge on existing security / property documents, with charge forms required for mortgage purposes or both. Other Charge Forms, as may be necessary. Moreover, where limits are interchanged between two legal entities within a group, resolution to borrow and inter-unit guarantee may be warranted besides right of set-off.

4.

Others (Where Necessary)

It is the responsibility of Branch Managers / Banking Units to ensure that required Fresh / Supplement Charge Forms / Documents are obtained before allowing earmarking. In case of any ambiguity / confusion, opinion from the in-house legal department must be obtained and followed carefully. 3.3.8 NOCs (No Objection Certificates)

For financing the assets (current or fixed) of private & public limited (listed & unlisted) companies, it is a mandatory requirement of Companys Ordinance 1984 that lending institutions must create their encumbrance over the respective assets via registering charge with Securities & Exchange Commission of Pakistan. Sometimes the banks, prior to extending fresh facilities and registering of their charge over assets of the Company, require a no objection certificate from the existing charge holders. e.g.

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Registering a charge ranking Pari Passu with the existing lenders. Registering an exclusive charge on specific assets. Bank prior to acceding to the request of issuance of the NOC must ensure the following: Our position is by no means diluted via issuance of the requested NOC. For any dilution the request must be accompanied by due justification. Prior clearance on the draft must be obtained from Legal Cell. Similar NOCs must be obtained from other lenders.

Format for the NOC request is attached as per Appendix VI to Chapter 3.3. All NOCs issued to and received from other financial institutions are treated as a Security and accordingly proper Inward & Outward Register should be maintained at Branches and CRCD (for CRCD taken over branches) and copies of all such NOCs are kept in safe custody along with other security / charge documents in the concerned branches / CRCD. 3.3.9 Credit Risk Ratings

For details on the selection and use of Credit Risk Ratings of customers, please refer the Chapter on External and Internal Credit Ratings in Section-2. 3.3.10 Prudential Regulations Checklist

State Bank of Pakistans Prudential Regulation checklist is required to be filled before sanctioning of all approvals, whether normal or one-off / temporary. The Prudential Regulation Compliance Checklist is enclosed as Appendix VII to Chapter 3.3. 3.3.11 Calculating Yield of Account

Yield / Profit on Fund-Based facilities is calculated and attached with all Credit Proposals (CPs) involving concessional finance and for all funded exposure. A format of Yield / Profitability Report of Borrowers is enclosed as Appendix VIII to Chapter 3.3, which also shows the relevant calculations. 3.3.12 Credit Limit Review

Short Term Limits (For Working Capital Requirements) All short term limits for working capital requirements (Revolving Limits) are required to be renewed every twelve months. In case of one-off (Terminating / Non Revolving) facility, expiry date may be different from the annual CP expiry date. If such a facility is not fully settled or paid on the expiry or due date, a CP should be proposed to regularise this facility. Expiry date of this CP should generally not exceed the annual CP expiry date.

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For all Corporate-Large clients (for WBG and CBBG) the Credit Proposal of Working Capital facilities must be accompanied by the Financial Spreads Model with at least one year projections. This requirement for obtaining projections shall not be applicable for commercial banks, insurance companies, leasing/ Modarba and correspondent banks for short and long term facilities. Long Term Limits In all cases where long-term facilities are being availed by customers along-with short-term / working-capital facilities, the annual review CPs for short-term / working-capital facilities must include all long-term facilities for review. In all cases where customers are availing only long-term facilities, CPs for only the long-term facilities should invariably be put-up for annual review. This exercise will inculcate discipline in risk rating review. In all such cases, the Credit Proposals accompanied by revised projections for the remaining tenor of the long-term facilities should be elevated up to the level of the Approval / Review Authority. The term loan review should include a comparison of actual financial numbers with the numbers projected at the time of requesting term loan along with comments on the variance (whether positive or negative). If a CP only has term facilities, its review date shall be in accordance with the financials availability date. CP Expiry Date Expiry dates of CPs shall be fixed keeping in view the availability of latest financials and seasonal requirements of the company. For companies having June as their financial year-end, the ideal CP expiry date shall be November-December. For companies having December as their financial year-end, the ideal CP expiry date shall be May-June. However, all CPs shall also contain comments on the latest sixmonthly financials (operating performance and balance sheet condition) if the CP expiry date and financial year-end have a gap of more than eight months. In such a case the CP must also project the year-end sales and profitability figures for the current year. In case of non-availability of financials by the due date of CP submission, a CP incorporating all other aspects (excluding only the latest financials) shall be submitted on the basis of half yearly or quarterly financials with a short expiry date (coinciding with the availability of financials). After receipt of latest financials, regular Credit Proposal shall be initiated containing detailed financial analysis. In no case should branches / units be allowed to continue with the expired limits without approvals. In case any documentary requirement is lacking, a temporary approval may be obtained before expiry of limits. Business Units shall monitor the counterparty limits with specific reference to nonutilisation of limits, at least on a quarterly basis. Such cases shall be taken with the customers and appropriate actions must be taken e.g., reduction in limits or marketing for availment of unutilised limits by the customers.

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3.3.13 Legal Documentation

Credit Handbook

MCB has standardised legal documentation (prepared by in-house / external legal counsel) which the borrowers are required to execute before availing credit facilities. Deviations, if any, shall be approved according to the following grid. For all credit facilities approved at levels below Group Head Risk Management, such deviations shall be approved by Group Head Risk Management on the recommendation of the relevant business Group Head. For facilities approved at Group Head RMG level and above, such deviations shall be approved at the original approval/review level.

It is pertinent to mention here that all the documentation formalities mentioned in the Credit Handbook has been finalized in consultation with LAD. Waiver may be allowed on case to case basis, against due justification, keeping in view the risk profile, track record and credit worthiness of the customer. Such requests for waiver of legal and/ or security documentation formalities shall not be referred to LAD for clarification/ opinion. These cases shall be elevated to the relevant competent authority mentioned above for decision. It will be at the discretion of the competent authority to refer these cases to LAD if deemed appropriate. The justifications for proposing/ granting such waiver will be properly documented in the credit proposal and approval of finance for record. 3.3.14 Facility Advising Letter (FAL)/ Sanction Advice (SA)

After issuance of Approval of Finance by the relevant Approval/ Review authority, CRCD/ Branch Manager (where CRCD services are not available) shall issue the FAL/ SA, detailed process is mentioned in section 3.5.
All approvals / sanction advices shall mandatorily contain credit proposal reference number and date and the following condition with regards to change in directorship: During the tenancy of MCBs exposure or financing arrangement, for any change in directorship prior consent in writing must be obtained from the Bank. Otherwise MCB has right to recall the loan / exposure / financing arrangement immediately. Relevant Business Group Head has been authorized to waive this requirement on a case to case basis (only for those out-going directors whose PG is not obtained as security or has already been waived at appropriate level) keeping in view the risk profile and track record of the customer. Relevant Business Group Head may delegate this authority at Business Head level if deemed appropriate

The format in use at MCB is enclosed as Appendix-IX to Chapter 3.3. 3.3.15 Financed Organization Type (FOT)

All Credit Proposals, Approvals of Finance and CRMIS Reporting shall invariably mention the Financed Organization Type (FOT). Definition of each FOT has already been provided by SBP, however, the same is being elaborated hereunder in order to clarify any ambiguity in this regard/ ensure correct reporting. There are three FOTs in which the borrowers are categorized viz. Consumer, Small and Medium Enterprise, Corporate / Commercial.

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1- Consumer: Consumer means individuals who apply for financing to meet their personal, family or household needs. The facilities categorized as consumer financing are Credit Cards, Auto Loans, Housing Finance and Personal Loans (personal loans mean the loans to individuals for the payment of goods, services and expenses and include Running Finance / Revolving Credit to individuals for said purposes). 2- Small and Medium Enterprise (SME): SME means an entity, ideally not a public limited company, which does not employ more than 250 persons (if it is manufacturing / service concern) and 50 persons (if it is trading concern) and also fulfills the following criteria of either a and c or b and c as relevant: a. A trading / service concern with total assets at cost excluding land and building up to Rs50 million. b. A manufacturing concern with total assets at cost excluding land and building up to Rs100 million. c. Any concern (trading, service or manufacturing) with net sales not exceeding Rs. 300 million as per latest financial statements. Please refer to a checklist (Appendix X to Chapter 3.3) for clear distinction between SME and Corporate/Commercial (as these two FOTs are mixed-up mostly). The said check list shall be tagged with all credit proposals being elevated for approval from CBBG. Section A of the checklist pertains to Trading & Service Concerns whereas Section B of the checklist pertains to Manufacturing Concerns. Branches shall ensure that checklist is properly and accurately filled and borrower that meets criteria of SME should be reported (in CPs, AOFs and CRMIS reporting) as SME accordingly. Furthermore if an individual meets the criteria mentioned in the checklist, he/ she shall also be categorized as SME. 3- Corporate / Commercial: Customer, other than the one defined under the SMEs, Consumer, Agriculture and Micro Financing shall be categorized as Corporate / Commercial. MCBs Internal Definitions While for the purposes of ascertaining the appropriate level of Credit Approval / Review Authority and the relevant credit approval process / formats, borrowers of the bank have internally been sub-divided into two categories viz. Corporate-Large and Corporate-Commercial (for details refer Section 2.2.3 of Credit Handbook). The Corporate-Large category includes entities with Annual Group Sales exceeding PKR 3 Billion; while entities with Annual Group Sales of up to PKR 3 Billion are categorized as Corporate-Commercial. The above categorization into Corporate-Large or Corporate-Commercial is different from FOT and should not be confused with the same. Every Credit Proposal and Approval of Finance should explicitly state Financed Organization Type (FOT) of the customer only as per the guidelines mentioned above (terms like individual, sole proprietor, etc. should not be used as FOT in CPs, AoFs and monthly reporting).

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3.4
3.4.1 3.4.2 3.4.3

Credit Pricing
Introduction Responsibilities and Timelines Deviations

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3.4.1 Introduction

Credit Handbook

The pricing of a credit transaction is dependent on a number of factors that include, among others, cost of funds adjusted for liquidity and cash reserve requirement, market rates offered by competitors, credit risk premium, etc. Although various factors have been presented for pricing credit, the approved Pricing Grids / Mark-up Circulars on this matter should be given priority. The starting point of any pricing shall be Normal Markup rate (Timely Payment Markup Rate) notified in terms of Mark-up Circulars / Pricing Grids and where there is a justification / competitive consideration, the same may be negotiated subject to approval by competent authority. In case of branded consumer products, the pricing indicated in the product circular shall usually be adhered to, whereas markup agreements in all cases are executed at Standard Markup Rate. KIBOR Based Pricing With effect from Feb. 2004, in terms of SBP circular it is mandatory for banks to quote pricing on the basis of KIBOR, with spread and reset period specified for all types of customers. Following are some requirements for KIBOR based financing structure: i. KIBOR shall be taken as KIBOR on the day of draw down and subsequently on first working day of the relevant tenor (calendar month, quarter, half year, year etc.). In other facilities (e.g. DF) where draw down is allowed in tranches or enhancement is allowed by relevant CA/RA, the rate shall be applicable to the tranche/enhancement amount and KIBOR shall be taken as KIBOR on the day of draw down and subsequently as mentioned above. The frequency of re-pricing/ resetting has to match the KIBOR used as benchmark. Spread over KIBOR shall not be changed during the tenor of the loan once determined at the time of execution of finance/ loan documents. There shall be no clause in the loan documentation regarding change of spread anytime during the tenor of the finance. All related documents shall clearly indicate the spread over the benchmark (KIBOR or any other rate). Finance agreement should not contain the clauses/stipulations to change the rate unilaterally. All charges, other than mark-up, including fees/prepayment penalties etc. to be recoverable, should be clearly disclosed and agreed with the customers at the time of entering into finance/ loan agreement. A complete amortization schedule shall be provided to the customer along with the facility offer letter showing the breakup of principal and mark up to be paid by the customer over the life of the loan/finance or till the next re-pricing date.

ii. iii.

iv.

v.

vi.

vii.

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viii.

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A statement showing outstanding position of principal and markup should be issued to the customers on half yearly basis as per format attached as Appendix I to Chapter 3.4.

Approving /reviewing authority shall specify the minimum pricing in AoF, Business Groups may agree and convey higher pricing to the customer at their own discretion subject to obtaining approval from relevant approval authority only. This shall be capped at respective business group heads. In exceptional cases keeping in view the profitability and risk profile of the customer, relevant business Group Head may allow lower than approved pricing subject to the condition that it should not be lower than Pricing Grid. A copy of such approval for charging lower pricing should be marked to relevant approval / review authority for information. Business Group Heads shall also be authorized to allow change in approved base rate. The effective date of new rate should be properly mentioned in all proposals, approval of finance and facility acceptance letter. The rate should be changed/ charged after obtaining acceptance from the customer on FAL/SA. This process will eventually be replaced by a formal capital allocation process which will risk adjust returns. This will be a part of the Basel II exercise. 3.4.2 Responsibilities and Timelines

Pricing is a Risk issue, only to the extent of highlighting return on Economic Capital. Risk will highlight issues where we are not being compensated for the risk being undertaken, and may seek review of pricing at the level of the President. On a yearly basis (at least 30 days prior to the beginning of calendar year), Business Groups (WBG, CBBG and Islamic Banking Group) shall submit their respective pricing grids to ALCO for review. ALCO and/or Business Groups may also review the pricing grids on need basis during the intervening period. Following approval by ALCO, Business Groups shall forward their respective pricing grids to CRMD at least 15 days prior to the beginning of each calendar year on the recommended formats attached as Appendix II and III to Chapter 3.4 CRMD would review the proposed pricing grids and would elevate the same to MCC for approval. Business groups shall be responsible for ensuring compliance with the approved pricing grid. This process of approval/ revision of pricing grid can be done at any time during the year, as and when required by Business Group Heads. 3.4.3 Deviations

Exceptions (reductions) to pricing from the pricing grid as notified will require approval as follows: o o President can approve requests for up to 25 basis points reduction Any further reduction would require MCC approval.

For WBG clients only, a below grid pricing request would require a proper justification along with a detailed analysis as justification for the request.

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In this regard, the share of wallet analysis is required to be used to quantify MCBs return from the account as a justification for the recommendation for below grid pricing. A suggested format for the analysis is attached as Appendix IV to Chapter 3.4. MCBs share in the total wallet (financial & bank charges paid by client) can be captured from the annual reports of the client and the data available with the business group. The total wallet would include revenue earned from the various funded and un-funded facilities as well as other fee and commission based services. Where data is not readily available, suitable assumptions (clearly stated) should be incorporated in the analysis. For each case, Share of Wallet (MCB revenue / Total wallet), Cross-Sell ratio (all non-lending revenue / lending revenue) and Yield of the Account should be computed. If so desired, the business group can include income from the specific client earned by other group companies (Adamjee Insurance, MCB AMC, etc.) as justification for the below grid pricing request. The proposal for below grid pricing should be forwarded to sanctioning authority along with the above mentioned analysis to justify the same.

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3.5

Credit Approval and Facility Acceptance Processes

Credit Approval Process-flow Facility Acceptance Process

3.5.1 3.5.2

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3.5.1 Credit Approval Process-flow

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The credit approval /review hierarchy has been elaborated in Chapter 3.1 of this manual. All credit proposal initiated by the business groups shall invariably follow the process-flows detailed in the attached appendices as follows: o Appendix I to Chapter 3.5 Credit Proposal process flow for all credit proposals (where CRC support is available) Appendix II to Chapter 3.5 Credit Proposal process flow for all credit proposals (where CRC support is not available) Facility Acceptance Process

3.5.2

All authorities signing on AOF shall ensure to mention their names, designation and the date of signing must be clearly legible on the AOF. Where CRC is present, all Facility Advising Letters / Sanction Advices shall be prepared by the CRC personnel (Appendix III to Chapter 3.5 Facility Advising Letter process flow). For branches where CRC is not present, like all other CRC related tasks, FALs shall also be prepared by the branches. Wholesale Banking Group Facility Acceptance Process For the Wholesale Banking Group, excluding Investment Banking, the following process-flow shall govern the facility acceptance process. CRCD shall prepare the draft of Facility Advising Letter (FAL) as per the Approval of Finance and communicate the same to the Marketing Unit. If a modification is required, the Marketing Unit shall request CRCD for the same. CRCD will, if agreed, incorporate modifications and send the revised FAL to the Marketing Unit. In the event of a disagreement between CRCD and the Marketing Unit, CRCD will elevate the matter to the relevant credit sanctioning authority whose decision shall be final. CRCD and the Marketing Unit would jointly sign the final FAL. The Marketing Unit shall be responsible for communicating the FAL to the customer and obtaining accepted copy of the same from the customer. The Marketing Unit shall retain a copy of customers accepted FAL and pass on the original to CRCD.

Commercial Branch Banking Group Facility Acceptance Process For CBBG the following process-flow shall govern the facility acceptance process. CRCD shall prepare the draft of Facility Advising Letter (FAL) as per the Approval of Finance and communicate the same to the branch. If a modification is required, the branch shall request CRCD for the same. CRCD will, if agreed, incorporate modifications and send the revised FAL to the branch. In the event of a disagreement between CRCD and the branch, CRCD will elevate the matter to the relevant credit sanctioning authority whose decision shall be final. CRCD and branch would jointly sign the final FAL.

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The branch shall be responsible for communicating the FAL to the customer and obtaining accepted copy of the same from the customer. The branch shall retain a copy of customers accepted FAL and pass on the original to CRCD.

In case of temporary extensions, CRCD shall not perform the first step of seeking the opinion on the draft to FAL for temporary extensions. It will prepare the FAL and send it to Branch/ Relationship for onward communication to customer. Detailed processes flows along with roles and responsibility are defined in the Service Legal Agreements between Business Groups and CRCD.

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3.6

Product Program Manual Framework

Definition Contents Approval Process Annual Audit Requirement Annual Reviews Temporary Extension

3.6.1 3.6.2 3.6.3 3.6.4 3.6.5 3.6.6

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3.6.1 Definition

Credit Handbook

A Product Program is documentation of product or facility specific credit approval requirements, risk parameters and related business strategies 3.6.2 Contents

All Product Program Manuals (PPMs) must discuss in detail the business strategy, target market, major risks and mitigants thereto, risk acceptance criteria, rules for approving credit, security perfection standards, caps proposed, process for compliance and reporting standards, accounting procedures, and entries & practices. Detailed format is enclosed as Appendix I to Chapter 3.6. We have tried to cover the information requirement for a diverse portfolio of products ranging from consumer banking to treasury to Islamic Banking as well as conventional loan products. Business units would be required to select the appropriate items that they consider material for their respective product program(s). Appendix I to Chapter 3.6 provides guidelines for this process and units may provide any other relevant information that can help in decision making. 3.6.3 Approval Process

Management Credit Committee (MCC) will be the approving authority for all new lending product programs prior to the launch of the related products. All Product Programs will require recommendation from respective Business Group Head and Group Head Risk Management. The new product program will be submitted to the MCC for approval only after signature/recommendation from all the requisite Group Heads. This is to avoid circumstances where products are launched before fulfilling the necessary approval requirements. Different groups would be required to assess the risk involved in introduction of the new product. A sign-off by any group would imply that they consider the risk acceptable as far as the scope of their function is concerned. At a minimum, in addition to the concerned Business Group Head and the Group Head Risk Management (as mentioned earlier), the following groups would sign-off on all PPMs: Compliance Department Legal Affair Division IT Department (where applicable) Operations Department Treasury (where applicable) Human Resources Division (where applicable) Group will approve accounting entries and reporting

Financial Control requirements.

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For Treasury/ Capital Markets related products or products perceived to have a high degree of market risk exposure, RMG would submit its recommendations to ALCO for review and onward submission to MCC for approval The recommending and approving authorities should ensure that the analyses underlying the product program are representative of the conditions at the proposed launch timelines i.e. the analyses and information are current. The Business Group shall be responsible to ensure that the related product is launched within proposed launch timelines. In case the product launch is to be postponed to well beyond the initially proposed timeframe on account of any unavoidable circumstances, fresh analyses should be done and represented in a revised PPM for necessary approval by the above-mentioned authorities. 3.6.4 Annual Audit Requirement

Internal audit Group will be required to conduct audit/review of the product program at least once a year. 3.6.5 Annual Reviews

Annual renewal for all Product Programs would be required from MCC. Annual Renewal must reach RMG at least 30 days before the expiry of the product program. At a minimum, the annual review submission must include following: Business Performance results This section should provide a detailed analysis of business performance in terms of: Revenue and profitability Portfolio quality and break-ups Non Performing Portfolio Variances from targets and analysis/ reasons thereto Comparison on how similar products of other banks have performed in the period

Any changes in target market, credit quality, market conditions, business environment, risk acceptance criteria etc. Future Business Plan and Targets Copy of audit report with comments from business unit. It must be ensured that internal audit is conducted before annual review. Any other relevant information that can help in decision making If there is a material change in the product program and / or material amendments are required to be incorporated in the same, sign off from the relevant Group(s) would be required, as deemed appropriate.

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3.6.6 Temporary Extension

Credit Handbook

Extensions in the expiry date of an existing product program in force can be obtained by elevating the request for the same along with valid reasons. The first such extension can be obtained by relevant Business Group Head who is authorized to approve a maximum extension of 90 days. Any further extensions would require the Presidents approval based on Group Head RMG recommendations. Approval from other original signatories to the original product program is not required for PPM extension.

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Credit Handbook

Section 3 Appendices

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Date of Compilation Branch Name

Credit Handbook
Appendix I to Chapter 3.2
Code

Investigator Mr.

Grade CREDIT WORHTINESS REPORT PROFORMA

Emp. No.

a) b) c)

Name of Customer Group Registered Address Phone No. Business Address Phone No. Fax No.

d)

Fax No.

Business Venue a) Ownerships / Rented b) Leased / Un-leased c) Area / maintenance a) b) d) e) Nature of Business Date of Establishment National Tax Number Import Registration No. item Registration No. & date & Tax paid last Year Export Registration No.

c) f)

Constitution of the Firm Name and Share of the Proprietor / Partners / Directors (Main Sponsor First) Name Fathers / Husbands Name N.I.C. No. % Share

Brief History / Antecedents of the Proprietor / Partners / Director

Details of their Allied Concerns

a)

Details of Business Assets and figure of Latest Audited Balance Sheet with date (where applicable)

b)

Number of employees

Date of Compilation

Branch Name

Code

Investigator

Grade

Emp. 110

MCB Bank Limited

Mr.
Financial Stake of the client in business a) Market Reputation & Source of the same Investigation from at least two suppliers must be mandatory Financial Stability

Credit Handbook
Appendix I to Chapter 3.2

No.

x)

Business potential of the concern Association a) Name 1. 2. Name of their previous / other Bankers Report of their previous / other Bankers Nature of Default, if any other Bank Financial Institutions

Last Year Sales

x)

Membership No.

Business Performance (Current Year) a) Turnover Dr. Rs. b) Avg. Balance Dr. / Cr. Rs. c) Present Balance Rs. d) Other Deposits Rs. Details of Account a) A/C No. b)

(M) (M) (M)

Turnover Cr. Rs.

(M)

Type of A/C

c) Date of A/C Opened

Person Contacted a) Name Any other Information

b)

Designation

( SIGNATURE )

( COUNTER SIGNATURE )

( NAME OF THE PREPARER WITH DESIGNATION )

( NAME OF THE COUNTER SIGNATORY WITH DESIGNATION )

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Credit Handbook

Appendix I to Chapter 3.2 EXPLANATORY NOTES / GUIDE LINES FOR COMPILATION OF CREDIT WORTHINESS REPORT Credit Report plays a vital role in assessing the credit worthiness of the Customer. A high degree of care and attention should be paid to the credit investigation and compilation of such reports. Credit report should be comprehensive as to give clear picture of the important aspects like net worth of the party, their general reputation, experience, position of borrowings and stuck-up loans and operating performance. It is the function of credit investigator to search out and obtain complete reliable information and to undertake the painstaking investigation of affairs of the applicant through banking, trade and competitive sources. While undertaking a credit investigation, numbers of sources of information are employed while the following are most important: 1. 2. 3. 4. 5. 6. 7. The applicant himself from whom information is obtained during the interview which is outlined in the report. Financial statements (Profit and Loss Statements and Balance Sheet). The Banks own record. Credit Information Bureau reports of State Bank of Pakistan. Other Banks with whom the applicant maintains account. Market report including from those who sell the raw materials to the applicant or to those to whom finished goods are sold. A visit to the plant and office of the applicant.

If the subject of the bank investigation is an individual the following questions should be asked where applicable. How old is the individual? With what Company or Enterprise is he connected? What is his present position? How long has he been employed in his present position or engaged in professional work? What is his annual Salary or Income? Does he own his own home? What was his previous connection or business? What is the condition of his health? Is he prompt in meeting his obligation? Credit Investigator will report the results and findings in orderly sequence under the following headings (Specimen is enclosed as Annexure 6.3). 1. a) b) Name of the Customer Name of the customer for which credit report is compiled. This must be reported as it appears in the account opening form. Group Mention name of the business group to which the customer belongs if applicable.

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c)

Credit Handbook
Appendix I to Chapter 3.2

Registered Address, Phone No. and Fax No. Mention registered address if the borrower is a business concern and registered company. Also mention Phone number(s) and Fax number(s). Business Address Mention business address if the borrower is a business concern. In case of Individual mention usual Residential Address. Also in both cases, mention Phone Number(s) and Fax No(s).

d)

2. Business Venue a) Ownerships / Rented Mention one of them. If the business premises are rented, mention amount of rent per month. b) c) Leased / Un-leased Mention one of them. Either it will be leased or un-leased. Area / Maintenance Mention the area of the office and also its maintenance, whether the office is well maintained or not. Nature of Business Their line of business whether the company operates as manufacturers, retailer, importer or whole seller and items dealt in. Date of Establishment i) In case of Proprietorship concern, please report date of establishment as declared by Proprietor or date on which license was obtained from any Government Body. ii) In case of Partnership please mention date on which Partnership Deed was executed.

3. a)

b)

iii) In case of Limited Company please mention the date of Certificate of Commencement of business as issued by the Registrar Joint Stock Companies. Dates of consolidation of mergers, if any should also be mentioned. c) Registration No. & Date Mention Registration number of certificate of incorporation and date in case of Registered Company or Partnership Registration No. and Date of Registration. National Tax No. & Tax Paid Last Year Mention National Tax number allotted to the company in case of business concerned and also mention the amount of Tax paid last year. Import Registration No. Mention the Import Registration number on the space provided. Export Registration No. Mention the Export Registration number on the space provided.

d)

e) f)

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Credit Handbook
Appendix I to Chapter 3.2

4. Constitution of the Firm Legal status of the company, write whether the customer is a Proprietorship, Partnership, Private limited company, Public limited company in the Public sector, Govt. Department, Autonomous body, Trust, Co-operative Society etc., as the case may be. 5. Name and Fathers / Husbands Name, CNIC No. and Share of the Proprietor / Partner / Director (Main Sponsor first) Strike off Proprietor / Partner / Director, whichever is not applicable. Thereafter, report name of the Proprietor or, in order of importance, name of the partners of the firm or Directors of the company with fathers / husbands name and CNIC number, obtain copy of CNIC for record. Also, mention respective percentage of shareholding. 6. Brief History / Antecedents of the Proprietor / Partners / Directors Please mention brief history of the clients i.e. origin of the owner Proprietor / Directors and to which business community they belong / general background / experience. Qualification of directors may also be obtained, where possible. If they hold life insurance policies details of the policies amounts insured and name of the Insurance Company may be stated. 7. Details of their Allied Concerns Please mention clearly, the names, addresses and composition of their allied companies. 8. a) Details of Business Assets and figure of latest Balance sheet (where applicable) In case of Proprietorship and Partnership, mention the amount of Capital which is invested in the business by his / their own resources. Details of assets such as stock in hand, landed properties of the Company / Proprietor / Partners and their family members along with municipal survey number and address. In case of manufacturing unit, mention annual production capacity and list the details of machinery. Please also mention whether the factory building / machineries are rented or are owned properties. Photo copy of property documents and electricity bills may be helpful. If the factories, shops or godowns are insured, state the name of insurance company and amount for which insured. In case of limited company, please mention the latest figures of their assets and liabilities as per their audited Balance Sheet and obtain a copy of Audited Balance Sheet, Form 29 and Form A. b) Number of Employees Number of persons employed in the business is to be mentioned.

9. Financial Stake of the clients You have to judge the customers means. For this, we have categorized the means on page 5 of 5 of this. As such the amount assessed will fall in any of the category of means. 10. a) Market Reputation Mention Market Reputation (to be collected) through independent enquiries. Market Reputation & Source of the same investigation from at least two

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Credit Handbook

Appendix I to Chapter 3.2 suppliers must be mandatory. Market reputation will fall in three categories (a) Good (b) Fair (c) Bad. b) Financial Stability State whether the company is financially sound / appears good or not.

11. Business Potential of the Concern and Last Year Sales State whether the company is progressive or under recession. Also mention last year sales amount in million. 12. Association Mention name and membership number of associations. 13. Source of Market Report At least two respectable and reliable firms / customers should be consulted, preferably our customers and their names should be incorporated along with address and telephone numbers. 14. Name of their Previous / Other Bankers Please mention the names of their previous bankers along with the name of their branches. Also mention the date account was opened and range of balance maintained. 15. Report of Previous / Other Bankers Mention what they have reported on them. 16. Nature of default if any with Other Banks / Financial Institutions Please mention whether they are defaulter of any Bank or not. Figures may be obtained from State Bank of Pakistans eCIB Report. 17. Business Performance (Current Year) Mention current year figures of turnover debits credit and average balance maintained in debit or credit with amount. Also, mention present balance and figures of other deposits. Figures shall be reported in millions of rupees. 18. Details of Account Mention account number and type of account such as current, savings, etc. Also mention date account opened. 19. Person Contacted Mention name of the person or partner or director of the company with designation contacted. 20. Any other Information Any other information of the Customers if not covered above. It must be noted that these reports are meant for our internal use only. These are not to be forwarded to their clients and to outside Agencies, DFIs, Banks. When any request letter for credit worthiness report is received from any Local / Foreign Banks / DFIs, Embassies and Government Agencies etc., it may be supplied by branch in the form of the usual short Bank report (Circular No PO/CMD/PI/875 dated September 7, 2001).

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The following format may be used for the call reports. CALL REPORT
Name of Calling Company with Address:

Credit Handbook
Appendix II to Chapter 3.2

Calling Officer (s) (Name (s) & Designation)

Calling Upon (Name(s) & Designation)

Date:

Purpose of the call: (One or two lines only) Details (Details incorporating issues mentioned on the previous page.

Conclusion / Evaluation

Action Plan / Follow-up / Target Dates

Signature Name and Designation of person writing the call report.

Supervisor Name and Signature Copies to: Branch Manager Regional Manager General Manager Area Corporate Office

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Credit Handbook
Appendix III to Chapter 3.2

MCB Bank Ltd.

Name of Branch

Postal Address

Private & Confidential

CREDIT ENQUIRY To,

Dear Sir, Kindly provide your opinion in confidence as to the means, standing and credit history of:

Any information that you may give will be treated in strict confidence. Yours faithfully, Manager Phone #: Fax #:

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Date: Applicants Name and Address:

Credit Handbook
Appendix IV to Chapter 3.2

CONFIDENTIAL Dear Sir, CONFIDENTIAL CREDIT REPORT ON [Name of Client] This refers to your [Reference number of applicants request letter] on the subject. We are enclosing herewith our credit opinion of the above-mentioned client. This opinion is being provided to you under practices and usage customary among bankers, at your request in strict confidence for your use only and should not be passed on to any third party. This opinion has been furnished to the best of our knowledge, in good faith and without prejudice; and it does not in any way constitute any warranty or financial undertaking and is being given to you without any risk and responsibility on the part of MCB Bank Limited or any of its subsidiaries or affiliates or employees.

Regards,

Authorized Signatory

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CREDIT REPORT OF [Name of Client]

Credit Handbook
Appendix IV to Chapter 3.2

CONSTITUTION OF THE COMPANY

NATURE OF BUSINESS NAME OF DIRECTORS PAID UP CAPITAL DATE OF INCORPORATION/REG NATURE OF FACILITIES FUNDED AS WELL AS NON-FUNDED (whatsoever applicable)

RESUME OF CREDIT EXPERIENCE The Subject Company has been availing funded as well as non-funded credit facilities from our bank. Their dealings with us are [conduct of the account as to good, satisfactory, average etc.].

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Name of Customer: ACustomer Group *GECP Approval Level Routing Sheet Proposed Expiry of WC Facilities**

Credit Handbook
Appendix I to Chapter 3.3

Region / Branch (Code)

Last Approval No. and Date

Date

* Specify the GECP viz. WBG / IBG / CBBG ** Indicate next review date for term exposure i.e. where only the term finance has been extended. CP date should be within 6-months of financial year end. For Group Accounts, proposal should have the same expiry and ideally be elevated in one lot to the credit approval / review authority. Further, group name must be same for all accounts belonging to a single group.
PKR in Million

Business Group

Funded Limit Existing

Non Funded Existing

Aggregate Existing

Funded Proposed

Non Funded Proposed

Aggregate Proposed

Corporate Commercial Islamic Banking Treasury* Investment Banking** FI Capital Markets Aggregate Facilities (Bank-wide) *Forward and Spot cover. ** Underwriting commitment (off balance sheet financing) Recommendation Chain Relationship Manager Unit Head Regional Manager Business Head Portfolio Management Group Head WBG Date Name/ Signature Comments

Credit Proposal Checklist Serial Documentation included in # Credit Package 1 Credit Proposal 2 Credit Comments / Memorandum 3 Basic Information Record 4 PR Checklist 5 eCIB Report (not more than 1 month old) 6 Application of Finance 7 BBFS 8 Yield Statement 9 Call Report (not more than 1 month old) 10 CRR 11 Spreads 12 Audited Accounts 13 Quarterly Accounts 14 Stock Report 15 Stock Inspection Report

Attached Yes No

Rationale for not furnishing the document(s)

Confirmation also required that Auditor has signed off If proposal is elevated after 4-months from FY end Only confirmation required that it is held Only confirmation required that it is held as per Handbook

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16 17 18 19 20 21 22 Search Report Valuation Report Bank Checking Watch-List report (if applicable) CRCD Remarks/ UER Exceptions Detail of Deposit Account of Customer Brief Customer Report (generated through CRMIS)

Credit Handbook
Appendix I to Chapter 3.3
Only summary page needs to be attached Only confirmation required that these are held Must be provided with all CPs

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Name of Customer: BeCIB CRR & Weighted Average CRR (previous) CRR & Weighted Average CRR (current) Yield (previous) Yield (current )

Credit Handbook
Appendix I to Chapter 3.3

SF-86 / Credit Proposal

Classificati on / WatchList Status Internal / External Audit Compliance Covenant Compliance PR Compliance Credit Handbook Compliance

For items tabulated above provide the status as (i) For eCIB as Clean or Qualified (ii) Mention CRR , weighted average CRR and Yield (iii) For other fields mention compliance status as Yes or No. Any adverse remark to any of these items needs to be explained in detail in later sections of CP and/or Credit Comments. eCIB to be obtained for the group, name of bank to be mentioned if report is not clean. PKR in Million 1. Facilities *Facility Limit Existing: Outstanding Current of): Maximum: Average: (as IDA Terms and Conditions Status: Fresh / Renewal / Enhancement / Reduction etc. Purpose: General statement (for instance WC requirement) should be avoided. Purpose should be structured / stated to cover specific funding requirement of the client Existing Pricing Proposed Pricing

Proposed

In case relationship proposes change in base rate / spread, then effective date of change must be clearly mentioned. Margin: Specify the margin Security: Specify if proposed security is different from existing arrangement. Stocks: mention items, margins, valuation date, and location. Deposit Receipt / Certificates: Face value, market value, status of lien Property / Fixed Assets: owners name (self-occupied /rented), Property Number, Area Details, Nature of charge (Regd. / Equitable), other encumbrances, legal clearance, noting of lien in land revenue / authority record. Charge Registration: Date of charge registration, Asset, Amount of Charge, Ranking, NOC from senior charge holders, other charge holders name and amount. For charge on fixed assets, RM should separately highlight FSV of land, building, plant & machinery. Value and date of valuation, valuators name to be mentioned. Business Group is required to confirm that (a) valuator is on approved panel of MCB and PBA, (b) valuation was conducted within the last three years, and (c) scope was within the limits granted by MCB / PBA to the valuator.

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Collateral

Credit Handbook
Appendix I to Chapter 3.3

Details of securities held for the existing facilities and those which will be held for the proposed facilities (existing / fresh / enhancement) are to be mentioned against each facility. Security covering more than one facility to be mentioned only once stating the facilities that it covers, so that value is not double counted. Criteria for determining when the facility should be repaid. For term facility please specify (a) date of final recovery of principal (b) frequency of recovery of installments, For BGs incorporate date of expiry.

Repayment Arrangement

* Separate box for each facility (fund or non-fund) to be inserted. 2. Total Facilities Type of Facility Total Fund Based Total Non-Fund Based Aggregate Facilities (FB +NFB) 3. Comments by SBP/ Internal / External Auditors S. No. Comments by SBP / Internal or Commitment by Business Group External Auditor Brief description, specify date of observation also. Incorporate date of commitment PKR in Millions Current Outstanding as of

Present Limit

Proposed Limits

Progress to Date

Incorporate provisioning for accounts classified by SBP and state progress made since classification and future strategy. 4. Remarks by Credit Risk Control Division (CRCD) S. No. Remarks by CRCD/ UER Exceptions Commitment by Business Group with timelines

Briefly mention comments by CRCD regarding security / documentation shortfall or any other aspect, along with necessary action to be taken there against. 5. Waivers/ Deviations S. No. Waivers and/or Deviation from Credit Handbook / Circulars / Previous Approval

Justification

Status (Existing / Fresh )

Mention any post facto approval, waiver and/or deviation obtained over the last 12 months. Relaxation obtained from SBP, if any, should be mentioned separately. Mention status of deviations / waivers as either existing or fresh. For waivers / deviations already approved, mention if they are continuing or not. 6. Customer Business Performance Customer Business Performance(last three calendar years) Product 2008 2009 Last Commitment (2010) Actual (2010) Future Commitment (2011) Import Export Guarantee Total Deposits Earnings Mention detail of business routed through MCB by the customer along with commitments for the next 12 months.

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Name of Customer: 7. Business Potential Business Potential Product Lending - WC Lending Long Term Import Export Guarantee Deposits Revenue Product

Credit Handbook
Appendix I to Chapter 3.3

Total Business

MCBs Share (%) Current

MCBs Share (%) Proposed

Current

Projected

Lending Trade / Guarantee Treasury Investment Banking Cash Management Deposits Total

8. Group Summary GROUP UNITS Limit Amount NAME Existing Proposed Client Name / Business Group : CRR : F.B. N.F.B. Client Name / Business Group : CRR : F.B. N.F.B. Client Name / Business Group : CRR : F.B. N.F.B. Client Name / Business Group : F.B. CRR : N.F.B. Client Name / Business Group : CRR : F.B. N.F.B. TOTAL

Variation ( +, - )

O/S as on

Overdue for Payment Principal Mark-up

Due since (Oldest date) d )

9. Adverse Remarks on Group Companies Any adverse remarks on group companies (eCIB, pending markup / installment, etc.) Mention adverse remarks / details of qualified eCIB report here (if any). eCIB Report dated: FB NFB Total Overdue Client Group Total (including above) Name of Bank / FI (if default) 10. Group Business Performance Group Business Performance(last three calendar years) Product 2007 2008 Last Commitment (2009) Import Export Guarantee Total Deposits Earnings Name & Signature of Relationship Manager Default

Group concerns not availing credit facilities from MCB Mention names of business units (whether maintaining nonborrowing account with MCB or not) that form part of the Group but are not availing any credit facility from MCB.

Actual (2009)

Future Commitment (2010)

Name & Signature of Unit Head

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Name of Customer: CCredit Comments / Memorandum 1. Purpose The purpose should be specified for the request / credit package.

Credit Handbook
Appendix I to Chapter 3.3

2. Facility Rationale / Justification (Facility Wise) Requests for enhancements, fresh facilities and one-off transactions should be supported by due justification / rationale there against. This section of the proposal should capture purpose of proposed facility, evaluation of requested amount with respect to production capacity and funding requirement of the client, pricing (list spread from competing banks), value addition through the proposed arrangement, etc. Synopsis of last 12 months, containing brief description of changes in credit facilities i.e. enhancements, one-offs, reductions, any other financial accommodation, should be provided. For BMR/Capex/ Project Financing, discuss viability of the investment. Discussion should also include rationale for facility restructuring or reduction in existing limits, if applicable. 3. Financial Summary Financial analysis The aim of the financial analysis should be to provide qualitative/quantitative information which is not available from the spreads. Discussion should evolve around account heads reflecting material movements between the two audited accounts. Stating increase/decrease in amount/percentage should be avoided; the emphasis should be to uncover the underlying reason(s) which led to the change. Business Unit is required to confirm that director loan (if any) is subordinated with MCB, and should also briefly discuss any intercompany borrowing. Unit should try to extract ageing of receivables, evaluate marketability of stocks in consultation with the client, and highlight any balance sheet mismatch. If material, Off-balance sheet financing / Contingencies/ Commitments to be briefly discussed. Variance analysis Emphasis needs to be on explaining underlying reason for the variance (projected numbers vs. audited numbers) Projections It should include projections up to one year for Working Capital Lines and till final adjustment in case of Term Facilities. Sensitivity analysis is required for term exposures. Covenants should be listed and reason for any breach should be explained including future course of action to strengthen MCBs position. Quarterly accounts - Latest set of quarterly accounts to be attached with the credit package (if Credit Proposal is elevated after 4 months from financial year end), and only significant observations need to be pointed out. Writeup/analysis is not required for quarterly accounts. CRR - Brief account of key reasons for improvement / deterioration in CRR should be provided. Balance Sheet and Income Statement: Mention status i.e. Audited/ Unaudited /Certified by Chartered Accountants but not audited Balance Sheet (last three years) Stocks Receivables Current Assets Net Fixed Assets Other Long Term Assets Total Assets Creditors 2007 2008 2009 Variance (2009 vs. 2008) Reason for Change

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Short Term Borrowing Current Maturity of Long Term Debt Current Liabilities Long Term Debt Directors Loan Total LTL Revaluation Reserves Capital Other Reserves + Retained Earnings Equity Equity+ Liabilities

Credit Handbook
Appendix I to Chapter 3.3

Income Statement (last three years) Sales Gross Profit Other Income EBIT Interest PAT

2008

2009

2010

Variance (2009 vs. 2010)

Reason for Change

Financial Indicator 2008 2009 2010 Variance Reason for Change (Ratios) (2009 vs. 2010) (last three years) Gross Margin Net Margin Interest Cover DSCR Current Ratio Stock Days Debtor Days Creditor Days Total Lib/Equity Linkage Ratio Cash Cycle NOCG Int. - Tax Off-BS Financing Formulas of the above Financial Indicators / Ratios are given in General Guidelines attached herewith. Cash Flows - The emphasis should be more on projected cash flow than historical figures. Analysis should cover adequacy of operating cash flows to meet funding requirement as well as repayment capacity of external financing sources and sustainability of cash flows. 4. Industry outlook / Peer analysis Industry analysis should reflect the current macro environment and expected developments over the medium term, change in government regulation and its impact on the sector. Peer analysis should include comparative analysis with three similar companies operating on similar scale and in same line of business. Peer analysis would not be required in cases where comparable firms are not operating. Please state recent trends in raw material and finished good prices. Financial Indicator Prod. Capacity Capacity Utilization Sales Gross Profit Client Company A Company B Company C

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Interest Net Profit Current Assets Total Assets Equity Gross Profit Margin Net Profit Margin Interest Cover Debt Service Coverage Ratio Current Ratio Stock Days Debtor Days Creditor Days Total Lib/E (STB+LTB)/E Cash Cycle Net Op. CF 5. Facilities from Other Banks/ FIs

Credit Handbook
Appendix I to Chapter 3.3

Bank-wise facilities Bank Facility

Limit

O/S

Type of charge

Amount charge

of

Ranking of charge

Margin

Total Total Total Separate tables are required for current and fixed assets. If MCB holds a Parri Passu charge, please do not incorporate ranking charges. If MCB holds a ranking charge then a separate table would be required which should reflect details of facilities availed by the client against ranking charges. Categorically indicate if MCBs security is inferior to any other bank. 6. Security Analysis Relationship manager should comment on quality of receivables (ageing) and stocks (saleable value). For financing against fixed assets, please comment on potential recovery if assets are to be sold under distressed condition. 7. Repayment Behavior Delay in Recovery of Markup / Installment (last four quarters) Q1 Q2 Q3 Incorporate number of days by which markup / installment was delayed 8. Risks & Mitigants Risk Impact on Repayment Ability Financial Risk Business Risk Any other Risk Industry and company specific risks and mitigants to be addressed. 9. Account Strategy This should be a comprehensive section and should contain relationship strategy based on upcoming opportunities (state expected time to materialize), any early warning signals, pricing, Capex/BMR, utilization levels, change in yield, comment if trade business is lower than initially agreed, etc. Mitigants

Q4

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Credit Handbook
Appendix I to Chapter 3.3

Identification of banks handling major part of clients Cash Management and Investment Banking needs. RM should try to extract Consumer Banking requirements of Directors / Executives of the company, once obtained same should be forwarded to Consumer Banking Group. Division / Group Comments* Possibility** (High / Med / Low) Target Date

Cash Management Investment Banking Consumer Banking * Categorically state if a new opportunity is identified. ** Probability of capturing the identified opportunity. Account strategy should end with clear concluding remarks and recommendations (enhance / hold/ reduce / exit) with regard to request made in credit proposal. Enhance / Hold / Reduce / Exit

Name & Signature of Relationship Manager

Name & Signature of Unit Head

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Credit Handbook
Appendix I to Chapter 3.3
Name of Customer:

DCompany Information Company Background Plant location and Business Address Financed Organization Type (FOT) Production Base Product Mix Suppliers

Basic Information Record

Legal status (i.e. ownership type), date of establishment, brief company history, industry and line of business Mention complete address where production facility / factory / mill / trading office / head office of the customer are located. Specify FOT of the customer as per CRMD Circulars issued from time to time. Installed capacity and utilization (current and last year). Indicate if there are multiple plants / sites. Historical trend of capacity enhancements. Breakup of sales by line of business segregated into local sales / exports List of suppliers; share of each of the top 5 suppliers in the overall procurement of the client. Credit/purchase terms. List of buyers, share of each of the top 5 buyers in the overall sales. Credit sales terms. Compared to competing firms Please propose strategy to overcome any limitation If listed on stock exchange, please provide market capitalization, PE ratio, dividend yield. Compare the numbers with the ones falling on the last CP date

Buyers Strengths Weaknesses Stock Market Data

Share Holding Pattern Directors/Partners /Proprietor

Percentage Share

Shareholders Aggregate shareholding Directors

Percentage Share of

Total Total Mention any material change in shareholding since last year Company Management Directors Senior / Executive Management

Briefly comment on reputation, capability and vision Briefly comment on education, experience and ability to execute business and financial strategies

Mention the name and designation of contact individuals and contact details. Succession Planning Comments on succession. Mention any change in Directorship / Senior Management since last year.

Access to Management

Name & Signature of Relationship Manager

Name & Signature of Unit Head

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General Guidelines 1. Relationship managers initial required on all pages 2. Proposed font and size Garamond 10 3. Ideally, credit comments section should not be more than 4 pages Formulas of Financial Indicators / Ratios: To be calculated from the figures of Balance Sheet / Income Statement. i) Gross Profit Margin % Gross Profit

Credit Handbook
Appendix I to Chapter 3.3

Sales Revenue
ii) Net Profit Margin %
Net Profit After Tax

100

Sales Revenue

100

iii)

Interest Coverage Ratio Divide Profit before interest and taxes by "Financial Charges". Profit Before Interest & Tax

Financial Charges
iv) Current Ratio This ratio is determined by dividing Total Current Assets by Total Current Liabilities. It is an indicator of liquidity position of a business concern i.e. its capability of meeting its obligations expected to be due in the next accounting period through its current assets. Total Current Assets Current Ratio =

Total Current Liabilities

v)

Linkage Ratio (between Bank Borrowing & Equity) This provides linkage between total exposure (fund based and/or non-fund based) availed by the borrower from financial institutions and borrowers equity as disclosed in its financial statements. This ratio should be complied with SBP PR No. R-5 for Corporate / Commercial Banking. Total Exposure availed from Financial Institutions (fund based and/or non-fund based)

Total Equity of the borrower(as disclosed in financial statements)

vi) Cash Cycle This gives us the number of days required from purchase of Raw Materials / Stocks to realization of sales revenue. This is calculated by using following formula:
(Average Inventory (Cost of Goods sold Average Receivables Sales _ Average Payables) Purchases or COGS)

360

N 12

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Credit Handbook
Appendix I to Chapter 3.3

Note: a. N = Number of months for which income statement relates. b. Average Inventory / Receivable = Opening plus closing balance divided by two. c. Cost of Goods Sold = Sales Revenue Less Gross Profit vii)

Stock Days A ratio measuring how long on average it takes a company to convert its stocks into revenue. Stocks Cost of Goods Sold 360

viii)

Debtor days A ratio used to work out how many days on average it takes a company to get paid for what it sells. Trade Debtors

Sales
ix) Creditor

360 Days

A ratio measuring how long on average it takes a company to pay its creditors. Trade Creditors 360

Purchases
x)

Debt Service Coverage Ratio (DSCR) This is an important ratio used in determining the customers ability to honour its commitments relating to repayment of long-term debt. This is calculated by adding (i) Profit After Tax (ii) Depreciation & Non-Cash Expenses and (iii) Financial Charges together and then dividing the aggregate by sum of (a) Financial Charges plus (b) instalments of Long-Term Debt (including lease) due in the same year. Net Operating Cash Generated (excluding Interest & Tax) This financial indicator provides the cushion available in cash flows of the company. Net operating cash generated Interest Tax Off-Balance Sheet Financing A type of company financing that does not appear as a liability on the company's balance sheet. A company may engage in off-balance-sheet financing if it wishes to keep its debt-equity ratio low and thereby appear as if it is carrying little debt. This, in turn, makes the company look more creditworthy than it would otherwise. A common form of off-balance-sheet financing is an operating lease, in which a company rents, rather than buys, a capital asset. In an operating lease, the company must record only the rental payments, and not the whole cost of the asset. While off-balance-sheet financing is permissible, it can become unsustainable and can hide a company's true financial state.

xi)

xii)

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ACustomer Group *GECP Approval Level

Credit Handbook
Appendix II to Chapter 3.3
Routing Sheet
Circle/ Region / Branch (Code) Last Approval No. and Date Date & Ref No. of CP

Proposed Expiry of WC Facilities**

* Specify the GECP viz. WBG / IBG / CBBG ** Indicate next review date for term exposure i.e. where only the term finance has been extended. CP date should be within 6-months of financial year end. For Group Accounts, proposal should have the same expiry and ideally be elevated in one lot to the credit approval / review authority. Further, group name must be same for all accounts belonging to a single group. PKR in Million
Business Group Funded Limit Existing Non Funded Limit Existing Aggregate Existing Funded Limit Proposed Non Funded Limit Proposed Aggregate Proposed

Corporate Commercial Islamic Banking Treasury* Exposure at any other group Aggregate Facilities (Bank-wide) *Forward and Spot cover. ** Underwriting commitment (off balance sheet financing) Approval Chain Branch Credit Manager Branch Manager Regional Manager General Manager Business Head Credit Head Group Head Date Name/ Signature Comments

Serial # 1 2 3 4 5 6 7 8 9 10 11 12 13 14

15

Credit Proposal Checklist Documentation included in Attached Rationale for not furnishing the document(s) Credit Package Yes No SF-86 / Credit Proposal Credit Comments / Memorandum Basic Information Record PR Checklist eCIB Report (not more than 1 month old) Application of Finance BBFS Yield Statement Call Report (not more than 1 month old) CRR and & Weighted Average CRR Audited Accounts Where applicable. Confirmation also required that Auditor has signed off Quarterly Accounts Where applicable. If proposal is elevated after 4-months from FY end Stock Report Where applicable. Only confirmation required that it is held Stock Inspection Report Only confirmation required that stock inspections have been conducted as per Handbook requirements. Search Report In case of a limited company

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16 17 18 19 20 21 22 Valuation Report Bankers report Watch-List report
CRCD Remarks/ UER Exceptions

Credit Handbook
Appendix II to Chapter 3.3
Only confirmation required that satisfactory report have obtained and are held on record. Where applicable Must be provided with all CPs

Detail of Deposit Account of Customer Brief Customer Report (generated through CRMIS) Legal Opinion

Where applicable.

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B- Credit Proposal
eCIB CRR & Weighted Average CRR (previous) CRR & Weighted Average CRR (current)

Credit Handbook
Appendix II to Chapter 3.3
Name of Customer:
Classification / Watch-List Status (if any) PR Compliance Credit Handbook Compliance

For items tabulated above provide the status as (i) For eCIB as Clean or Qualified (ii) Mention CRR, and weighted average CRR iii) For other fields mention compliance status as Yes or No. Any adverse remark to any of these items needs to be explained in detail in later sections of CP and/or Credit Comments. eCIB to be obtained, name of bank to be mentioned if report is not clean.
(Amount in Million)

1- FACILITIES: Fund Based Facilities: a. b. c. d. e. f. g. h. Total Fund Based Facilities Non Fund Based Facilities: i. j. k. l. m. n. o. Total Non-Fund Based Facilities Total Fund & N.Fund Based Facilities
* Mup/ com: In case any change in base rate/ spread in proposed, effective date of change must be specifically mentioned. **Margin: Specify the margin ***Status: Fresh / Renewal / Enhancement / Reduction etc.

Existing Limit

O/S As on

Initial Date

Proposed Limit

Status**

M-up/ Com.

Proposed Tenor Margin*

Expiry

Existing Limit

O/S As on

Initial Date

Proposed Limit

Status***

M-up/ Com*

Proposed Tenor Margin**

Expiry

Security: Please mention here facility wise security against each facility. Furthermore specify if proposed security is different from existing arrangement. Following information shall be disclosed. Stocks: mention items, margins, valuation date, and location. Deposit Receipt / Certificates: Face value, Encashment value, status of lien Property / Fixed Assets: , Nature of charge (Regd. / Equitable), other encumbrances, Property Number, Area Details, owners name (self-occupied /rented), legal clearance, noting of lien in land revenue / authority record, value of property (MV and FSV), date of valuation, valuators name. Charge Registration: Date of charge registration, Asset, Amount of Charge, Ranking, NOC from senior charge holders, other charge holders name and amount.

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2-MCB Exposure on this Group Customer Name Proposed Limit F.B. N.F.B. Present Limit F.B. N.F.B. Overdue

Credit Handbook
Appendix II to Chapter 3.3
Borrowing from other Banks (Limit) Name of Bank WC LT

TOTAL

TOTAL

3. Comments by SBP/ Internal / External Auditors S. Comments by SBP / Internal Commitment by Business Group No. or External Auditor Brief description, specify date of observation also. Incorporate date of commitment

Progress to Date

Incorporate provisioning for accounts classified by SBP and state progress made since classification and future strategy. 4. Remarks by Credit Risk Control Division (CRCD) S. Remarks by CRCD/ UER Exceptions No.

Commitment by Business Group with timelines

Briefly mention comments by CRCD regarding security / documentation shortfall or any other aspect, along with necessary action to be taken there against. 5. Waivers/ Deviations
S. No. Waivers and/or Deviation from Credit Handbook / Circulars / Previous Approval Justification Status (Existing / Fresh )

Mention any post facto approval, waiver and/or deviation obtained over the last 12 months. Relaxation obtained from SBP, if any, should be mentioned separately. Mention status of deviations / waivers as either existing or fresh. For waivers / deviations already approved, mention if they are continuing or not. 6. Customer Business Performance Customer Business Performance(last three calendar years) Product 2008 2009 Last Commitment (2010) Actual (2010) Future Commitment (2011) Import Export Guarantee Total Deposits Earnings Mention detail of business routed through MCB by the customer along with commitments for the next 12 months.

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7. Group Business Performance (only for group accounts) Group Business Performance(last three calendar years) Product 2008 2009 Last Commitment (2010) Import Export Guarantee Total Deposits Earnings

Credit Handbook
Appendix II to Chapter 3.3

Actual (2010)

Future Commitment (2011)

Name & Signature of Credit Manager

Name & Signature of Branch Manager

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Credit Handbook
Appendix II to Chapter 3.3
Name of Customer:

C-

Credit Comments / Memorandum

1. Purpose of the Credit Proposal The purpose should be specified for the request / credit package with respect to status of the proposal i-e Fresh, Renewal, Enhancement, Reduction, one off etc. It must also state any change in terms and conditions from the previous approval and also whether fresh approval is required for any matter. 2. Facility Rationale / Justification (Facility Wise) This section of the proposal should capture purpose of proposed facility, evaluation of requested amount with respect to production capacity and funding requirement of the client, pricing, value addition through the proposed arrangement, etc. Synopsis of last 12 months, containing brief description of changes in credit facilities i.e. enhancements, oneoffs, reductions, any other financial accommodation, should be provided. For BMR/Capex/ Project Financing, discuss viability of the project. Discussion should also include rationale for facility restructuring or reduction in existing limits, where applicable. 3. Financial Summary Financial analysis The aim of the financial analysis should be to provide both qualitative/ quantitative information. Discussion should evolve around account heads reflecting material movements between the two audited accounts. Stating increase/decrease in amount/percentage should be avoided; the emphasis should be to uncover the underlying reason(s) which led to the change. In case of limited companies, Credit officer should try to extract ageing of receivables, evaluate marketability of stocks in consultation with the client, and highlight any balance sheet mismatch. If material, off-balance sheet financing / Contingencies/ Commitments to be briefly discussed. Variance analysis Emphasis needs to be on explaining underlying reason for the variance (projected numbers vs. audited numbers) Projections It should include projections (Balance Sheet, Profit & Loss and Cash flow) up to one year for Working Capital Lines and till final adjustment in case of Term Facilities. Sensitivity analysis is required for term exposures. Covenants should be listed and reason for any breach should be explained including future course of action to strengthen MCBs position. Quarterly accounts In case of listed public limited companies, latest set of quarterly accounts to be attached with the credit package (if Credit Proposal is elevated after 4 months from financial year end), and only significant observations need to be pointed out. Write-up/analysis is not required for quarterly accounts. CRR - Brief account of key reasons for improvement / deterioration in CRR should be provided. Balance Sheet and Income Statement: Mention status i.e. Audited/ Unaudited /Certified by Chartered Accountants but not audited Balance Sheet (last three years) Stocks Receivables Other Current Assets Net Fixed Assets Other Long Term Assets Total Assets 2008 2009 2010 Variance (2010 vs. 2009) Reason for Change

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Creditors Short Term Borrowing Current Maturity of Long Term Debt Other Current Liabilities Long Term Debt Directors Loan Total Liabilities Revaluation Reserves Capital Other Reserves + Retained Earnings Total Equity Total Equity+ Liabilities

Credit Handbook
Appendix II to Chapter 3.3

Income Statement (last three years) Sales Gross Profit Other Income EBIT Financial Charges PAT

2008

2009

2010

Variance (2010 vs. 2009)

Reason for Change

Financial Indicator (Ratios) 2008 2009 2010 Variance (2010 vs. Reason for Change (last three years) 2009) Gross Margin Net Margin Interest Cover DSCR Current Ratio Stock Days Debtor Days Creditor Days Total Lib/Equity Linkage Ratio Cash Cycle NOCG Int. - Tax Off-BS Financing Formulas of the above Financial Indicators / Ratios are given in General Guidelines attached herewith. Cash Flows - The emphasis should be more on projected cash flow than historical figures. Analysis should cover adequacy of operating cash flows to meet funding requirement as well as repayment capacity of external financing sources and sustainability of cash flows. 4. Industry analysis / Peer analysis Industry analysis should reflect the current macro environment and expected developments over the medium term, change in government regulation and its impact on the sector. It must cover the demand and supply conditions viz a viz price trends of raw material and finished goods, future price expectations, effect of price trends on industry margins etc. Competition/ Market Positioning of the client shall also be discussed with respect to size of the concern in comparison to other market players, market share, substitutes, barriers to entry, key selling point of Product (s) etc. Peer analysis shall be done for limited companies only and should ideally include comparative analysis with similar companies operating on similar scale and in same line of business. Peer analysis would also not be required in cases where comparable firms are not operating.

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Credit Handbook
Appendix II to Chapter 3.3

5. Account/ Group Performance Following shall be covered while doing the clients account/ group performance review: Repayment Track Record Principal, mark-up, PAD, etc of both WC and LT Limits Reasons for any delayed payments. Any restructuring/ rescheduling in past from MCB/ other banks. Adjustment date in seasonal finance. Delay in Recovery of Mark-up / Instalment (last four quarters) Q1 Q2 Q3

Q4

In case Facility Utilization is low, explain reasons. In case ancillary business is less than commitment, explain reasons. Future Business Commitment. Discuss reasons if commitment is less than expected. Profitability/ Account Yield (income form FB & NFB limits)

6. Collateral/ Security Analysis Branch should comment on quality of receivables (ageing) and stocks (saleable value). For financing against fixed assets, please comment on potential recovery if assets are to be sold under distressed condition. Furthermore analysis must be provided with respect to exposure versus collateral value (coverage) on both account and group basis. Any issues highlighted by LAD/ CRC must also be discussed here. 7. Facilities from Other Banks/ FIs If the client is also availing any financing facility from other financial institution, then particulars of the same shall be disclosed here. Bank Facility Limit O/S Security Other terms & conditions/ Information

Total

Total

Total

8. Risks & Mitigants Risk Impact on Repayment Ability Financial Risk Business Risk Any other Risk

Mitigants

Industry and company specific risks and mitigants to be addressed. 9. Account Strategy This should be a comprehensive section and should contain relationship strategy based on upcoming opportunities (state expected time to materialize), any early warning signals, pricing, Capex/BMR, utilization levels, change in yield, comment if trade business is lower than initially agreed, etc. Account strategy should end with clear concluding remarks and recommendations (enhance / hold/ reduce / exit) with regard to request made in credit proposal.

Name & Signature of Credit Manager

Name & Signature of Branch Manager

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DBasic Information Record

Credit Handbook
Appendix II to Chapter 3.3

Customer Information Customer Background

Legal status (i.e. ownership type), date of establishment, brief customer history, industry and line of business Mention complete address where production facility / factory / mill / trading office / head office of the customer are located. Specify FOT of the customer as per CRMD Circulars issued from time to time Installed capacity and utilization (current and last year). Indicate if there are multiple plants / sites. Historical trend of capacity enhancements. Total stock storage capacity of the customer. Mention the address if stock storage place is other than the plant/ business address Breakup of sales by line of business segregated into local sales / exports List of suppliers; share of each of the top 5 suppliers in the overall procurement of the client. Credit/purchase terms. List of buyers, share of each of the top 5 buyers in the overall sales. Credit sales terms. Compared to competing firms Please propose strategy to overcome any limitation If listed on stock exchange, please provide market capitalization, PE ratio, dividend yield. Compare the numbers with the ones falling on the last CP date

Plant location and Business Address Financed Organization Type (FOT) Production Base

Product Mix Suppliers

Buyers Strengths Weaknesses Stock Market Data

Share Holding Pattern Directors/Partners /Proprietor

Percentage Share

Shareholders Aggregate shareholding of Directors

Percentage Share

Total Total Mention any material change in shareholding since last year Company Management Directors/ Partner/ Proprietor Senior / Executive Management Access to Management Succession Planning

Briefly comment on reputation, capability and vision Briefly comment on education, experience and ability to execute business and financial strategies Mention the name and designation of contact individuals and contact details. Comments on succession.

Mention any change in Directorship / Senior Management since last year

Name & Signature of Credit Manager

Name & Signature of Branch Manager

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Detail of Deposit Accounts of Borrower Customer Name: Group Name:

Credit Handbook
Appendix III to Chapter 3.3

Detail of All Deposit Accounts (Both Time & Demand) maintained across MCB: Provide following details for each account Title of Account Nature of Account Account Number Branch where Account is maintained Date A/C opened Current Balance

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Credit Handbook
Appendix IV to Chapter 3.3

CREDIT PROPOSAL - TEMPORARY ACCOMMODATION

BRANCH OFFICE REGIONAL OFFICE 1) CLIENT DIRECTORS/ 1) PARTNERS / 2) PROPRIETOR 3) 2) EXISTING LIMITS Nature of Facility CIRCLE OFFICE BR. CODE REF. NO. ACCOUNT NO. DATE A/C OPENED DATE A/C TYPE

4) 5) 6) EXISTING Limit Outstanding Initial date PROPOSED LIMITS Proposed Ren/ Mark-up/ Enh. Comm. Margin Limit etc. CP EXPIRY DATE Expiry Securities (Amount in Millions) Value

Total Non-Fund Based

Total Fund & Non Fund 3-a) PURPOSE OF BORROWING / TRANSACTION 3-b) REPAYMENT ARRANGEMENT / SOURCE

4) FRESH / ADDITIONAL SECURITIES TO BE OBTAINED :

EXISTING Rs.

5) OVERDUE (if any) Nature of Finance

As on : Principal

Mark-up

T o t a l .. (Break-up along with maturity dates wherever applicable to be submitted on separate sheet). 9) GROUP POSITION FUND BASED

6) BUSINESS PERFORMANCE YEAR Imports Exports Local L/Cs Guarantees Debit Turnover Credit Turnover N. F. BASED TOTAL

Total Incl. Fresh 7) eCIB REPORT Applicants A/C Group Total Overdue Default 8) PRUDENTIAL RATIOS i) Current Ratio ii) Debt / Equity iii)Borr. to Equity

COMMENTS BY MANAGER / RELATIONSHIP MANAGER

RECOMMENDATION / DECISION OF REGIONAL/ UNIT HEAD & GENERAL MANAGER/ CORPORATE HEAD Regional Manager/ Unit Heat CREDIT OFFICER/ SENIOR CREDIT OFFICER General Manager

BUSINESS HEAD/ CREDIT HEAD

HEAD OF BANKING GROUP/ RMG

MANAGEMENT CREDIT COMMITTEE (MCC)

Head of Business Group

Head of RMG

Note: This CPs must be computer printed / typed.

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EARMARKING OF LIMITS

Credit Handbook
Appendix V to Chapter 3.3

Earmarking of limits can be done after approval is obtained from approving authority on the following format: To: From: Circle: Name of Customer: Risk Rating: Credit Proposal # dated / / (Latest Approval CP). (Approving Authority) (Through the concerned General Managers Office) (Name of Branch)

Re: Request for earmarking of limits for (Full Name of Company). We are proposing earmarking of PKR-----M as follows:
No. Type of Facility Limits (AMT) Current Outstanding (Including mark-up) Brief Security Details Limits being Earmarked

(Rs. 000)
Proposed Limits (After Earmarking)

1 2 3 4

A B C D Total :

X X X X

X X X X

+ --- M

- --- M NIL

Period of Earmarking

(Mention the Date of this Earmarking after which the limits will be reverted to the original). (Not to Exceed 90 days). For Facilities A and D (for facilities involved in the earmarking). Additional security (if Any)

Security

Branch Manager

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Request for No Objection Certificates 1. Customer Name/ID:___________________________ 2. Group Name/ID:______________________ 3. CRR__________ eCIB status:_______________ 4. Expiry / Maturity of existing limits:______________ 5. Are there any past dues in the account? (Y/N)

Credit Handbook
Appendix VI to Chapter 3.3

6. If yes the reasons for the same & justification for the proposed transaction: _____________________________________________________________________ 7. Request details Name of the Facilities to FIs in whose offered favour NOCs to Client which required to be be issued covered against charge Total 8. Bank wise analysis of the charge position, as per the description mentioned above. Name of the FI Including MCB Total Primary risk based facilities secured against charge (current or Fixed) (a) Charge held Amount (b)
(c)= a/b -1

Amount of charge for which NOC is required

Description of the Charge (Current or Fixed assets)

Other securities offered by the customer to that FI

Ranking

Margin

Latest O/s

9. Encumbrances vs. Valuation of Current / Fixed Assets Total encumbrances Value of Current Assets (as per latest stock / receivable reports). / Fixed Assets (as per W.D.V or Forced sale value whichever is higher) Existing Cushion if any Latest Short / Long term borrowings Amount of assets (Current / Fixed) likely to be build up as a result of additional financing availed or to be availed Expected Cushion (a) (d)

(e)= (a) (d) (f) (g) (h)=(e) + (g)

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Credit Handbook
Appendix VII to Chapter 3.3

Guidelines:-

Check List for Prudential Regulation Compliance [This list to be kept updated as per changes in PR] M/s. __________________________ B/o ________________________

Answers should be Yes(Y) or Not Applicable (NA) for all the items listed below to be eligible for Bank's financing unless prior exemption from SBP available on branch record. (Y/NA) Check List:1 a) Financing facility to the single person (entity) at any point of time shall not exceed 30 percent of the banks unimpaired capital and reserves, subject to condition that the maximum outstanding against fund based financing facilities do not exceed 20% of the unimpaired capital and reserves. Groups Total Exposure Limit of 40% & FB only 35% of Banks equity also complied with (effective from 31-12-2010). In case of SMEs maximum exposure to a single person (entity) do not exceed Rs.75.0M.

b) c) 2

Approval of majority of directors of MCB's excluding the director(s) concerned obtained as the borrower fall in category specified in of Prudential Regulation. (Includes persons who may not be director but hold 5% share). Nor any un-secured Advances allowed to/against guarantee of Bank's director. a) Clean advances (including against personal guarantees only as well) to the borrower/their family members from all Banks do not exceed clean lending limit (as per PR & Banks Policy) in aggregate (written declaration obtained as per Prudential Regulation). The purpose of loan, is expressly stated and is for genuine purpose (Applicable for clean advances as well). i) Statement of Accounts / Balance Sheet as required under Prudential Regulation obtained (audited accounts required where exposure exceeds Rs.10.000M or a limited company. In case of fully secured against liquid assets, financial statement signed by borrower shall suffice). If the borrower is a public limited company and exposure exceeds Rs. 500 million, financial statements duly audited by a firm of Chartered Accountants which has received satisfactory rating under the Quality Control Review (QCR) Program of the ICAP. Fund Based & Non Fund Based Financing from all Banks / FIs do not exceed 10 times of equity and Fund Based only 4 times [incl. (i) subordinated debt with subordination agreement duly signed, & (ii) revaluation reserve up to 3 years from date of revaluation]. In case of seasonal financing up to 6 months, total exposure (FB & NFB) do not exceed 12 times and FB only 8 times of equity of borrower as per above. Not applicable to exposure fully secured against Liquid Assets, Cotton Ginning & Rice husking units and Export Finance. Where subordinated loan treated as equity the loan subordination agreement signed by loan provider and the borrower, confirming that the loan shall be repaid with Bank approval is held.

b) 4 a)

ii)

b)

i)

ii)

NOTE:

iii)

In case of negative equity, financing do not exceed 4 times of fresh injected equity during current year and agreement held that customer shall plough back 80% of net profit each year till able to borrow without relaxation. In case of SMEs total exposure at all Banks / FIs do not exceed Rs.150.000M (including leased assets) or Rs.100.000M (excluding leased assets). (Y/NA)

iv)

While giving advances against shares / TFCs , bank shall not : take exposure against the security of shares / TFCs issued by them. provide unsecured credit to finance subscription towards floatation of share capital and issue of TFCs.

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Credit Handbook
Appendix VII to Chapter 3.3

take exposure against the non-listed TFCs or the shares of companies not listed on the Stock Exchange(s). take exposure on any limited company against the shares/TFCs of that company or its group companies. take exposure against sponsor directors shares (issued in their own name or in the name of their family members) of banks / DFIs. take exposure on any one person (whether singly or together with other family members or companies owned and controlled by him or his family members) against shares of any commercial bank / DFI in excess of 5% of paid-up capital of the share issuing bank / DFI. take exposure against the shares/TFCs of listed companies that are not members of the Central Depository System. take exposure against unsecured TFCs or non-rated TFCs or TFCs rated below BBB or equivalent. minimum margin requirement is 30% of the shares complied with. Banks / DFIs shall not hold shares in any company whether as pledgee, mortgagee, or absolute owner, of an amount exceeding 30% of the paid-up share capital of that company or 30% of their own paid-up share capital and reserves, whichever is less.

Classification of Advances, where applicable, is done strictly in accordance with time frame specified in Prudential Regulation or classification not required. Classification of Restructured / Rescheduled loan not changed unless terms are complied with, for a period of 1 year (excl. Grace period) and 10% of Restructured / Rescheduled amount recovered. Reasonable effort has been made to determine true two identities of the borrower/their ownership and to ensure that Bank's finances shall not be used for any un-ethical purpose. a) b) eCIB Report obtained and is satisfactory/due consideration given to over exposure/default by borrower or its group accounts. (Applicable for all exposure irrespective of any amount) In case of SMEs effort made for obtaining Credit Worthiness Report from their association.

8 9

10

No issuance of any guarantee or letter of comfort by Bank's is involved for mobilisation of deposits/Investments Certificates/issue of Commercial paper by any NBFI (Investment Banks/Leasing Companies/Modarabas/ DFIs) (Prudential Regulation) in this case. Latest Borrower Basic Fact Sheet obtained. Guarantees issued comply with PR & Banks Policy (exception in Banks Policy, where applicable obtained from competent authority). In case of Restructured / Rescheduled Loans, loan status not be changed unless all conditions are complied for one year (excluding grace period) and minimum 10% of the restructured amount is realized in cash. In case of SMEs, Personal Guarantees obtained from directors / owners. Loans obtained by the borrowers have been utilized for the purpose started and specific purpose for which loan is being obtained known. Name, Designation & Signature

11 12 13

14 15

Dated: Note: A separate file / register to be maintained at each branch and check list of all borrower be prepared and kept with Manager/Advances Incharge of the branch, who shall ensure that the same is kept update

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PROFITABILITY / YIELD REPORT OF BORROWERS
1. (a) (c) (e) 2. Borrowers Name Branch Code Area Office Name

Credit Handbook
Appendix VIII to Chapter 3.3

(b) Date of Report (d) Period Covered Ref. No.

To

LIMITS
Nature of Limit Limit approved Mark-up / Commission Rate O/S as on Product of F.B. Since Jan.

(Amount in Million Rs.) Mark-up Earned

1 Total F.B. Total N.F.B. 3. a)

Imports Exports Import (Local) Remittances Bank Guarantees Deposits T/O Dr. T/O Cr.

5 A1

6 A2

BUSINESS PERFORMANCE

b) EARNING (From Non-Fund Based Operations)

# of Tr. Comm. On L/Cs Comm. On Gtees Comm. On DA Bills Exchange earning on Imports Exp. Negotiation Comm. Comm. On Remittance Misc. Income (specify)* TOTAL INCOME B Comm. / Income

Business / Year

* e.g. monitoring fee, commitment charges etc. c) DEPOSIT (Including Balance in Margin Account / TDR etc.)
i) Deposit Type ii) Deposit as on iii) Rate of Profit p.a. iv) Product v) Net contribution to Br. Income + / (-) **

**

Column (iv) x[Average Pool Rate on Debit balance with H.O. Column (iii)] 36,500

Total Net Contribution + / (-)

4.

CUSTOMER PROFITABILITY (Actual) Yield of Fund-based Assets (Gross) = A2 B C Total A1 = _______ Ps. / day / Rs.1000/= (or *** % p.a.) *** Mark-up Rate x 365 10

5.

a)

FOR APPROVAL Nature of Limit 1)

Normal Mark-up Rate

Existing Mark-up Rate

Proposed Mark-up Rate

b)

Justification for concession in Mark-up Rate, e.g. :i) ii) With approval of above, expected yield is = ________ Ps. / day / Rs.1000/= (or _________% p.a.).

2) 6.

Signature of Area Head __________________________

Signature of Approving authorities 1. 2.

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Credit Handbook
Appendix IX to Chapter 3.3

SANCTION ADVICE FORMAT OF A LETTER TO THE CUSTOMER ADVISING LIMITS

(To be prepared after every credit limits renewal or in case of a new facility)

Ref. Dated:

M/s. (Name of Customer)

Dear Sir,

Re: SANCTION LETTER FOR (NAME OF BORROWING ENTITY)

We are pleased to advise that the following Credit Limit(s) has/have been made available to you, as approved by the competent authority till__________. Sr. # a b c d Limit (Rs. In Millions) Mark-up)/ Commission

Facility

Status

Margin

Expiry

Purpose a. b. c. d. Security(ies) / Collaterals a. b. c. d. Covenants a) b) c) d)

Covenants: Sanction Advice must capture all covenants, as defined in Approval of Finance, which require performance on part of customer KIBOR BASED MARKUP: - TPMR: Approved KIBOR benchmark Ask Rate at the first day of each calendar reset period + ____ p.a. spread. - Reset/Repricing Period: As per approved benchmark.

e.g.: Directors loan shall not be withdrawn during tenancy of Banks loan (where applicable). Any change in ownership/strategic control during tenancy of Banks financing shall require banks prior clearance. The customer shall ensure that financial ratios do not fall below the requirement under Prudential Regulations or as may be specified / subsequently specified by Bank (where applicable). E.g.: While declaring any cash dividend / profit distribution there should be no bank dues in arrears or prior NOC should be in place (where applicable).

Other Terms & Condition(s) a) b) c) The bank reserves the right to add, amend or alter any condition (except those, which are prohibited by regulator) at its discretion including increase in margin requirement. The Bank Shall, at all times, have full authority to cancel/reduce the facilities allowed without assigning any reason and to call for adjustment of the liabilities within the period so decided by the Bank. The hypothecated or pledged goods or mortgaged building and machinery must be kept fully insured by insurance company on Banks panel or nominated by bank specifically at all times against the risks of Fire, Riots, Strikes, Burglary and malicious damage risks with the bank as the mortgagee and yourself as the mortgagor, and the relevant policy along with premium payment receipt held by us. Security / watch and ward of assets placed under Banks lien shall be your responsibility. Details as per Borrowers Basic Fact Sheet format prescribed by bank shall be provided at least once in a year and wherever any change in ownership / key management or credit rating or substantial change in financing arrangement with other Banks / FIs or changes in details of Associated units takes into effect. Stock statements together with a list of book debts are to be submitted at the end of each month, to reach us by the first week of the following month. The statement / list should provide Bank-wise break up of outstanding amount with total value of stocks and receivables there against. Bank may require

d)

e)

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the statements earlier.

Credit Handbook
Appendix IX to Chapter 3.3

f)

The Bank or its authorised representative(s) would have the right undertake inspection of Stocks / Assets under Banks lien from time to time and in any case at least once in each calendar year with or without prior intimation and you shall be obliged to extend all possible assistance. The facilities granted are subject to State Bank of Pakistans Prudential Regulation / restrictions and Credit Policies as may be imposed from time to time. These facilities are being offered with the understanding that your companys financial condition will comply with these regulations and other regulatory requirements as well, the compliance of which depends on your actions / performance.

g)

h)

Audited accounts should be submitted to the bank within three (3) months from the date of your financial year end. Whereas half yearly accounts should be submitted within two (2) months. In both cases it shall be submitted to the bank within 7 days of its finalization. Any further break up / details or interim / in-house report required by bank to be provided immediately. Details of liability (fund based & non-fund / contingent) towards our bank or other lenders shall be appropriately reflected in Annual A/Cs of the concern & / or note forming its integral part, in appropriate manner with name of the Bank(s) reflected therein. All levies and taxes now or at any time hereafter levied and payable in respect of the financial accommodation and banking facilities set out in this letter will be exclusively borne by you. All requisite charge forms to be submitted, duly filled in and signed by the authorised persons. Security held by Bank against one limit, at Banks own discretion, shall be available for other limit(s) of same entity group entities [tick applicable box(es)]. The value of security determined by Bank shall be final. In case the market value of assets placed under Banks lien / pledged shares / pledged or hypothecated stocks, as determined by the Bank, falls below the specified margin requirement, the customer must provide additional shares / stocks acceptable to the bank or reduce the finance accordingly, within 3 days of receiving a letter for the same. However, if the margin falls below 75% of the requisite margin requirement or margin available is less than 10% or as may be specified by Bank in case of shares or value of stocks / assets held as security falls below the banks exposure, the bank at its own discretion, may sell the same, for adjustment / reduction of exposure without reference to borrower / customer. During the tenancy of MCBs exposure or financing arrangement, for any change in directorship prior consent in writing must be obtained from the Bank. Otherwise MCB has right to recall the loan / exposure / financing arrangement immediately. Import Export Remittances / Others

i) j)

k)

l)

Business commitments to be met during the calendar year are as under: a) b) c)

In the normal course you may rely upon the above facility till but you will appreciate that in accordance with normal banking practice, the facility is repayable on demand and we reserve to ourselves the right to vary the terms and condition and/or ask for repayment if circumstances arise which in our opinion justify our doing so. If you agree with the terms and conditions of this Sanction Advice/Letter, please return the duplicate copy with its each page duly signed as token of your acceptance of the aforementioned terms and conditions within 15 days from the date hereof.

Yours faithfully

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Credit Handbook
Appendix X to Chapter 3.3

SECTION A TRADING / SERVICE CONCENRN

Remarks
1. Core Business of the company 2. Are the total assets of trading/service concern at cost excluding land and building less than Rs.50 Million? 3. Are sales of the concern not exceeding Rs.300 Million as per latest financial statements? 4. Are numbers of employees of the concern not more than 50 persons if trading concern? 5. Are numbers of employees of the concern not more than 250 persons if service concern? In case answer of question No. 2 to 5 is YES then said concern is SME. SECTION B MANUFACTURING CONCERN

YES YES YES YES

NO NO NO NO

Remarks
1. Core Business of the company 2. Are the total assets of manufacturing concern at cost excluding land and building less than Rs.100 Million? 3. Are sales of the concern not exceeding Rs.300 Million as per latest financial statements? 4. Are numbers of employees of the concern not more than 250 persons if manufacturing concern? In case answer of question No. 2 to 4 is YES then said concern is SME.

YES YES YES

NO NO NO

Note: Please tick mark the YES/NO column and provide actual information regarding core business of the company in the point No. 1 of both the sections.

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Credit Handbook
Appendix I to Chapter 3.4

Day

Date Month

Year

Reference No. Name of Branch:

__________________________________ __________________________________

Name and Address of Customer: _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________

Outstanding Balance (Principal & Mark-up) as on ________________________:

Amount in PKR Outstanding Balance Expiry Date Principal Mark-up

S No.

Nature of Facility

Approved Limit

1. 2. 3. 4. Dear Customer, Please note that outstanding balance of principal and mark-up against the credit facility (ies) availed by you is indicated above. In case of any disagreement, contact us within 10 days from the date of this letter. If, however, we do not receive a response within the time stipulated above, the outstanding balance amounts as shown above, shall deemed to be correct and confirmed by you. Yours faithfully,

Branch Manager

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Credit Handbook
Appendix II to Chapter 3.4

PRICING GRID FOR WHOLESALE BANKING GROUP Sr. No. 1 2 3 4 5 6 Category PKR Cash Collateralized Exposure FEX Cash Collateralized Exposure Share Secured Exposure Non Stock Brokers Stock Brokers Pledge Based Inc. Import based PKR loans Hypothecation based Lending/TR Post Shipment Exposure Post Shipment L/C Post Shipment Contract/Discrepant (Accepted) Post Shipment Contract/Discrepant (Unaccepted) GoP GTEE/GoP backed security/GTEE or Deposit under-lien with Bank rated Investment grade and above Term Exposure Term Loans 3 yrs Term Loans 5 yrs Term Loans 7 yrs Term Loan 10 yrs Term Loans more than 10 years FE-25 based Lending Import/Export Tier 1 Proposed Pricing Tier 2 Tier 3

7 8

Relevant LIBOR + Spread (Minimum positive spread to be notified at the beginning of each quarter)

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PRICING GRID FOR COMMERCIAL BRANCH BANKING GROUP
Sr. No.
1 2

Credit Handbook
Appendix III to Chapter 3.4

Category
PKR Cash Collateralized Exposure FEX Cash Collateralized Exposure (Advances Against Lien on MCB's FCY Deposit Receipts / Certificates under FE-25)

Proposed Pricing
* MARK-UP: Relevant ask KIBOR/ relevant Benchmark + Spread (Minimum positive spread to be notified by the Group Head at the beginning of each quarter). RESET FREQUENCY: Must match the relevant ask KIBOR tenor.

5 6

7 8

10

Share Secured Exposure Non Stock Brokers Stock Brokers Pledge Based Exposure (Including Import Based PKR Loans) Pledge Based (Textile / Refined & Raw Sugar / Wheat / Rice & Paddy / Steel) Pledge Based (Others) Hypothecation Based Exposure / TR Post Shipment Exposure Under LC Under LC (Discrepant Documents) Under Contract / Firm Orders GoP Backed Exposure / First Class Bank Guaranteed Exposure Term Exposure Up to Three Years Up to Five Years More than Five years GoP Backed Exposure / First Class Bank Guaranteed Term Exposure Up to Three Years Up to Five Years More than Five years FE-25 Based Lending (Import / Export)

MARK-UP: Relevant ask KIBOR + Spread (Minimum positive spread to be notified by Group Head at the beginning of each quarter).

RESET FREQUENCY: Must match the relevant ask KIBOR tenor.

MARK-UP: Relevant LIBOR + Spread (Minimum positive spread to be notified by Group Head at the beginning of each quarter). RESET FREQUENCY: Must match the relevant LIBOR tenor.

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SHARE OF WALLET ANALYSIS

Credit Handbook
Appendix IV to Chapter 3.4

Revenue Item Income from Short Term Loans Income from Long Term Loans Income from Trade Loans Commission on LC's/ LG's/FX, etc. Investment Banking related fees Any other sources Total

Total Wallet (PKR Million)

MCB's Share (PKR Million)

Share of Wallet (%)

Share of Wallet Cross Sell Ratio Yield of Account

= = =

MCB's Share / Total Wallet Non Lending Revenues / Lending Revenues (M/Up Income + Non-M/Up Income) / Total Products (of Fund Based Facilities)

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Credit Handbook
Appendix I to Chapter 3.5

Credit Proposal Process Flow (With CRC Support)

Processing of Credit Proposal
Customer
Application of Finance

Credit Proposal Rejected

Credit Proposal Approved

Reviewing Authority Approving Authority Credit Risk Control Originating Business Unit

Credit Proposal Preparation along with recommendations

Approval of Finance Credit Proposal Returned

Copy of Approval of Finance

Credit Proposal Returned Decision by Approving Authority

Copy of Approval of Finance

Pre-Fact Review by Reviewing Authority

155

Reviewing Authority Approving Authority Originating Business Unit

Customer

MCB Bank Limited

Appendix II to Chapter 3.5

Credit Handbook

156

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Credit Handbook
Appendix III to Chapter 3.5

Facility Advising Letter (CRC Support)

Customer

FAL for acceptance by customer

Credit Approving / Reviewing Authority

Credit Package Approved with all related Documents

Business Unit

Business Unit accepts Draft

Yes

To Business Unit for joint signatures & acceptance by Borrower

Accepted FAL received Original sent to CRC

No => Returned for modification

Change request differs with original CA

No

FAL Prepared

Accepted FAL filed in Safe Custody

CRC

Draft FAL is Prepared as per approved Package

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Credit Handbook
Appendix I to Chapter 3.6

Items Executive Summary Launch Timelines Glossary Target Market

Details / Areas that should be discussed A brief overview of PPM summarizing key points. A deadline Expected date for launch of the product to ensure that analysis of the product and its associated risks should be valid A list of technical terms with their definitions used in the PPM. This section should describe the target market in detail and cover the following items: Size & segmentation of the target market % age of the target market anticipated to be targeted Statistics / research on the target market (refer source if possible) Exclusions : Non Targeted customers Negative list of segments / professions Geographical Areas (Example: FATA) This section should discuss rationale for launch of product and potential pay-off. This will include: Product features in line with target market segmentation Distinctive competence/ uniqueness of product Overall fit of the product within MCBs existing product portfolio Effect of this product on MCBs image Future potential for expansion This section should discuss material parameters of the product that will include: Eligibility Criteria Account Initiation (Screening) Account Maintenance Pricing (Effective annual return) Limits (Maximum & Minimum) Security structure Tenure (Maximum & Minimum) Application approval process (Minimum criteria for risk acceptance and rules for approval) Approval Grid (This should also include deviation approval level) Collection policy Write off policy Early Redemption policy etc. This This section should provide details of documentation required for the product. should include: Documentation standards and any variances thereto List of documentation required Draft of agreements Legal opinion from Legal Affair Division on the adequacy and completeness of the standard documents.

Product Description

Products details

Documentation

Loan booking, Maintenance and responsibility schedule Economic & Competitive Environment

This section should explain where these loans will be booked and what would be the responsibility schedule for performance of various tasks.

This section should discuss: Overall economic situation Primary & Secondary competitors. Which organizations have offered a similar product in the past, from what date, and what has been their experience with the product? What specific losses have been associated with this product or similar products, Please list the five largest such losses with a brief description of the

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Credit Handbook
Appendix I to Chapter 3.6

Financial forecasting/ Business Plan

Stress Testing Program Caps Program Compliance Marketing strategy & Distribution channel Staff required & Human Resource policy Potential risks involved and strategy Legal, regulatory & policy compliance Accounting Procedures & Entries MIS reports & portfolio Management

circumstance surrounding each event. A comparison of competing banks (at least three) on major elements like limit, pricing, tenure, approval process etc. Competitors product stage (rapid growth / stable growth / mature / declining) Likely response of competitors of the new product Cannibalization effect, if any This section should provide the business plan in quantitative terms and include the following: Initial launch expense A detailed financial forecast in terms of Revenues Expenses (Fixed & variable) Profitability / yield Delinquencies & write offs (Please provide region wise break-up) Sensitivity analysis by varying key assumptions. This section should incorporate three scenarios - optimistic / most likely / pessimistic. This section will include limits on the size of program or any other parameters in the initial phase. This section should define a process to ensure compliance with any applicable program limits and other parameters (regulatory as well as internal). Details of marketing strategy for new product and distribution channels.

Details of human resource requirements, requirements, succession planning etc.

availability,

specialized

training

This section should discuss Key Risk Areas that arises due to unique nature of product and risk mitigants thereto. New product should be in compliance with SBP regulation and in conformity with MCBs loan policy. This will be responsibility of business unit initiating the request. Detailed accounting entries for guidance purposes New account codes to be introduced in the systems An appropriate MIS system for the product program should be designed to ensure availability of information for decision making. IT system & database source should have ability to: Disaggregate performance at various levels Provide aggregate exposure on product & individual transaction Establish standard reporting system Attach formats of reports that will be generated on an on-going basis based on dummy data. The product program should incorporate a provision for reporting MIS to RMG on a regular basis.

Exit Strategy

The PPM should incorporate an exit process for the product in the event that the product is required to be dis-continued by the approval authority. Details of how the existing exposure will be reduced to nil, what is the expected cost, time and other resources required to ensure a smooth exit need to be mentioned.

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AREAS RELATED TO OPERATIONAL RISK Procedure Manuals List of internal controls Outsourcing Arrangements Insurance Arrangements Vendors IT Architecture & system Support Reporting of Operational Losses & Control Breaches

Credit Handbook
Appendix I to Chapter 3.6

Confirmation that procedure manuals have been developed / exist for all the activities related to the product. List of all such manuals. Approving Authority for each of these manuals

Business unit initiating the new product request shall provide list of internal controls that exist as part of various procedures. Internal Controls include financial, operational, and compliance related controls. In case outsourcing is involved, details of such activities and risks involved should be provided. Insurance arrangements relating to new products should be specified Selection criteria of vendors Brief overview Capacity to monitor performance and regulatory parameters Capacity to monitor portfolio parameters Contingency planning/ disaster recovery planning MIS should have capacity to provide the following reports at periodic intervals/ at time of annual review: a) b) Operational Loss Report Control Breaches Report (where loss has not been incurred but control has been breached)

Operational loss is defined as the loss resulting from inadequate or failed internal processes, people and systems or from external events. Operational losses needs to be classified in the following seven event types: Internal Fraud External Fraud Business Disruption and System Failure Damage to Physical Assets Execution Delivery and Process Management Client, Product, and Business Practices Employment Practice and Work Place Safety Format of reporting operational losses shall at minimum include the following fields: a) Detail of loss incident (including analysis of cause) b) Date of incident c) Risk Event Type d) Branch/ Office e) Amount of loss f) Recovery through insurance g) Recovery through other sources h) Future Recovery Plan Format of reporting control breach information shall at minimum include the following fields: i) Detail of control breach incident (including analysis of cause) j) Date of incident k) Risk Event Type l) Branch/ Office m) Frequency of incident Severity of potential loss (Low/ Medium/ High) Listing of BU/SF Group Heads whose sign-offs/recommendations are required before presentation of the proposed program to Board nominated committee for approval

Signoffs

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Credit Handbook

Credit Handbook Section 4 Management of Deteriorating Credits

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Credit Handbook

Section 4 Management of Deteriorating Credits

4.1 Defining Default 4.2 Watchlisting Policy 4.3 Provisioning Policy 4.4 Write-off and Rescheduling / Restructuring Policy 4.5 Special Assets Management 4.6 Monitoring

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Credit Handbook

4.1
4.1.1

Defining Default
Definitions 4.1.1.1 4.1.1.2 4.1.1.3 Overdue But Not Classified OBNC Watchlist Default

4.1.2

Scope of Default

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4.1.1 Definitions

Credit Handbook

At MCB, default and other loan classifications shall be governed by the following definitions. 4.1.1.1 Overdue But Not Classified - OBNC If a client fails to service mark-up / interest and / or principal within 30 calendar days from the due date, it should be classified as OBNC. In case of trade bills (import / export), if a client fails to adjust the same within 10 calendar days from the due date, it should be classified as OBNC. 4.1.1.2 Watchlist Watchlist Account is one that has risks or potential weaknesses of a material nature requiring monitoring, supervision or close attention of the management but has not yet been classified as Substandard or worse as per State Bank of Pakistans Prudential Regulations. 4.1.1.3 Default A default will be deemed to have occurred with regard to a particular obligor when either or both of the following two events have taken place. If a client fails to service mark-up / interest and / or principal within 90 calendar days from the due date or as defined in Prudential Regulations from time to time, it should be classified as Default. In case of trade bills (import / export), if a client fails to pay within 60 calendar days from the due date, it should be classified as Default. The bank considers that the obligor is unlikely to pay its credit obligations to the bank in full, without recourse by the bank to actions such as realizing security (if held).

An obligors un-likeliness to pay can be characterised by the following: The bank puts the credit obligation on non-accrual status. The bank makes a charge-off or account-specific provision resulting from a significant perceived decline in credit quality subsequent to the bank taking on the exposure. The bank sells the credit obligation at a material credit-related economic loss. The bank consents to a distressed restructuring of the credit obligation where this is likely to result in a diminished financial obligation caused by the material forgiveness, or postponement, of principal, mark-up / interest or (where relevant) fees. This also includes allowing of Forced finances, Temporary overdrafts / extensions etc. In case of overdrafts, an obligor has breached an advised limit or has been advised of a limit smaller than current outstanding. Occurrence of a specific event of default under a contract.

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Credit Handbook

For defaulted clients, the Risk Rating (RR) of the client should be downgraded as per the classification criteria. In case a finance agreement specifies Event(s) of Default, Default would be deemed on the occurrence of such event(s). The following events shall override any / all of the above. SBP Inspection declares an obligor to be in Default (on subjective basis or otherwise). A change in the regulatory definition(s) of Default.

In case of sovereign exposures, declaration of default by International Rating Agencies and / or Bilateral / Multilateral Lending Agencies shall constitute an event of default. 4.1.2 Scope of Default As a matter of policy, for all exposures the bank will treat default at the obligor level rather than at the facility level, i.e. default on one facility shall be construed as default on all facilities of the obligor. All other facilities of such an obligor shall at least be classified into the same category as that of the obligors defaulted facility, except for Trade Bills, which will be classified as per SBP PRs only. In case of default on Trade Bills, other facilities shall not be classified. However, on a case to case basis, Business Group Head may allow to classify other facilities in case of default on Trade Bills. The above shall also apply to facilities subjectively classified by either SBP or MCB, irrespective of the reasons for the subjective classification. Relevant Business Group Head shall have the authority to allow exception to the above. The relevant Business Group Head shall also have the authority to treat default on Group Obligor basis with the concurrence of Group Head RMG, provided authentic group data is available. The above mentioned definition of default and scope of default shall also be applicable to Consumer Lending.

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Credit Handbook

4.2
4.2.1 4.2.2 4.2.3 4.2.4 4.2.5 4.2.6 4.2.7 4.2.8

Watchlisting Policy
Introduction WAR Committee Levels Watchlist Symptoms Watchlist Reporting Responsibility for Declassification Documentation Review Revaluation of Properties Held as Security Remedial Actions 4.2.8.1 4.2.8.2 4.2.8.3 Immediate Actions Further Investigations Relationship Strategy

4.2.9

Annual Review

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4.2.1 Introduction

Credit Handbook

A Watchlist Account is one that has risks or potential weaknesses requiring monitoring, supervision or close attention by the management but has not yet been classified as per State Bank of Pakistans Prudential Regulations. However, there is a probability that the same will be classified as such at a future date. In no way categorization of an account as Watchlist implies that the account is in a workout situation or a case for the Special Assets Management Group. Watchlisting also does not mean that field should stop doing business with a particular client or stop draw-down in an account. It only entails a higher level of vigilance. Watchlist categorization only reflects weaknesses in credit quality, which need to be addressed. Also, it requires an assessment of the borrowers ability to rectify the problem within a reasonable time frame, and thus, improve its position as a borrower. The Watchlisting process is to be used as a monitoring tool for credits requiring greater management attention. The bank recognizes that some credit decisions, despite being undertaken properly and prudently, may still go wrong. The early detection of deterioration in credit quality and prompt reporting of such early warning signs are evidences of the proper exercise of account management responsibilities and will not be seen as a weakness in executing credit responsibilities. Early identification and prompt reporting of deteriorating credit signs enable swift action to protect the Banks interest. Moreover, early discussion with customers will enhance the likelihood of developing strategies mutually acceptable to both the customer and the bank. As per time based classification guidelines of Prudential Regulation (PR) of SBP, the first level of classification, i.e. Substandard is triggered only once the borrower fails to repay mark-up / interest, or principal, within 90 days from the due date. Obviously, the reasons and symptoms in respect of a borrowers inability to meet its commitment have occurred much earlier. The essence of good credit management lies in early problem recognition, leading the bank to take corrective measures to protect asset quality through prompt remedial action (tighter structuring of facilities, strengthening of security position, etc.). Therefore, in order to protect and improve the quality of the banks portfolio through effective monitoring, a more pro-active approach needs to be adopted. An early warning system in the form of Classification Watchlist, as delineated below, is to cover the gap between Regular and Classified categories. No provisioning is required in Watchlist category. As soon as the account is classified as Watchlist, the risk rating14 should be amended as per Rating Scales defined in Section 2.6.

14

Please refer the Chapter on External and Internal Credit Ratings

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4.2.2 WAR Committee Levels
WAR Levels Amount (Total Exposure) WAR Committee Levels

Credit Handbook

Frequency of Reviews

For amounts up to PKR 15M

For amounts between PKR 15M and PKR 50M For amounts between PKR 50M and; PKR 200M for CBBG PKR 750M for WBG

For amounts more than PKR 200M for CBBG and PKR 750M for WBG.

Relevant Business Head / Corporate Head - Chairperson General Manager Relevant Credit Officer(s) (CO2 or CO3) Relevant Senior Credit Officer 1 Chairperson Relevant Business Head Relevant Credit Officer Nominees from LAD and SAMG* Manager NPL CRRS* Group Head RMG / SCO3 - Chairperson Relevant Business Group Head Head of Special Assets Management Group* Relevant Senior Credit Officer 2 Relevant Corporate / Business Heads Nominee from LAD* Manager NPL CRRS* President - Chairperson Head of Risk Management Group Relevant Business Group Head Head of Special Assets Management Group* Relevant SCO-2 / SCO-3 Relevant Corporate / Business Heads Nominee from LAD* Manager NPL CRRS*

Quarterly

Quarterly

Quarterly

Quarterly

*= They are not permanent members. Chairperson of the relevant WAR committee level shall have the authority to call upon these nominees on as and when required basis.

Relevant Credit Officer for Level-1 and Level-2, relevant Senior Credit Officer 2 for Level-3 and Level 4 shall be the coordinators and responsible for conducting the meetings, recording minutes of the meetings, circulating decisions of the meetings and following up for compliance. Reviews by WAR committees will be conducted on quarterly basis. Coordinators for various WAR levels shall be responsible for data compilation from relevant business units. The final decision making authority for all WAR committees shall be the designated Chairperson. Watchlist reports, after sign-off by the chairperson should be circulated to all concerned for compliance and should be held on record (at the Chairpersons Office) for future reference. Furthermore, to facilitate the watchlist process, WAR Committee reviews may also be conducted through electronic means (e-mails, video conference, conference calls etc.).

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4.2.3 Watchlist Symptoms

Credit Handbook

In Watchlist account, the obligor exhibits deteriorating trends / symptoms, which could jeopardize repayment of its obligations, as due, if not corrected. If these deteriorating trends / symptoms persists over a period of time and are deemed to be of a permanent nature and/or the account has been on Watchlist category for a period greater than 6 months then in such a scenario the relevant WAR Committee level must take a decision on the fate of the account/relationship (i.e. further downgrade the account to substandard or continue with watch-list category or declassify it to regular status depending on the nature and severity of the symptoms. Indicative list of symptoms: o o o o o o Diminished marketability and / or value of collateral Material documentation problems Inability to clean-up the facilities Frequent overdues/excesses over limit/creation of forced finance Diversion of loan proceeds/Excessive inter-company lending(s) Industry-specific, economic, and/or political problems, affecting the obligors performance o o Declining revenues / profitability Tightening liquidity or cash flow or late payment of mark-up / instalment due or considerable increase in days payables o o o o o Increasing leverage and/or weakening net-worth Concerns about the obligors management competence, or depth An inability to obtain current financial information Exhibit adverse trend in sales and cost of goods sold Significant increase in receivables and inventory build-up with declining sales o o Violations of loan/approval terms Any other event which reflect probability of account going bad

It is not an exhaustive list and they do not necessarily merit classification of an account into Watchlist category. However, the Relationship Manager / Branch Manager and Regional Manager / Team Leader (jointly) must document the reason for not classifying an account into Watchlist category when some of these symptoms exist. Since the above mentioned symptoms are not an allinclusive list, Field / Relationship Managers must use their judgment in identifying symptoms which merit classification of an account into Watchlist category.

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4.2.4 Watchlist Reporting

Credit Handbook

The responsibility for promptly identifying any deteriorating signs in the credit quality and categorizing an account to Watchlist and updating the Credit Risk Rating is the responsibility of the concerned Relationship / Branch Manager countersigned by Regional Manager / Unit Head. Continuous monitoring of Watchlist accounts shall also be the responsibility of the concerned Relationship / Branch Manager and Regional Manager / Unit Head. This classification will be approved by the Credit Approval Authority / Head of concerned Business Group for the respective customer/relationship. If the concerned Credit Approval Authority / Head of concerned Business Group does not approve the classification of the account as Watchlist then this decision must be documented along with the justification. Related copies of correspondence must be placed in the credit files for record. Copy of decision regarding watchlisting must also be endorsed to the concerned review authority for information along with watch list report. The concerned review authority can downgrade an account to Watchlist category at his/her discretion. The Relationship Manager / Branch Manager must review their respective portfolios on continuous basis to ensure that if relevant symptoms exist then accounts should be classified to Watchlist category. Besides, watchlist report (Appendix I to Chapter 4.2) for individual account/relationship must be submitted within a reasonable time (maximum one month) after identification / occurrence of Watchlist symptoms as per the judgment of Relationship Manager / Branch Manager. The Watchlist Report as per Appendix I to Chapter 4.2 (along with CRMIS format Set-up Sheet) is duly submitted to the relevant approving authority. It is strongly advised that a decision by the approving authority regarding classification of an account to Watchlist status should be taken within 7 business days from the date of initial receipt of Watchlist report. This would facilitate in early identification of Watchlist account and would also expedite implementation of WAR Committees strategy for the account. A separate database should be maintained of the Watchlist accounts at the respective business groups and SCOs. This would facilitate monitoring, reporting and follow-up at all levels. Audit / RAR can advise business groups to downgrade accounts to Watchlist category. In case the relevant business group disagrees with Audit / RAR downgrade recommendation, the matter shall be decided at WAR Committee level during the quarterly meetings. The frequency and circulation of reviews for accounts on Watchlist category will be as per the WAR Committee Levels as detailed above. The Watchlist reports shall be forwarded to the relevant coordinator; who shall consolidate the information and forward the Watchlist Summary Report (AppendixII to Chapter 4.2) to the Chairperson of relevant on quarterly basis. Copies of the Summary Report should also be endorsed to the relevant Business Group Head and Head ARAR.

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The SCOs shall forward the Summary Report for review to WAR Committee Level-3 and 4 through Group Head Risk Management. 4.2.5 Responsibility for Declassification An account may be declassified to regular from Watchlist status after carrying out analysis as per Appendix-III to Chapter 4.2 when the symptoms causing the Watchlist classification have been regularized or no longer exist. This must be initiated by the relevant business group. The authority for declassification of an account from Watchlist status to regular status will vest in next higher level in the approval / review level. Once the account/relationship has been classified as sub-standard or worse as per SBP Prudential regulations, it is understood that risk rating of such account shall be updated accordingly and simultaneously excluded from the watch list category. Documentation Review

4.2.6

As soon as an account is Watchlisted, on the spot verification of property / assets held as security / collateral and verification of ownership from relevant land authoritys records shall be arranged by the business. Subsequently, business shall immediately arrange legal review of all limit / security / collateral documentation. For branches where CRC is present, such legal reviews shall be arranged by CRC upon the businesss request. Results of the legal review shall be reported (as part of the Watchlist Report Appendix-I to Chapter 4.2) by the business and shall form the basis for decision among alternative courses of corrective action. If any deficiency is discovered, business shall arrange immediate rectification of the same. Specific target dates for rectification shall also be provided in the Watchlist Report. As a minimum, the following information shall be included in the Watchlist Report and all credit requests initiated after Watchlisting an account. Security audit completed on (Date); by (insert name of lawyer or Legal Firm); (all securities are complete, in order and enforceable) / (securities are complete, in order and enforceable except for the following: list deficiencies and expected completion date(s) of each security); and Comments of previous watch list review (where applicable) and update on shortcoming/s

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4.2.7 Revaluation of Properties Held as Security

Credit Handbook

Relationship/Branch Managers are supposed to get the property re-valued, only if the property held as security has not been valued within the last 18 months by an authorised valuer and/or approval/review authority is not satisfied that the value ascribed can still be relied on. The above condition for valuation can be waived by the Chairperson of the relevant WAR committee level, subject to confirmation by the BM / RH, based on physical visit, that the existing valuation of the property still holds good. However, as soon as a loan is classified its Forced Sale Valuation (FSV) as discussed in subsequent section be arranged by concerned relationship/branch manager from PBA approved evaluator enlisted with MCB Bank for FSV. 4.2.8 Remedial Actions

4.2.8.1 Immediate Actions As soon as a client is Watchlisted, the following measures shall be considered. Client Call15 Ensuring that no excess have been allowed. Advising other branches / units known to have contact with the customer or related entities. Step must always be taken at the appropriate level ensuring full confidentiality. Checking that all documents (including transaction related & other documentary requirements like insurance etc.), are complete and in order. Checking effectiveness of mucaddum arrangement (if applicable). Higher offices in the Business Group are informed accordingly. Procurement of latest audited / management accounts and analyse the same vis--vis his overall liabilities in order to determine clients capacity to settle the obligations. Request for fresh eCIB report or external credit report to ascertain the position of customers outstanding overdues with other banks. Monitor further facility utilizations in the accounts and consider blockage of the unutilized lines depending upon the situation (if considered necessary).

Note: This is not an exhaustive list and other measures may also need to be considered.

15

Please refer the Chapter on Credit Investigation

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4.2.8.2 Further Investigations

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Further investigations on the banks exposure should be carried out, covering the following: Loan Review: Once the overall debt burden of the borrower has been ascertained and debt repayment capacity has been analysed then the account can be reviewed for any amendment in security structure, facility structure, pricing, deferrals, waivers and loan covenants. Checking of Security Documents / Charge Forms: This have been discussed in detail in the section on Documentation Review. Securities to be checked: All type of securities under charge/lien of Bank should be examined, assessed, evaluated, to find out the net realizable value. Shortfall, if any, should be ascertained. Ensure that stock inspection has been conducted as per specified schedule. Determine Borrowers Liability / Outstanding: Borrowers exact liability, including mark-up / interest should be correctly determined. Branches should avoid applying mark-up on the finances not permissible under NIB System or which are not recoverable as per agreement/terms of loan. Analysis of all related Security Factors: Financial status / position / means of all partners / proprietor / guarantors and their assets, both movable and immovable, should be investigated and taken into account. Spot Checks of Company's Premises: On-the-spot inspection/ review of clients premises and inventory/ receivables should be undertaken by Business Units to have first-hand knowledge about actual financial position and operational condition. Causes of Business Failures: Probe into the causes of Watchlist symptoms should be conducted. It may be either due to overtrading, poor management, mis-management, adverse market conditions / product changes, competition, over concentration of business in few hands / market, etc. This would help in arriving at a correct, rational decision. 4.2.8.3 Relationship Strategy

An overall assessment of the borrower, based on the strength and weaknesses of the credit is the key element in determining the relationship strategy to be adopted. This should enable the bank to adopt a Maintain, Reduce or Exit strategy based on (but not limited) to the following factors: Maintain: Where the weakness is of temporary nature and the obligor has the capacity to overcome these problems, where the obligor is willing to rectify deficiencies (operational or financial) and takes steps to ensure that the bank is adequately protected. (Maintain strategy).

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Reduce or Exit: Where the repayment capacity of the borrower is in doubt and the bank anticipates deterioration in the classification indicators, or the default is wilful in nature, a work-out strategy (Reduce or Exit strategy) should be implemented depending upon an assessment of the situation. In case this strategy is adopted, the bank could either: Reschedule/ restructure the facilities Work-out with formal rescheduling/ restructuring Opt for an immediate/ phased exit from the relationship Annual Review

4.2.9

Annual review of all watchlisted accounts shall be conducted at one level higher than the original approval/review level.

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4.3
4.3.1 4.3.2 4.3.3

Provisioning Policy
Introduction Provisioning for Loan and Lease Losses Submission of Returns 4.3.3.1 Submission Deadlines

4.3.4 4.3.5 4.3.6

Timing of Creating Provisions Reversal of Provision Verification by the Auditors

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4.3.1 Introduction

Credit Handbook

The allowance for loan and lease losses, usually referred to as the reserve for bad debts, is a reserve established and maintained by charges against the banks operating income. As a reserve, it is an estimate of uncollectible amounts that is used to reduce the book value of loans and leases to the amount that is expected to be collected. As per policy the bank follows the instructions of SBP in this regard. The allowance, which is a reserve, exists to cover the loan losses that occur in the loan portfolio. Adequate management of the Loan Loss reserve is an integral part of a banks credit risk management process. Further, all fund based financings under litigation must be downgraded to Loss irrespective of the applicable time based classification criteria. However, the same is not mandatory for consumer financing litigation cases other than consumer mortgages (Pyara Ghar, Business Sarmaya etc.) and personal needs based cash collateralized lending (cash for cash etc.). In all cases (e.g. programme based lending) where internally approved specific provisioning requirements are in excess of the regulatory requirements (i.e. internal provisioning requirements are more conservative than regulatory requirements), internal requirements shall be followed. 4.3.2 Provisioning for Loan and Lease Losses As per SBP instructions the banks must establish an allowance for loan and lease losses (for classification and provisions there-against). Classification and Provisioning shall be done in accordance with the governing SBP Prudential Regulations. In addition to the time bound criteria as prescribed, bank is also required to perform subjective risk assessment of the performing and non-performing portfolio where considered necessary. Relevant review authority or Internal Audit & RAR, during their respective review, can classify an account on subjective basis. Bank shall classify loans / advances portfolio and make provisions in accordance with the prescribed SBP criteria. However, where bank wish to avail the benefit of collateral held against loans / advances, same can be considered in accordance with the SBP PRs and guidelines. 4.3.3 Submission of Returns As per requirement of Prudential Regulation PR-8 for Commercial & Corporate clients, the bank shall submit the borrower-wise annual statements regarding classified loans / advances to the Banking Inspection Department. CRRS will be responsible for Consolidation and timely submission of the borrower-wise annual statements regarding classified loans / advances to SBP.

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The same borrower-wise annual statements regarding classified loans / advances will also be sent to all pertinent Circles / Area Corporate Offices/ SAMGs/ Consumer Assets Division for updating of data / information. All circles/ Area Corporate Offices/ SAMGs / Consumer Assets Division are required to submit the revised borrower-wise annual statements regarding classified loans / advances to CRRS on every quarter end for consolidation and onward submission to SBP. Submission Deadlines

4.3.3.1

Classification of NPLs to be updated monthly as per the SBPs PRs/guidelines and managements instructions. Branches / SAMG Units/ Consumer Assets Division/Nelson Chambers Staff Loans Office/Overseas Operation Units to update classification, for the position as of month-end and reconcile the same with GL. The branches will then forward the CRMIS data to their respective circle offices for validation/consolidation within 2 days after each month end. The circle offices will ensure that branches have correctly reported the data in CRMIS and the same reconciled with GL Balances. In case of any variance, the data will again be reverted back to the respective branch by the circle for correction of the same. After receipt of the revised CRMIS data from branch/es, the circle office will consolidate the same for onward submission to CRRS through Web Portal within 3 days after each month end. In order to improve the data quality and reconcile the data with GL balances, the reports should be duly signed by respective designated officers. December end Classified Advances list shall also be provided to the respective Audit Centre by Circle Offices for their counter signature, to be finalized within 7 days of the year end. Any change consequent to Audits counter signature shall be advised by Circle Offices to CRRS within 10 days of year end.

4.3.4 Timing of Creating Provisions The bank shall review, at least on a monthly basis, the collectability of their loans / advances portfolio and shall properly document the evaluations so made. Shortfall in provisioning, if any, determined, as a result of quarterly assessment shall be provided for immediately in their books of accounts by the bank on quarterly basis. At the end of each quarter the final borrower-wise annual statements regarding classified loans / advances will be submitted to FCG for creation / reversal of provisions (if required). 4.3.5 Reversal of Provision In case of cash recovery, specific provision held against classified assets shall be reversed subject to the following:

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In case of Loss account, reversal may be made to the extent that the remaining outstanding amount of the classified asset is covered by minimum 100% provision. In case of Doubtful account, reversal may be made to the extent that the remaining outstanding amount of the classified asset is covered by minimum 50% provision. In case of substandard accounts, reversal may be made to the extent that the remaining outstanding amount of the classified asset is covered by minimum 25% provision.

Further, the provision made on the advice of State Bank of Pakistan shall not be reversed without prior approval of State Bank of Pakistan, including those related to fully adjusted accounts, except to the extent of cash recovery made. . 4.3.6 Verification by the Auditors The external auditors as a part of their annual audits of bank shall verify that all requirements of Prudential Regulations for classification and provisioning for assets have been complied with. The State Bank of Pakistan shall also check the adequacy of provisioning during on-site inspection.

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4.4 Write-off and Rescheduling / Restructuring Policy

4.4.1 Definitions 4.4.1.1 4.4.1.2 4.4.1.3 Write-off Reversal Waiver

4.4.2 Process for Write-off the Debt 4.4.2.1 4.4.2.2 4.4.2.3 4.4.2.4 4.4.2.5 4.4.2.6 4.4.2.7 Full Write-off Partial Write-off Criteria for Write-off Accountability Pre-Audit Forced Sale Valuation Prior Approval from SBP

4.4.3 Rescheduling / Restructuring 4.4.4 Authority for Write-off / Remission 4.4.5 Security Redemption 4.4.6 Abandonment of Collection and Recovery Efforts 4.4.7 Data-base of Defaulters / Defaulters List 4.4.8 Financing to Defaulters 4.4.9 Lessons Learnt 4.4.10 Reporting
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4.4.1 Definitions 4.4.1.1 Write-off

Credit Handbook

In respect of the following receivables from the borrower (i.e. recorded as assets of the bank), any financial relief given on account of: principal amount outstanding; and/or mark-up, in case of non-classification of relevant loan account, credited as income in any previous financial year; and/or non-mark-up incomes (fees, commissions, etc.) credited as income in any previous financial year; and/or Other charges, i.e. other than the above categories (e.g. litigation charges, miscellaneous charges, etc.). 4.4.1.2 Reversal

In respect of the following receivables from the borrower (i.e. recorded as assets of the bank), any financial relief given within the same financial year in which the income corresponding to these receivables was credited: mark-up, in case of non-classification of relevant loan account; and/or non-mark-up incomes (fees, commissions, etc.) 4.4.1.3 Waiver

Any financial relief given in respect of mark-up and/or non-mark-up incomes (fees, commissions, etc.) and/or other charges contractually or legally due on the borrower but not yet or any longer recorded as assets of the bank. Therefore, financial relief in respect of mark-up amounts due on the borrower against classified loans noted in their memorandum accounts shall be considered as waivers. It must be noted here that any accounting treatment required in the following scenarios cannot be deemed to fall and must not be reported under the aforementioned categories of financial remissions / relief: (a) Accounting treatment required for the purpose of correcting earlier erroneously recorded receivable entries against the borrower. (b) Accounting treatment for already booked receivables (i.e. recorded as assets of the bank) that are later on established, through a regulatory/ legal process or by a regulatory/ legal/ judicial authority, to be not due on or claimable from the borrower. (c) Accounting treatment or reversals required for subsequent recording of mark-up in memorandum accounts in accordance with regulatory directives pertaining to classified loan accounts. However, to simultaneously ensure transparency and proper approvals for book cleaning purposes, accounting treatments and amounts as regards (a) and (b) above: Must be mentioned separately in the proposals in itemized manner; and

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For the sole purpose of determining the approval levels on the remission approval grids (mentioned further ahead), must be aggregated with respective remission items (if any) falling under the abovementioned remission categories; but Must not be considered and reported as a remission / relief.

FCG shall be responsible for formulation and dissemination of appropriate accounting treatment / entries / procedures in accordance with the above. 4.4.2 Process for Settlement/ Writing-off the Debt A write-off is necessary to remove an asset from the banks books which is considered to be irrecoverable from the borrower. All proposals of Write-off shall be prepared in accordance with the governing SBP circulars and other regulatory guidelines as amended from time to time. All efforts should be made to recover defaulted finance with or without the intervention of court. In case of agreement between customer and bank for settlement of outstanding liabilities, a settlement proposal shall be elevated on the prescribed form (Appendix I to Chapter 4.4) to the relevant approval/ review authority, as per the remission grid, seeking approval for the settlement. A proper settlement agreement (comprehensively drafted by our legal counsel covering all the terms and conditions of the settlement approval) shall be executed before implementation of the settlement approval. After the execution of settlement, a proposal for remission (appendix II to Chapter 4.4) shall be elevated to relevant approval/ review authority seeking approval for necessary write-off/ waiver in terms of previously approved settlement. In case, where there is no formal settlement done with the customer, security should be realized and all efforts should be made for recovery. In case no further source of recovery is available, the Proposal for Remission (Appendix II to Chapter 4.4) should be prepared seeking approval to write the debt down (by applying the provision in place for this purpose) and/ or waiver as the case may be. The write off proposal is processed after all possible efforts are made to either recover or improve the loan rating including revival of accounts, without taking any additional risk. The Senior Management will recognize the innovation and ingenuity of Branch Managers / Credit Officers in improving the risk rating or classification of loans /advances including restructuring of credit facilities. The restructuring however, should clearly demonstrate improvement in banks position both in short and long terms. Where a write off has been approved and at a later stage the customer comes up for settlement of the liabilities, a post write off settlement proposal (Appendix III to Chapter 4.4) shall be elevated for seeking necessary approval to the level where request for write-off and/or waiver was originally approved. This shall be capped at the level of Write off committee.

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4.4.2.1 Full Write-Off

Credit Handbook

To write off the full amount of the customers borrowings, we must ensure the following: All tangible security has been realized; and All avenues of recovery have been adequately explored and as such the full amount of the debt is clearly irrecoverable. Partial Write-Off

4.4.2.2

A partial write off of the customers borrowings will be subject to all known sources of repayment being insufficient to: Pay an acceptable market rate of mark-up (or any other mark-up rate agreed under a troubled loan restructure) on the total amount of the borrowings; Amortize repayment of the total borrowings over a reasonable period; and All liquid assets including TDRs / FCY Deposits, Government Security, Shares certificates etc. are realized.

This would entail all avenues of recovery having been adequately explored and an assessment being made that: Reasonable steps have been taken to realize all tangible security; The maximum potential recovery is clearly established by reference to current market values; and The shortfall to be written off is clearly identified as being irrecoverable. Criteria for Write-Off

4.4.2.3

Following are the points that define the criteria for write-off, any instructions circulated by SBP with regards to write-off, from time to time, shall supersede the following criteria. All efforts of assets traceability are exhausted. Time barred Loans / Advances etc. Loans and Advances with security / documentation deficiency seriously impairing banks legal rights. Advances / Loans where both borrowers and guarantors are non-existent or untraceable and their assets are not known.

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Loans and advances which have become un-collectible due to part or full erosion/ depletion of security / collateral for any reasons whatsoever. Loans / Advances which have been decreed but adequate assets are not available for realization of decreed amount or part thereof. Loans and Advances to widows and other individuals who are destitute or disabled and have no repayment capacity may be considered for write off on humanitarian grounds. Write-off / Waiver may be allowed also to facilitate recovery of Banks stuck-up advances. No discount house is available or is available but not willing to purchase the loan. It is not feasible to sell the loan to discount house. In exceptional case(s) where bank, on commercial considerations or for the purpose of cleaning the balance sheet, is unable to comply with one or more of the above/SBP guidelines, may put up the case to BODs for consideration. BODs may then decide the case on merit and by recording reasons in writing for approval or otherwise of the case(s). These cases shall be reported immediately to Director, Banking Inspection Department for information. All such cases shall be reported to SAMG for onward submission to SBP. Accountability

4.4.2.4

While considering the proposal of write off, it is to be ensured that responsibility has been fixed and proper action taken against the officials responsible for the loss (if the loss has been caused by negligence of any bank official) and Pre-approval Audit of write off proposal has been carried out. MCB recognises that losses are part of banking business but non-adherence to procedures and instructions and concealment of facts have to be penalized. 4.4.2.5 Pre-Audit

In cases where outstanding amount of principal is equivalent or greater than PKR 0.500Million and write off of any amount is being proposed in these accounts, remission proposal in such cases should be first pre-audited by Bank's Internal Audit / Respective Audit Centres before consideration by approving authority. Before elevating a pre-audit request/ processing requests for write off, following must be ensured: Encashment of security held has been done or is underway at appropriate forced sale value. Moreover, the write-off shall be made for the portion of outstanding amount that is in excess of forced sale value.

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No write-off will be allowed where forced sale value of securities held, is more than the recoverable outstanding amount. However, the said condition shall not be applicable on the cases recommended/settled under any general incentive scheme of SBP or such other committee(s) as notified by SBP or present Committee for Revival of Sick Industrial Units (CRSIU). Liquid assets / readily en-cashable collateral has been fully realized and appropriated towards adjustment of outstanding. Confirmation is required from originating branch/office duly countersigned by one level higher than original approval/review level that Borrower / guarantor has no other means of repayment. Nevertheless, a prudent banker would certainly know the financial position and the sources of repayment available with its borrowers". Borrower has not created other business interests and assets out of loan proceeds to be written off. Borrower is not involved in any criminal mis-appropriation of stocks, moveable and immoveable assets or security.

Internal Auditors shall cover the following: Deviation, if any from credit policy at the time of sanctioning / approval. Deviation from the terms & conditions of approvals of finance. Any concealment of facts in the Credit Proposals. Identification of irregularities or slackness that occurred during the disbursement / documentation or subsequent monitoring/supervision of loan/advance and underlying security. Pointing out names / designations of Officers / Staff responsible for various lapses leading to write-off fully / partially and action taken against them along with the reasons of these lapses. The Audit on compilation of exercise, will return the proposal to the respective office under his signature for final disposal. For writing off of loans/advances, where outstanding amount of principal is below PKR 0.500M, the clause stipulated at para 4(vii) and (viii) of SBP BPRD circular No.06 dated June 05, 2007 shall not be applicable. While following clauses at 4(i) to (vi) of SBP circular in said cases shall also obtain a joint certificate from originating branch manager and an authorized officer of the said branch duly countersigned by the authorized official(s) of the office higher than the originating branch confirming that no irregularity/deviation of prescribed rules and regulations in the process of sanction, disbursement, documentation, monitoring/supervision of loans/advances and its underlying security(ies) has occurred which has turned the loan/advances partially or fully bad/irrecoverable. The name(s) of the official(s) responsible for the irregularity (ies)/lapses may be clearly spelled out along with action taken against such official(s).

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No recommendation / suggestion vis--vis write-off proposal should form part of Auditors Report. Auditors should only verify facts. However any recommendations with regards to procedures should be part of their report. Pre-audit report should not be older than one year at the time of elevating proposal for write-off. Relevant approval/ review authority may call for a fresh report where it considers appropriate. 4.4.2.6 Forced Sale Valuation

Forced Sale Valuation shall be conducted as required under governing SBP circular and in accordance with regulatory requirements (governing PRs). GH RMG and Relevant Business Group Head shall approve requests for conducting FSV below the regulatory threshold. It must be ensured that valuation report should not be more than one year old at the time of elevating write-off proposal. Exception to this rule shall be approved by the relevant Business Group Head, subject to confirmation by the relationship, based on physical visit, that the existing valuation of the collateral still holds good. Valuation shall be assigned to valuer other than the one who conducted the earlier valuation. 4.4.2.7 Prior Approval from SBP

The write-off of loans/advances in the names of Directors or their relative/dependent/concern in which they have any interest of 5% or more and in the name of President requires prior approval from SBP. 4.4.3 Rescheduling / Restructuring

Rescheduling refers to the extension in the date(s) of payment of instalment(s) due to various reasons including but not limited to late commencement of commercial production or teething problem faced by the project during trial run. Similarly, restructuring is an exercise to give relief to the business units facing severe financial crisis, in the form of change in the facility structure i.e. from interest or mark-up based to interest / mark-up free finance, conversion of part of finance into equity of the Company etc. Similarly relief is also given in the form of reduction in the rate of return and extension in the date of payment of instalment. This can also entail amendment in the security structure or loan covenants.

Rescheduling / Restructuring is allowed to borrower if the project / concerns / for which the finance has been borrowed is not running smoothly and is facing problems due to various reasons, some within the control of the borrower and others due to factors beyond the control of the borrower. Rescheduling / Restructuring is allowed to borrowing concern in order to overcome the negative effect of the adverse situation faced by the project.

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However, care should be exercised while rescheduling / restructuring sick projects where the factors responsible for making the project sick are still continuing. Rescheduling / Restructuring are generally allowed on merit but sometimes it is also allowed as per Govt. Policy. It is generally allowed to sick Industries subject to payment of reasonable down payment of overdue amount. Reduction in down payment is also considered on case to case basis. The term Sick Industry may be applied to all projects that are facing problems in maintaining their operations profitably in order to earn returns on their investment as well as to repay their debt, obligations. The factors which may contribute to the sickness may be external; they are those factors over which the promoters have not direct control while internal factors may be within the control of the management to some extent e.g. the abrupt changes in the fiscal and tariff policies of the Government, big disparity in the import duties on imported raw materials and finished products which may induce smuggling and make locally manufactured goods in-competitive in the local market, are some of the factors beyond control of the management. When an advance is restructured following concessions / remissions can be considered: o o o Reduction in rate of mark-up. Capitalization of accrued interest / Liquidated damages. Sometimes, principal amount of loan is circumstances warrant, as a very special case. also written off if such

Amendment in the loan amount to the business like allowing working capital finance. Change in financial covenants. Increase in grace period. Extension in maturity.

o o o

When an advance is rescheduled almost all general conditions remain unchanged except the repayment period which is extended for certain period. Payment of mark-up, etc. can be deferred for a specific period. In most cases, rescheduling/ restructuring proposals will not be considered unless the proposed plan results in substantive improvement in the banks risk. This may be achieved through enhancement of security/ collateral/ and/ or through injection of fresh equity or subordinated directors loan. It is to be noted that rescheduling/ restructuring is not intended to defer identification of problems and consequent misrepresentation/ misclassification of risk i.e., while the bank may consider rescheduling or restructuring, it should

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not be implemented to allow unwarranted improvement in the classification category of the loan. Before providing concessions, the following must be ascertained: o The obligor is not misrepresenting actual facts with the purpose of securing concessions. The obligor has a viable business plan for the future as demonstrated by financial projections. Such projections should be examined to assess the validity of assumptions and veracity of projected cash flows. Management, despite the initial set back has a demonstrated competence / ability to run the business profitably in the future. Willingness and stability of the sponsors to participate in a rescue programme by injecting fresh equity or subordinated directors loan to demonstrate commitment to the business. In case of a syndicated loan, other lenders must agree, in writing, to the proposed rescheduling/ restructuring.

The agreed repayment schedule should be based on the cash generation capacity of the unit, sponsors ability to inject funds into the business and the remaining economic life of the business (plant and machinery in case of manufacturing concerns). Where the restructuring involves a change in sponsors/ management, due care should be exercised to ensure that the incoming management has integrity and the capability to manage the business successfully. In such cases, however, personal guarantees of outgoing directors should not be released until and unless proper security for the outstanding amount of the loan (including personal guarantees of the incoming directors) is obtained. Rescheduling/ restructuring in suit filed cases should be implemented through consent decree except advised otherwise by the legal counsel. Governing SBP PRs and other guidelines shall be meticulously followed with regards to restructured/rescheduled accounts. It is further clarified that settlement(s), restructuring / rescheduling and remission(s) are not mutually exclusive terms and a combination of scenarios pertaining to the same can occur simultaneously in any case / circumstances. Rescheduling / restructuring of deteriorated consumer loans shall be governed as per relevant SBP guidelines (specifically BPRD Circular letter # 43 of 2009, dated 31.12.2009), other regulatory guidelines and internal bank policy / procedure guidelines issued from time to time. With regards to consumer loans, cases for restructuring / rescheduling: o Involving any remissions shall accordingly be approved as per the consumer loans remission grids (a) & (b) below and relevant procedures; and

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o Not involving any remissions shall be approved as per the grid below:
Per customer (inclusive of all consumer facilities)

Total Restructured/Rescheduled Amount PKR 50K or below Above PKR 50K but not more than PKR 100K Above PKR 100K but not more than PKR 500K Above PKR 500K

Approval Authority Regional Collection Manager OR Regional Recovery Manager Unit Head Collection OR Unit Head Recovery OR Unit Head Litigation Department Head Collections OR Department Head Recovery & Litigation Group Head Consumer Banking

Note: Without remissions restructuring / rescheduling of consumer exposures managed by groups other than CBG shall be approved as per their respective approval grids in accordance with the afore-referred SBP guidelines on consumer loans restructuring / rescheduling.

4.4.4

Authority for Write-Off / Remission

Authorities for final settlement, subject to the condition that there is no violation of any instructions issued in this respect by SBP or any other regulatory authority, are as follows:
Remission Level Where aggregate of write-off plus waiver does not exceed PKR 3 million subject to the condition that write-off is not more than PKR 2 million Where aggregate of write-off plus waiver does not exceed PKR 5 million subject to the condition that write-off is not more than PKR 3 million Where aggregate of write-off plus waiver does not exceed PKR 10 million subject to the condition that write-off is not more than PKR 5 million All other cases Approving Authority Head-SAMG or Head of Business Group, as applicable, jointly with SCO-2 / SCO-3 RMG Group Head RMG & Group Head SAMG

Management Credit Committee

Write-off Committee (cases to be forwarded through Head SAMG) to be chaired by the President other members to include Secretary to the Management Credit Committee and Group Heads Risk Management, FCG, SAMG, Strategic Planning, WBG and CBBG*.

* GH WBG and CBBG will not have voting rights for approving any write-off / waiver case pertaining to their respective group as member of the Write-off Committee. Back-ups shall be governed as per CA/RA document and to be effective only in situations where the original approving authority is on leave or out of country. For Consumer Loans Only Any consumer financing case / account involving any remissions must be elevated by the Consumer Banking Group in accordance with the following two approval

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matrices. However, these grids shall not be applicable to consumer exposures transferred to SAMG and would instead be approved as per the above grid:
(a) Consumer proposals involving principal Remission Level Where aggregate of principal write-off plus other remissions does not exceed PKR 250K subject to the condition that principal writeoff is not more than PKR 100K Where aggregate of principal write-off plus other remissions does not exceed PKR one million subject to the condition that principal write-off is not more than PKR 0.500 million Where aggregate of principal write-off plus other remissions does not exceed PKR 3.000 million subject to the condition that principal write-off is not more than PKR 2.000 million Where aggregate of principal write-off plus other remissions does not exceed PKR 10.000 million subject to the condition that principal write-off is not more than PKR 5.000 million write-offs and/or other remissions Approving Authority Department Head Collections/ Department Head Recovery & Litigation jointly with Head of Consumer Credit Review Group Head Consumer Banking jointly with SCO-2 or SCO 3 of RMG Group Head RMG jointly with Group Head SAMG

Management Credit Committee

Write-off Committee (cases to be forwarded through Head SAMG) to be chaired by the President other members to include All other cases Secretary to the Management Credit Committee and Group Heads Risk Management, FCG, SAMG, Strategic Planning, WBG and CBBG* * GH WBG and CBBG will not have voting rights for approving any write-off / waiver case pertaining to their respective group as member of the Write-off Committee.

Cases involving income write-offs of less than PKR 100K (but not any principal write-off) shall be approved as per Grid (b) below.
(b) Consumer proposals involving only remissions other than principal write-offs Remission Level Approving Authority 25% of maximum remission amount Regional Collections Manager or provided that income write-offs are less than Regional Recovery Manager PKR 10K 50% of maximum remission amount Unit Head Collections or provided that income write-offs are less than Unit Head Recovery or PKR 25K Unit Head Litigation 75% of maximum remission amount Department Head Collections or provided that income write-offs are less than Department Head Recovery & PKR 50K Litigation 100% of maximum remission amount provided that income write-offs are less than Group Head Consumer Banking PKR 100K Note: Joint sign-offs / four-eye principle shall not be applicable to this grid. Remission approvals involving income write-offs equal to or above PKR 100K (but not any principal write-offs) shall be given as per approval grid (a) above and, thus, would also require joint sign-offs under the four-eye principle.

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For both Grids (a) & (b) above, Group Head of CBG and SAMG shall respectively nominate back-ups for all CBG and SAMG approving authorities, backup of Head of Consumer Credit Review shall be Group Head RMG, while back-ups pertaining to all other authorities shall be governed as per the CA/RA document. However, invariably, back-ups shall be effective only in situations where the original approving authority is on leave or out of country. All consumer cases involving any principal write-off must carry prior recommendation by Group Head Consumer Banking. However, GH-CBG recommendation shall not be required for those cases / exposures which have already been transferred to SAMG. For all written-off cases, request for full and final settlement shall be approved at the level where request for write-off and/or waiver was originally approved. This shall be capped at the level of Write off committee. All cases that require approval from Write-off Committee (WOC) shall be processed by the relevant Credit Review Division. After obtaining recommendations from MCC, the case shall be forwarded to Group Head SAMG (secretary WOC) for arranging approval from Write-off Committee. All cases that require approval from Board of Directors (BoD), shall be processed by the relevant Credit Review Division. After obtaining recommendations from MCC, the case shall be forwarded to Group Head SAMG (secretary WOC) for obtaining recommendations of Write-off Committee since as per approved TORs, the WOC shall act as recommending authority for write-off/ waiver proposals requiring BoD approval. After obtaining recommendations from WOC, case shall be returned to RMG for arranging approval from BoD. Post settlement proposals shall be elevated (to relevant credit approval/review authority) for only those cases where terms of original pre-settlement approval are not fully complied (i.e. further remission in shape of write-off and/or waiver is being sought). All settlement cases where repayments were made strictly as per settlement approval (where remission remained unchanged or where the amount is reduced due to early repayment), such cases shall not require approval/review by the relevant authority. In such cases, approval from GH-SAMG / Head of Business Group only, with notification (i.e. settlement executed as per settlement approval or settlement executed with reduction in waiver amount on account of early payment) to the original approval / review authority, will suffice. Four eyes principle will be applicable to accounts handled by SAMG and their proposals will be elevated to relevant authority of RMG (as mentioned above) for further disposal. To comply with the requirements of State Bank of Pakistan BPRD circular dated 05/06/2007, SAMG shall on regular basis compile the details of all Loans / Advances written-off / waived and submit the same to BOD for their information on quarterly basis.

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o

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To comply with the requirements of SBP circular BPRD 06/07 dated 05/06/2007, CRRS shall on regular basis compile the full particulars of loans/advances written-off and report the same to Credit Information Bureau on monthly basis. All accounts parked in business groups, where any remission has been allowed by the above mentioned authorities, should be brought to the notice of SAMG. Copies of all related proposals & approvals should be forwarded to SAMG within 15 days of allowing such write-offs / waivers. As regards consumer proposals, except remissions in outstanding principal (that exclusively require the creation of a write-off expense), all other items pertaining to remissions, irrecoverable consumer loan accounts and their management, including but not necessarily restricted to the following items, are to be treated as either write-offs, reversals or waivers in light of the aforementioned definitions: Current month mark-up Overdue mark-up Shadow mark-up Late fees / liquidated damages Cheque returned charges Repossession charges Vehicle evaluation / parking / litigation charges Pre-payment penalty As regards consumer proposals, while elevating such cases to the relevant remission approving authority CBG must separately mention each item of the respective write-off, waiver and reversal amounts, as applicable. Moreover, CBG should seek FCGs feedback, on a case-by-case basis if necessary, to ensure proper categorization and treatment of each remission item. An appropriate consumer product-wise remission approval MIS, showing relevant remission item break-ups against each remission approval / review authority, must be maintained and reported to CRMD (RMG), SAMG and FCG on a monthly basis, and to the BoD through the Write off Committee on a quarterly basis.

4.4.5 Security Redemption All cases involving write-off, waiver, rescheduling and/or restructuring should specifically address the issue of security redemption after adjustment of finance. Specific approval for security redemption shall be sought in the proposal and adequately covered in the approval. Upon full and final adjustment of finance in such cases, Internal Audits clearance for security redemption should be obtained and forwarded to the relevant Business Group Head / Group Head SAMG for final approval for security redemption. In cases where partial redemption of security is involved, the request for partial release shall be forwarded by the Business Group/ SAMG to the relevant Approval/ Review Authority. The detailed mechanism for release of partial security shall be

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mentioned in the proposal and shall be approved by relevant approval/review authority on a case to case basis. The relevant approval/review authority shall approve the process of release and the pre-audit requirement at various stages in the approval document on case to case basis. Before approving all requests for security redemption, the relevant business Group Head / SAMG - Group Head shall ensure that the security being redeemed is not held as a common security for any other unadjusted credit facilities of the Bank and that the Bank has not issued any letter for joint charge or received any such letter from any other bank. Consumer Auto Financing and Consumer Auto Leasing shall be exempted from internal audit clearance requirement. 4.4.6 Abandonment of Collection and Recovery Efforts When all recovery possibilities have been exhausted (asset tracing, litigation etc.), a decision may be made to abandon further collection and recovery efforts. A Proposal should be prepared and approved to document such decisions. Normally such decisions will only be taken at least one year after the account has been written down. Approval for abandonment of collection and recovery shall be obtained from the relevant Business Group Head/ Group Head SAMG (as the case may be). However, where the write off approvals specifically stipulate continuation of recovery efforts, approval for abandonment must be obtained from original approval / review authority. 4.4.7 Data-base of Defaulters / Defaulters List Apart from monthly / quarterly reporting by SAMG & businesses to CRRS, SAMG & Business Groups should report the lists of defaulted customers where exposure has been written off/ waived. This data base should be part of CRMIS and before extending any fresh facility it should be checked whether the client has previously defaulted with MCB or not. It is to be ensured that as soon as the loan is writtenoff/ waived, all the related data of the customer is forwarded to CRRS for uploading in CRMIS. 4.4.8 Financing to Defaulters

Specific approval from Group Head Risk Management / President shall be required prior to allowing any fresh credit facility to a borrower or its associates, directors and partners whose debts have been written-off in past at MCB or with other banks / financial institutions. For consumer mortgages, the above shall also be applicable in addition to their respective Product Program Manual (PPM) guidelines. Other consumer lending products shall be exempted from the above.

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4.4.9

Lessons Learnt

The management of problem loans (NPLs) is a dynamic process. To ensure this, a process should be established to share the lessons learnt from the experience of credit losses in order to update the lending guidelines, procedures & manuals etc. To accomplish this SAMG would review their cases being transferred to SAMG (settled or in SAMG for more than five years) and would prepare a case study (sample format of Appendix IV to Chapter 4.4) and submit the same to Credit Review on half yearly basis. This report should preferably be prepared and submitted to Credit Risk Review within 30 days following half year. However this tenor should not, in any case, exceed 90 days. From SAMG preparation of this report is the responsibility of the Relationship Manager while from RMG this report can be finalized by SCO-1. Format of Appendix IV to Chapter 4.4 is just a guideline but any format used should be able to comprehend the reasons for default and highlight improvement(s) in the existing processes. These reports should be available for perusal to all pertinent staff members for their reference and learning. 4.4.10 Reporting CRRS shall report Full particulars of all loans/ advances written off to Credit Information Bureau of SBP. RMG shall also submit to BoD, a report on quarterly basis, with necessary details in respect of write off of loans at various levels, for information.

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4.5
4.5.1 4.5.2 4.5.3 4.5.4 4.5.5 4.5.6 4.5.7 4.5.8 4.5.9

Special Assets Management

Introduction Retain / Transfer Policy Account Transfer Procedures Attachments for Transferring the Account Management of SAMG Accounts Review of Classified Portfolio Parked at SAMG Review of Classified Portfolio Parked at Branches Guidelines for Customer Handling / Remedial Action Guidelines for Recovery Procedure

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4.5.1 Introduction

Credit Handbook

Special Assets Management Group (SAMG) is a separate Group that looks after non-performing loans that require adept, dedicated and specialized recovery skills. This Group is staffed with experienced credit officers who possess the skill-set required for managing problem loans. This section discusses the policy to retain or transfer the asset to SAMG, key roles of SAMG and other stake holders, various levels of waivers/ write-off and reporting / review requirements. The main responsibility of SAMG is to manage accounts classified as loss above threshold limit of PKR 2 Mln. However, exceptions to this rule are allowed in circumstances where Business / RMG may recommend implementation of exit strategy through SAMG for accounts classified as Watchlist / Substandard / Doubtful. SAMGs significant functions include the following: Ensure availability of data / information/ documentation pertaining to SAMG Customers before completion of transfer Determine Account Action Plan/Recovery Strategy Pursue all options to maximize recovery, including placing customers into receivership or liquidation as appropriate. Negotiate with client for Recovery. Where necessary Rescheduling/ write-off / Waiver may be recommended. Regular review of transferred accounts. Arrange Asset Tracing Liquidation of cash collateral File recovery suit. File liquidation petition and liquidation of collateral. File for appointment of Administrator. Ensure adequate and timely loan loss provisions are made based on actual and expected losses. Refer cases to SECP for blacklisting of Directors. Refer cases to District Administration for recovery under Banking Companies Ordinance, as arrears of Land Revenue. Any other function as delegated by competent authorities. Restructuring /

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SAMG would be assisted by a panel of Banks approved lawyers, particularly with regards to cases involving legal complications, filing of recovery suits, etc. 4.5.2 Retain / Transfer Policy Whether the account will be transferred to SAMG or will remain parked at the business group would depend on the following factors: All relationships with exposure (principal) PKR 2 Million & above and classified as Loss will be retained by the respective Business Group for one year from the date of classification in loss category. The relevant Business Group will continue the recovery efforts for one year in these accounts. After lapse of one year, such cases shall mandatorily be transferred by the Business Groups to SAMG. Exception to this transfer policy may be allowed by the President on a case to case basis. Any account that meets the criteria should be transferred immediately to SAMG after completion of one year from the date account classified as loss. The relevant Branch / Business Unit shall be responsible to initiate the transfer process of accounts that meet the eligibility criteria. Relevant Branch / Business Unit shall prepare the request for transfer and obtain approval from respective Business Group Head. Relevant Branch / Business Unit shall be responsible to provide all documents that are required to complete the transfer process. Business units must ensure that all the transfer formalities must be completed within 90 days after completion of one year from the date account classified as loss. When any business group transfers any exposure, all other exposure (funded and/or non-funded) on the said borrower (regular or otherwise) must also be transferred to SAMG. If such borrowers are also availing facility at branch(es) under other business group, the transfer shall be done under intimation to other branch(es)/ Business Groups so that entire exposure on a borrower is transferred to SAMG simultaneously. In case the exposure being transferred belongs to a Group then total Group exposure shall also be reviewed and transferred to SAMG to ensure a unified approach towards the relationship. In case of groups which are partially under the control of SAMG and partially within the other Business Groups of the Bank, the following rules shall apply: o When 50% or more of gross outstanding to a group are classified as loss then the entire outstanding of the group should be managed at SAMG and similarly all review authorities of SAMG will be applicable to the group. Where less than 50% of gross outstanding to a group are classified as Loss then the accounts not classified as loss can be managed by business. However concurrence of Group Head Risk Management / President shall be required for accounts managed by business groups.

It is expected that the accounts that will be transferred to SAMG have already been reported/ classified as Watchlist; however if the client has not been

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classified as Watchlist then the transfer application must accompany a justification for not classifying and reporting the account to pertinent WAR committee. All classified accounts except those falling within parameters mentioned above should be handled by the respective business groups irrespective of the classification status. Subjective decisions, including cases where manufacturing facility / main business operations of the borrower are no longer in operation even though repayment timelines are being met by the borrower, in such cases transfer of account to SAMG shall also become mandatory. For all such cases joint approval from Relevant Business Group Head and GH RMG shall be required. GH RMG is authorized to take a decision for transfer of an account to SAMG on subjective basis.

4.5.3 Account Transfer Procedures As soon as account is classified as LOSS (which meets the eligibility criteria) a Request for Transfer (RFT, Appendix-I to Chapter 4.5) should be completed by the relevant Branch / Business Unit and necessary approval from relevant Business Group Head should be obtained. The Transfer Checklist (Appendix-II to Chapter 4.5) should be completed by the Business Unit forwarded to SAMG after obtaining approval for transfer. A copy of the same should also be endorsed to CRC. Relevant Business Unit / Branch shall be responsible to complete all formalities for transfer of account to SAMG. Exposure shall be transferred to SAMG after completion of all formalities. After completion of transfer process, the account should be assigned to Relationship Manager within SAMG, who should review all documentation, meet the customer, and prepare a Classified Loan Review Report (CLR, Appendix-III to Chapter 4.5) within thirty (30) days of the transfer. The CLR should be approved by the Head of SAMG. The approved CLR shall be shared with the Head of the relevant Business Group and the Branch/office where the loan was originally parked. This initial CLR should highlight any documentation issues, loan structuring weaknesses and proposed workout strategy. Relationship Manager should ensure that the following is carried out when an account is transferred to SAMG: Facilities are withdrawn or repayment is demanded as appropriate. Any drawdowns or advances should be restricted. Any draw-downs should only be allowed after careful scrutiny and approval from competent authorities. eCIB / other reporting should be updated according to guidelines. Loan loss provisions are adequate keeping in view Force Sale Value (FSV) of collateral. Loans are only rescheduled / restructured in conjunction with Banks policy. Any rescheduling should be based on projected future cash flows, and should be strictly monitored.

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Prompt legal action is taken where required.

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4.5.4 Attachments for Transferring the Account Branches shall ensure forwarding of following documents along-with Handover Checklist, while transferring account / limit from one Branch to SAMG Units after obtaining necessary approval from relevant Business Group Head. It must be ensured that all appendices should be counter-signed by the competent authority not lower then General Manager for CBBG and Unit Head for Wholesale Banking and Islamic Banking. CRMIS Set-up Sheet, available at Branches where CRMIS is installed or from Regional / Circle Office. This shall facilitate the transferee Branch in entering the details in CRMIS System. For Basel Compliance it is mandatory that we have pertinent information of the defaulted clients therefore it will be mandatory for Business Unit to submit the requisite information to SAMG, as a minimum, for the last three years as per the format prescribed by RMG from time to time. It is to be noted that original security documents should remain in custody of the branch / CRC (which ever applicable) and should be forwarded to SAMG only when required in writing. However the transfer of original charge forms/ security documents should be routed through circle / controlling office after obtaining approval from GM / Corporate Head. Details (as per Appendix-II to Chapter 4.5) to be provided and also adhere to the following: o The covering letter should mention the accrued mark-up / memorandum entry figure along-with rate of mark-up and period etc. Also mention, if there is any amount lying in suspense / sundry account and the same should also be transferred separately. The original files should be transferred and copy / shadow files be retained at the branches. Copy(ies) of any communication between SAMG and the customer, after transfer of files shall be endorsed to Branch for their files. Where necessary the same should also be endorsed to their controlling Offices. Copies of all proposals, approvals, charge documents and securities held should also be forwarded along-with the correspondence file. The originating branches will remain responsible for these accounts in terms of providing statements of account / information required if deemed necessary by SAMG, bearing all litigation expenses (including legal, professional, consultancy fee / other charges if any claimed by the Advocates / Court), whenever it is so required. All expenses related to accounts transferred to SAMG (legal, professional, consultancy, insurance, muccadum charges, etc. etc.) shall be borne by the respective Business Unit / Branch. Relevant Unit at SAMG before incurring such expenses shall obtain

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necessary approval from competent authority within SAMG and then incur the expenses accordingly. SAMG shall forward necessary details to relevant branch/ business group. SAMG and relevant branch/ business group shall maintain proper record of all such expenses account wise. o Mark-up should be charged strictly in accordance with the circulars issued from time to time. As per SBP PRs, as soon as account is classified no markup is to be charged. Group summary sheet (Please refer the Chapter on Credit Approvals).

Transfer of credit exposure of any borrower after 25th of any month and on Fridays / Saturdays to be avoided, so that credit exposure does not remain un-responded in monthly / weekly Statement. 4.5.5 Management of SAMG Accounts Operation and day to day activities in accounts transferred to SAMG shall be managed by SAMG, but, where circumstances so warrant, accounts may be managed on a day-to-day basis by Business Groups (subject to concurrence of Group Head Risk Management / President). All accounts transferred to SAMG will be assigned to a specific Relationship Manager who is ultimately responsible and accountable for coordinating and controlling the management of the Special Asset to ensure that: Credit and other risks are properly identified, analysed and assessed; Account objectives are agreed and approved; and Strategies and action plans are formulated, approved and implemented so as to minimize risks, prevent losses, maximize recoveries and restore profits through rehabilitation, restructuring, work-out and direct recovery and / or legal actions.

SAMG Relationship Managers are required to manage all manner of transactions associated with the normal operation of the accounts under their charge, including, but not limited to, advances, extensions, renewals and modifications of loan terms and conditions; these are tasks which fall within the range of duties typically carried out by a Relationship Manager in the Business Groups. Additionally SAMG Relationship Manager has to carry out a wide range of specialized tasks, including the following: Recommendation of provision against or write-down of a Special Assets value in the Banks books. Recommending debt compromise or forgiveness, to include principal, mark-up, mark-up adjustments and any other fees or amounts due to the Bank. Release or disposal of security /collateral after approval from competent authorities.

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Commencement of foreclosure proceedings, litigation, legal settlements, lien settlements etc. Management of property / asset acquired as a result of foreclosure etc. Where the Bank acquires ownership of real estate / tangible asset in this way, the concerned SAMG Relationship Manager shall be responsible for the close monitoring of expenditure, continual review of compliance with pertinent laws in the relevant jurisdiction and ensuring that appropriate insurance cover is always in place. Sale of assets for cash or through providing new loan facilities. Recommending asset swaps under compromise agreement to Competent Authorities. Engagement of consultants, legal counsel, contractors, advisors etc. Conversion of debt to equity. Leading, arranging and / or agreeing to participate in the formation of any creditors group (in instances like where banks go for combined settlement / litigation against a customer).

Whilst some assistance from Business Groups may be sought, it is essential that the autonomy of SAMG and its Relationship Manager be maintained to ensure that appropriate recovery strategies are implemented. 4.5.6 Review of Classified Portfolio Parked at SAMG

Review of all accounts parked at SAMG shall be conducted as per the below grid on annual basis, an NPL Review Proposal (Appendix IV to Chapter 4.5) should be prepared by the SAMG Account Relationship Manager to update the status of the action / recovery plan, review and assess the adequacy of provisions, review of security adequacy, and modify the banks strategy as appropriate. Classified Loan Review shall be approved/reviewed as per the following grid and a copy of the approved SAMG Review Proposal shall be sent to the transferring business unit.
Exposure Level Where exposure is PKR 25M or below Where exposure is above PKR 25M but not more than PKR 50M Where exposure is above PKR 50M but not more than PKR 100M Where exposure is above PKR 100M Reviewing Authority Review level shall be determined by Head SAMG within SAMG*. Head-SAMG & SCO-2 RMG President & Head-RMG MCC

* Such approval levels shall be intimated to Group Head RMG for their information and concurrence.

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All proposals involving any remission (writer-off and/or waiver etc.) shall be processed on the Remission Proposal (Appendix I to Chapter 4.4) and shall be approved/reviewed as per Authority for Write-off / Remission grid. 4.5.7 Review of classified portfolio Parked at Branches Regardless of the approval level and exposure amount, all reviews of regulatory classified loans will be done at one level higher than the original approval / review level. This review will be done on the format of Standard Credit Appraisal form as per section 3.3.4 (for loans classified as substandard and doubtful only) with special mention of status of the recovery plan, action taken, review of security, adequacy of provisions, and proposed banks strategy. For review of Loss category loans, NPL Review Proposal (Appendix IV to Chapter 4.5) shall be used. Frequency of such review shall be annual or more frequent if specified / desired by the relevant Reviewing Authority. Relevant Business Unit / Branch shall be responsible for elevating the Proposal to the concerned approval/review authority. All proposals involving any remission (writer-off and/or waiver etc.) shall be processed on the Remission Proposal (Appendix I to Chapter 4.4) and shall be approved/reviewed as per Authority for Write-off / Remission grid. 4.5.8 Guidelines for Customer Handling / Remedial Action

All efforts for recovery of Bank's dues should be initiated at the earliest. Unit Head, Regional and General Managers' (Higher level Field Managers) concerted efforts to persuade the customers to submit, in writing, a definite repayment schedule, if Branch / Relationship Manager's (lower level Field Managers) endeavours, in this direction, have not produced the desired results. Co-ordination of efforts at the Senior Executives / SAMG / Principal Office level to assist in pressurizing the defaulters for early repayment, in accordance with Bank's standard procedures. In genuine cases, where financial losses have been suffered by the customers due to factors beyond their control and customer repayment capacity is very limited, the Bank may allow repayment on easy terms, through moratorium / rescheduling. Also, in such instances, financial relief may be allowed through remission / write-off / stoppage of mark-up or through concessional rate of mark-up, following the procedures laid down for doing so, particularly State Bank of Pakistan's directives / Prudential Regulations / Banks internal policy, as may be applicable and adhered to. If there is insufficient tangible response from the defaulting borrowers, the usual remedial action necessary in such cases should be initiated viz. issuance of legal notices through the lawyers and, thereafter, proceeding further through the appropriate legal courts, for recovery. Finally, the liquidation process may be initiated, declaring the borrower as bankrupt, for realization of proceeds of borrowers' assets, to be applied towards settlement of Bank's dues.

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The defaulters should be declared as Bad / Defaulting Borrowers, by putting them on the Defaulters list, to safeguard against any financing in future. Every effort should also be made by the concerned SAMG Office, through Bank's solicitors, for prompt disposal of legal cases in the courts. Accurate reporting of NPLs in CRMIS. Guidelines for Recovery Procedure

4.5.9

The procedure for recovery of bad / stuck - up advances, either under the previous interest - based system or under the present PLS based system is basically the same, except for certain variations in the legal modalities involved, as outlined hereunder: Recovery suits for interest - based finances / on amount Non-interest Banking System, are to be filed in the Banking Court / High Court depending on amount as per Financial Institutions (Recovery of Finances ) Ordinance 2001. In case of interest - based loans/advances, the accrued interest is recoverable from the defaulting borrowers for the entire period during which the dues have remained outstanding and Court allows decree, along-with Interest till the date of realization. Under the Non-interest based System, however, the Court grants decree, allowing mark-up for the limit period and it depends upon the Court's discretion, as to whether or not, cost of funds, if any, are allowed. Owing to the afore-mentioned difference in legal concept, while suit for recovery under the old interest based system could be filed at any time within the limitation period, under the prevailing Non-interest based System, it is in the Bank's interests to file a recovery suit as soon as possible, as delay in filing a recovery suit would cause loss to the Bank. It is of utmost importance that our Branches realize the difference between the two systems, explained in the preceding three paragraphs. They should not continue applying / charging mark-up on credit facilities allowed under the present non-interest based System in the same manner as applicable to loans under the old interest based system. The requirements under Prudential Regulations are to be adhered to. As indicated in the preceding sections (Remedial Actions and Customer Handling / Remedial Tips), there are various options available to the Bank for recovery of its stuck-up credit portfolio and it is for the Bank to select the most viable method of settlement in the best interests of the Bank. In case Branches require any further clarification, the matter should be referred by them to our Special Assets Management Group or Legal Affairs Division, for necessary guidance and assistance.

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4.6
4.6.1 4.6.2 4.6.3

Monitoring
Introduction Management Information System Exception Reporting

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4.6.1 Introduction

Credit Handbook

One of the main reasons for loans going bad is the lack of proper monitoring and supervision. Accordingly, effective monitoring of regular loans should be ensured. To minimize credit losses, monitoring procedures and systems should be in place that provides an early indication of the deteriorating financial health / inability / unwillingness of a borrower regarding repayment of loan. The risks in a relationship can arise both from factors that are internal or external to the client. A borrower with good financials & management can go bad despite Relationship Manager taking all the standard precautionary measures. This could be due to some unforeseen events or unpredictable external factors e.g. sudden adverse changes in the local / international economic scenario. Unexpected changes in Government policies, local / global market trends, etc. could result in financial losses to customers' business which, in turn, would jeopardize Bank's position with regard to security / recovery of finances. 4.6.2 Management Information System

The risks involved may be overcome / minimized by vigilant monitoring, early identification of potential bad debts and prompt remedial measures to safeguard Bank's interests. At a minimum, systems should be in place to report the following exceptions to relevant executives in RMG and Business units:

Past due (including overdue but not classified, Watchlist Accounts & Regulatory Classified) principal or interest / mark-up payments covering trade bills etc. Account excesses. Expired Guarantees. Breach of loan covenants like non adherence to loan terms and conditions, delayed or non-receipt of financial statements and any other covenant breaches or exceptions are referred to RMG and Business units for timely follow-up. Documentation & reporting of any internal, external or regulator inspection/ audit/ CRC/ RAR observation / finding for timely corrective action and reporting of the same to relevant approving authority. Delayed or non-review of a facility16.

MIS systems must be able to produce the above information for on-site and off-site review. Where automated systems are not available, a manual process should have the capability to produce accurate exception reports. Exceptions should be followed up and corrective action should be taken in a timely manner before further deterioration. Branches are required to send sanction advice to the borrower for acknowledgment of acceptance of approved terms and conditions. It is advised that for all new facilities (including one-offs) / renewals a sanction advice should be sent to the customer giving details of the transaction, security, purpose, mark-up rate and expiry dates etc. All Branch Managers/Relationship Managers are required to send a reminder letter in case customer fails to make payment of Principal and/or markup on due date. The reminder letter should be sent to customer not later than 5
16

All borrowing relationships / loan facilities should be reviewed and approved at-least annually (including long term facilities, which should be reviewed at-least annually)

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working days from due date. This letter (Appendix-I to Chapter 4.6) is in addition to the documentary requirements detailed in the chapter covering security documentation. Branch Managers/Relationship Managers should make continuous efforts for recovery of overdue principal/mark-up and repeated reminders should be sent fortnightly. In case customer fails to make payment of overdue liabilities within 60 days from due date. An intimation should be sent informing customer about the implications of reporting of name to eCIB (copy of format attached as Appendix-II to Chapter 4.6). It should be ensured that this intimation letter is sent to the customer after lapse of 60 days from due date of Principal and /or mark-up. 4.6.3 Exception Reporting One of the key controls for credit monitoring is highlighting and reporting existing or expected irregularities from standard practice to the management. Complete and correct reporting of CIF/ CRMIS data shall be of great assistance in this respect.
SN 1 Statement Name Statement of Past Due Obligations Recipient Region / Circle/ CRCD Originator Branch / Area Office Frequency Monthly Append ix III-i Description This statement should incorporate all past due (except Regulatory Classified) principal or interest / markup payments covering trade bills too Should incorporate all the excesses allowed in the particular week Should incorporate all the expired guarantees outstanding Should incorporate all the expired LCs outstanding Should incorporate all the clients regardless of the outstanding Any loan covenant required to be complied along with any unauthorized beach of manual should be covered

Account Excess (Commitment / Outstanding Monitoring Report) Statement Of Expired Guarantees Statement Of Expired Letter Of Credits Statement of Expired Facilities Statement of Breach of Loan Covenants

Regional / General Manager / CRCD Regional / General Manager Region / Circle Region / Circle/ CRCD Region / Circle/ Credit Review -RMG

Branch

Weekly

III-ii

Branch

Monthly

III-iii

4 5

Branch / Area Office Branch / Area Office Branch*

Monthly Monthly

III-iv III-v

Monthly

III-vi

In addition to the above mentioned statements, CRCD shall continue to prepare Unit Exception Report (UER) and same should be advised to the branches/ Business Units periodically.

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Section 4

Appendices

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WATCHLIST REPORT* Report Date: Date of original WL: Date(s) of last WL: Business Group / Circle: Customer Name: Group: Nature of Business: Date of Latest Customer visit: CRR Grade (at last approved): CRR Grade (current): Reaffirmed CRR Grade: (Now) Facilities & Outstanding Customer Group Security Fund Based Facility OverO/S & due & IDA Amount Non Fund Based Facility OverO/S & due & IDA Amount Date:

Credit Handbook
Appendix I to Chapter 4.2

Prepared by: Branch Code: Relationship Manager: Approving Authority:

Facility Review Date: Strategy: Hold/Reduce/Restructure/Exit

Total Facility & Amount O/S & IDA Overdue Date Since Overdue

i - Brief description of security (including FSV, name of the valuer and date when the valuation was carried out) ii - Is Security and Documentation complete? : Yes/No (If No, then please provide brief details of deficiencies. Also include action plans and deadlines to perfect security and documentation in Key Strategy/Action Plan section) iii - Security Checked by LAD/ Approved Legal counsel/ CRC/ Audit? : Yes/No iv - Date Checked: v - Is insurance cover available: Yes/No (Brief details of insurer, insurance amount, premium payment receipts etc.) Reasons for being classified Watchlist:

Key Strategy / Action Plan (bullet points):

Declassification Triggers** (bullet points):

* To be initialized five to fifteen business days after Watchlist symptoms begin to surface. After approval of initial classification, report to be prepared on quarterly basis and updated more frequently in case of need to reflect changes in circumstances until account is taken out of Watchlist category. Copy of this report is to be held at the branch and the Head Office. ** Events to be specified in bullet points, the occurrence of which will trigger declassification of account from Watchlist to Regular Category.

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Business Group / Circle: Strategy Agreement / Documentation:

Credit Handbook
Appendix I to Chapter 4.2

1- Have strategies and action plans been agreed with the customer? 2- Are strategies and action plans documented with the customer? 3- Has the customer breached any condition since strategy /action plans were agreed?

Yes/No Yes/No Yes/No

In case of No answer to 1 and / or 2 above; please indicate the expected date of completion / compliance, In case of No to 3, please document reason for breach of previous strategy / action plan: DD/MM/YYYY (Agreement) DD/MM/YYYY (Documentation) Progress Since Last Report:

Prognosis: Overall condition of the client is considered to be: Improving Stable Deteriorating

Relationship / Branch Manager Comment:

Unit/ Regional Manager /GM Comment:

Business Head/ Corporate Head Comment:

Group Head Comment:

WAR Level 1: Relevant CO/ SCO Comment: WAR Level 2 / 3: Relevant SCOs Comments: AR Level 4: Group Head RMG Comments

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WATCHLIST SUMMARY REPORT AS ON __________ AWatchlist Cases Business Group Date placed on WL status Exposure in PKR Millions O/s Collateral Valuation (FSV) Valuation Date Ageing of Overdues Strategy last agreed with the customer

Credit Handbook
Appendix II to Chapter 4.2

Customer

Recommendations of the last WAR Committee

Current Strategy Status

B-

No of cases declassified from Watchlist during the month __________ [Watchlist Declassification Report is also attached]

CSN

Details of cases shifted from Watchlist category to PR classification during the month Name of Customer Date placed on WL Total Exposure in PKR Millions Exposure Classified in PKR Millions

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Credit Handbook
Appendix III to Chapter 4.2

WATCHLIST DECLASSIFICATION REPORT * Report Date: Date of original WL: Date(s) of last WL: Business Group: Customer Name: Group: Nature of Business: CRR Grade (at last approved): Date: CRR Grade (current): Reaffirmed CRR Grade: (NOW) Reasons for being classified Watchlist:

Prepared by: Branch Code: Relationship Manager: Approving Authority: Facility Review Date: Strategy: Hold/Reduce/Restructure/Exit

Reasons for Declassification:

Business Head/ Corporate Head Comments:

Relationship / Branch Manager Comments:

SCO Comment:

Credit Executive Comments: (where appropriate)

Signature of original approving authority

Signature of approving authority next on the approving grid

* Once the reasons for classification are no longer valid, a declassification request may be initiated and approvals sought at one level higher than the initial sanctioning authority

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SETTLEMENT PROPOSAL
1. Approval Level: 2. Title of Account: 3. Nature of Business: 4. Date Account Transferred to SAMG: 5. Business Name from where A/C transferred: 6. Branch Name with Code:

Credit Handbook
Appendix I to Chapter 4.4
(Rs. in Million)

7. Amount outstanding (as on..) (Outstanding exposure details to be on obligor group basis, where applicable) (i) Funded: (i) Principal (ii) Markup@ SMR (from. to) (iii) Other/Legal Expenses (ii) Non Funded Rs.__________ Please provide details of O/S non funded exposure along with margin held (if any) 8(a) Amount of Provision Held: 8(b) Provision Parked At: 9. Agreed Repayment as per settlement deal with Customer: (i) Principal (ii) Markup (iii) Other/Legal Expenses Total Agreed Repayment 10. Amount to be Write off / waived off after execution of settlement: (i) Proposed Write off (ii) Proposed Waiver Total Write off / Waiver 11. Status of Security: Sr # Description of Property MV (Rs.) FSV (Rs.) Valuators Date of Valuation

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12. Legal Status/Brief Background: 13. Comments / review of clients latest CIB Report: 14. Offer of Borrower: 15. Details of Previous Settlement, if any: 16. Deal Flow: 17. General Settlement Terms: 18. Rationale for settlement: 19. Pre-Audit Requirement: 20. Deviation from SBP Guidelines (if any):

Credit Handbook
Appendix I to Chapter 4.4

____________________ (Name) Relationship Manager

_______________________ (Name) Unit Head

____________________ (Name) Department Head

_______________________ (Name) Divisional Head

____________________ (Name) Group Head

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Br. Code A/C #

Credit Handbook
Appendix II to Chapter 4.4
Type Calendar Year CP#

Proposal of Remission (Write off/Reversal/Waiver)

Branch: Region: Business group: Group: Nature of business: Capacity (production): Plant location: Business address: Person to contact: Phone no.: Ownership type Remarks : 1LATEST eCIB REPORT
Fund based Borrower's Account : Total O/S in Group A/c (Incl. Above) N.F. Based Total Overdue Default

Br. Code: Circle: CRR:

Ref. No.

Date

Date of a/c opened Date of facilities first allowed Proprietor/Partner/Directors

% Share

1 2 3 4 Fax no.: Estab. date 5 6 7 Total . . . Next Review Date:

100%

Involvement of other banks (y/n)

Report dated: i) ii)

2-

GROUP POSITION:
FUND BASED PRINCIPAL MARK UP Accrued

GROUP COMPANIES

BRANCH

NON FUND BASED O/S

OVERDUE

DEFAULT

Total:

3-

STATUS OF THE A/C AS ON

Limit Outstanding IN PKR Other Expense Mark-up Accrued

S . N o

Nature

Amount

Initial Date

Expir y Principa Date l

Mark-up Charged

Total

Provision

Classificati on Dt.

Present Status

Total

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4S. No.

Credit Handbook
Appendix II to Chapter 4.4

SECURITIES HELD (LIMIT-WISE; AT THE TIME OF INITIATING THE PROPOSAL) Particulars Market Value Present FSV Date of Valuation Name of the Valuator

Total: 5BRANCH MANAGER/EXECUTIVE WHO RECOMMENDED THE CREDIT PROPOSAL

NAME DESIGNATION PLACE OF PRESENT POSTING

6-

SANCTIONING AUTHORITY WHO SANCTIONED THE CREDIT PROPOSAL

NAME DESIGNATION PLACE OF PRESENT POSTING

7Date Filed

DETAILS OF SUIT FILED

Date of Decree Execution Date/ Progress of Court Case

Court

Name of Legal Counsel

Amount

Current Status:

8Date Filed

DETAILS OF COUNTER LITIGATION:

Name of Legal Counsel Date of Decree Execution Date/ Progress of Court Case

Court

Amount

Current Status:

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9-

Credit Handbook
Appendix II to Chapter 4.4

INTERNAL AUDIT REPORT; audit date should not be older than 1 year & must encompass the current status, (give name of person heading audit team, brief findings of the audit including fixation of responsibility, if possible, for advance going bad)

10-

Recovery efforts made; including rescheduling /restructuring allowed (including date of each relief involved and reason for non-adherence)

11-

Is borrower doing business in some other Name; give details:

12Nature

Liability Position with amount upto paisas

Account number Principal Mark up/Intt. Other charges Total

Outstanding Liability Before Settlement (attach settlement approval):

Total Outstanding liability Less :Amount Recovered as per Approved Settlement

Total Amount Recovered Net Outstanding Liability; Recommended for Remission:

A--Net Outstanding Liability Amount Recommended for Write off

B--Total for Write off Amount Recommended for Reversal from Mark-up Recoverable Account:

C--Total for Reversal: Amount Recommended for Waiver:

D--Total for Waiver: Amount Recommended for Remission(E=A=B+C+D):

E--Total for Remission: Date mark-up stop accruing in memorandum account:

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13Reasons/ Justifications for recommending for Remission:

Credit Handbook
Appendix II to Chapter 4.4

Tick appropriate reason and strike through others: The borrower has paid the agreed settlement amount of Rs. _____________, as mentioned in (12) above towards full and final settlement. For the rest remission is to be allowed as above. The borrower is not traceable and his whereabouts are not known nor his assets are known/ could be traced. The borrower has paid/deposited amount in terms of Judgement/Decree and balance is to be written-off. Additional reasons:

14-

Further recovery efforts (Please tick the appropriate and strike through the irrelevant): To be abandoned and all litigation to be withdrawn To continue

15-

Securities Held (Please tick the appropriate and strike through the irrelevant): To be released (wholly or Partially Not to be released till any settlement.

16-

DESCRIPTION OF CONTROL/OPERATIONAL FAILURE RESULTING IN LOAN LOSS :

a. Attested copies of documents to be attached; if available otherwise the fact should clearly mentioned
1 2 3 4 5 6 7 8 Approved settlement Proposal; if the remission is being recommended as an offshoot of settlement: Statements of all the accounts; principal; mark up (accrual, memorandum & recovered, mark up suspense, other charges etc. Photocopy of Account opening form Photocopy of Plaint, if suit filed Photocopy of Decree, and Judgement, if suit decreed. Photocopy of execution application, if execution filed Request letter of borrower for settlement National Tax Number

b. More over CHEK LIST FORMAT (as per BID Circular No. 2 of 03.09.2001) along with attested copies of all the documents ticked "Yes", must also be submitted. It is MANDATORY)
Name; Designation (Credit Officer/Relationship Manager) Name; Designation: Br. Manager/Unit Head

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Credit Handbook
Appendix II to Chapter 4.4

17-

APPROVAL: Approved for remission as under:

(Approval Level)______________________________)

WRITE-OFF REVERSAL WAIVER TOTAL

RS._________________________________ RS._________________________________ RS._________________________________ RS.____________________________

Further recovery efforts: to continue / to abandon Securities: to be released (wholly or partially)/ Not to be released till settlement
Approved By: Name; Designation

Name; Designation

Name; Designation

Name; Designation

Name; Designation

Name; Designation

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Credit Handbook
Appendix II to Chapter 4.4

BORROWER NAME:_______________________________
CHECK LIST
(To be annexed with each write-off Proposal) Please arrange to furnish attested photocopies of the documents (where applicable) 1Is / are Borrower's Loan application(s) available on record? If Yes, 22-A 33-A 4Dated Is / are original sanction advice(s) available on record? If Yes, Dated Is / are renewal sanction advice (s) available on record? If Yes, Dated Is / are there any enhancement (s) Sanction Advices in loan facility available on record? If Yes, Dated Is / are borrower request letter for enhancement (s) of limit available? If Yes, Dated Whether Credit Worthiness Reports on the Borrowers were obtained from banks / other financial institutions? If Yes, copy of receipt dated Is the nature of business available on record? What is the status of ownership of Business?

Yes Yes Yes Yes Yes Yes

No No No No No No

567-

Yes

No

Sole Proprietorship / Partnership / Private Limited Co. / Public Limited Co./ Other Are names and addresses of Owners/ Partners/Directors available on record? Yes No If Yes, give details as follows: Name of Director / Partner / Proprietor With CNIC No. (If available) Are the names of Guarantors with full addresses, their status and their worth Yes No at the time of sanction and at present available on record? Is the mode of repayment of loan or repayment schedule available on record / Yes No mentioned in Sanction Advice? Is the Valuation Certificate of property / security through bank's approved Yes No Surveyor available on record? If Yes, Valuation Certificate dated _______________ for Rs.____________by M/s. _____________ Is legal opinion of the banks Legal Advisor regarding genuineness of the Security documents available on record? If Yes, Opinion dated_____________ Is the report of the borrower's borrowings from other banks / financial Institutions called from (CIB) Credit Information Bureau of SBP? Is the date and amount of last repayment available on record? If Yes, 14Date Yes No

8910-

11-

1213-

Yes Yes

No No

Are the reasons on account of which the loan became stuck-up /Write-off available on records? If Yes, a) Reasons for stuck-up

b)

Reasons for Write-off

15-

Are the details of outstanding against the borrower i.e. Principal, Interest charged. Accrued Interest not debited, Penal Interest, Other Charges and total available on record?

Yes

No

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16Legal Notice issued

Credit Handbook
Appendix II to Chapter 4.4
Yes Yes Yes Yes Yes No No No No No

The details of recovery efforts made by the bank Brief steps / efforts taken Suit No. Suit Decreed Execution filed Are details of compromise made outside the Court and reasons there of available on record? If yes, copy of compromise application filed in Court. Dates on which the borrower deposited amount in terms of compromise If yes Dated If the borrower has become bankrupt, are the details of Court proceedings and action taken by the bank available on record? If the borrower is dead, are the following details available on record:Heirs left behind? If yes, give detail. ii) Assets left behind? If yes, give detail. iii) Valuation of Assets? If yes, give detail. Write-off approval of the Competent Authority is attached? Are the details of action taken against the delinquent officials, available on record? If yes, details of punishment awarded / action taken Name Designation What action taken a. Whether the borrower is still in business? b. Is borrower doing business in any other name?

17-

181920-

Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

No No No No No No No No No No No

2122-

23-

Yes Yes Yes

No No No

24-

In case of sale of stock / securities / properties, whether the proceeds thereof credited to the loan account? If yes, Dated

25-

Whether the securities pledged/hypothecated were released to the borrower? If yes, date of release

Yes

No

26-

Whether property / properties mortgaged were redeemed to the borrower? If yes, Date of redemption: Documents by which redeemed:

Yes

No

27-

Whether periodical stock reports / Insurance cover of hypothecated / pledged stocks were obtained? If yes, Last stock report and last Insurance cover to be attached. Whether physical verification of the hypothecation / pledged stock was carried out periodically? If yes, Last verification / visit report to be attached. Whether debit balance confirmation was obtained from the borrower if so, is a copy of the same available on record? If yes, Dated

Yes Yes

No No

28-

29-

Yes

No

Credit Officer/Relationship Manager

Br. Manager / Unit Head.

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Credit Handbook
Appendix III to Chapter 4.4

POST WRITE- OFF SETTLEMENT PROPOSAL (Rs. in Million) 1. Title of Account: 2. Nature of Business: 3. Date Account Transferred to SAMG: 4. Business Name from where A/C transferred: 5. Actual Figures: (i). Funded a. Principal Written-Off b. Mark-up in Memo Waived c. Total Amount Written Off / Waived d. Legal Charges incurred up to date e. Date of write off f. Write off Approving Authority at the time of write off (ii). Non Funded Rs._____ Please provide details of O/S non funded exposure along with margin held (if any) 6. Writeoff Rationale:

7. Agreed Repayment By the Borrower:

(i) Principal (ii) Markup (iii) Other/Legal Expenses Total Agreed Repayment

8. Status of Security:
Sr # Description of Property MV (Rs.) FSV (Rs.) Valuators Date of Valuation

9. Legal Status/Brief Background: 10. Comments / review of clients latest CIB Report:
11. Offer of Borrower:

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12. Details of Previous Settlement, if any: 13. Deal Flow: 14. General Settlement Terms:

Credit Handbook
Appendix III to Chapter 4.4

16. Rationale and SAMGs Recommendations for proposed settlement: 17. Status of Asset Tracing: 18. Authority Level:

19. Deviation from SBP Guidelines (if any):

____________________ (Name) Relationship Manager

_______________________ (Name) Unit Head

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MCB Bank Limited

Title Sub Chapter No. Reference No. Date of Issue Amount loosed Industry

Credit Handbook
Appendix IV to Chapter 4.4 Lessons Learnt (Title should describe the event leading to default) (Any serial number that SAMG may adopt)

LESSONS TO BE LEARNT (Chapter Title) Background This should cover industry, business or any particular details that needs to be mentioned for understanding the background of the transaction. This should be sufficient to explain why bank went for the transaction (justification), highlighting the risks & mitigants taken into consideration at the time of approval. What were the projections and why account deviated from them? Any other pertinent thing can be mentioned. Credit Risk Rating Validation This section should elaborate on the point whether the CRR template applicable to the said customer actually indicated the default before hand or it failed to do so? What indicators can be built in the CRR? Security This should highlight the security held, any periodic amendments along with justifications. Any monitoring issues that need to be mentioned must be stated. Company Financials Financial position / ratios considered while financing. Any ratio that was ignored, which would have / was indicating deterioration in the companys profitability. Projects along with assumptions etc. Lessons from this experience This should explain the aspect that we could learn from the default. What went wrong, when and why it happened. Most importantly it should elaborate on how losses would have been prevented/ minimized, something that was ignored etc. Conclusion Any suggestion regarding process improvement etc.

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Request for Transfer To: From: Customer Name Present CRR Account Manager Relationship / Branch Manager Unit Head / General Manager Brief Description of Business Related Accounts

Credit Handbook
Appendix I to Chapter 4.5

Date: Ref. No. : Group Name SBP Classification Date of existing SBP Classification Date classified as Watchlist Group Exposure (Gross) Group Impaired Exposure (Gross) Customer Industry Rs in Mln

Total Gross Outstanding of the Customer Total Classified Exposure Net Exposure After Liquid Assets Group Gross Exposure* *Group summary sheet to be attached (where applicable)
Attachments List any and all documents which are physically attached to the RFT and considered necessary for making an informed decision. If there are too many documents to list without breaching the one-page rule, refer instead to a list of documents which can itself become an attachment to the RFT. List any relevant documents which will be readily available to the Approver (such as the Watchlist correspondence, Proposal and Approval of Finance, RAR Report, CRMIS reporting, Call Reports, any earlier RFT or other correspondence, etc.). Focus on major issues regarding the account and be succinct. If additional detail is considered necessary, information memoranda may be attached and crossreferenced. Chronological details of recovery efforts made by the field and negotiations held with the borrowers up to the date of transfer of the account incorporating details of recovery. State succinctly the precise purpose of the request, together with a recommendation. Again, if additional detail is needed, information memoranda may be attached and cross-referenced.

References Background Negotiations Requests

Signed By (Unit Head/ General Manager): Comments

Approved By (Group Head): Comments

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Branch Name + Code

Credit Handbook
Appendix II to Chapter 4.5 Branch Ph #

TRANSFER CHECK LIST - FOR TRANSFER OF ACCOUNT TO SAMG

Name of Borrower

Name of Concerned Person/client________________________________ Cont. #___________ Current Business Condition: _________ (Running/Closed. if closed, please mentioned reasons)
Date Relationship started with Bank _______________ Date 1st Credit Allowed ___________ Date of Classif. as watchlist _______________ Date of first classification __________________ Date of Classification reported as Loss _________ Date of last Agreement for Finance executed by the client _________ Expiry of Agreement: _________________ Last payment made by the Borrower: _______________ Amount Paid: _______ Amount of existing Provision _____________ FSV:______________: Benefit of FSV taken (if any) _________ Please convey the following figures: a. Principal outstanding: (Nature: ___) _____ b. Payable amount of Mark-up _____ c. Mark-up Rate as per last approval of finance SMR _____, TPMR _______ d. Repayments after expiry (if any) Principal________ Mark-up_______ dated________ e. Legal Charges / any other charges recoverable from borrower: _____ Name of Credit Manager __________________ Name of Br. Manager______-_________ S# 1 2 3 4 5 6 7 1). ACCOUNTS SECTION (a). A/C opening form along (b). S.S card of the clients (c). Copy of CNIC of Account Holders/Directors Brief Profile of the Company (Comprehensive report on classified account) Detail of Allied Accounts (if any) along with their classification status. Latest eCIB acquired from through CRMIS eCIB Report. (a). Manager Latest visit report of the property mortgaged with Bank. (b). Manager name who recommended along with approving authoritys name. (a). Efforts made by the branch for recovery (b). (Minutes of last meeting with the borrower) - Statement of Account ((a).Principal (showing all Fresh/Enhanced/Renewed Disbursements., (b). Mark-up (showing all Dr./Cr. Entries, Rate of mark-up @TMPR & SMR) (c). Borrowers fact sheet extracted from CRMIS Database. (a). Applications for finance (in chronological order) Dated. (b). Basic Borrowers fact Sheet Dated. (c). Credit Proposals Dated. (d). Sanction Advices Dated. (e). Acceptance letter Dated. (f). Complete IB forms held against each & every approval/sanction. Please provide year wise set of above documents including Fresh/Renewal/ Enhancements/Extension/reductions. (g). eCIB at each approval date. (h). Financial Statements on all approval dates, (if applicable) Page #

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MCB Bank Limited

9 10 11 12

Credit Handbook
Appendix II to Chapter 4.5

Information on allied / sister concern if any Certified copy of Board Resolution and list of Directors Last Inspection Report, (External Audit report & SBP Audit report with compliance) Out standing Position from TSC in case of Import/export financing

2). SECURITIES SECTION

1 2 5 6 7 8 9 10 11 12 13 14 15 16 17 All (Previous/Latest) Valuation report / (s). (No. of collateral ____ ) (Total FSV _______) Sale Deed / s , Fard, Mutation / Intiqal and NEC Memorandum & Article of Association Partnership deed (if required) Letter of Hypothecation Charge Certificates, Form 10 from RJSC & Form 16 if charge modified Latest form 29 Latest Search Report Irrevocable General Power of Attorney (of each property) & Agreement to create Reg. mortgage Legal opinion (Pre disbursement and Post disbursement) Completion Certificate of Property (a). Detail of Pledged stock (if any). (b). Latest Stock inspection report along with current value of stock. Any additional Security / documents held Complete details of Pledge stock if CF/FIM sanctioned. Causes Leading to Classification

3). LEGAL SECTION

1 2 3 (a). Current Legal Status: (otherwise) mention SUIT NOT FILED YET (b). Name of Lawyer and his contact numbers: (c). Latest update position in court (obtained from Lawyer) Copy of Legal notice, Plaint / PLA, Judgment and Decree and Execution petition if any Detail of Suit Amount (Principal + M/up) Complete statement required

4). SOFT / HARD COPIES

1 2 Review Proposal (Last) CRMIS systems file for uploading data. (Please use transfer out option from Utilities / Account Management and provide the file on floppy or through email)

5). CERTIFICATE/APPROVAL REQUIRED

1 2 3 4 5 Request for transfer of account to SAMG on prescribed format available in Credit Hand Book (Appendix I to Chapter 4.5) duly signed by Unit Head/General manager and approved by Group Head. Certificate for holding of Original property documents & marking of banks lien with relevant authorities Certificate that No other relationship of Borrower/Mortgagor has remained in the branch. Certificate that No Mark-up was taken to income account after Classification. Confirmation that no allied account of Company or its Director is running in branch.

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6). EXPENSES SECTION
1

Credit Handbook
Appendix II to Chapter 4.5

Detail of legal fee & expenses. And/or any other expenses incurred after Classification

7). CORRESPONDENT BETWEEN BANK & CLIENT

1 Essential correspondence between Bank & Client/ Memos, notices issued & reply thereof Only Photocopies are required. Original documents will be intact in branch/CRC custody All pages must be allotted page nos (e.g. E-1, E-2) Pages should be duly signed / stamp by authorized person. Separator for each section should be arranged. Documents must be forwarded along with Box file duly separated into sections

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Credit Handbook
Appendix III to Chapter 4.5

Classified Loan Review (CLR) Form A/C:- M/s.________________________________ TO: From: Customer Name Present CRR Date of Account Opening Account Manager /Branch Manager Branch from where transferred to SAMG Unit Head/ General Manager Brief Description of Business Related Accounts Date: Ref. No: Group Name SBP Classification Date of Facility First allowed Date of Existing SBP Classification Date Classified as Watch List Group Exposure (Gross) Group Impaired Exposure (Gross) Customer Industry

Brief History of the Relationship: (state in action words) 1. 2. 3. 4. 5. 6.

Present State of Operations / Business: Operative / Partially Operative / closed since ________ Causes Leading to Classification: (any discrepancies, errors, omissions short comings state in action words) 1. 2. 3. 4. 5.

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Credit Handbook

Appendix III to Chapter 4.5 Present outstanding as on _____ Facility Limit Expiry date of Fund Mark-up Total Non Fund Others Grand Nature Amount limit / Based (Mem. A/C. Based Charges* Total Contingent till ) obligation

Total * give details of the amounts: Previous Outstanding when Relationship was transferred to SAMG (on Facility Limit Nature Amount Expiry date of limit / contingent obligation Fund Based Mark-up Total (Mem. A/C. till ) Non Fund Based Others Charges* ) Grand Total

Total * give details of the amounts: Details of Securities Held: (Facility-Wise) Facility Particulars of Securities

Evaluator

MV

FSV

Date

Total:

Note: Use extra sheet, if required.

Security Assessment: (any other material fact):

Existing Provision Comments on Adequacy of Provision Legal Status: Action Suit Filed: Decreed: Execution Filed: Auction Order: Winding-Up / Liquidation: Counter Litigation Criminal Proceedings (FIA / NAB / Civil Court etc.):

Amount

Date

Dealing Counsel

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MCB Bank Limited

Is there an agreed restructuring in place? If Yes Provide details: Yes /No

Credit Handbook
Appendix III to Chapter 4.5

Date of Last security and Documentation Review:________________ Confirmation that Security & Documentation have been reviewed by SAMG: Yes /No Actions of Other Bank / Institutions (If applicable):

Latest Payment Received: Amount ____________ date:___________ Adjusted towards_________ Ultimate Realizable Value Calculations:

Strategy & Recovery Plan:

Forwarded by:

Approved by:

Copy to: The Group Head_______________________

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MCB Bank Limited NPL Review Proposal

Credit Handbook
Appendix IV to Chapter 4.5

(Rs. In Millions)

Name of Borrower / Group: Branch Office: Region/ circle: Date Transferred to SAMG (if applicable) Sector / Nature of Business: Operational Status:(Select one) Classification Date Present Status of Classification Particulars of Main Sponsors / Directors / Partners: Names Designation Operational / partially operational/closed since________

Recovery Since Transfer:

Outstanding Liabilities as of __________________ Type of Facility Limit Expiry Date Principal MarkUp Charged MarkUp in Memo (till____) Other Charges Total Provision Held

Total: Details of Securities Held: (Facility-Wise) Facility Particulars of Securities MV FSV Date Done By

Total:

Note: Use extra sheet, if required.

Legal Status: Action Suit Filed: Decreed: Execution Filed: Auction Order: Winding-Up / Liquidation: Counter Litigation Criminal Proceedings (FIA / NAB / Civil Court etc.):

Amount

Date

Dealing Counsel

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MCB Bank Limited

Credit Handbook
Appendix IV to Chapter 4.5

Brief History: (Use Action Words & Sentences in Bullet Form)

Date Last Rescheduled / Restructured: Repayment Behaviour since last R/R Package:

No. of Resch. / Restr. So Far: Regular / Irregular / Default / No. & Amount of Instalments Overdue

Developments Since last report

Strategy for Resolution/ Future Action Plan:

Relationship Manager/ Credit Manager

Unit Head/ Branch Manager

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MCB Bank Limited

Credit Handbook
Appendix I to Chapter 4.6

Mr./Madam/M/s.____________________ Address :___________________ Date: :___________________ Ref No. :___________________ Dear Sir, PAYMENT OF DUE PRINCIPAL / MARK-UP Please refer to your following mentioned financial facilities, being availed by you from us. The following amount(s) in this respect is/are due for payment by you. Sr. Nature of Finance Amount due
Example 1.000M 0.140M 2.000M ____________

Description

Initial Date

Due since

1) 2) 3)

DF#35 DF#35 FIM#59/03 Total

Principal Mark-up Principal

30//09/2006 30/09/2006 30/09/2006

31/12/2006 31/12/2006 30/09/2006

You are therefore requested to please pay the above mentioned amounts immediately. Please note that if payments are made in time, you will be entitled to a prompt payment bonus, to be calculated as per documents executed by you, including but not limited to, Finance Agreement(s) for respective financial facilities. Yours faithfully, (Manager) Phone #____________

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MCB Bank Limited

Credit Handbook
Appendix II to Chapter 4.6

Mr./Madam/M/s Address Date Ref No . Dear Sir,

.____________________ :___________________ :___________________ :___________________

REPORTING OVERDUES TO eCIB This refers to our letter # dated regarding payment of markup/ principal, on account of financial facilities being availed by you. We regret to note that you have not paid the overdue amounts, as mentioned in the above referred letter. You are therefore, requested to make the overdue payments to clear your overdue liabilities. In addition, please be apprised that all Banks/ FIs are required to report the overdue information of their customers to eCIB (Electronic Credit Information Bureau) database of State Bank of Pakistan. Accordingly, you are conveyed that in case of nonpayment of the overdue amount(s) by you within 15 days of this letter, MCB will be constrained to report to eCIB database your overdue information. This will impact, amongst other implications, your credit worthiness; and you may not be able to avail credit facilities from any bank in future. In case you have already made the payment please disregard this letter. If you have any queries or would like to discuss any aspect of your account please do not hesitate to contact us. Yours faithfully, (Manager) Phone #____________

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MCB Bank Limited Statement of Past Due Obligations as on _______________

Credit Handbook
Appendix III-i to Chapter 4.6

To: Region / Circle/ CRCD From: Branch / Area Office (Rupees in Millions) Amount Overdue (90 days or more) Remarks Mark Principal -Up

Sr. #

Name of Customer

Nature of Finance

O/S Amount Principal Mark-Up

Due Since Oldest Date Latest Date

Amount Due Principal MarkUp

Signature

234

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Credit Handbook
Appendix III-ii to Chapter 4.6
MCB Bank Limited

Account Excess (Commitment / Outstanding Monitoring Report) To: Regional / General Manager / CRCD/ From: Branch
If Yes Date Excess Yes/No Customer's Name Date of Adjustment (if any) O/s in days Excess allowed for days Remarks

Excess

Signature

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Appendix III-iii to Chapter 4.6
MCB Bank Limited

STATEMENT OF EXPIRED GUARANTEES AS ON _______________ To: Region / Circle From: Branch

Date of Issue

BG#

Amount of BG

Issued on behalf of

Beneficiary Name

Expiry of Guarantee

Liability Status whether reversed or not

Remarks

Signature

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Appendix III-iv to Chapter 4.6
MCB Bank Limited

STATEMENT OF EXPIRED LETTER OF CREDITS AS ON _______________ To: Region / Circle From: Branch / Area Office

Date of Issue

LC#

Amount of LC

Issued on behalf of

Beneficiary Name

Expiry of LC

Liability Status whether reversed or not

Remarks

Signature

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Appendix III-v to Chapter 4.6
MCB Bank Limited

Statement of Expired Facilities as on ..................

To : Region / Circle/ CRCD From : Branch / Area Office

Branch

Account Name

Nature of Facilities a) b) c) a) b) c)

Amount of Facilities a) b) c) Total a) b) c) Total

Outstanding

Initial Date

Limit Expiry Date

Sanctioning Authority

SBP Classification Code

Mark-up Due a) b) c) Total a) b) c) Total

Over Due Amount a) b) c) Total a) b) c) Total

Overdue since a) b) c) a) b) c)

Reason for delay in Approval

Expected date of Approval

a) b) c) Total a) b) c) Total

Signature

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Appendix III-vi to Chapter 4.6

MCB Bank Limited

Statement of Breach of Loan Covenants as on ..................

From: Branch To: Region / Circle/ Credit Review -RMG

Log of Special Covenants For Year

Sr# Customer's Name Date of Approval Special Conditions Target Date Compliance Date Remarks

Signature

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Credit Handbook Section 5 Collateral Management & Controls

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Section 5 Collateral Management and Controls

5.1 5.2 5.3 5.4 5.5 5.6

Collateral Management Guidelines Legal Documentation Credit Risk Control and Processes Insurance Deferral Policy Vendor Management

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5.1
5.1.1 5.1.2 5.1.3 5.1.4 5.1.5 5.1.6 5.1.7 5.1.8 5.1.9 5.1.10 5.1.11 5.1.12 5.1.13 5.1.14 5.1.15 5.1.16 5.1.17 5.1.18 5.1.19 5.1.20

Collateral Management Guidelines

Collateral meaning and scope Primary and Secondary Collateral Types of Collateral Mortgage and its kinds Financial Institutions Recovery Ordinance 2001 Salient Features Title Documents Legal Clearance Valuation Minimum Margin Requirements on Fixed Assets held as Collateral Movable Properties Hypothecation Pledge over Movable Stocks Stock Report Stock Inspections Pledge of Marketable Securities Cash /Near Cash Collateral Liquidation Procedures for Marketable Securities & Cash/ Near Cash Collaterals Other forms of Collateral Credit Risk Mitigation under the Standardized Approach to BASEL II Swapping of Credit Facilities from other Financial Institutions

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5.1.1 Collateral Meaning and Scope 5.1.1.1 Introduction

Credit Handbook

Collaterals comprise assets and other forms of securities that secure debt obligations of customers. As a general policy, the bank essentially lends against cash flows, which is considered the primary means of repayment. However, if due to any reason whatsoever, cash flow is insufficient or becomes unavailable, then collaterals serve the purpose of second way-out. 5.1.1.2 Reasons for Taking Collateral

Clean exposure is not allowed by SBP, which requires that all exposures (more than PKR 500,000/- for Corporate/ Commercial and PKR 3,000,000/- for SME (Fund Based not to exceed PKR 2,000,000/-)) must be backed by some tangible or intangible security with appropriate margins. Exposure without any security or collateral is treated as clean. Nevertheless, as per SBP PRs, finance extended from the date of opening of L/C till the receipt of title documents to the goods, and finance against Trust Receipts are exceptions to the above requirement, and banks are allowed to decide about collaterals for these two financings, at their own. Apart from mandatory requirements, banks primary interest lies in timely repayment of principal along with markup. Adequate collateral safeguards against loss incase borrower defaults and is used to fund repayment (second way out) when cash flows (first way out) are short/ become unavailable. 5.1.1.3 Eligible collaterals under Standardized Approach to Credit Risk

Where an exposure is secured by eligible collateral and that meets the eligibility prescribed criteria and minimum requirements, the risk mitigating effect of the collateral can be taken into account for the calculation of capital requirement. In this regard there are two approaches: i) Simple Approach; and ii) Comprehensive Approach. Under the Standardized Approach, the bank has exercised the option of using Simple Approach for CRM whereby limited financial collaterals are available for capital relief. The bank is in the process of acquiring a Collateral Management System (CMS) which is expected to be in place in the future (acquisition of CMS has been deferred due to the banks inability to provide timelines for implementation of SYMBOLS) and to be used going forward when the bank would be performing parallel run under the FIRB Approach (alongside performing Standardized Approach capital calculations) when additional requirements of the Comprehensive Approach to CRM would become applicable. The data requirement for the simple approach to CRM shall be met by CRMIS and Capital Calculator.

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Under the simple approach to Credit Risk Mitigation, in case the risk weight of the counterparty is higher than the risk weight of the available eligible collateral1, the risk weight of eligible collateral replaces the risk weight of the counterparty in whole or in part provided that there is no currency or maturity mismatch2 between the exposure and the collateral. The risk weight on the collateralized portion is subject to a floor of 20%. The remainder of the claim is assigned the risk weight of the counterparty. The 20% floor for the risk weight of collateralized portion is relax-able up-to 0% provided that the exposure and the collateral are denominated in the same currency, and the collateral is either cash / deposit receipt or is in the form of Sovereign / PSE securities eligible for a 0% risk weight, and its market value has been discounted by 20%. Where guarantees or credit derivatives are direct, explicit, irrevocable and unconditional, and the banks fulfill certain minimum operational conditions relating to risk management processes outlined in the SBP Basel-II Framework, they may take into account benefit of such credit protection in calculating capital requirements. A range of guarantors and protection providers is recognized. A substitution approach is applicable. Thus only guarantees issued by or protection provided by entities with a lower risk weight than the counterparty leads to reduced capital charges since the protected portion of the counterparty exposure is assigned the risk weight of the guarantor or protection provider, whereas the uncovered portion retains the risk weight of the underlying counterparty. For further details, please refer Appendix I to Chapter 5.1 and Section 2.6 Credit Risk Mitigation of SBP Basel-II Framework. 5.1.2 Primary and Secondary Collateral: Collateral should match the purpose, nature and structure of the transaction and should also reflect the form and capacity of the obligor, its operations, nature of business and economic environment. Collateral may include assets acquired through the funding provided, i.e. stocks, receivables, or export bills, as well as cash, government securities, other marketable securities (such as shares), current assets, fixed assets, specific equipment, commercial and personal real estate. Based on the above, collateral can be categorized as follows: 5.1.2.1 Primary Collateral

Primary collateral comprises assets that are acquired / to be acquired through banks financing i.e. hypothecation and pledge of stocks in case of Running Finance and Cash Finance respectively.
1 Eligible collateral for CRM under Simple Approach is covered in detail in the Chapter on Collateral Management Guidelines 2 Simplified Standardized Approach criteria as detailed in the SBP Basel-II Framework

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5.1.2.2 Secondary Collateral:

Credit Handbook

Secondary collateral is over and above primary collateral and it serves the purpose of additional security. Generally, for short term financing tangible fixed assets i.e. immovable properties are required as secondary collateral. 5.1.3 Types of Collateral Collateral may be broadly classified in two types. For further sub classification please refer to Appendix II to Chapter 5.1 Immovable properties Movable Properties Immovable Properties

5.1.3.1

The word Immovable Property has been defined in the registration Act 1908, section 2 (6) in detail. For the purpose of this document, it means - land, buildings and things attached to the earth or permanently fastened to anything attached to earth; and does not include Standing timber, growing crops or grass, Machinery imbedded in or attached to the earth, when dealt with apart from the land.

The phrase attached to earth means something in the nature of permanent fixture, for work, and not removable after a short period / time. Accordingly, machinery of a factory would fall in the definition of immovable property. However, if the machinery is treated or dealt apart from the land, like in the case where it is movable in nature or where machinery is installed over land which is not owned by the owner of the machinery, then it would be treated as movable property. However, in cases where machinery is installed over leasehold land and the lessor has specifically allowed the lessee to mortgage the leasehold rights, then the machinery will be treated as Immovable Property. Whenever an immovable property is offered as security against credit /advances, it would be taken as security by way of mortgage whether registered or equitable and all other property, being movable property would be taken as security by way of hypothecation, or specific charge. From a financing perspective, only private domain immovable properties will be accepted as security. Private domain includes the properties owned by private national persons, singular, collective, or the State. Public domain properties will not be accepted as security.

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Types of Immovable Properties a. Properties having Land Revenue Record

Credit Handbook

The record of major portion of the countrys land is maintained under the Land Revenue Laws. The properties falling within jurisdiction of the said Laws are identified vide Khewat, khatooni and Khasra Numbers. A Khewat depicts overall holding (of property) of a land owner or joint land owners in an Estate/Mahal/Hadbast, which is the area under jurisdiction of a Patwari. A Khatooni depicts sub holding of a land owner or joint land owners in a Khewat. Khewat / khatooni numbers are like Account and Sub Accounts. Whereas, Khasra Number is basically survey mark of part of the property for the purpose of identification. A Khasra is constituent of Murabba and Killa.
Measurement 01 Murabba 01 Acre 01 Kanal 01 Marla Equivalent to 25 Acres of land 08 Kanals 20 Marlas 09 Sarsahis 225 Sq. Feet (It varies in some areas, especially in agri land it is 272 Sq. Feet)

The record in respect of such properties is held with Patwari in Register Record of Rights (Jamabandi), the extract/copy whereof is called Fard. Record of Rights is a periodical record; and is updated after four years, the updating of which may alter the numbers of khewats/khatoonis, on the basis of changes in holdings/sub holdings; however the khasra numbers generally do not change, being survey numbers, except in case of Ishtimal (consolidation) or in case of sub division of Khasra. Any change in the said register is effected through mutation (Intiqal), which is sanctioned by the concerned Tehsildar/Revenue Officer. The record of mutations is maintained in the Register Mutations (Dakhil Kharij/Intiqalat), held by Patwari. The record of mutation is also maintained at the Tehseel Record Office, the copy obtained wherefrom is called certified copy or par`t sarkar; whereas, the copy obtained from the Patwari record/register is called par`t patwar. Such properties may have title documents like sale deed/ gift deeds/ exchange deed/ conveyance deed etc. and may not have title documents where the sale/transfer is made through oral transactions, or the property is inherited. b. Properties of Public Sector Development Authorities (Government /Semi Government)

These are the properties which are acquired by government/semi government development authorities like LDA, KDA, and CDA etc. and then allotted/transferred to the public. Generally, the title documents of such properties are allotment/transfer letter. However, these may have title documents like sale deeds/ conveyance deeds etc. also along with allotment/transfer letters.

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c. Properties of Private Sector Housing Societies;

Credit Handbook

These are the properties which are acquired by Private Housing Societies and then allotted/transferred to their members/public. The main record of such properties is vested with the society concerned. Generally, the title documents of such properties are allotment/transfer letter. However, these may have title documents like sale deeds/exchange deeds/gift deeds etc. also, along with allotment /transfer letters. d. No permanent Record (Shamelat Deh/ Aabadhi Deh) i. Shamelat Deh Shamelat Deh is a piece of joint land designated for the common use of village communities; and it comprises proportionate shareholding of each land owner in a village. Such land, however, may be transferred by any shareholder in accordance with his proportionate share, which nevertheless, breaks the Shamelat; and proportionate share of each shareholder is reverted back. For a banker, a piece of property/land falling in shamelat may be acceptable as security, if the transfer of the piece of property/land is evidenced through a mutation. ii. Aabadhi Deh/ Laal Lakir The expression Aabadhi Deh is a term of the Land Revenue Laws, which is meant for the areas where the record isnt updated; and stands ceased on the date, when the relevant provincial government declares the area as such, by way of Gazette Notification. Any transfer of property in such an area can only be effected vide registered document. Inheritance is, however, an exception to the said rule. Nevertheless, in such a case, it is mandatory for legal heirs of a deceased to obtain declaration from the court of law to get themselves declared as legal heirs as well as owners of the deceased's estate. Branches should be careful while accepting properties that do not have permanent record. These properties are inherently risky and may have invalid title or may not be mortgaged due to legal difficulties. However, such properties may be accepted as valid security subject to condition that clear legal opinion on its title and acceptability is obtained from banks Legal Affairs Division (LAD) before accepting it as security. e. Properties of private housing schemes / developers: These are the properties/schemes, developed by private developers, on the lands owned by them. The property record of such schemes is generally held with the land revenue authorities, with the exception of areas falling in Abadi Deh. Such schemes do not meet the criteria of Cooperative Housing Schemes. Nevertheless, the relevant Municipal Authorities (or Cantonment Boards) do

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sanction / approve layout plan of such schemes (or issue NOC); and this is a prerequisite for establishing such housing schemes. These schemes do not fall under the purview of Cooperative Societies. Therefore, these cannot transfer plots / property to anyone through Allotment/Transfer Letters, since such documents can only be issued by Societies formed under the Cooperative Laws. Accordingly, any transfer of property in such schemes should be affected through registered documents like Sale Deed / Gift Deed etc; and should be mutated in the land revenue record, also. In view of the above, the properties falling in such schemes can be accepted as collateral, if the schemes have been approved by the relevant Municipal Authorities (or Cantonment Boards); and further, the record of the collateral being offered is complete in the land revenue record, as detailed in a above. (The Allotment/Transfer Letter, along with NOC, Site Plan, PTM etc. as issued by the Society / Scheme shall also be obtained, as additional comfort/ security perfection). However, such schemes if developed in Abadi Deh area should not be considered as valid collateral, as there would not be any supportive record, in such a case. 5.1.3.2 Movable Properties

Property of every description except immovable property is called movable asset. 5.1.4 Mortgage and its Kinds Section 58 (a) of the Transfer of Property Act 1882 defines mortgage as follows; mortgage is the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan and existing or future debt or the performance of an engagement which may give rise to a pecuniary liability. The transferor is called a mortgagor, the transferee a mortgagee; the principal and markup/commission of which payment is secured are called the mortgage-money, and the instrument (if any) by which the transfer is effected is called a mortgagedeed. Following are the essentials of a valid mortgage. Where the principal money secured is one hundred rupees or more, There should be a written document. Such written document must be: o Signed by the mortgagor, o Properly witnessed, and o It should be registered. (Equitable mortgage is exception to this rule) o Stamp duty adequately paid

Legally mortgage may be of various types, however, from banks perspective only Simple (which is also called legal/ Registered/Token/Collateral mortgage) and Equitable mortgages are used.

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a. Equitable Mortgage

Credit Handbook

In equitable mortgage mortgagor delivers the bank / banks agent, documents of title to immovable property, with intent to create a security thereon. Memorandum of Deposit of Title Deeds (IB 24) is obtained as an explicit proof showing intent of the mortgagor to mortgage in favor of the bank. This type of mortgage is also called mortgage by deposit of title-deeds. i. Creation of Equitable Mortgage In order to create valid charge, mortgagor will be required to surrender all original title documents to the branch and execute a Memorandum of Deposit of Title Deeds (IB-24). Agreement to create registered mortgage is also required in case of equitable mortgage. This requirement can be waived off by Legal Affairs Division upon recommendations from concerned Group Head. After creation of mortgage, relevant land authority will be informed about banks mortgage with a request not to allow any further transaction in respect of the mortgage property without the banks written consent. ii. Registration Registration of Equitable Mortgage with the Sub Registrar is optional. However, if the mortgagor is a Limited Liability Company, then the equitable mortgage charge will be registered with SECP, evidencing banks charge. iii. Constructive Deposit of Title Deeds: Equitable mortgage can also be created through constructive deposit of title deeds. Original Title deeds are held with existing charge holder (usually holding first charge). In such cases, certified copies of title deeds are deposited along with an undertaking from the existing charge holder for holding original title deeds deposited with them in a representative capacity on behalf of MCB. Original title document holder should also further undertake that the documents will not be released without prior consent of MCB. This type of equitable mortgage is only allowed if a specific approval has been granted by the credit sanctioning authority and relevant documentation has legal clearance. Equitable Mortgage can only be created in cases where ownership of the mortgagor is based upon documents that are recognized as title documents by courts; and which are available in original; and no duplicate thereof is possible. Title Documents include (i) Sale Deeds (ii) Gift Deeds (iii) Exchange Deeds (iv) Partition Deeds (v) Surrender Deeds (vi) Conveyance Deeds (vii) Lease Deeds etc. which are registered with the Sub Registrar of Properties. Similarly, Allotment Letters / Transfer Letters of Semi Government Authorities like LDA, DHA, CDA, KDA, FDA etc. are also considered as title documents. Allotment Letters / Transfer Letters of Private Housing Societies may be considered as title documents, subject to clearance from Legal Affairs Division.

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Where a property is based upon title documents referred above, however, the original ones are lost; no equitable mortgage thereof can be affected. In cases of properties of land revenue record, sale deeds etc. (as referred above) are considered as the principal title documents; and Fard/Mutation etc. are considered as supporting documents, which in cases where ownership of the property is based upon oral transaction (oral sale/exchange/gift) or inheritance, would not be considered as title documents for the purpose of equitable mortgage. Court decrees can be considered as title documents subject to opinion from LAD. Court Decrees may be of many types, like in cases of specific performance (sale / purchase), partition, arbitration matters, court declaration, etc; and a few of those may require registration (like in specific performance cases); and it also rest with the Honorable Courts to decide that registration is required in certain cases. It is therefore, to be examined in each case that whether registration is required. Therefore court decrees can be considered as title documents subject to opinion from LAD on a case to case basis. Certified copies of original title documents cannot be used as title documents for equitable mortgage. Equitable Mortgage therefore can only be created in cases where Original Title Documents are available and deposited with the Bank; whereas, in all other cases, only registered mortgage can be affected. For all fresh cases where original title documents are not held, 100% coverage of finance amount shall be obtained through registered mortgage/ mutation. In all existing cases of such nature, registered mortgage amount should be enhanced to 100% on best effort basis b. Simple/ Registered/ Legal Mortgage

In Legal mortgage, mortgagor/customer does not deliver possession of the mortgaged property, rather he binds himself personally to pay the mortgage-money, and agrees, expressly or impliedly, that, in the event of his failing to pay according to his contract, the bank shall have a right to cause the mortgaged property to be sold and the proceeds of sale to be applied, so far as may be necessary, in payment of the banks funds. This type of mortgage is also called Legal Registered Mortgage or Simple Mortgage. i. Execution In order to create valid registered mortgage charge, customer will be required to execute Banks standard Mortgage Deed. After creation of mortgage, relevant land authority should be informed about our mortgage with a request not to allow transaction in respect of the mortgage property without the Banks written consent. In case of Registered Mortgage, mortgagor must also surrender all title documents along with IB 24 (Memorandum of deposit of title deeds).

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ii. Registration

Credit Handbook

Irrespective of the type of the customer, all registered mortgages will compulsory be registered with the Registrar of Properties, also known as the Sub-Registrar, under Section 17 of the Registration Act, 1908. If mortgagor is a Limited Liability Company, IB-24 will be executed and the documents will be registered with SECP, evidencing banks charge. Stamp Duty & Registration Fee are required to be paid for the registration of charge. c. Token Registered Mortgage

When finance is allowed against equitable mortgage, as per requirement, revenue authorities do not mark mortgage mutation in banks favor in their record. Accordingly, to strengthen Banks position Token Registered Mortgage is obtained. When the Banks exposure is fully secured through equitable mortgage and name of the Bank as mortgagee is properly recorded in Revenue Record (Record of Rights) vide a mutation, then it is not necessary to obtain additional token registered mortgage over the property. Documentary evidence to this effect should be kept in safe custody along with original title deeds and other related documents. Before, allowing any disbursement, the mutation should be verified by obtaining certified true copy thereof from Naqool (copying) agency to the satisfaction of Legal Affairs Division/ Legal Counsel on banks panel. In instances where properties are owned by third parties, appropriate securing documents, such as memorandum of deposits of title deed (IB 24) and Mortgage Deed duly signed by third party mortgagor, should be obtained. Branches should ensure verification of the signatures. The documents should be signed by the third party mortgagor in presence of branch manager / bank officer and the same is verified with original CNIC, retaining the photocopy of CNIC for branch record along with recent photograph, where photograph in CNIC is not updated. Of the two witnesses required in the Mortgage Deed, one should be from borrower / mortgagors side whose CNIC photocopy should also be retained; and one should be from the Banks side. In case, the witnesses are female, two signatories shall be necessary in order to comply with the requirements of Article 17 Qanoon-eShahadat Order, 1984 (P.O.10 of 1984). The guidelines on security / documentation aspects relating to property financing are only broad outlines and branches should wherever necessary, seek appropriate legal advice / clearance, on specific cases, from Legal Affairs Division / Ex-House lawyers on Bank's approved panel, prior to finalizing the security documentation / other security aspects. d. Post Mortgage Requirements Noting/ Marking of banks charge is required to serve as notice to subsequent lenders or any other person having interest in that property. In all cases of Mortgage, Noting/Marking of banks charge/mutation will be arranged with

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concerned Records Offices and documentary evidence of noting / mutation will be kept with security documents. 5.1.5 Financial Institutions Recovery Ordinance 2001 - its salient features No blank documents signed by the customer to be held. As per section 18 (1), no financial institution shall obtain the signature of a customer on a banking document which contains blank columns in respect of important particulars including the date, the amount, the property or the period of time in question. Branches / CRC should ensure that no blank documents signed by customer to be held on record. Attestation: Finance agreements executed by or on behalf of a financial institution and a customer shall be duly attested in the manner laid down in Article 17 of the Qanun-e-Shahadat Order, 1984. One of the two witnesses should be from borrowers / mortgagors side whose CNIC photocopy should also be retained; and one should be from the Banks side. Banks official signing on behalf of the bank must give his AS/ IBS/ Employee Number. This requirement shall be fulfilled on all documents requiring the witness formality. Sale of mortgaged property Recovery Ordinance gives certain statutory powers to Financial Institutions in lieu of defaulted loans, including sale of the mortgaged property, whereby a financial institution may, without the intervention of any Court sell the mortgaged property or any part thereof by public auction for adjustment of defaulted loans after complying with conditions as laid down in the ordinance. For purposes of execution and registration of the sale deed in respect of the mortgaged property, the financial institution shall be deemed to be the duly authorized attorney of the mortgagor and a sale deed executed and presented for registration by duly authorized attorneys of the financial institution shall be accepted for such purposes by the Registrar and Sub-Registrar. Exemption from requirement of Irrevocable Power of Attorney Irrevocable General Power of Attorney Banks as a general practice obtain Irrevocable General Power of Attorney (IGPA) from the mortgagors, in respect of their mortgaged properties. It is obtained for two reasons (a) to have powers to sell the mortgaged properties in case of default; and (b) to have powers to convert equitable mortgage into legal/simple mortgage, if desired. The present banking recovery law i.e. Financial Institutions (Recovery of Finances) Ordinance, 2001 has covered the aspect of sale of mortgaged properties by banks itself, whereby if a bank opts to sell the mortgaged property, it can do so without intervention of courts; and in addition, a bank in such a situation is considered by

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law as Attorney of the mortgagor. Accordingly, there is no need to obtain IGPA from mortgagors in context of the subject powers. Given that Equitable Mortgage is as good as Legal/Simple Mortgage, if perfect, therefore, there is no need for conversion of equitable mortgage into Legal/Simple Mortgage. Furthermore, IGPA before June, 2006 involved a nominal amount of stamp duty and registration fee which has now been changed and the Registering Authorities insist upon payment of CVT on IGPAs (at the rate of 2% of value of the property) as levied by the Federal Government on transfer of properties. In view of the above, it has been decided by banks (at the level of PBA) to discontinue this practice. Accordingly, the requirement of obtaining an IGPA has been dis-continued at MCB. 5.1.6 Title Documents Document of Title should be of such nature that the deposit thereof would render the mortgagor unable to transact the property. The title deed of a property is generally the document by which the property is acquired. A sale deed in favor of the borrower is a title deed but not a copy of the Fard / Jamabandi / Intiqal in which there is an entry that the borrower is the owner of the property. A map or a tax receipt does not qualify as a title document.

The property being offered as security should have an absolute, exclusive and clear title. Mere holding of title documents, or having possession of a property, does not necessarily mean a valid title. By law, a mortgage with the defective title is invalid. In this context it is important to look into the documents of the previous owner of the property to establish that a valid title has been transferred to the present owner. Moreover obtaining the chain documents, in original, prevents the previous owner(s) to misuse these documents. Court decrees can be considered as title documents subject to opinion from LAD on a case to case basis. A list of documents required for mortgage is given below. If any of the documents listed below is missing, guidance from Legal Affairs Division/ legal retainers should be obtained. Title document i.e. Letter of allotment / Inheritance Deed / Sale Deed / Gift Deed / Permanent Transfer Deed (PTD) etc. Chain of documents to establish title (Please refer to Appendix III to Chapter 5.1 for documents required with respect to types of properties). Approved site plan.

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Approved Building Plan. Completion Certificate.

Credit Handbook

No Objection Certificate / permission to mortgage from concerned revenue department or society. Checks should be performed to confirm that the property should not be under any dispute and there should be no dues outstanding against it. Accordingly, relevant certificates should be obtained from the appropriate authorities to determine that there are no outstanding payments of taxes/rates due on the property. Non-encumbrance certificate (NEC)/search certificate. NonEncumbrance/Search Certificate is obtained from the Registrar of Properties or Assurance/SECP to ensure that the property has not already been charged in favor of some other bank/financial institution/creditor. Conveyance Deed (in case of property on allotted plot). Independent valuation of property by Banks approved evaluator. Visit report of responsible officer of the Bank and recent photograph of the mortgagor where photograph appearing on CNIC do not serve the personal identification purpose. Any other document as required by Legal counsel on banks approved panel/ Legal Affairs Division

5.1.7 Legal Clearance Legal opinion from banks own legal department or legal counsel on banks approved panel is required at two stages a. Legal opinion on title of property

It is required when borrower offers a property as security. It establishes that depositor of collateral/ property has a valid title and collateral/ property offered is a valid security from banks perspective. b. Final Legal opinion/ Clearance

It is required before disbursement stating that documentation is complete, all legal formalities have been completed and security is perfect. Legal opinion on banks standard documents will not be required. CRC will ensure that they are properly filled in and registered (where required). Where CRC services are not available, Branch Managers will perform this function. A legal opinion on title of a property preferably should have following elements: Identification of the present owners. Identification of the previous owners.

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Details as to the mode of transfer of the property, in favor of the present owner i.e. whether it is sale, gift, exchange or relinquishment and how the transfer has taken place i.e. whether it is through documents (registered or unregistered) or through oral transfer or through inheritance. Details of the present owner and previous owners documents of transfer. Complete description of propertys Khewat/ Khatooni / Khasra numbers / allotment / transfer letter numbers, tax numbers etc. and exact measurement thereof. Observation as to whether the owner is holding proprietary rights, or vested rights, in the property. Whether NOC / permission to mortgage is required from some office / authority. Whether the property is clear from any earlier charge, or there are outstanding dues payable in this context.

At present in all cases where total exposure of an account is more than or equivalent to PKR 10 million, legal opinion on title documents and final vetting certificate is required from Legal Affairs Division (LAD). However, first legal opinion as to the title of fresh collateral securities for any amount will be dealt by LAD and there will no outsourcing in this regard. LAD shall provide detailed opinions, without any qualification, pointing out all the lacunas & remedies thereof. They also advise the requisite documentation at the very outset, which will help the field/panel lawyers to execute flawless documentation. Further, if in any particular account below PKR 10 million, where Business / Risk Management specifically require legal vetting and opinion from Legal Affairs; Legal Affairs will facilitate the same. The threshold of PKR 10.000 Mn can be changed with the mutual consent of business units and Legal Affairs Division. For exposure below PKR 10 Million legal opinion can be obtained from Ex-house legal counsel/ legal retainer on banks approved panel Under consortium finance arrangements legal opinion from transaction lawyer will be acceptable. List of legal counsels at the panel of MCB shall be circulated to all concerned by LAD. It is responsibility of business units to ensure fair distribution of work among ExHouse legal counsels. Management of concentration risk arising from utilization of services of Ex-House legal counsels will also be responsibility of business units. In case business units disagree with legal opinion provided by Legal Affairs Department, they can seek second legal opinion from Ex-house legal counsel on banks approved panel subject to following conditions. Approving Authority for decision to obtain second legal opinion will be as follows o o SCO 2 for Corporate Commercial Customers. Group Head RMG for Corporate Large Customers.

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Proper Justification must be provided for seeking second legal opinion. Sanctioning Authority will decide regarding acceptance of either of two legal opinions.

5.1.8 Valuation Valuation of assets held as security is an important function, as it has a direct bearing on the amount of loss that the Bank might have to suffer in the event that the borrower defaults. Guidelines regarding Valuations of fixed assets are given in Chapter 5.6. 5.1.8.1 Valuation of Stocks in Trade / Shares / LCY Deposits / FCY Deposits etc. Stocks are to be valued at cost or market value, whichever is lower, except where otherwise notified. Imported goods shall also be valued similarly at C&F cost plus regular port dues/import duties (exclusive of sales tax), subject to the condition that the same do not exceed price on local market. In addition to above, valuation for specific nature of collaterals comprising of stocks and cash/near cash securities along with valuation frequency and relevant criteria to be used for valuation is given below.
No. 1 Nature of Security Raw Cotton / Phutti / Sugar/ Rice etc. Minimum Valuation Frequency Fortnightly Valuation Criteria Bench Mark Price (BMP) Conveyed in latest CRCD circular OR cost (invoice price) WHICHEVER IS LOWER As per daily prices quoted in Karachi Stock Exchange. Encashment Value of securities on the date of disbursement/Renewal. NAV at the date of revaluation Encashment Value of securities

2 3 4 5

Shares Government Securities NIT Units Local Currency (LCY) Deposits / LCY Deposit Certificates or LCY Receipts. (Whether held with MCB or other Banks) Foreign Currency (FCY) Deposits / Receipts / Certificates. (Held as security for PKR financing)

Daily Bi-annual Bi-annual

Bi-annual

From time to time (Upon change of FCY rate in latest CRMD circular) At-least on monthly basis

Rates conveyed in latest CRMD circular OR 2.5% below T.T buying rates advised by Treasury (WHICHEVER IS LOWER)

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7 Financial guarantee issued by local/ foreign bank Guarantees in FCY shall be revalued as per CRMD circulars

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Rates conveyed in latest CRMD circular OR 2.5% below T.T buying rates advised by Treasury

(WHICHEVER IS LOWER). Any exception shall be allowed at original approval/ review level, minimum review level SCO3. Note: In case of old FCY deposits held since May 28,1998 which are under Banks lien, the valuation of same to remain unchanged at PKR 46 per US Dollar as the policy is not to allow fresh financing against such deposits.

Check list of Documentation should be properly prepared refer Appendix IV to Chapter 5.1 General Part B. 5.1.9 Minimum Margin Requirements Following table should be referred for determining margin requirements on various type of assets held as security.
No. 1 2 3 4 5 6 7 8 9 10 11 12 13 Nature of Security Residential/ Industrial Property Commercial property Agricultural Property Raw Cotton / Phutti / Sugar/ Rice etc. Shares Government Securities NIT Units Local Currency (LCY) Deposits / LCY Deposit Certificates or LCY Receipts. (Whether held with MCB or other Banks) Foreign Currency (FCY) Deposits / Receipts / Certificates. (Held as security for PKR financing) MCB AMC Dynamic Cash Fund and Cash Management Optimizer Fund Financial Guarantee issued by local/ foreign bank Hypothecation of stocks/ receivables Pledge of stocks other than mentioned above Margin 30 % of Market Value (MV) 30 % of Forced Sale Value (FSV) 50 % of Market Value (MV) As per latest CRCD circular As per latest CRMD circular

5% (net of Zakat & withholding taxwhere applicable)

7.5% (net of Zakat & withholding taxwhere applicable) Relevant Credit Approval/ Review authority shall decide minimum margin requirements 25 % 15 %

In continuation to above, where minimum margin requirement is stipulated for a specific facility/ sector/ goods/ module/ section of Credit Handbook/ SBP, same will be applicable. Relevant approval/review authorities can place higher margin requirements keeping in view location of the property, nature of asset and risk profile of the customer. For Guidance on calculation of margin please refer Appendix V to Chapter 5.1

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5.1.10 Movable Properties

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Assets of every description except immovable assets are called movable, this may include: Tangibles; like goods, stock, machinery; marketable securities, etc. or Intangibles; like book debts, receivables, etc. Types/ Nature of Charges/ Securities 5.1.11 Hypothecation

Hypothecation is a legal transaction where borrowing is made against goods which are charged in favor of the Bank as security; however, the ownership as well as the possession of the goods remains with the borrower. If the borrower fails to repay the loan, the Bank can set-off its obligation by liquidation of hypothecated asset after obtaining court order. Associated Risks i. ii. Low control over goods (possession with the borrower). Difficult to verify title to the property.

Following should be given due consideration in case of hypothecation of stocks: Where finance is secured by inventory, a. Ascertain that the goods are of stable value, b. Readily marketable, and c. Borrower has valid title to the assets. The Bank should avoid financing against high-risk items, such as perishable/hazardous and government banned commodities or goods whose prices are usually subject to wide fluctuations. Where security comprises of seasonal goods, repayment of finance should be effected by customers before the end of season. For commodities, whose season is not described in Credit Handbook; approving authority shall define clean-up period & full adjustment date in Approval of Finance. CRCD conveyed prices should be taken into account while assessing the quantum of finance to be extended against the merchandise hypothecated, after deduction of the stipulated margin. For all those commodities whose prices are not conveyed by CRCD, Invoice price or market price, whichever is lower, shall be used. Since possession of goods remains with the customer, such form of security should only be considered for high value customers. Where finances are extended to listed companies, hypothecated stock statement would be verified with quarterly financials of company. For other types of

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borrowers stock statement would be verified with annual financials. This requirement is in addition to physical stock inspection. The following should be given due consideration in case of hypothecation of debtors/receivables: Since real time check for amount of receivables and objective evidence of the debtors is difficult to obtain. So such security should only be considered for high value customers. The age of the debt is an important aspect, where finance is secured by Account Receivables. In this case proper ageing of the receivables should be obtained from the customer and must be critically analyzed. Where finances are extended to listed companies, statement of book debts would be verified with quarterly financials of company by relevant branch/ relationship manager and further reviewed by Credit Review Division at the time of approval.

Documentation Ensure appropriate security documents are arranged and also ensure validity of the documents. In addition to finance agreements, following document(s) should be obtained. For hypothecation of stocks, standard letter of Hypothecation (IB 25-A). For hypothecation of book debts/ Receivable and machinery, draft to be obtained from Legal Affairs Division Insurance The hypothecated/pledged goods should be adequately & comprehensively insured against all the usual hazard/ risk as per section 5.4 of the handbook. Stamp Duty Stamp duty should be recovered from the borrower for IB 25-A & Letter of hypothecation of book debts/ Receivable/ Machinery Enforceability Possession & sale of goods shall be arranged via Court. Charge Requirements In case of limited companies, Bank's first / or ranking (as per Approval for Finance) charge over the borrower's entire stocks/ book debts/receivables should be registered with SECP.

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5.1.12 Pledge over Movable Stocks The bailment of goods as security for payment of debt or performance of a promise constitutes to pledge. It envisions physical delivery of the pledged property being given to the pledgee (Bank). Pledge provides the bank with actual possession of goods. Types of Pledge Pledge can be classified on the basis of godowns and storage conditions into the following two categories: i. Pledge:

Pledge means that the goods are kept in covered godowns under lock and key arrangements. ii. Open Pledge:

Open pledge means that the goods are kept in an open place and control over the pledged goods is affected at the main gate of the factory/godown premises. Keeping in view the relatively high risk involved in open pledge, this should only be allowed to high value customers. Due consideration should also be given to the factors specified in the hypothecation section. Documentation In addition to finance agreements, standard Letter of Pledge (IB-26) is to be arranged. Insurance Same as for hypothecated goods. Miscellaneous In case finance is primarily secured against pledge of stocks, secondary collateral is required which should be 25 % of limit/ finance amount. The collateral (property) shall be taken at Market Value (MV). In case of a limited company, in addition to pledge, a ranking charge on current Assets (other than those pledged with bank)/ Fixed assets should also be obtained. Waiver (if required) may be obtained from the relevant approval/review authority. For all other borrowers, where registration of charge is not possible, in addition to pledge, letter of hypothecation should invariably be obtained covering stocks and book debts.

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Enforceability The Bank is required to give notice of its intention to sell the pledged goods to the borrower. The notice period should be 15 days. The notice requirement is statutory, thus, even where the pledge agreement stipulates that the Bank may sell without notice, this statutory requirement must be fulfilled. On case to case basis, advice to be obtained from Legal Affairs Division. Stamp Duty Required for IB 26. Precautions Regarding Pledge of stocks Please refer Appendix VI to Chapter 5.1 for Guidance. 5.1.13 Stock Report Client Stock Report on Hypothecated Stocks It is mandatory requirement (SBP PR-12) to obtain monthly stock statements from borrower containing bank-wise break-up of outstanding with the total value of stocks and receivables there against in case of Pari Passu charge. Accordingly, stock statement providing bank-wise details of outstanding against hypothecated stocks/receivables and value of stocks/receivables there against (as detailed in Appendix VII to Chapter 5.1) should be obtained on monthly basis. Stock statements should be carefully analyzed and Drawing Power should be calculated from the same. Where clients fail to submit these, Relationship/Branch Managers are required to follow-up, preferably through reminder letters. The first reminder will be sent not later than 5th of the month in which the report is due and the second letter one week later. Non-submission of stock statements should be highlighted in a Call Report and customer should be sent repeated reminders. Copies of reminders should be filed in the Credit File.

Stock Report of pledged stock and stock Register On routine basis, Muccadum is required to provide stock report on banks prescribed format (Appendix VIII to Chapter 5.1) by the 3rd working day of each month (or earlier / daily basis where specified by branch e.g.; seasonal finance). However, in case of change in inventory (quantity & value of stock) stock report will be received with in one working day of such change. Muccadum will provide stock statement to the Bank as per the following schedule: i. at the time of takeover of pledge site, ii. at the time of movement of stock, either in or out,

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at every month-end, irrespective of any stock movement during the month.

While submitting stock statement to the Bank, it shall be mandatory for muccadum to obtain Borrowers authorized signature on the stock statement. The stock report should convey all essential information inclusive of location and ownership of the place of storage, specification, unit of measure, opening stocks, closing stocks, receipts and delivery, value of stocks and the drawing power. Where opening stocks remain unchanged, date of last change should be mentioned. i. Supervisors / Managers / Owners of Muccadumage firms shall record the details of verifications / observations made during their visit of the Godowns in Godown Register. ii. Godown Register shall be considered Banks property. Muccadums supervisory staff will visit each site at least once every fortnight, or earlier, where considered necessary. iii. Godown register must be maintained properly and should be checked by the inspecting executives / officers that incoming and outgoing stocks are accurately recorded in Godown register. The visiting bank staff / executive should sign the register and shortcomings, if any, should be pointed out and noted in the register. A Godown visit report should be prepared and submitted / kept at branch and endorsed to next line authority as well. Pledged stocks to be valued at cost or market price whichever is lower. Rates circulated by CRCD will be used for calculating market value. For commodities where rates are not circulated by the CRCD. It will be the responsibility of Business Units to acquire market rates for valuation purposes. 5.1.14 Stock Inspections

Hypothecated/ pledged stock inspections should be arranged as per prescribed schedule (Appendix IX to Chapter 5.1) preferably with an element of surprise. Where necessary, a higher frequency may be specified in the credit proposal; or approving authority may require this in Approval of Finance. Care should be taken by randomly examining / counting / weighing the individual items and arriving at exact calculations, by applying the current market prices of such goods. While checking the security comprising of pledged/hypothecated goods, it is important to ensure that the goods have not deteriorated in value, due to aging and/or other factors, resulting in inadequacy of security vis--vis credit facilities offered. Pledge Sites Inspection Before Disbursement Site Inspection must be undertaken before disbursement. Stock inspection report should be filed in relevant section of Credit File. Any discrepancies like non availability of firefighting equipment, improper stacking, unacceptable stocks condition, non-standard procedures being followed at site as discussed above, be checked and action should be taken to rectify the same & reported to Regional /General Manager immediately.

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i. All such discrepancies must be removed by the borrower before loan is disbursed. Once a loan is disbursed, it is usually difficult to get the faults/discrepancies rectified. ii. Where necessary borrowers should be asked to provide authentic laboratory report of various goods coming under pledge to ascertain the condition and value of stocks. If necessary, independent Laboratory Report may be obtained. iii. Borrowers to provide weight sheets. Where applicable, test weighing to be carried out for phutti/paddy in sacks (boras), and cotton bales etc. iv. Quick action should be taken on the observations/weakness observed on the sites and highlighted by the Muccadums. The short coming should be communicated in writing. Precautions for arranging Stock Inspection of Hypothecated/ Pledged Stocks Appendix IX to Chapter 5.1 lays down frequency for periodic stock inspection of both hypothecated and pledged assets to be undertaken by various levels in all Business Groups. The hypothecated/pledged merchandise will be checked against branch records and a written Stock Inspection Report (Appendix X to Chapter 5.1) will be filed in credit file of the customer. Contents of the Stock Inspection Report Stock inspections provide us an opportunity not only to assess the adequacy of stocks securing our exposure, but also to monitor on a regular basis the following: 1. 2. 3. 4. 5. 6. 7. Stock break-up. Quality of collateral. Evidence of ownership. Quality of warehousing. Adequacy of fire-protection devices. Adequate protection from theft / burglary. Condition at the premises.

Inspection Administration Process Stock inspections are carried out in accordance with the frequency laid down in Appendix IX to Chapter 5.1 or as per Credit Approval. Credit sanctioning authority may set a higher frequency keeping in view risk of obligor. 1. CRC to advise the Branch Manager/ Relationship Manager at least one month in advance of the inspection requirement. 2. The report is to be circulated to the CRC/Regional Manager/General Manager and a copy is filed for reference and same be recorded in stock register. 3. Stock Inspections at GM level shall be carried out as per Appendix IX to Chapter 5.1. However, GM may sub-delegate a reasonable number of stock inspections:

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To bank employee with required knowledge/skills to conduct stock inspections To independent valuator (at approved panel of MCB)

4. Business Heads should monitor whether stock inspections have been done in accordance with Appendix IX to chapter 5.1. he should also conduct random inspections in order to verify the inspection reports. While delegating stock inspections, GMs must ensure that at least 50% of stock inspections are carried out by themselves. Sub-delegation is not allowed to Incharge Advances, Branch Managers and Regional Managers. CRC must follow-up with the Branch Manager when the inspection report is not received on time. Joint Inspection of Stocks/ Multiple borrowings There are instances when borrowers avail finance from more than one bank against identical securities. In such cases financing banks are exposed to additional risk, which can be mitigated by proper co-ordination & co-operation amongst the banks and incorporating appropriate check and precautions as follows; i. Such multiple borrowings can be identified by conducting charge search with SECP (in case of limited companies) and exchange of information with local banks / other bankers of the borrower. ii. Where eCIB/ BBFS/ Latest financials of the client report indicates exposure greater than our financing, the other bank(s) and security (ies) there-against should be identified. iii. Information about pledged / hypothecated stocks, wherever, multiple borrowing is identified, should be exchanged at least on quarterly basis among Banks / FIs. iv. Joint stock inspection to be conducted at least once a year on best effort basis. Banks with highest exposure against the common security may be requested to serve as coordinator for such inspection. v. Muccadums posted at such sites should be cautioned to ensure that stocks pledged in favor of MCB are not commingled with stocks pledged with other banks and proper signboards are fixed. vi. In case of pledged stocks under lock and key, the borrower should be required to partition the godown with masonry blocks so as to ensure that there is no common access to the godown. 5.1.15 Pledge of Marketable Securities Marketable securities comprise of assets/securities that can be easily converted into cash. Such securities can easily be traded or converted into cash at a reasonable price at any time. An effective pledge of marketable securities should ensure the following:

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Actual possession of the securities by the bank. Power to dispose off the securities, without approval of the owners/ depositors (before disposal; 15 days prior Notice should also be given)

Documentation Required In addition to financing agreement standard pledge documentation (IB-28 & IB31) should be held. Irrevocable encashment / set-off authority in banks favor should be held. Allowing the bank to encash security without reference to borrower in case of non-payment of principal/ mark up. a. Important Points

i. Securities in un-marketable lots or stocks/shares not quoted on the Stock Exchange shall not be accepted. ii. Banks lien should be perfected on the securities. The lien should be notified with the security issuing Agency e.g. in case of DSCs, SSCs, RICs lien should be marked on securities by National Savings Center or the bank issuing such security on behalf of Government. Said lien is also noted in the books of the issuing office. iii. Objective should be to ensure that, in case of need, all such securities can be sold by the Bank, without experiencing any difficulty/legal impediments. iv. Signature of discharge should be obtained from the depositor (pledger). The signatures should be verified from security issuing office. v. Every precaution should be taken to verify that the securities are not forged or stolen and that they are genuine. The securities should also be in reasonably good condition, not mutilated or torn. vi. Securities (scripts) should be kept in safe custody under dual control and proper entry should be made in safe custody register. vii. Before allowing approval for acceptance of marketable security sanctioning authority should be satisfied that financing against the securities are not prohibited e.g. at present financing against behbood certificates is not allowed. viii. While accepting instrument or other such type of securities, which have dividend/profit coupons, attached to them, the Bank should ensure that all the coupons are duly attached and kept in safe custody. ix. Credit facilities may be allowed beyond the maturity date of deposit receipts but date of expiry of finance should not be later than six month from the maturity date of the deposit receipts unless where specific waiver is held in this respect. During such period, it should be ensured that Banks right / lien

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over the deposit receipts remains effectively in place till such time the Banks exposure is adjusted or alternate security is arranged. Where financing facilities are allowed against MCBs own deposit receipts roll over instructions till maturity of finance must be obtained from customers. x. In case of financing against deposits or instruments issued by other financial institutions, line allocation approval should also be obtained from FIID before allowing disbursement. xi. Facility Advising letter should contain Top Up clause and acceptance thereof should be held from customer. This clause can be waived at level of SCO 2. xii. It is MCBs policy not to allow financing against Bearer or non-registered instruments. Financing against Special US Dollar Bearer Bonds / Certificates issued by MCB Branch was allowed as an exception. These Bonds were issued for seven years in 1998 and have now expired. b. Miscellaneous:

The Bank is required, before selling the subject matter of the pledge, to give notice of its intention to sell to the defaulter / borrower. The notice period should be 15 days. This notice requirement is statutory, thus, even where the pledge agreement stipulates that the bank may sell without notice, this statutory requirement must be fulfilled. Necessary guidance to be obtained from Legal Affairs Department on a case to case basis. 5.1.16 Cash / Near Cash Collateral For MCBs internal purposes Cash/Near Cash Collateral include the following: LCY deposits; FCY deposits; MCB AMC Dynamic Cash Fund/ Cash Management Optimizer Fund Growth Certificates DSCs/SSCs/ RICs and Govt. of Pakistan securities; Rated Bank COIs, where FID can give line allocation against the said FI; and SBLCs or guarantees of banks for which FID line allocation can be obtained. Documentation Requirements
Cash/ Near Cash Collateral MCBs own deposit PKR/ FCY Other Banks Deposit PKR/ FCY Documents required (In addition to Financing Agreement) CF-19 (Signed by depositor, Borrower or 3rd party as the case may be) Lien should be marked in banking computer system/ books Request letter by depositor (Borrower or 3rd party as the case may be) to mark Lien in MCBs favor with authority to MCB to exercise setoff. Confirmation from other bank that lien has been

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marked in MCBs favor and will be paid to MCB on first Demand without referring to depositor MCBs Own Deposit Pledge of Original Deposit Receipt along with Receipts endorsement in banks favor. Letter of Lien (IB-28 & IB-31) from depositor (Borrower or 3rd party as the case may be). MCB AMC Dynamic Confirmation of lien marking from MCB AMC Cash Fund/ Cash Pledge Form F1 Management Request letter by depositor (Borrower or 3rd party as the Optimizer Fund case may be) to mark Lien in MCBs favor Growth Certificates Authority for encashment Letter of Lien (IB-28 & IB-31) from depositor (Borrower or 3rd party as the case may be) (For other details, please refer to circular CRMD circulars issued from time to time.) Other Bank Deposit Pledge of Original Deposit Receipt along with Receipts/ COIs/ endorsement in banks favor. NSC Certificates etc. Request letter by depositor to mark Lien in MCBs favor Letter of Lien (IB-28 & IB-31) from depositor. Confirmation from other bank that lien has been marked in MCBs favor and will be paid to MCB on first Demand without referring to depositor. SBLCs or Guarantee verification to be obtained from issuing Guarantees (Local/ banks head office/ controlling office. In case of foreign Foreign) guarantee, text of guarantee should be obtained through authenticated swift message, Text of Guarantee to be vetted and cleared by banks Legal Affairs Division on a case to case basis. FIID line allocation to be obtained. Due date diary should be maintained for proper monitoring purpose. Expiry of the facility should be within the claim lodgment period of the guarantee. Stamp Duty should be recovered in case of CF 19, IB 28 & 31.

Important Points i. The original deposit receipt(s), duly endorsed, should be held by the Bank, with lien marked thereon, in its favor. ii. Lien should be marked in system / books in case of MCBs own deposit and it must be ensured that it remains intact till adjustment of finance. iii. The deposit receipt should preferably be in the name of the borrower and "Caution" should be marked in the books / system/ register, as appropriate. In cases, where such receipts are in other names, it should be ensured that the receipts are properly and legally pledged to the Bank with appropriate documentation. iv. An appropriate margin should be retained, practice/prevailing regulations/ credit policy. as per standard

v. At times, a depositor at a branch may request for finance from another branch of the Bank. The branch allowing the credit facility should register its

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lien with the branch holding the deposit, whose acknowledgement should be obtained and retained in safe custody. vi. Deposits receipt offered as security should NOT be in the name of a minor. vii. In case of exercising right of sell off 15 days notice to be send to the depositor. 5.1.17 Liquidation Procedure for Marketable Securities & Cash/ Near Cash Collaterals

In the event of non-payment of principal and / or markup by an obligor (by the due date) 15 days notice should be send to the depositor/ pledger conveying banks intention to exercise the right of realization Following the expiry of the 15 days notice period, after obtaining approval from relevant GM / Corporate Head, branches should exercise the right of realization or lodge claim in case securities are held with another institution 5.1.18 a. Other forms of Collateral

Personal Guarantees

Personal Guarantee of Directors It is the Banks policy to obtain personal guarantee (IB 29) of Directors in case of Public Limited Companies as well as Private Limited Companies. Requirement of obtaining PGs of directors can be waived on case to case basis at the level of SCO 2. For higher approval/ review levels than SCO 2, sign off from relevant Approval/ Review authorities will be required. All approvals / sanction advices shall contain a condition that during the tenancy of MCBs exposure or financing arrangement, for any change in directorship prior consent in writing must be obtained from the Bank. Otherwise MCB has right to recall the loan / exposure / financing arrangement immediately. As per SBP PR for SMEs, all facilities, except those secured against liquid assets, extended to SMEs shall be backed by the personal guarantees of the owners of the SMEs. In case of limited companies, guarantees of all directors other than nominee directors shall be obtained. Accordingly, Personal Guarantees of owners irrespective of legal structure of organization should be obtained in case of SMEs. Exceptions Allowed Personal Guarantees will not be required in cases where exposure is 100 % secured against Cash/ Near Cash Collateral. Personal Guarantees will not be required from directors of MNCs (MultiNational Companies) belonging to Corporate Large Class which has CRR of 1 to 4. Personal guarantees of nominee directors shall not be required.

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Personal Wealth of Directors (Net Worth Statement) Requirement on Best effort Basis The Bank shall obtain the details of personal wealth properties etc., along with the personal guarantees of Directors. It is desired that the branches should try, on a best effort basis, to obtain such details while accepting Personal Guarantees, especially in case of fresh facilities. Such information may be categorized as Declared (D), Verified (V), or Estimated (E). Availability of similar information in respect of personal wealth properties etc., of partners / proprietors will enable the branch to expedite recovery / attachment process. b. Guarantees

Bank may lend against guarantee issued by another company. Normally such guarantees are provided by parent company to its subsidiary or an associate company. In such circumstances, the credit standing of the guarantor should be impeccable & memorandum of the company should allow undertaking of a 3rd party. In ordinary course of business, a company is not authorized to give guarantee against its directors borrowing. Before accepting a company as a guarantor bank should see whether the Article and the Memorandum of Association have allowed him to do so and the directors signing on behalf of guarantor company are authorized or not. The authority is delegated through Memorandum and Articles of Association and through a Resolution of directors. (Documentation Check List Appendix IV to Chapter 5.1 PART B) Regarding guaranteed transaction, guarantees would be allowed to be taken as an eligible credit protection in calculating capital requirements (For details refer to Appendix I to Chapter 5.1). Branches while accepting SBLCs, Guarantees from other banks and Corporate Guarantees as security shall ensure compliance to all requirements laid down in Appendix I to Chapter 5.1. Before acceptance of such guarantees, clear legal opinion from Legal Affairs shall be obtained. Legal Affairs will confirm following minimum points while issuing legal opinion. i. A guarantee (counter-guarantee) must represent a direct claim on the protection provider and must be explicitly referenced to specific exposures or a pool of exposures, so that the extent of the cover is clearly defined and incontrovertible. Other than non-payment by a protection purchaser of money due in respect of the credit protection contract it must be irrevocable; there must be no clause in the contract that would increase the effective cost of cover as a result of deteriorating credit quality in the hedged exposure. A Guarantee (Counter Guarantee) must be unconditional. There should be no clause in the protection contract outside the control of the bank that could prevent the protection provider from being obliged to pay out in a timely manner in the event that the original counterparty fails to make the payment(s) due.

ii.

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On the qualifying default or non-payment of the counterparty, the bank may in a timely manner pursue the guarantor for any monies outstanding under the documentation governing the transaction. The guarantor may make one lump sum payment of all monies under such documentation to the bank, or the guarantor may assume the future payment obligations of the counterparty covered by the guarantee. The bank must have the right to receive any such payments from the guarantor without first having to take legal actions in order to pursue the counterparty for payment The guarantee is an explicitly documented obligation assumed by the guarantor.

iv.

NOTE Branches may accept Guarantees other than Basel Compliant Guarantees subject to Credit Approval and legal clearance. 5.1.19 Credit Risk Mitigation Under The Standardized Approach To Basel II Basic principles for collateral management In order to take CRM benefit under the Standardized Approach, the bank will need to ensure compliance with specific operational and monitoring requirements in relation to eligible collaterals (as defined above). Some of such significant requirements, as set out under the SBP Basel II Framework, are as follows: The Business Units shall employ a consistent frequency to collateral valuation as defined under this Handbook. The minimum frequency for revaluation will be six months for all types of eligible collaterals under the Standardized Approach. The actual frequency shall be decided considering the above requirement (as provided in this Handbook) and the Business Units/ CRC shall ensure that all collaterals are accurately valued as per prescribed frequencies in accordance with laid out criteria/ mechanism and collateral amounts are duly captured/ updated in the systems. Normally the collaterals shall be held for the life of the exposures. This is necessary to ensure that CRM benefit of collaterals can be taken. In the event of maturity mismatch in any case whatsoever, CRM benefit will not be taken in accordance with the SBP Basel II Framework. Similarly only those collaterals will be allowed for CRM benefit which do not have any currency mismatch with the exposures. Business Units shall consistently monitor the roll-off risks and maturity/ currency mismatch (based on the features available in CRMIS) and take necessary actions to mitigate the risks, where considered necessary. They will also monitor the correlation between the collateral value and underlying credit exposure and report any exception to the competent authorities. This is because under the SBP Basel II Framework, credit quality of the counterparty and the value of collateral must not have a positive correlation. For example, securities issued by the counterparty or by any related group entity would provide little protection and so would be ineligible for Basel II purposes.

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The bank shall use effective procedures to control residual risks arising from the use of CRM techniques (mainly including legal, operational, liquidity and market risks). In this connection, this Handbook provides guidelines on types of permissible collaterals, valuation policies/ procedures, management of roll-off risks and concentration risks etc. Collateral concentration should also be periodically monitored by the Business Units. For this purpose, reports shall be periodically generated (at least on a biannual basis from the banks system (i.e. CRMIS etc.) and reviewed. On the basis of information provided and due analysis, RMG will be authorized to amend the banks collateral guidelines including introduction of new collateral types, absolute restriction or acceptance with restrictions on certain types. The impact on the banks collateralization strategy shall also be assessed and the strategy, as contained in the banks credit risk strategy document, shall be updated accordingly. The Business Units/ CRC shall monitor the coverage of exposure by the collaterals (collateralization levels) and the type of charge over collaterals on a periodic basis and identify exceptions for resolution. Going forward, necessary fields/ capabilities shall be provided in the existing systems so as to enable identification of LTV ratios and type of collaterals which is also necessary to calculate the applicable supervisory LGD under the SBP Basel II Framework, when the bank will be transitioning to the FIRB Approach. CRMD, in coordination with Business Units and TROPS, develop a list of permitted Mutual Funds which invest in instruments listed under the Simple Approach to CRM. Such listing shall be reviewed and updated on a regular basis and circulated to all the concerned quarters within the bank to ensure that only units in permitted funds are identified as eligible for taking capital relief. Where the bank has a right to set-off, Business Units shall ensure that the relevant exposures are monitored on a net basis (besides their review/ monitoring on a gross basis). The procedures contained in this Handbook have been designed to ensure compliance with the condition (specified in the SBP Basel II Framework) that the documentation used for collateralized transactions and for documenting guarantees remain binding and legally enforceable. There will be a process for sufficient legal review to verify this and a well-founded legal basis to reach this conclusion. The banks legal mechanism by which collateral is pledged or transferred will be designed in a manner that ensures that the bank has the right to liquidate or take possession of it in a timely manner in the event of default insolvency or bankruptcy (or one or more otherwise defined credit events set out in the transaction document) of the counterparty and, where applicable, of the custodian holding the collateral. The bank will take all steps necessary to fulfill those requirements under the law applicable to the banks interest in the collateral for obtaining and

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maintaining an enforceable interest e.g., by registering it with a registrar, or for exercising a right to net or set off in relation to transfer of title of collateral. The bank will use clear and robust procedures for the timely liquidation of collaterals at its end. In this connection, it shall be ensured that legal conditions required for declaring the default of the counterparty and liquidating the collateral are observed, so that collateral can be liquidated promptly.

Data Quality/ Integrity The respective Business Units will be responsible to ensure that all the related data is completely and accurately captured/ updated in CRMIS. The responsibilities of the dedicated Data Validation Unit (as referred to in section 2.2 of this Handbook) will be extended to review of the collateral data and supervising resolution of the errors identified (in addition to exposure related aspects mentioned in that section). The external ratings for collaterals/ guarantors shall also be captured in the systems (as soon as done by the ECAI and communicated to the bank) by the Business Units in order to identify eligible collaterals. The whole process relating to capture and use of external ratings for customers, as set out in section 2.6 to this Handbook, will also be followed for collateral ratings, as far as applicable. Identification of eligible collaterals CRRS will perform a detailed mapping exercise of each relevant field/ sub-field in CRMIS with the specific eligible collateral types (consideration will be given to enhancing the coding structures in CRMIS, where possible/ practicable in case such identification is not possible with the existing CIF structure). Provision for manual tagging shall also be provided for types of collaterals in CRMIS where such tagging is considered more appropriate Necessary features shall be introduced in the systems for automatic identification of eligible collateral category based on set of rules supported by detailed mapping of relevant fields with such categories mentioned above. The above-mentioned mapping will be adequately documented and will become part of the CRMIS documentation. Role of Internal Audit Internal Audit shall be responsible for reviewing the policies, procedures and guidelines for collateral identification and data capture (including compliance with criteria for identification of eligible collaterals) and other aspects of the Collateral Management Framework particularly collateral revaluation, maturity mismatches, concentration in collaterals, collateral management, compliance with prudential regulations etc. They will also update the Internal Audit Policy/ Guide in the above-mentioned respects.

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5.1.20

Credit Handbook

Swapping of Credit Facilities from other Financial Institutions

A swap transaction involves complicated details. After approval of finance, swap transaction should be undertaken in a manner where the disbursement of the finance and process of securitization should be conducted simultaneously. However a situation may arise, where the releasing bank expresses its inability due to its internal operational formalities to deliver the title documents immediately upon adjustment of liabilities. In this situation, specific approval shall be obtained from the relevant Credit approval/ review authority. Following are some precautions/ procedures which should be observed while entering into swap transactions: Confirmation from the releasing bank should be obtained with respect to the following ; Outstanding amount of the liabilities on a given date. List of title/ allied documents for the assets held as security along with its copies duly certified by them. List of legal documentation relating to registered deeds (e.g. Mortgage Deed, General Power of Attorney etc.) if any. Undertaking that original security/title documents will be handed over to MCB upon adjustment of outstanding liabilities intimated.

All standard charge documents, facility advising letter etc. whatsoever required in compliance with the covenants, other Terms & conditions of approved arrangement, shall be obtained from the customer before disbursement of finance. Pre mortgage legal opinion should be obtained from LAD over the property/security documents. In case of any registered legal documents, the redemption documents shall be prepared otherwise the releasing bank shall be asked to arrange for redemption of the security. Necessary arrangements shall be made to sign the redemption documents on the same day of swap/payment of liability. An authority shall be obtained from the customer to receive the title documents from the releasing bank for onward creation of mortgage in favor of MCB. Payment of the outstanding amount shall be made through Pay Order in the name of releasing bank with reference to the customer. Relevant IBs including Memorandum of Constructive Deposit of Title Deeds (as per draft available on our Banks Portal) shall be got executed from the Customer, at the time of originating pay-order in favor of the other bank. (Memorandum shall be executed by owner of the property, in case of third party collateral).

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The pay-order shall be handed over to the other bank, against an Undertaking in writing that they are holding such and such property documents (as referred in pre-mortgage legal opinion by LAD) in original, which shall be handed over to MCB upon realization of the pay-order. In case of same day release of documents, the equitable mortgage may be created through MOTD in consultation with LAD. Upon clearance of the pay-order, all original property documents shall be collected from the other bank. At this stage, however, it should be ensured that the documents are in original and as per the legal opinion. In addition, Redemption Deed(s) (if applicable) shall be got executed from the other bank. Necessary NOC/Clearance letter shall be obtained from the releasing bank for the relevant departments like revenue department, excise department, SECP for registration of redemption deeds for subsequent removal of lien of the releasing bank. In case there would be multiple charges on assets of a company by other banks, relevant NOCs should be arranged. After the completion of transaction and the receipt of the original title/security documents shall be duly recorded in the safe custody register. MODTD & Agreement to Create a Registered Mortgage shall be obtained/ executed from the Customer / Mortgagor. Further Token Registered Mortgage Deed, (if applicable), shall be got executed by the Customer / Mortgagor; and the same, along with Redemption Deed(s), (if applicable) earlier executed by the other bank, shall be presented before the Sub Registrar concerned, for registration. Furthermore, all other formalities of approval of finance may be fulfilled including the marking of lien in the relevant departments. In case of properties involving permission to mortgage, the necessary permission to mortgage shall be obtained afresh favoring MCB after the receipt of the title documents. The removal of lien /satisfaction of charge of the releasing bank and subsequent lien marking of the charge of disbursing bank may take considerable time of more than one month. Therefore, necessary deferral for completion of post disbursement formalities should be specifically built in with the approval arrangements. A post mortgage legal opinion/vetting certificate shall be obtained to secure the interest of the bank.

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5.2
5.2.1 5.2.2 5.2.3 5.2.4 5.2.5

Legal Documentation
Introduction Company Types of Companies Extent of Liability of Directors Documents required at the Time of Establishing a Borrowing Relationship with a company Collateral in case of Companies Specific Features Types of Charge, Importance and Limitations Registration of Charge Ranking of Charges Approval for issuance of NOC Release of Charge / Letter of Satisfaction of Charge Documentation under Consortium Finance Other Types of Borrowers Documentation Requirements List of Documents Required Documentation Description and

5.2.6 5.2.7 5.2.8 5.2.9 5.2.10 5.2.11 5.2.12 5.2.13 5.2.14 5.2.15

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5.2.1 Introduction

Credit Handbook

While extending credit it is important that the corporate status / structure of the customer should be clearly established. The corporate status / structure of the borrower determine what security / collateral and documentation is required to secure the finances. A borrower can either be a Company, Firm, Sole Proprietorship, individuals, Trust, Society, NGO, or Non-Profit Organization etc. A brief discussion of these corporate forms is as follows: 5.2.2 Company The Companies Ordinance, 1984 defines a Company as, a Company formed and registered under this Ordinance or an existing Company. (Existing Company means a Company incorporated under the previous law on the subject i.e. Companies Act, 1913). A Company has a number of legal features and characteristics, as defined in the Ordinance. Some of the important characteristics relevant to topic are discussed below: a. A Company is a legal person, which status it attains as soon it is incorporated under the Ordinance. Following incorporation, it becomes capable of purchasing and disposing of property, entering into contacts, suing or being sued etc. in its own name; and capable of performing all the functions which a Company is authorized to perform, though the functions are performed through its management. A Company has an existence which is separate, independent and distinct from its shareholders / members, as well as from the management. A Company has the privilege of limiting personal liability of its shareholders / members for the business debts / obligations. A Company having a separate personality from its shareholders/members is itself bound for its debts and obligations; and the shareholders/members are liable for the Companys debts/obligations only in case of a Companys winding up; and that also to the extent of: i. ii. amount of value of the shares respectively held by the shareholders, in case of a Company limited by shares; and to the extent of such amount as the members may respectively undertake vide the Memorandum of Association to contribute to the assets of the Company, in case of a Company limited by guarantee.

b. c. d.

ii.

A Company has a perpetual succession. Its existence is independent of existence of its members and directors i.e. the company shall remain, unless wound up.

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Laws Governing Companies in Pakistan

Credit Handbook

Companies Ordinance, 1984 and the Securities Exchange Commission of Pakistan Act, 1997 are the basic laws governing companies in Pakistan. The Ordinance provides basic principles and procedures of the Company law, whereas, the Act provides regulatory and monitoring principles of the Company law. 5.2.3 Types of Companies Generally, companies can be categorized as follows: a. Company limited by Guarantee

A Company limited by Guarantee means a Company the members whereof undertake / guarantee vide the Memorandum of Association to contribute a certain amount to the assets of the Company, in the event if its winding up, to meet the Companys debts / obligations. Such a Company may or may not have share capital. b. Company limited by Shares

A Company limited by Shares means a Company the shareholders whereof are liable for the Companys debts and obligations, in the event of its winding up, however, to the extent of the amount of value of the shares respectively held by them. Companies limited by Shares have further two types, (i) Private Limited Companies and (ii) Public Limited Companies. i). Public Limited Company A Public Limited Company means a Company with limited liability (by shares) that allows invitation to the public to subscribe for the shares of the Company; and also allows transferability of its shares. The number of its shareholders can be more than fifty. However, the minimum number of members and directors of such a Company should be at least three (03). It is required to use the word Public Limited with its name. ii) Private Limited Companies A Private Limited Company means a Company with limited liability (by shares) which prohibits invitation to the public to subscribe for the shares of the Company; and restricts transferability of its shares. Additionally, it limits the number of its shareholders to fifty. Furthermore, the minimum number of members of such a Company should be at least two (02); and the minimum number of its directors should also be at least two (02). It is required to use the word Private Limited with its name. A Private Limited Company may also be of another type of Company i.e. Single Member Company (SMC) which has only one member. It is required to use the

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word SMC Private Limited with its name. It is governed by all the provisions applicable upon a Private Limited Company, except that the number of its members and directors cannot from one (01). However, it is required that the single member of every SMC shall nominate a nominee director to act as director in case of his death; and shall nominate an alternate nominee director to act as nominee director in case of non-availability of nominee director. 5.2.4 Extent of Liability of Directors Directors are shareholders representative and are not liable for the debts / obligations of the company. Banks obtain personal guarantees of directors of companies for finances allowed to the companies, especially in case of Private Limited Companies, so that if companies fail to repay the finances, the same can be recovered from the personal assets of their directors. Please refer to MCBs Policy on Personal guarantees. 5.2.5 Documents required at the time of Establishing Borrowing Relationship with a Company. The validity of any act of a company is dependent upon firstly, whether it is within the powers of the company, as provided in the Memorandum Of Association (MOA) thereof (or in the Ordinance); and secondly whether the act has been performed by the management of the company in accordance with the rules and regulations provided in the Articles Of Association (AOA) (or in the Ordinance). Consequently, any act of a company contrary to the said aspects would be invalid. Documents Required i. Memorandum of Association

MOA is the constitution of a company. It defines objectives and purposes for which the company has been formed. It also provides basic information about the company i.e. Name, Registered Office/Address etc; information as to liability of the members; the amount of share capital with which the company proposes to be registered, and the division thereof into shares of a fixed amount etc. MOA should be carefully examined as to any restrictive clause i.e. whether it places any restrictions on the actions of the company. ii. Articles of Association

AOA are by-laws for the working and general administration of a company. It provides the powers and duties of the Directors and Officers of a company. The AOA should be examined to establish how, by whom; and to what extent the borrowing powers of a company would be exercised. Generally, AOA of companies allow the directors to exercise borrowing powers. However, it must be ensured that the directors may exercise the powers without any restriction.

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iii. Board Resolution (BR)

Credit Handbook

Generally, all the powers of a company are exercised by its directors, except as provided in the Ordinance or AOA of a company. However, as regards the borrowing powers of a company, the Ordinance specifically provides vide Section 196 that the directors of a company shall exercise the said powers on behalf of the company by means of a Resolution passed at their meeting. It is therefore, necessary that whenever a Company requests a financial facility, a copy of the Board Resolution be obtained in this regard, duly attested by Company Secretary/Director(s). Similarly, on each renewal / enhancement of the facility (ies), a fresh Board Resolution should be obtained to cover the aspect of renewal/enhancement. The Board Resolution should preferably be specific as to bank name, nature and amount of facility (ies), aspect of renewal / enhancement, nature of securities; and should specify the companys representatives, who would sign / execute the documents. In addition, a BR must confirm that the minutes of the relative meeting of the Directors have been entered in the Minutes Book of the Company. A general and open ended Board Resolution may also be accepted in case of corporate customers (Both in CBBG & WBG), provided the BR covers all the aspects mentioned above. In such a case, no fresh BR would be required on renewal/enhancements.
List of documents required. Memorandum of Association Articles of Association Certificate of Incorporation Certificate of Commencement of Business (Only required for Public Limited Companies) Board Resolution to Borrow Form 29 (List of Directors)/ Form A Attested copies of CNICs of all directors Source for Certified Copy SECP SECP SECP SECP Company Secretary SECP NA

Documentation Check List Appendix IV to Chapter 5.1 (Part A) 5.2.6 Collateral In Case Of Companies Specific Features There are specific features of collateral in Company category firstly in terms of expressions used for collaterals; and secondly in terms of additional requirement for perfecting the collaterals. The expressions used for collateral in company category include Charge over Current/Fixed Assets, Floating Charge and Assignment, which expressions are based upon nature of the assets under charge. As regards the additional requirement for perfecting the collateral in company category, the same are laid down in the Companies Ordinance, including Registration of the said Charges with the relevant office of SECP

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5.2.7 Types of charges, importance and their limitations a. Charge:

Credit Handbook

Charge refers to the security interest created on the property of the company. A charge is security for the payment of a debt or other obligation that does not pass title of the property or any right to its possession to the person to whom the charge is given. b. i. Types of Charge: Fixed Charge:

Fixed Charge means a charge over assets of a company, which attaches to the assets from the time of its creation. ii. Floating Charge:

Floating Charge means a charge which floats over assets of a company until an event of default occurs or until the company goes into liquidation, at which time the floating charge crystallizes and attaches to the assets intended to be covered by the charge. Furthermore, its ranking shall be determined when crystallized. A floating charge is not as effective as a fixed charge but is more flexible. Distinction between Fixed & Floating Charge The basic distinction between fixed and floating charges is that a fixed charge attaches to the asset in question as soon as the charge is created, whereas a floating charge attaches only when it crystallizes 5.2.8 Registration of Charges It is mandatory under provisions of Section 121 of the Companies Ordinance, 1984 that every mortgage, charge or other interest created by a company over its assets should be registered with Registrar of Companies, within 21 days after the creation of the mortgage or charge. Effects of Registration and Non Registration Registration of a mortgage or charge ensures its security in the event of liquidation or winding up of company. Registration of a charge, as such, constitutes a notice to the public as to the creation of the mortgage or charge; and if any person acquires such property, he will be deemed to have notice of the said mortgage or charge from the date of such registration. If a mortgage or charge is not registered in time, then it would become void against any other secured creditor (holding registered charge over the companys assets). Such a void charge would not be entertained by official

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liquidator, in case of winding up of the company. Nevertheless, the charge in such a case will remain payable, but it will be unsecured. Remedy for registration of a charge out of time If a charge is not filed within 21 days, then SECP may be applied for extension of time; and if the Commission is satisfied that it was accidental or due to inadvertence or due to some other sufficient cause, or is not of a nature to prejudice the position of creditors or shareholders of the company, or that on other grounds it is just and equitable to grant relief, then the Commission may on such terms and conditions as seem just and expedient, order that the time for registration be extended. In such an event, the mortgage or charge shall be filed with registrar in the manner above referred, along with a certified copy of the order of the commission. Documents required for registration The following documents are required to be filed for registration of a mortgage or charge with the Registrar: Form 10 containing particulars of mortgages or charges etc. Certified copies of instruments creating the mortgage or charge. Affidavit that copies of the instruments are true copies.

From X. Form X should be properly filled-in, it must be signed and stamped by the company's authorized signatory. Instruments Instruments creating the mortgage or charge include mortgage deed/ Memorandum of Deposit of Title Deeds (IB-24), Letter of Hypothecation (of Stocks, Book Debts, Machinery/Plant/Equipment etc.). These would be filed in the form of certified copies, attested by a Notary Public. Precautions in filing of charges Make sure the creation date and description of the charge agree with the instrument Make sure that ranking of charge is properly mentioned on form X. Make sure the amount secured accurately reflects what is stated in the Instrument. Make sure details of the property charged accurately reflect what is stated in instrument. For mortgaged land it is desirable that you give the title number of the Property. Ensure that charging clauses are always inserted, including reference to fixed and floating charges. Sign and date the form. Complete the forms legibly using black ink or, preferably, type the form.

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Certificate of Registration

Credit Handbook

If the Registrar is satisfied that the documents filed are acceptable, then he will cause an entry in the register of charges; and will issue certificate of registration of mortgage or charge, which will be considered as evidence of the charge. Modification of Mortgages and Charges Whenever the terms or conditions or extent or operation of any mortgage or charge registered as above are modified, it is mandatory that the particulars of such a modification together with a copy of the instrument evidencing such modification be filed / registered with the Registrar. The procedure for modification of mortgage or charge is same as in case of registration of mortgage or charge, however, for the subject purpose Form XVI shall be used instead of Form X; and the Registrar shall issue Acknowledgement of Filing instead of Certificate of Registration. Modification is change in mortgage or charges i.e. change in: Amount of mortgage / charge (enhancement or reduction in amount). Change in particulars of property (excluding or including certain property or asset). Variation in the rate of markup or interest. Extension of time for repayment on period of maturity (Rescheduling). Change in other terms and conditions.

Rectification of charges, relevant provisions of law and procedure The following are some of the acceptable grounds for rectification of register of mortgages or charges: Omission or mis-statement of particulars. Failure to file modification of charge. Omission to intimate payment or satisfaction.

Satisfaction of charges and related Forms Satisfaction of mortgage or charge is also necessary to be filed with Registrar. It is caused by way of memorandum of satisfaction of mortgage or charge on Form 17 with or without NOC obtained from the mortgagee/chargee. 5.2.9 Ranking of Charges Companies may create charge over their assets in favor of more than one lender. However, the charge of each lender would not be equal. The law in such a case gives priority to a charge created earlier in time. The priority as such is termed as Ranking, which determines priority of right amongst companys secured creditors to enforce their charge, in case of liquidation. Ranking of a charge is determined by time of filing of the particulars of the mortgage or charge with the Registrar.

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In view of the aspect of ranking of charges, it is utmost necessary while extending loan to a company that a Search Report is carried out from the Company Registrars office to ascertain whether the company assets have earlier charge in favor of some other lender. The search should be conducted by the Banks approved agencies. a. i. Terminologies First Exclusive Charge

A Charge is called First Exclusive when it has been created over assets of a company by a single creditor/lender; and there is no other charge holder having claim over the said assets. ii. Second/Inferior

A Charge is called Second or inferior when it is created over assets of a company which are already under a prior charge. iii. Pari Passu Charge

Pari Passu charge means a charge under an agreement between the secured creditors of a company where all the creditors have equal rights of payment; and have the same level of seniority/ranking, irrespective of date and time of creation of their respective charges. In case of Pari Passu Charge, every Pari Passu charge holder shall have a right over respective assets of the company, in accordance with its proportionate amount of charge/exposure. Pari Passu charge may be arranged/created amongst creditors of a company jointly at the time of creation thereof or even in case of inferior ranking charges, by way of having NOC from the senior creditor. Under consortium finance usually lenders jointly enter into an agreement with the borrower to create a Pari Passu charge on assets of the company. b. Importance of Ranking

Ranking of charge determines secured creditors priority/ranking to recover their outstanding from the assets of a company, in case of liquidation or winding up thereof. In the event of liquidation/winding-up of a company, though all the secured creditors have a right to enforce their claims, however, the claims are entertained in accordance with the ranking and there are chances that inferior charge holders may not have any assets to enforce their claims. c. Procedure to be followed

The procedures for the same is laid down vide Circular # PO-Law/Gen/141 dated 02/05/2002 hereunder:All security documents and Form 10 should distinctly specify ranking of MCBs charge. If prior charges exist over the assets of a customer, then NOC for creation

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of pari passu charge in favor of MCB shall be required. In such cases, reference number and date of NOC for creation of pari passu charge should be given in the letter of hypothecation, deed of floating charge or mortgage deed. Prior to creation of charge, Search Report from office of SECP should invariably be obtained. Search Report should clearly mention the ranking of existing charge(s) created on the assets intended to be accepted by our Bank as security. This report would help in ascertaining the total amount of charge / encumbrance created on the assets and ranking of existing charge holders. After registration of charge, final legal opinion on perfection and ranking of charge should be held from banks Legal Affairs Division/ Legal Retainer. As per present practice, for exposure greater than PKR 10.000 million legal opinions should be sought from Legal Affairs. d. Satisfaction of Banks registered charges with SECP in case of liquidation:

The amount for which the bank creates a registered charge at SECP is the secured amount. Several banks may concurrently have charges registered against the assets of a company. In this case, the charge holders may rank pari passu or may hold ranking charges with varying priorities. In case of pari passu charge holders, the proceeds of liquidation of a company will be shared in the ratio of the outstanding of their respective secured amount to the aggregate outstanding secured amounts of all the charge holders of the company in the same ranking. Amount owed by a lender over and above a charge / pari passu charge registered with the SECP, shall be an unsecured credit and will be satisfied after all the secured creditors have been paid and all preferential payments to be made under the Companies Ordinance 1984 i.e. employee wages etc. have been fulfilled. 5.2.10 o Approval for issuance of NOCs Issuance of NOCs to be allowed at approval / review level of the limits provided there is no dilution in security i.e. after issuance of NOC MCB should not become inferior in respect of ranking of charge or margin. In cases where there is manifest evidence of dilution in security: Review from at least one SCO will be required, or a higher review level in case the subject proposal is processed by the Credit Review Dept.

Issuance of NOCs for all watchlisted and classified accounts not transferred to SAMG to be allowed at the review level of GH RMG. Maintenance of NOC issued/ received record NOCs issued to and received from other financial institutions are treated as a Security and accordingly a proper Inward & Outward Register shall be maintained at Branches & CRCD (as the case may be) and copies of all such NOCs shall be kept in safe custody along with other security / charge documents in the concerned branches / CRCD. Formats of proposed Inward & Outward Folios are attached as Appendix I to chapter 5.2.

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5.2.11

Credit Handbook

Release Of Charge / Letter of Satisfaction of Charge

Before replacement or change of security / security documents / partial release of security, written approval is required from relevant Approval/ Review Authority. Where property documents / security documents are released on full and final adjustment of a limit, the Branch Manager (CBBG)/ Relationship Manager (WBG) should satisfy himself that the property held is not a common security for any other unadjusted limits with the branch or the branch has not issued any letter for joint charge or have received a letter for joint charge from any of our other Branch / Bank. If documents are held with CRC relevant Branch Manager/ Relationship Manager should confirm of above to CRCD for release of security. In case exposure is secured against 100 % Cash Collateral In case full/ partial release of cash collateral security on full/ partial adjustment of limit, branch manager/ Relationship manager after satisfying that remaining security (in case of partial release) will adequately cover finance along with margin and also that the security held is not a common security for any other unadjusted limits with the branch, can release cash collateral securities. Approval for competent authority is not required in this regard. If cash collateral securities are held with CRCD, request letter from branch manager will be required to CRCD confirming above. In case of replacement of security (cash collateral), approval from relevant approval/ review authority (to be capped at relevant Business Group Head) shall be obtained to this effect. In terms of SBP BPD/RU-20/121-04(Policy)/7868/02 dated 24th May 2002, where we are not in favor of creating further encumbrance on the assets held by them, this should be communicated to the concerned bank/ NBFI / Customer within a period of 15 working days. Consumer auto financing and consumer auto leasing shall be exempted from the above instructions in this section. Full/partial release of security for non-performing loans (involving any remission and/or rescheduling/restructuring shall be governed as per Section 4) Documentation Check List Appendix IV to Chapter 5.1 (PART A) 5.2.12 Documentation under Consortium Finance

The term "syndicated lending/ Consortium Lending" refers to arrangements whereby multiple lenders usually advance funds jointly to one/ single borrower While the structure, pricing, repayment schedule and other terms of syndicated loans can vary, the following common characteristics are usually present:

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a.

Credit Handbook

Syndicated loans are normally governed by one set of documentation describing the rights and obligations of the signatories - the borrower and all the lenders (or syndicate members). One or more lenders are mandated by the borrower to arrange credit facilities on terms agreed between the arranger and the borrower. The arranger may underwrite (i.e. undertake to provide) all or part of the facility amount; Typically, the total amount of a syndicated deal is relatively significant, even though the credit extended by each participant does not generally exceed what it would be prepared to lend on a bilateral basis; The tenor may well be medium- or long-term, although short-term (under one year) facilities are also common, particularly for trade-related transactions; Syndicated lending involves multiple parties e.g. arrangers, underwriters, agents (facility and security), legal counsel (Transaction Lawyer) and participating lenders. Please refer to checklist Appendix IV to Chapter 5.1 PART A for completion of security documentation in following two cases i. ii. Where MCB is Lead Manager/ Security Trustee Where MCB is not Lead Manager/ Security Trustee Other Types of Borrowers and Documentation Requirements

b. c. d.

e.

f.

g.

5.2.13

a. Sole Proprietorship A sole proprietorship is a business concern owned by a single person on his / her own account with 100% control. There is no formal procedure to be followed in setting up a sole proprietorship concern. However, it is necessary to establish that the borrower is the sole owner of the business whose name is being used; and therefore, a declaration evidencing the said position and the proprietors name etc. should be obtained on the concerns letterhead. Furthermore, such a concern may be associated/registered with trade associations/bodies; and may have NTN number, which should also be obtained, if applicable. The account opening and lending documents stipulated by the Bank should be signed by the sole proprietor and the Proprietorship stamp should be affixed. Nevertheless, it must be ensured that the documents of all types (especially DP Note) should be signed in such a manner that the name of the proprietor appears along with the name of the proprietorship concern, since proprietorship isnt a separate entity. b. Partnership/ Firm Partnership is a business relationship entered into by a formal, written or oral agreement between two or more persons carrying on a business in common. The

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capital of a partnership is provided by the partners who are liable jointly and severally for the total debts/obligations of the firm; and share profit and loss of the business according to the terms of the Partnership deed. In case Partnership deed in unregistered, all partners of the firm should sign the Account Opening Form. However, in case of registered partnership deed, partners may authorize any one or more partners to do so (only if Partnership deed specifically allows the same). While extending loans partnership deed should be carefully analyzed as to borrowing clause, signing / documentation execution requirements or any restrictive clause therein. The Loan documentation should preferably be got signed by all the partners. However, they may authorize one or more partner to do so, as per the above mentioned procedure. The firm stamp should be affixed on all the documents. c. Other forms like Trusts, Societies, NGOs, Clubs etc. While extending loans to these bodies special care should be exercised. Charter of incorporation, bye laws as well as proof of their registration should be carefully examined before granting any facility. Clear legal opinion from banks Legal Affairs Division should be obtained prior to extending finance, regarding borrowing powers and charging of security and other requirements. d. Government Bodies etc. Officials negotiating on behalf of government should have necessary authority. The lending documents should be signed by the Government officials authorized to sign such documents and the document authorizing them to do so must be carefully checked. Legal Clearance from banks legal Affairs Division should also be obtained. 5.2.14
Sr # 01

List of Documents Required

Account Nature Individuals / Sole Proprietor ship Documents Required 1. Attested photocopy of CNIC 2. Trade body Association Letter/NTN, if applicable.(For Sole proprietorship only) 3. Sole proprietorship declaration letter (A declaration to be obtained from the proprietor on plain paper that he is the sole proprietor of the firm and he undertakes to inform the bank of any change in the business constitution). 1. Attested photocopies of CNICs of all partners. 2. Attested copy of Partnership Deed duly signed by all partners of the firm. 3. Attested copy of Registration Certificate with Registrar of Firms. (In case partnership is registered) 1. Certified copy of Certificate of Registration. 2. Certified copy of Bye-laws/Rules & Regulations. 3. Resolution of the Governing Body/Executive Committee for opening of account authorizing the person(s) to operate the account and attested copy of the identity card of the authorized person(s). 1. Attested copy of Certificate of Registration (Where applicable). 2. Attested copies of CNIC of all the trustees. 3. Certified copies of Instrument of Trust.

02

Partnership/ Firm

03

Societies/ NGOs Clubs etc.

04

Trust

Documentation Check Appendix IV to Chapter 5.1 PART A

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5.2.15 Documentation Description

Credit Handbook

The present mode of banking financing is structured on the pattern of Islamic modes of financing, since interest based system of banking financing has been banned in Pakistan, since 1982. The system started and developed as such under guidelines and parameters of a Board constituted then by the Federal Government. The Board not only developed basic structure of the system but also drafted standard documentation in this context, including financing agreements. The said standard documents/agreements are called IBs/IB Forms. a. List of IB Forms Facility Wise

Following IB forms shall be obtained invariably for the facilities mentioned hereunder: 1. All Fund based facilities IB 6 or 6 K (Mark Up Agreement) IB 12 (Demand Promissory Note)* 2. LC IB 8 (LC application cum agreement) IB 12 (Demand Promissory Note)* 3. FBP/ IBP/ FAFB IB 9 (Letter of Buy-Back-cum-Indemnity) IB 20 (Agreement for discounting/purchase of Bills) 4. FATR IB 27 (Trust Receipt) 5. FIM IB 6A1 (letter of indemnity for clearance of consignment) 6. BG IB-30 (Counter Guarantee) IB 12 (Demand Promissory Note)* 7. Finance against Govt. Commodities IB-4
* = Waiver of DP note may be allowed on case to case basis, against due justification, keeping in view the risk profile, track record and credit worthiness of the customer. Such requests for waiver of legal and/ or security documentation formalities shall not be referred to LAD for clarification/ opinion. These cases shall be elevated to the relevant competent authority as per section 3.3.13 for decision. It will be at the discretion of the competent authority to refer these cases to LAD if deemed appropriate.

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b.

List of IB/ charge forms Security wise

Following IB forms/ charge forms/ documents shall be obtained invariably for the facilities mentioned hereunder:

1. Hypothecation of Current Assets IB 25A (Letter of Hypothecation) 2. Pledge of Stocks IB 26 (letter of pledge) Letter of access Letter of disclaimer (if storage place belongs to third party) 3. Lien on marketable securities IB 28 (Letter of Lien on Marketable Securities) IB 31 (Agreement for Sale and Buy Back of marketable Securities) Letter of encashment IB 28A (in case of financing against third party shares to be obtained from owner of shares (third party). IB 31 shall not be obtained from third party in this case) 4. Lien on Bank Account CF 19 (Authorization for Ear marking) 5. Equitable mortgage IB 24 (MODTD) Agreement to create registered mortgage 6. Registered Mortgage Registered mortgage deed
7. Personal Guarantee (IB-29) Where applicable/ required. c. i. Description of Commonly used IBs Agreement for Finance Agreement for Financing or Mark-up Agreement is the basic and fundamental document in Non Interest based financing system. It provides basic terms and conditions of financing between the Bank and the Customer. It provides the amount of finance and the mark-up thereupon; and the terms and conditions for repayment thereof. It in fact establishes the contract between the Bank and the Customer.

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IB-6 (Agreement for Finance) is used for Short/Medium/Long Term Financing on mark-up, other than Agricultural farming finance. IB-6A is used in case of single transaction finance, other than Running Finance. IB6A is used as mark-up agreement for Demand Finance. IB-6C is used as mark-up agreement for financing to fixed income persons. IB-6K is used where mark-up is linked with KIBOR. IB-6, in whatever form, is the most necessary document, without which the bank's claim cannot be established. It must be obtained in case of all types of financing (except Non Fund Based Financing). In addition, it must be obtained on each renewal/enhancement.

iii.

IB-8 (Application/Agreement for Issuance of LC) is an application written by the customer and guaranteed by one guarantor, stating particulars of its own, beneficiary, goods, amount, shipment, payment and voyage etc. The application is in itself an agreement; and upon execution thereof by the parties, it attains the status of a contract. IB-12 (D. P. Note) is a written commitment by the borrower that on demand he/she shall pay to the bank certain sum of money. It should be obtained in case of all financings. It is obtained for the Purchase Price. It must be obtained on each renewal/enhancement of the facilities. However, in case of a facility for a period of more than three years, a fresh DP Note should be obtained before expiry of three years. IB-20 (Agreement for Discount/Purchase of Bills) is an agreement whereby the customer agree to (i) honor the bills on maturity (ii) indemnify the bank in case of dis-honor of any Bill etc. IB-28 (Letter of Lien on Marketable Securities) is a letter by which the customer or the owner (third party) agrees to pledge its marketable or other securities e.g. Shares DSCs, SSCs etc. with the Bank. It must be signed by pledger (owner of securities) IB-29 (Personal Guarantee) is an agreement/contract between the guarantor/surety, the borrower and the Bank, whereby the Guarantor/Surety undertakes to repay the outstanding liabilities of the borrower, in case of his default, to the Bank. It may be given in person or in a corporate capacity (by a company). IB-30 (Counter Guarantee) is obtained in the event of extending Bank Guarantee facility to a customer, whereby it undertakes, amongst other covenants, to pay any and all amounts which bank may be required to pay under the BG to the beneficiary of the BG. IB-31 (Agreement for Sale & Buy Back of Marketable Securities) is obtained in the event where collateral is in the form of marketable securities, like shares. It also refers sale price and purchase price, on the pattern of IB-6, for the reasons that the securities are treated to have been purchased by the Bank and then sold back to the customer.

iv.

v.

vi.

vii.

viii.

ix.

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d. Terminologies used in IB Forms

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The principal segment of banking financing (Running/Cash/Demand Finance) is based upon Morabaha, one of the Islamic modes of Financing. Morabaha is basically a sale on credit. However, in banking financing terms, the Bank purchases certain assets (raw material/stocks/machinery etc.) from the borrower and pays the price thereof (sale price) to him, which is actually the amount of finance; and then sells it to the borrower at a price (purchase price) which is to be paid by the borrower after a certain period, along with mark-up/profit for the period of finance. Sale Price therefore, is actually the amount of finance i.e. principal amount of finance; and purchase price is the amount financed to the borrower and the markup thereupon. i. Sale Price Amount of the facility ii. Purchase Price The sale price + the maximum allowable mark-up according to the following formula: Principal mark-up rate (No of days of agreement ) 365 Morabaha in its original terms provides that the purchase price may include an amount of mark-up for some further period (cushion period), over and above the period of finance, so that if the purchase isnt paid on time, the lender may bring the matter to the court of law during the said further period; and no financial loss is caused to him for the said period. However, if the borrower pays the purchase price in time, the amount of mark-up for the further period is reversed. It is called rebate or prompt payment bonus. Presently, it is taken as difference of mark-up calculated @ Standard Markup Rate (SMR) and Timely Payment Markup Rate (TPMR). e. Precautions in filling in IB Forms i. Since sale price, purchase price and rebate are the main terms used in the IBs, therefore, while getting executing IBs principal emphasis should be upon the amounts relating to the said terms. Accordingly, the relevant columns provided in the IBs for the said amounts should be filled in appropriately. The date of execution and the reference of IB-6 (where applicable) should be given therein. IBs should be executed and witnessed appropriately. One witness should be from borrower side and second witness should be from bank side. Copy of CNIC of witness should also be kept

ii. iii.

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iv.

It must be ensured that the executants of the IBs are duly authorized to execute the same, in case of companies and firms; and their constitutions (MOA & AOA; and Partnership Deeds) allow execution of the documents. Signatures of executants should be got verified with lead pencil by authorized signatory (AS/ IBS holder) Provincial Governments levy stamp duty on agreements. It should be ensured that proper stamp duty is paid as per requirement Every Page of IB forms should be got signed by the executant (s) There should be no cutting of text in IB forms, while executing IB forms some customer delete standard clauses or alter the draft of IB forms. In case of cutting of clause or any text in IB forms its approval should be obtained from competent authority. All cuttings/ alterations must be duly authenticated. Use of Non Standard Documentation Branches/ CRC should use standard formats of the bank. In case of specialized transactions, where it is not possible to use standard formats. Draft should be vetted from banks internal legal department prior to execution of documents.

v. vi. vii. viii.

f.

g.

Inclusions of standard clauses Following clauses documentation should be present in all standard/ Non-standard

Material Adverse Change Clause Majority Ownership Clause Cross Default Clause Especially, in case of financing to Large Corporates/ Consortium Finance it should be ensured that these clauses are covered in documentation. h. Review of Standard Documents Legal Affairs Division (LAD) will review all standard documentation / IB forms at least once in a year and will circulate the necessary changes. Any change made by legal department in standard documentation shall override the existing documentation.

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5.3

Credit Risk Control and Processes

Introduction Service Level Agreement CRCD Scope of Services Responsibility Schedule Process Flow

5.3.1 5.3.2 5.3.3 5.3.4 5.3.5

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5.3.1 Introduction

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The presence of a strong and centralized credit risk control department is a key element to ensure proper credit discipline in the Bank. In order to achieve this objective, the Bank has established the Credit Risk Control Division (CRCD) independent of business units. Credit Risk Control (CRC) is essentially a back office activity that supports the extension and monitoring of credit by the business units. This support allows the business units (CBBG/ WBG/ IBG) to focus on their marketing goals while operating within the covenants, conditions & requirements of credit approval. CRCD is independent of the business groups and has been structured as a part of the Risk Management Group. The relationship / branch remains the focal point of contact with the client / borrower and, therefore, CRCDs direct contact is only with the business / operations side that in turn interact with the borrower on documentation / monitoring matters. MCB is a large commercial bank with a wide a network of branches. Accordingly, there is a need to balance the scale of CRC coverage against the cost of such support. Presence of a CRC support person in every branch is not desirable owing to the following: High cost involved Inefficient utilization of resources Logistical problem of controlling off-site staff Non availability of adequate trained human resource

The alternative is to centralize this function on a regional basis and gradually increase its coverage and reach. The hubs thus created assist the regions central CRC structure. The hub is an exact replica of a regions central CRC arrangement that supports a local cluster of branches. And provide all support provided by the regional CRC center. The collateral / security documentation of the branches covered by a hub are stored in the hubs vault and are not transferred to the main regional CRC vault for ease of logistics.

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For branches where CRCD cover is not available, the responsibility for providing credit risk control services will be with the relevant Business Group. All responsibilities as per Appendix I to Chapter 5.3 will be performed by the business units. 5.3.2 Service Level Agreement In order to document the roles and responsibilities of CRCD and branches (under CRC coverage) Service Level Agreements (SLA) have been executed between CRCD and the business groups that define the working relationship between the branches and the CRCD in terms of services and the parameters that govern the rendering of these services by CRCD to the internal clients (i.e. the branches & the business side). Turn-around-time (TAT), cut-off-time, list of support activities and responsibility are the major articles that are listed in the SLA. The range of services & support is to be evaluated in terms of SLAs only. The SLA may be reviewed (wholly or partially) with the mutual consent of the stakeholders on need basis. The purpose of this exercise is to review the contents of the SLA with regards to observations (if any) of CRCD and the business groups. In the future if and when CRCD takes over following role, separate SLAs will be executed 1. 2. 3. 4. With With With With HR for Employee Loans Agricultural Division for Agricultural Financing Transaction Banking Division for vendor Management Consumer Banking Group for Consumer Financing.

5.3.3 CRCD Scope of Services Credit Disbursement Control The Credit Risk Control function is responsible for issuance of Disbursement Authorization Certificate (DAC). The DAC is issued after CRC is satisfied that the following have been ensured: The loan application has proper approval from competent authority Documentation is complete as per approval of finance and receipt of collateral holding All covenants, terms & conditions have been / are complied with.

In case of any exceptions (to banks policy, rules, procedures, etc.) necessary approval should be held as per bank policy or a waiver is obtained for the same. Furthermore, the email instructions for implementation/ disbursement of credit lines from CRCD are also considered equivalent to the DAC (Disbursement Authorization Certificate). The instructions shall be issued by designated persons (within CRC) only.

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In automated (Symbol) branches where system can be accessed centrally, CRCD will feed limit particulars and initial markup rates. This will be effective after approval from Group Head RMG and once IT provides support for central access to the branch system. This action of limit feeding in Symbols for a particular borrowing account will constitute issuance of a DAC to the branch. For non-symbol branches (where central access to branch system is not available to CRC), the branch operations will feed limits after receipt of a DAC issued by CRCD. Credit Documentation Documentation is an essential part of the credit process and is required for each phase of the credit cycle. It establishes the relationship between the bank and the borrower and forms the basis for any legal action in the event of a default. It is the responsibility of CRCD to ensure completeness of documentation in accordance with approved terms and conditions. Outstanding documents should be tracked and followed up with business to ensure execution and receipt. Credit Monitoring and Administration After the facility is approved and draw down allowed, the facility is to be continuously monitored. The monitoring aspect includes tracking borrowers compliance with credit terms, repayments, identifying early signs of irregularity in exception reports and ensuring that periodic valuation of collateral is being conducted. It is the responsibility of CRCD to maintain a system to ensure effective monitoring of above mentioned requirements. Tickler system capable of generating advance alerts should also be developed for all its functional responsibilities. However, monitoring of Watchlisted/ Classified accounts will not be the responsibility of CRC. Maintenance of Collaterals / Security Documents Collateral documentation, such as mortgage papers and title documents, are assets of the Bank, which if lost or fraudulently given to other lenders may cause loss to the Bank. CRCD will keep all security documentation in Security Documentation Folder (as per Appendix II to Chapter 5.3) in a room with fire proof/ resistant arrangements under dual control after lodgment in Safe Custody Register (SB-21). A separate register will also be maintained to keep track of movement of any document / document folder. CRCD will issue collateral lodgment receipt to the concerned branch which will serve as a proof that documents are held with CRCD in safe custody. On receipt, collateral should be entered in register and placed in a clearly marked folder / pouch for accurate identification and ready retrieval. Profit payment on security held as collateral will be responsibility of business units

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Access to collateral should be by dual authorization. Receipt and release of collateral should require authorization from at least two authorized officers of the Bank. At all times, security documentation should be available for physical checking by internal and external audit. Under no circumstances a security document, an insurance folder or any contents of the same are to be removed from the CRCD Area. These documents should NOT be kept outside the vault area for an overnight period. Exceptions to the above rule need to be properly approved by Regional Head CRCD or the Hub Incharge. Authorization and outward movement of any such documentation should be noted in the Document Movement Register. In cases where an outward movement, of any such security document, from the custodial area to another CRCD area is required then this too should be noted in the Document Movement Register in its Internal CRCD Movement portion. When such a document is required by a branch then the request for its temporary release / transfer should come from the branch to CRCD such a request should clearly specify the purpose & time of temporary movement, needs to be duly approved by the Regional Manager (CBBG) or Unit Head (WBG). After CRCD authorization process, as detailed above, the branchs authorized representative will take custody of the required document at the CRCD premises. When files / documents are authorized to be removed temporarily outside CRCDs custodial area, the responsibility of these files / documents also shift to the concerned Unit Head CRCD or to the Branch Manager or to the Unit Head (WBG) who has taken over temporary custody. When the branch is taken over by CRCD, it will be the responsibility of CRCD to receive all security / title documents relating to finance account (as per list given under Part-XI (2) of Responsibility Schedule Appendix I to Chapter 5.3). CRCD will scan all these documents and a soft copy will be provided to respective branch for their use or any reference to such documents. Branches not taken over by CRCD In branches where CRCD is not functional, it will be responsibility of Branch Manager to ensure that security documentation is placed in Security Documentation Folder (As per Appendix II to Chapter 5.3) in room with fire proof/ resistant arrangements under dual control after lodgment in Safe Custody Register (SB-21). A separate register will also be maintained to keep track of movement of any document / document folder. On receipt, collateral should be entered in register and placed in a clearly marked folder/pouch for accurate identification and ready retrieval. Access to collateral should be by dual authorization. Receipt and release of collateral should require authorization of by least two responsible officers. At all times security documentation should be available for physical checking by internal and external audit.

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Under no circumstances the documentation, insurance folders and their contents should be removed from the Credit Documentation area. Exceptions need to be properly approved by Branch Manager and the outward movement of any such documentation should be noted in the Checkout Card. When outside the Credit Documentation Area, the responsibility of the files shifts to the Branch Manager. Collateral registers should be checked against physical holdings at least annually by the following: 1. Branch Manager (at the time of annual review) 2. Regional Manager (once during a calendar year) 5.3.4 Responsibility Schedule Please refer Appendix I to Chapter 5.3 for responsibility schedule between CRCD and Business Units (WBG/ CBBG) 5.3.5 Process Flows Process flows of CRCD are present in SLAs for reference and are subject to changes on a need basis with mutual consent.

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5.4
5.4.1 5.4.2 5.4.3 5.4.4 5.4.5

Insurance
Introduction Approved Panel of Insurance Companies Per Risk Limit Methodology Review of Insurance Policy Insurance Grid

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5.4.1 Introduction

Credit Handbook

All assets charged to the bank are to be insured during the complete tenor of outstanding liabilities. Accordingly, all assets under Banks lien are to be insured by an insurance company on the Banks approved panel. In case of equitable charge / mortgage on fixed assets, value of land shall be excluded to calculate the amount of which insurance is required. Business Units should preferably propose the same in credit proposal and same should preferably be made part of Approval of Finance. 5.4.2 Approved panel of Insurance Companies FIID will notify the list of insurance companies on MCBs approved panel on an annual basis. The annual review process would evaluate the financial condition and performance of each insurance company and a recommendation for continued inclusion would be elevated to MCC for approval, through CRMD. The process for inclusion of an insurance company on MCBs panel would be as follows: An insurance company desirous of inclusion in the MCB panel of insurance companies would submit a formal application to FIID along with all relevant documents. FIID would review the information and documents (SECP certificates, IAP directives etc.) received from the insurance company and can request additional information, if required. FIID would evaluate the financial condition of the applicant, review treaty arrangements, sponsor strength and the claim paying capacity of the applicant and would forward its recommendation (per risk limits) for inclusion or otherwise to CRMD. CRMD would elevate the proposal to MCC for final decision.

5.4.3

Per Risk Limit Methodology

Previously, a per party limit was assigned to each insurance company on MCBs panel and the same limit was construed to be applicable to each category of risk e.g. fire, marine, vehicle, etc. This led to frequent requests for waiver as the risk underwriting capacity of various insurance companies was different for each risk category. In order to rationalize the insurance exposure limit setting process, a per risk limit methodology has been put in place. The following methodology has been adopted for determining the risk limits for insurance companies:

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1) A credit scoring model giving due weight to capitalization, management competence and financial performance is used to score the insurance companies. 2) It will be the discretion of CRMD to determine weights for different factors in credit scoring model after getting agreement with FIID. In case of any difference, subject will be referred to GH RMG for final decision. 3) The credit score (as a percentage) is then applied to the risk-wise treaty capacity for each insurance company to determine the pre risk limits for each specific insurance company. The methodology is applied consistently across the insurance companies other than for National Insurance Company where a subjective limit is proposed based on the state owned nature of the entity. This methodology is used to determine the per risk limits for the universe of insurance companies on annual basis and the list is disseminated by FIID following approval. It will be the responsibility of FIID to monitor annual limit expiries of insurance companies. Unlisted insurance companies are recommended for participation as co-insurers only in the lead policies issued by MCB approved panel of insurers. Accordingly, the unlisted insurance companies would not be able to book business with MCB as lead insurers and would participate as syndicate partners to the extent of their respective approved limits. Exception approvals are to be allowed as follows: a) In case sum insured exceeds the Per Risk Limit but is within the Treaty Capacity of the insurer, the waiver shall be approved by Group Head RMG on the recommendation of the relevant Business Group Head. b) If cover is required from an insurance company not on MCB panel, approval from the President shall be required for the same. Request to carry recommendation of the relevant Group Head and GH RMG. c) GH RMG would be authorized to allow an un-listed insurance company to underwrite business in a lead capacity on the request of the relevant Group Head. The co-insurance limit of such insurer to be blocked for the duration of such approval. Waiver requests should be processed and approved prior to disbursement of facilities / opening of L/Cs. All such requests should be routed through FIID and approvals shall be held on record by FIID. 5.4.4 Review of Insurance Policy Following receipt of the Insurance policy, the same is required to be reviewed with special emphasis on the following points: MCBs name as mortgagee or loss payee

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Expiry date of insurance policy Description and location of insured property (stocks, plant & machinery, building, etc.) is same as mentioned in Credit Approval. Risks as mentioned in Approval are covered or in case Approval is silent about risks coverage, all applicable risks (fire, theft & burglary, malicious damage, riot, strike, etc.) are covered. Full premium paid receipt/ or certificate of premium payment in original or attested photocopy is available. Value of insurance is adequate to cover MCBs exposure. Adhesive stamps of required value are affixed on the face of original insurance policy. Amount insured by insurance company (ies) is within the approved per risk limits. In case of co-insurance, share of each insurance company is authenticated by co-insurers. the following are summarized for guidance and meticulous

Additionally, compliance:-

1- It is in the interest of the Bank as well as clients that adequate insurance cover is obtained for industries financed by MCB as well as for finance facilities extended to our clients against machinery / stocks and hypothecation / pledge of goods. It should be ensured that advances do not remain unsecured for lack of adequate insurance cover and a proper policy of insurance is obtained. This fact should also be reported in the proposals for renewal/enhancement of existing facilities and/or for grant of fresh finances mentioning therein validity date/risk covered/amount of insurance obtained. 2- It should be ensured that stocks/machineries providing cover to our facilities must always be adequately covered, i.e. insurance must always provide cover to the required stocks/assets declared from time to time for coverage/value not less than outstanding loan or exposure / operative limit whichever is higher plus 10%. 3- It may be suggested to customer to get insurance cover for remaining stocks/assets also, so that in case of any mishap their loss may be minimized. Where customers do not get the remaining assets/stocks insured, an undertaking should be obtained from customers, to the effect, that insurance claim received shall be first available towards adjustment of Banks financing and balance if any shall be repaid / paid from their own sources. In case where goods under banks lien have to be transported, the transit risk coverage should also be obtained. 4- Insurance coverage should be obtained for all risks pertinent to the assets being insured and keeping in view area / storage conditions where goods are stored. 5- Open Pledge: Some limits allowed against Phutti, Cotton, Rice, Paddy, Sugar and like stocks are under open pledge arrangement, exposing the Bank to high risks for Burglary, Fire, Riot, Strike, Damage/Malicious damage etc. As such, it is necessary that appropriate insurance policy is obtained keeping in view the fact that goods are kept under open pledge. The policy / policy cover note should clearly mention that the insurance stocks/assets are stored in open and there should be no restrictive

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clause regarding such storage arrangement to avoid any dispute in the event of a claim. 6- Legal Cases: Regarding insurance cover on non-performing assets for which Bank has filed recovery suit(s), insurance cost can be debited to outstanding balances only after seeking permission from the Competent Court by filing an urgent application through our counsel to this effect because the matter is subjudice. It is, therefore, recommended to consult the counsel, contesting the case on Banks behalf, well in time to seek courts permission in this respect. 7- The branches should invariably obtain insurance cover note in original and examine the same vis--vis appropriateness of the risks covered, with Bank Clause, before allowing any disbursement/taking any exposure on such assets under our lien. Please note that no risk extension is covered unless premium for the extension(s) is/are received by the insurance company. They should diarize the validity date of Insurance Cover Note and ensure that Premium Payment Receipt in original / Policy are received before the expiry of validity of the cover note. During currency of cover note if any claim is lodged, the insurance company is only liable to pay claim only after receipt of premium. 8- In case of insurance of building, insurance cover is available for value above plinth level and as such insurance coverage for fixed property under our lien may be obtained after deducting value of land and below plinth civil works etc., for which necessary assistance of banks approved valuer, may be obtained. Value of land shall be excluded to calculate the amount of which insurance is required. Business Units shall propose the same in credit proposal and same shall be made part of Approval of Finance. 9- Normally Insurance policies expire at 4 Oclock in the afternoon of the policy expiry date and as such branches should hold the documents confirming renewal of policy before the aforesaid time. However, as a matter of rule, branches are advised to obtain renewal of the policy at least one week before its expiry and should diarize the same. Where Night-work is applicable, the matter be referred to insurance companies for coverage &/or exclusion of Night-work clause from warranties. 10- In case the insured stocks/assets are stored in open or open sided building/sheds or where there is/are deviation(s) from policy or warranty conditions are not fulfilled, the policy/policy cover note should clearly mention the same and there should not be restrictive clause regarding such storage arrangement, to avoid any dispute in the event of any claim. Branches should ensure that clause excluding the storage as above is deleted or varied by the insurance company and duly authenticated bearing signature & seal. 11- Insurance coverage to be obtained should not only be limited to above guidelines, but be based on specific ground reality. To further facilitate understanding of branches/field offices on the subject, Appendix I to Chapter 5.4 provides details of perils for which insurance cover (other than marine insurance) are generally available for stocks/assets under banks lien and the risks usually not covered in a standard policy. However, branches are advised to study the specific original policy / policy cover note and ensure that all pertinent risk for which cover

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is available & required has been obtained/relevant exclusion have been deleted and duly stamped by the insurer. 12- In case of financing, where during Banks exposure (fund based &/or non-fund) transportation by sea vessel is involved, appropriate marine insurance cover shall be obtained in all cases as per guidelines provided in User Manual of Trade Service Centres. 5.4.5 Insurance Grid Branches/ offices are advised to ensure coverage of all pertinent risks associated with the asset held under security. In order to provide guidance an Insurance Grid (insurance risk coverage on assets held as security) is being introduced (Appendix II to Chapter 5.4). The Insurance Grid identifies the risk coverage to be obtained for various assets commonly held as security by the bank and this should not be considered as exhaustive requirement. Actual decision on risk coverage should be taken by relevant approval/review authority keeping in view nature, location and storage conditions of the asset held as security. For Current Assets and fixed assets (Plant & Machinery and Building) charged to the bank, insurance cover should invariably be obtained against the following risks: 1. Fire 2. Riots & Strikes 3. Malicious Damages 4. Burglary (shall not be required for mortgaged properties) GH RMG shall be authorized to allow waiver of above mentioned mandatory risks (for both current and fixed assets). Waiver of all other risks (for current and fixed assets) may be allowed at original approval/review level. Request for waiver of all other risks (other than the mandatory risks mentioned above) falling in approval levels beyond relevant Business Group Head, shall be approved by relevant Business Group Head level keeping in view nature, location and storage conditions of the asset held as security. Proper justification must be recorded and should be held on record for allowing waiver of insurance risk coverage. Relevant Business Group Head may delegate this authority at Business Head level if deemed appropriate. It should be ensured that formal request for waiver of insurance cover of mandatory and/or non-mandatory risks for both current and fixed assets, if any, is elevated as part of the Credit Proposal. Otherwise confirmation by the field should be incorporated in the CP that insurance shall be arranged in line with the Insurance Grid and no waiver is required.

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5.5
5.5.1 5.5.2 5.5.3 5.5.4 5.5.5 5.5.6

Deferral Policy
Introduction Documentation Categories Deferral Approval Authority Deferral Requests Compliance Responsibility Reporting

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DEFERRAL POLICY 5.5.1 Introduction

Credit Handbook

It is MCBs policy to allow disbursement of approved credit facilities after perfection of the required security/support documentation. Therefore, deferral of credit documents will generally be discouraged. There may however be genuine situations where deferral of credit documents may be considered for disbursal of approved credit facilities. The following guidelines should be observed for allowing deferrals: 1. The customer has proven positive track record. 2. The bank is not exposed to a pecuniary risk on account of the proposed deferral. 3. Completion of deferred documentation is certain. 4. The deferral does not violate any of the regulatory requirements. 5. The deferral does not jeopardize the rights and remedies available to the bank. It will be responsibility of business units to complete documentation within deferral time allowed. 5.5.2 Documentation Categories Normally there are three (3) categories of documents that are required to be obtained from the customer 1. Documents providing evidence to legal claim For example Board Resolution Markup/ Finance Agreements (IB 06, 6A, 6B, 6C, STFA etc.) Documents creating security interest like hypothecation/ pledge agreements, bill discounting agreements, Memorandum of Deposit of title deeds (MODTD), SBLC, Bank Guarantee etc. As a policy, all such documents that provide evidence to legal claim are not deferrable. 2. Documents required by regulatory bodies All documents that are required to be obtained as per instructions issued by SBP/ any other regulatory body are not deferrable. 3. Support documents Documents that do not provide evidence to legal claim and are obtained to further strengthen security interest or to monitor performance of the borrower are deferrable under guidelines mentioned above. Please refer to Appendix I to Chapter 5.5 for deferrable documents.

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5.5.3 Deferral Approval Authority Following approval matrix shall apply to allow deferrals:
Deferral status In-House Deferral CBBG Deferral Approval Authority for In-house deferral (for CBBG clients only) can be availed once i.e. either at General Manager or Business Head level, as per the requirement. Subsequent deferral shall be allowed as per following levels Concerned Business Group Head i.e. (GH CBBG / GH WBG/ Head Islamic Banking)

Credit Handbook

Maximum Tenor of Deferral from Deferral Approval Date

1st

2nd

For Approvals below level of GH CBBG/WBG, relevant Group Head can allow 2nd Deferral. For Approval/ Review level of GH-CBBG/ WBG & above, SCO 1 can allow 2nd Deferral. SCO 2 (Irrespective of Credit Approval authority Level)

As described in Appendix I to Chapter 5.5

3rd

Commercial Branch Banking Group (CBBG) shall have the option of obtaining in-house deferrals for their clients, details as per Appendix I to Chapter 5.5. CBBG Branches can avail only one of the in-house deferrals i.e. either from General Manager or Business Head. Branch Manager should identify the time required to rectify the discrepancy and in-house deferral should be obtained from GM or Business Head accordingly. Any further deferral shall be approved as per the above approval matrix (i.e. 1st, 2nd and 3rd deferral). If documentation is not perfected within the time-frame conveyed for 1st deferral, field may elevate request for 2nd and/or 3rd deferral providing adequate justifications in this regard. Maximum time for 2nd and 3rd deferral would be same as specified on a document-wise basis in Appendix I to Chapter 5.5. Upon expiry of 3rd deferral, any deficiency in deferred documents will result automatic limit freezing and no further deferral shall be allowed. Only in exceptional cases depending upon nature of case GH RMG may allow further deferral. While allowing such deferrals, sanctioning authority must be satisfied that, a. Deferred Documents do not fall under document categories 1 and 2.

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b. c.

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Deferral will not expose bank to any pecuniary risk and banks security position is not weakened Personal Guarantees are not included in document category 3 and a deferral of the same would require GH RMG approval.

In case of any other support document not specifically included in the list (Appendix I to Chapter 5.5) and business considers that there is a genuine requirement to defer the document. They can seek approval from Deferral approval authority as per matrix given above. At the time of take-over of a branch by CRCD, a 60-day grace period (starting from the date of UER provided to the concerned Branch) for rectification of all documentation related discrepancies would be provided to the concerned branch. After lapse of 60-days blanket period, relevant Group Head shall be authorized to allow further 60-days deferral for rectification of discrepancies. This 60-days period for extension in deferral shall commence from the date of expiry of blanket (60-days) deferral allowed at the time of takeover of Branches. However, customers lines shall remain blocked until relevant Group Head approval is obtained and conveyed to CRCD. Branches shall elevate requests to relevant Group Head for extension in deferral period, if required so, well before expiry of blanket deferral allowed at the time of takeover of Branches by CRCD. After completion of this period (60 + 60 days), any further relaxation would only be given through defined process of obtaining a deferral/waiver as per policy. In absence of deferral from competent authority, CRCD will freeze lines and no further disbursal will be allowed.

5.5.4 Deferral Requests Relationship Managers/ branches may use the attached format (Appendix II to Chapter 5.5) for obtaining deferral of any document. Proper reasons for deferral requirement should be provided with the request. In case request is forwarded electronically, they should incorporate all relevant information. The deferral approval will be forwarded to CRCD which would allow disbursement after confirming that all documentation including any required deferrals is in place. 5.5.5 Compliance Responsibility Compliance to the policy would be the collective responsibility of the business units and their respective Group Heads. 5.5.6 Reporting CRCD will maintain record of deferrals allowed and will also be responsible for reporting the same at different management levels. CRCD will develop formats keeping in view reporting requirements at different management levels. The branches shall assume responsibility for reporting and issuance of the DAC and other CRCD functions, wherever CRCD services are not available

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5.6
5.6.1 5.6.2 5.6.3 5.6.4

Vendor Management
Introduction to Vendor Management Role of Credit Risk Control in Enlistment / De-listment Valuation of Fixed Assets Under Banks Lien and Valuers Muccadumage Operations and Muccadums
5.6.4.1 5.6.4.2 5.6.4.3 5.6.4.4 Appointment of Muccadum & Payment Disbursement against Pledge of Stocks Issuance of Delivery Order Evaluation and Delinquency Reporting

5.6.5

C&F Agents and Clearing of Imported Goods

5.6.5.1 5.6.5.2 5.6.5.3 5.6.5.4 5.6.5.5 Appointment of C&F Agent Mechanics of Clearance of Goods Clearance of Goods in Bonded Warehouse One-off Transactions Clearance Documents Handling Commission

5.6.6

Tank Terminals & Handling Stock of Liquid Cargo

5.6.6.1 5.6.6.2 5.6.6.3 Service Mechanism Precautions Reporting

5.6.7

Vendors Providing Services of Credit Reports, Search Reports and Legal Services
5.6.7.1 Service Mechanism

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5.6.1 Introduction to Vendor Management1

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Outsourcing is a cost effective alternative for the bank for activities that do not constitute mainstream banking. However, outsourcing can amplify the risk profile of a bank by exposing it to strategic, reputation, compliance and operational risks arising from failure of a vendor in providing the service, breaches in security, or inability to comply with legal and regulatory requirements. The bank also needs to manage associated concentration risk that may cause lack of control over a service provider who renders many services for the bank, or Bank is excessively dependent on a vendor for a specific service or due to dominant position in a specific region etc. Management of concentration risk will be the responsibility of business units. In order to mitigate these risks, risk management techniques have been developed for proper identification, assessment and mitigation of third-party risks. Key factors involved in Risk Management Process Establishing senior management awareness of the risks associated with outsourcing agreements in order to ensure effective risk management practices; Ensuring that an outsourcing arrangement is prudent from a risk perspective and consistent with the business objectives of the institution; Systematically assessing needs while establishing risk-based requirements; Implementing effective controls to address identified risks; Performing ongoing monitoring to identify and evaluate changes in associated risks. Documenting procedures, roles/ responsibilities, reporting mechanisms, and responsibility segregation among different departments of the bank

Typically, this process incorporates the following activities: Risk assessment and its requirements; Due diligence in selecting a third-party service provider; Adopting qualitative & quantitative criterion for enlistment and allocation of limit; Contract negotiation and implementation; and Ongoing monitoring.

5.6.2 Role of Credit Risk Control in Enlistment and De-listment Credit Risk Control Division will perform following functions pertaining to all credit related vendors: Processing and recommending vendors applications for enlistment of credit related Vendors; Monitoring and Oversight;

Scope of the chapter includes only credit related vendors i.e. Valuers, Muccadums, C&F agents etc.

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Issuing Warnings and processing for de-listment, if vendors does not perform up to the mark;

Above functions will be performed by a Vendor Management Unit in CRCD. In this section CRC unit responsible for vendor management is referred as VMU of CRCD Branches / Relationship Managers will contact VMU of CRCD for reporting of all material anomalies regarding third-party service providers relating to Credits. Relationship between business units and CRCD is governed by Service Level Agreement (SLA); therefore, any change in SLA will result in amendment in processes defined in this chapter. 5.6.3 Valuation of Fixed Assets Under Banks Lien and Valuers Professional Valuers are individuals or organizations that appraise the value of assets and collateral provided to Banks and Financial Institutions for the purpose of securing loans, advances and any other facility. Section 5(m) of BCO 1962 states, Secured Loans and Advances means a loan or advance made on the security of assets, the market value of which is not at any time less than the amount of such loan. Accordingly, the market value is required to be used as the basis for valuation of assets offered as security at the time of extension of credit. Keeping in view best practices a reasonable margin should also be held to cover price fluctuations. Margin requirements are set in Chapter 5.1. Guidelines for Arranging Valuations of Assets: The valuation of assets will be arranged as under: a. CRC will arrange valuation of assets held as security in cases where existing / proposed limit size is above PKR 1.000M (both fund based and non-fund based). b. Branches shall arrange valuations in cases where existing / proposed limit size is up to PKR 1.000M (both fund based and non-fund based). However, in case of Branches taken over by CRC, valuations will be arranged by CRC, (irrespective of the exposure) and Branches shall not be authorized to arrange valuations. A- Valuation of assets where existing / proposed limit size is above PKR 1.000M (and for Branches taken over by CRC): Branch Manager / Relationship Manager shall request VMU, CRC (Lahore or any CRC sub office nominated by VMU-CRC Lahore) in writing (through memo or email) and provide necessary information for arranging valuation of the security. VMU-CRC (Lahore or any CRC sub office nominated by VMU-CRC Lahore) shall assign the valuation directly to a valuer from banks approved panel.

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The valuer will submit the valuation report directly to VMU, CRC (Lahore or any CRC sub office nominated by VMU-CRC Lahore). For Branches taken over by CRCD, original valuation report shall remain with CRC and copy will be provided to Business Unit. Payment to valuer shall be made through CRC.

CRC shall assign the valuation jobs after considering following, a. Concentrations to be avoided. b. Technical expertise of the Valuer to be kept in view. c. Fair distribution of business among all Valuers B- Valuation of assets where existing / proposed limit size is up to PKR 1.000M (and for Branches not taken over by CRC): Branch Manager / Relationship Manager shall select / appoint a valuer for valuation of the security. The valuer will submit the valuation report directly to the Branch. Valuation fee will be paid to the valuer after receipt of the valuation report. In case of new customer, payment of the valuation fee shall be recovered upfront at the time of assigning valuation of assets to the valuer. Payment shall be made through Branch. Below are the Process flow sheets to arrange Valuations. (1) Valuation of Assets arranged by VMU-CRC:
Valuation of Assets

Approved Valuer

Conduct Valuation

Prepare Valuation Report

Payment of Valuation Fee Received

Business Unit

Request for Valuation

Payment arrangements as per VMU-CRC Instructions

Copy of Valuation Report to branch

Bill Amount as per approved rates

VMU -CRC ( Lahore or any CRC sub office nominated by CRC- Lahore)

Payment arrangment

Payment arrangment

Receive Valuation Report along with BIll Select Valuer & Prepare Appointment Letter

CRC Database update

Lodgment in Safe Custody

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(2) Valuation of assets arranged by Branches:

Important guidelines to arrange valuations are as under, i. All valuation reports must be received directly from the Valuer in sealed envelopes. CRC officials/Branches will not accept the reports, if these are not addressed to MCB. CRC officials / Branch Managers will ensure that valuation report discloses basis and justification for values assigned by the valuer and it is supported with minimum required information. Valuations of tangible property and fixed assets should be updated at least after every three years unless, a. Branch Manager/ Relationship Manager on the basis of site visit concludes in writing that the valuation still holds true or present value is higher than assessed value. AND b. Obtains its approval from the sanctioning authority. iv. CRC officials/ Business units will not merely rely on valuation amount determined by the Valuer, but a Certificate from Branch Manager/Relationship Officer certifying that the property offered for security was personally inspected by him/ her and Valuers report

Safe Custody of Branch

Business Unit

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Approved Valuer

ii.

iii.

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regarding the value of property and the basis of prevailing cost / rate assumed are correct in his/ her opinion. This requirement shall apply in case of Residential, Commercial & SemiCommercial properties and will not be applicable in case of industrial plant, machinery etc. In case Branch Manager/Relationship officer differs from the valuation done by the Valuer, he/ she would give his own downgraded assessment in the certificate. v. Valuation charges must be negotiated/ paid as per approved fee grid and direct payment by the customers shall not be allowed. All payments would be made by Branch / VMU-CRC to the Valuer. Valuation reports of fixed assets should be jointly signed by Lead Surveyors along with Supervising Team members. Lead Surveyors shall also specify their Pakistan Engineering Council (PEC) number or Pakistan Council of Architects and Town Planners (PCATP) number, or Control number allocated by Pakistan Banks Association. In case of syndicated financing where MCB is not the arranger, valuation reports of Valuers which are not enlisted with MCB will be acceptable, if Valuer is enlisted with PBA. Advance against commercial building or building let out on rental/ goodwill basis will be discouraged. If however, it becomes absolutely necessary to accept such properties as security, a. b. The value of the property should be taken at Forced Sale Value (FSV) instead of Market Value. The minimum margin requirement on FSV is 30%; If forced sale value of property cannot be determined accurately then such property should be valued at 25% of Market Value evaluated by Banks approved Architects/ Engineers/ Surveyors (in this scenario no further margin will be applied if value is taken at 25%); Approval authorities may place higher margin restriction keeping in view the location of property and risk profile of the customer; Commercial buildings or buildings let out on rental/good-will shall only be accepted as security after obtaining legal clearance on title and mortgage documentation.

vi.

vii.

viii.

c. d.

ix.

While accepting argi land as collateral, value of the property shall be taken at market value. The minimum margin requirement on MV shall be 50% or 20% of PIU, whichever is higher.

Valuation of Classified Advances Valuation of the accounts transferred to SAMG shall be arranged by SAMG at their end from the list of Valuers approved on the panel of MCB Bank ltd. Valuation reports in write off cases should not be more than 12 months old from the date of elevation of remission proposal.

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Forced Sale Valuation (FSV) shall be undertaken as per guidelines/terms of reference2, and shall also be in line with the requirement of Prudential Regulation # R-8/Audit/SBP. Before arranging valuations, SAMG will obtain Valuers acceptance for above mentioned terms of reference. SAMG units will arrange FSV (Both full scope and desktop valuation) of only those classified assets which are under Banks exclusive or 1st charge under registered/equitable mortgage and have control in case of pledged assets, supported with perfect documentation. Otherwise approval from Group Head SAMG will be required before arranging FSV. This will be the responsibility of Business units to conduct Desktop Valuations for both the cases where FSV benefit is to be taken as well as for collaterals against regular exposures so as to ensure compliance with the qualitative criteria of collaterals under the FIRB Approach where the bank will be transitioning towards that approach. Professional Fee for Valuation of Assets Held As Security VMU of CRCD will convey Service Charges Grid for each type of assets (i.e. Land, Building/Civil works, Machinery, Commodities & Current Assets) on annual basis. Head of CRC shall be authorized to finalize the Service Charges Grid. The payment of valuation fee shall be made through Vendor Management Unit CRC, where valuation has been arranged through CRC. Direct payment by the customers is not allowed. All payments would be made by issuing Pay Order/ DD in favor of the Valuer. In order to avoid subsequent dispute with client, branches shall obtain authority letter3 from the borrower, a. b. To arrange valuations from Valuer AND; To debit the account for amount of valuation charges (In absence of debit authority, a cheque of valuation charges can be obtained).

To avoid additional burden on customer and on best effort basis, CRC /SAMG/ Branch would engage those Valuers who are based nearest to the place where property/assets are located. Performance Evaluation: Performance Evaluation of all enlisted Valuers is carried out twice a year. Evaluation will be initiated for following reasons: i. Periodic Evaluation:

VMU of CRCD will arrange appraisal of all enlisted Valuers on an annual basis to determine any change in Valuers limit amount, scope regarding nature of assets or geographical allocation. Mid-year performance evaluation shall be short, targeted and desktop in nature.

2 3

Appendix II to Chapter 5.6 (Terms of Reference) Appendix I to Chapter 5.6 (Formant for Authority letter)

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ii. Event Driven Evaluation:

Credit Handbook

Apart from arranging annual reviews, VMU of CRCD will arrange event driven evaluation upon receiving any material negative information regarding creditworthiness, integrity, reputation and /or conduct of approved Valuers from CRC concerns/Branches. All branches/CRC officials are advised to report all such instances directly to VMU of CRCD. On receipt of valuation report, Branch/RM should thoroughly examine valuation reports and identify any major variations to VMU CRC, so that CRC may seek clarifications from any such valuer in writing. iii. Hindsight Review: Hindsight review of the Valuers (valuation reports) shall be conducted by VMU-CRC Lahore. Valuers shall be picked on sample basis and their valuation reports shall be cross checked by conducting the valuation of the same asset by any other valuer and remarks shall be presented to Valuers review committee. Panel of approved Valuers once approved by the competent authority shall be disseminated on bank wide basis by Vendor Management Unit CRC- Lahore. 5.6.4 MUCCADUMAGE OPERATIONS AND MUCCADUMS Muccadumage services will be utilized for sites/customers with credit limits secured by pledge of goods or where independent inspection of Pledged/ hypothecated stocks is required. The job will be assigned to only banks enlisted Muccadums, as notified by CRCD/ CRMD from time to time. For branches where CRC is not functional, Branch Managers will perform all functions of CRC officials. Branches shall not be authorized to appoint Muccadum at a pledge site. All requests shall be forwarded to VMU of CRCD. Only VMU of CRCD is authorized to allocate a pledge site to Muccadum. 5.6.4.1 Appointment of Muccadum and Payment

While appointing Muccadum, CRC officials will try to ensure equitable and fair distribution of business among all enlisted Muccadums. Before entrusting any fresh site to a Muccadum, CRC officials will seek permission in writing from VMU of CRCD. VMU of CRCD responsible for vendor management will allow appointment of a particular Muccadum after checking following criteria: Total number of sites under charge of requesting Muccadum is less than Banks allocated limit on maximum number of sites to that particular Muccadum. ii. Not more than 25% of total sites of the circle are entrusted to the requesting Muccadum. i.

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However, CRC will not apply above conditions up to 5 sites per Muccadum per circle or where services of other Muccadums for the area are not available. In order to keep CRC database updated, branches will immediately inform VMU of CRCD about allocation of any fresh site to a Muccadum after site is taken over by Muccadum. At any point of time, VMU of CRCD may advise CRC officials/branches for change of Muccadum at any site. Copies of all such letters will be forwarded to the concerned business group office and Audit Center to ensure compliance of instructions. Change of Muccadum may be due to one of the following two reasons, i. Adverse results of periodic/event driven evaluation of a Muccadum; ii. Violation of concentration caps applied for a particular area. This includes appointment of Muccadum without permission from CRCD. Appointment of Muccadums and Determining Number of Chowkidar Customers request for appointment of Muccadum will be received on banks prescribed format4. After receiving customers request, CRC officials will prepare Appointment letter to take possession of the pledged stocks5 OR to arrange independent inspection of stocks6 and convey any special precautions pertaining to particular site/commodity/client in this letter. Before allowing any drawdown to the borrower under pledge based finance, Relationship/Branch Manager would undertake a site inspection. Concerned Relationship/Chief Manager will prepare a report in writing to Unit Head Relationship/Regional Manager with copy to concerned CRC official regarding discrepancies like non availability of firefighting equipment, improper stacking, un-acceptable stocks condition, non-standard procedures being followed, details of multiple borrowings (if applicable) and number of chowkidar/ Godown keepers to be posted at the site. A copy of the report must be kept in credit file of the customer. Corporate Head/ Business Head can allow waiver from site inspection required before entrusting any fresh site to a Muccadum. However, determination of number of Chowkidars will be responsibility of Business Units. The maximum period of Muccadumage for a specific customer's site shall be one year. Continuation of Muccadumage for second year shall require approval from relevant Group Head. President shall have the authority to approve continuation of Muccadumage beyond two years. Remuneration of Muccadum: Payment of muccadum service charges shall be routed through CRCD. Payment to Muccadum shall be made by CRCD through centralized process by direct debit to
4 5

Authorization for appointment of Muccadum from Banks Customer (Appendix III to Chapter 5.6) Format for letter to Muccadum to take possession of Goods Pledged with bank (Appendix IV to Chapter 5.6) 6 Format for letter to Muccadum for independent inspection of stocks (Appendix V to Chapter 5.6)

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borrowers current account. Branches must ensure that borrowers, availing pledge based facility, shall maintain sufficient credit balance in their current accounts or cushion in RF limits is available to settle monthly Muccadum Service Charges. In case if debiting the borrowers accounts for Muccadum service charges results in excess over limit or negative balance in the borrowers account. Branches will arrange to clear such negative balances in current account / regularization of excess over limit in RF immediately either by recovery from the customer or by debit the amount to respective loan account (including classified accounts). In no case negative balance in the current accounts or Excess over RF limits should stand beyond next working day. For accounts under litigation (Legal Cases), Muccadum service charges shall be debited to branches recoverable account Muccadum Charges Recoverable (GL Code 2090802340) through centralized process. Branches shall maintain customer wise record of such recoverable amounts. Total amount recoverable from the customer must be clearly mentioned in settlement proposals along with other obligations (i.e. principle amount and mark up amount etc.). CRC/ Branches will ensure, minimum two Chowkidars must be appointed at each site, as 24 hours posting of a Chowkidar is not allowed. Storage Conditions Due to any reason, whether shortage of goods in past or difficulty in managing stocks at borrowers premises (i.e. in case of multiple borrowing), it is advised that pledged goods should not be allowed to be stored in borrowers premises, but to be stored at a secured place outside Mills / Borrowers premises. Goods under banks pledge should remain under lock and key, duly insured, except where approval for open pledge is held. If deemed necessary by Relationship/Branch/ Approving authority, borrower will be asked to provide authentic laboratory report of various goods coming under pledge to ascertain the condition and value of stocks. While appointing Muccadum VMU of CRC to ensure that multiple borrowing against pledge of stocks of different customers to a single Muccadum at a single site is not allowed. However, pledge of stocks of different customers at a single site to a single muccadum may be allowed, subject to the following conditions: 1. The relaxation to be allowed to borrowers engaged in rice husking only. 2. Maximum four (04) huskers to be allocated to a single muccadum at a single site as mentioned above. 3. Track record of the borrowers should be clean with no history of default and stock shortage. 4. The husking unit must be exclusively mortgaged to MCB to the satisfaction of Legal Affairs Division / banks lawyer. 5. Approval of finance of the respective borrowers to include specific approval for co-husking of paddy on that particular husking unit. 6. Borrowers of other banks not to be allowed to co-husk and store their stocks on such sites.

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7. Number of godown keepers /chowkidars to be determined by CRC based on the exposure / quantum of stocks pledged at a single site. Maintenance of Godown Inspection Register: Godown Inspection register must be maintained for each site disclosing each in/out of inventory & all inventory changes should match their corresponding stock reports provided to Bank. All corresponding changes in level of stocks & outstanding will also be updated at branch in relevant register(s). Muccadums supervisory staff will visit each site at least once every fortnight, or earlier and record details of verifications/observations made during their visit of Godown in Godown Inspection register. Banks executive/officer will sign the register upon their visit to site & if any shortcomings are found, that will also be noted in the register. This register will be the property of Bank and at the end of Muccadumage services, it should be acquired from Muccadum by the business units. Reporting Branches will forward a monthly statement showing total number of sites under custody of various Muccadums to GM office. GM office will forward the same to VMU of CRCD after consolidating the statements received from branches of their respective circles7. Apart from routine reporting, branches will immediately inform to VMU of CRCD about allocation of a fresh site to a Muccadum after handing over site to the Muccadum. Appointment of Chowkidar: Above policy guidelines are applicable for all sites / customers except where i. The finance amount is up to Rs5.000 Million and either service of banks approved Muccadum are not available for that area or Branch Manager/Regional Manager does not deem it feasible. Then the branch is allowed to appoint Chowkidar subject to obtaining prior approval of G.M. This exception shall not be applicable to sites where more than one customer has pledged their stocks for the purpose of co-husking / coginning / seed crushing. ii. The finance amount is above Rs.5.000 Million but less than 50.000M and services of banks approved Muccadum are not available for that area, then the branch is allowed to appoint Chowkidar subject to obtaining prior permission from business Group Head. iii. The finance amount is Rs50.000 Million or above and services of banks approved Muccadum are not available for that area, then GH RMG approval will be required through Head of respective Business Group.

Format for monthly reporting from circles (Appendix VI to Chapter 5.6).

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All such approvals will be reviewed at least on an annual basis and all renewal/enhancement proposals will explicitly mention the appointment of Chowkidar instead of approved Muccadum. Clearance before appointment of Chowkidars will also be required from HR. All record regarding such appointments will be maintained by branches. In this regard, branches are advised to keep complete details of appointed Chowkidar along with attested copy of NIC. Process flow sheets for appointment of Muccadums Below are the process flow sheets for appointment of Muccadums in WBG & CBBG branches.

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5.6.4.2

Disbursement against Pledge of Stocks

Guidelines regarding disbursement against pledge of stocks Apart from described responsibility segregation and disbursement mechanics, following guidelines will be observed at the time of disbursement against pledge of stocks. a. On routine basis, Muccadum is required to provide stock report on banks prescribed format8 up till 3rd working day of each month. However, in case of change in inventory (quantity & value of stock) stock report will be received within one working day of such change. Muccadum will provide stock statement to the Bank as per the following schedule: i. at the time of takeover of pledge site, ii. at the time of movement of stock, either in or out, iii. at every month-end, irrespective of any stock movement during the month. b. While submitting stock statement to the Bank, it shall be mandatory for muccadum to obtain Borrowers authorized signature on the stock statement.
8

Format for stock reports.(Appendix VIII to Chapter 5.1)

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c. No disbursement would be made unless stock report duly signed by authorized signatories of Muccadum is not received. Branch will obtain list of all authorized signatory of Muccadum at the time of appointment. d. Separate file(s) would be maintained for stock reports and disbursement requests of individual customers. Process flow sheets for Disbursement against Pledge of stocks. Process flow sheets for disbursement against pledge of stocks in WBG & CBBG branches are as below.

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5.6.4.3 Issuance of Delivery Order9

Credit Handbook

Guidelines for issuance of delivery order Apart from described responsibility segregation and mechanics for issuance of delivery order, following guidelines will also be observed. a. All Delivery orders will be signed by two authorized persons of the branch whose names & signatures would be provided to the Muccadums at the time of appointment. b. Separate files will be maintained for individual customers stock release requests and issued delivery orders. c. It will be mandatory for the muccadum to release pledged goods to the borrower only against proper acknowledgement. Bank will provide Delivery Order in duplicate to the muccadum. While allowing physical delivery to the borrower, muccadum will obtain signature of authorized persons of the borrower on the Delivery Order. Muccadum will provide duly acknowledged copy of Delivery Order to respective branch for their record. Process flows for Issuance of Delivery Order Process flows for issuance of Delivery Order in WBG & CBBG branches are as below,

Format of Delivery Order Appendix VII to Chapter 5.6

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Delivery Order

Credit Handbook

Borrower

Stock release Letter is prepared

Borrower takes Delivery of Stock

Muccadam

Stock Released (DO in Duplicate)

Sends borrowers acknowledge copy of DO to Branch

Asks Borrower for adjustment in its a/c

Disbursement / Delivery Order File

Files acknowledgement

CBBG

No

Release Request Letter

Signature Verification

DO Calculation Sheet Prepared

Reserve balance in a/c for value of stock to be released

Yes

Delivery Order Issued

Reduce Implemented Limit inline with Current DP

5.6.4.4

CR C

Evaluation and Delinquency Reporting

Evaluation can be initiated for two reasons: a. Periodic Evaluation: VMU of CRCD will arrange evaluation of all enlisted Muccadums on Banks approved panel. Muccadum Performance Report will be arranged from all circles by the end of every year. Muccadum Performance Report (for all Muccadums operating in their respective area) shall be jointly signed by GM and relevant Business Head at the time of annual review of the performance of Muccadums. In case of Islamic Banking and WBG, same shall be signed by relevant Regional Manager for all Muccadums operating in their respective area. No Muccadum shall be considered for approval at the time of annual review without obtaining Muccadum Performance Report. b. Event Driven Evaluation: In the event of material discrepancy, evaluation of the Muccadum will be carried out immediately. Instances in this regard include failure of terms and conditions prescribed by the bank or handing over goods to customer without the issuance of delivery order from bank etc. CRC/Branches shall immediately inform all such instances to VMU of CRCD.

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5.6.5 C&F AGENTS AND CLEARENCE OF IMPORTED GOODS Clearing Agents services are required, whenever some branch process customers request for import of goods against banks financing from abroad and needs to fulfill the port/custom requirements for taking up custody of goods. Clearing & Forwarding (C&F) agents arrange clearance of shipment from the vessel through customs gate and take control of goods for onward delivery as per banks approved arrangements. Clearing of goods imported under banks lien will be entrusted only to Banks approved C & F Agents to be notified by CRCD. 5.6.5.1 Appointment of C&F Agent

Karachi Main branch and Nila Gumbad branch-Lahore shall continue to be designated branches for handing over C&F documents to approved C&F Agents of Sea Ports and Dry Port respectively. All non-designated branches will arrange clearance of shipment through these two designated branches. Service mechanism for clearance of documents is as follows. Import of goods under Banks Lien/Pledge Branches shall provide list of banks enlisted C&F agents to the customer requesting import of goods to be placed under banks lien/pledge. Selection of C&F agent Customer negotiates rates with any of banks enlisted C&F agent and informs the branch. Branches shall process customers request after obtaining a letter of authorization10 for appointing C&F agent. Forwarding documents to C&F agent After verifying customers signature, branches shall forward copy of Letter of Authorization to respective designated branch along with covering letter as per prescribed format11 and following documents related to import of goods. Performa Invoice Packing List (Providing case wise details regarding nature of goods, quantity, weight etc.) Original Bill of Lading endorsed in favor of designated branch Commercial Invoice Sales Tax Registration Certificate L/C and amendments if any Importers NTN Certificate Copy of monthly sales tax challan

10 Letter of Authorization (Appendix VIII to Chapter 5.6) shall be obtained for all goods except of liquid consignments; In case of Liquid consignments Appendix IX to Chapter 5.6 will be used. 11 Letter for forwarding of Import documents to Designated Branch (Appendix X to Chapter 5.6).

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Credit Handbook

Handing over documents to the C&F agent Designated branches shall prepare letter as per prescribed format (Annexure XI to Chapter 5.6) for forwarding the documents to nominated C&F agent and obtain acceptance from C&F agent on its copy. Documents shall be endorsed in favor of the C&F agent and handed over to its representative. Proper records of limits, outstanding of all C&F agents will be maintained on SB-104 register (Clearing Agent wise record) & SB-105 (Clearing document wise record). 5.6.5.2 Mechanics for Clearance of Goods

Obtaining Delivery Order of Shipping Company The C&F agent submits original bill of lading and invoice to the local agent of shipping company and obtains Delivery Order. This Delivery Order is submitted to Custom department at the time of taking delivery of goods. Custom requirements C&F agents arrange custom clearance of imported goods by one of the following two (2) mechanics. a- Manual filing of General Declaration (GD) C&F agent files General Declaration (GD) to Custom department as per Bill of Lading. If GD matches with Import General Manifest (IGM) lodged by the Shipping line or shipping agent; Custom department conveys applicable duty amount after arranging its appraisement. After payment of all duties and taxes against GD, custom authorities arrange inspection of goods at the port (if required). If goods are found according to declaration, custom authorities stamp the GD for Release Order. Goods shall be released from Terminal gate upon submission of GD duly stamped for Release Order and above mentioned Delivery Order issued by the local agent of shipping company. b- Electronic filing of General Declaration (GD) General Declaration (GD) is lodged on line in computerized environment under Pakistan Customs Computerized System (PACCS) and applicable duty payment is arranged first after which release order is received electronically. Goods are released from Terminal gate upon receiving of web based Release order from Custom department and Delivery Order issued by the local agent of shipping company. Handing over the goods C&F agent provides importers copy of GD to the bank and hand over the goods to banks representative/Muccadum as per arrangements conveyed by the bank.

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Sub delegation- Not Allowed

Credit Handbook

Designated branches are required to ensure that under no circumstances the banks approved C&F agent is allowed to assign/ handover/ delegate the Clearing & Forwarding job to any other C&F agents. 5.6.5.3 Clearance of Goods Stored in Bonded Warehouse

Bonded warehouses are authorized by custom department to store goods for which payment of duty is deferred until goods leave the warehouse. Clearance mechanism for In-bonded goods Clearance mechanics for in-bond goods can be summarized as, i. ii. iii. In-Bond GD is filed for clearance of goods from the port and their storage in bonded warehouse. After clearance from the port, goods are delivered to the bonded warehouse before payment of custom duties. Upon in bonding of goods, bonded ware house provides ware house receiving at the back of importers copy of In-bond GD and issues Storage Certificate/Letter. At the time of Ex-bonding, an Ex-Bond GD is filed for taking delivery of goods. Upon receiving of Ex-Bond GD, Custom authorities check warehouse receiving at the back of importers copy of In-bond GD and receipt for payment of applicable duties. If found in order, Ex-bond GD will be stamped for Release Order. Bonded ware house allows ex-bonding of goods after receiving of Customs Release Order. In case of Electronic clearing this Release Order is received electronically and custom authorities do not require warehouse receiving at the back of importers copy of GD.

iv. v.

Guidelines to arrange clearance of In-bonded goods When goods are to be stored in bonded warehouses, following guidelines shall also be complied: a. If goods are cleared by manual filing of GD; Designated branches shall ensure that C&F agents immediately after storage of goods in bonded warehouse; deliver the original Importers copy of GD and storage certificate/letter issued by the bonded warehouse to the concerned branch. In case the concerned branch do not receive Importers copy of GD and storage certificate within two working days (2) of delivering documents to the C&F agent and payment of custom duties; they shall follow-up with the Clearing and Forwarding agent for obtaining the same, so as to ensure that goods are not ex-bonded un-authorized. b. If goods are cleared by Electronic filing of GD; C&F agent is required to provide bonded warehouse storage certificate/letter and print out of electronically filed GD. As Terminal gates receive electronic confirmation about payment of duties, Custom authorities do not require

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importers copy of electronic In-bond GD for Ex-bonding of goods. Unauthorized ex-bonding may happen after payment of taxes directly to custom department. Whenever clearance is arranged by electronic filing of GD, Muccadum will be appointed at the ware house to avoid any unauthorized release of goods. Bonded warehouse storage certificate/letter should clearly describe that the goods shall be delivered upon receiving banks Delivery Order. The above described procedure for bonded cargo is also applicable for Liquid Cargo under banks lien. 5.6.5.4 One-off Transactions Where C&F Agent is Not on Banks Panel

All one-off requests shall be forwarded to CRCD. The turn-around-time (TAT) for decision on such requests is 2 days after the request is received by CRCD. While elevating One-off transaction request, concerned branches shall include customer name, C&F agent name, CRR of customer, nature of commodities being imported, country of origin and amount of such import. All such transactions will be approved at Group Head RMG level. In absence of Head RMG, this authority will be exercised by Acting Group Head RMG. Customer shall be requested to provide an undertaking12 from the C & F agent. This undertaking will remain valid as long as customer want to arrange clearance of goods through specific C&F agent and relevant approval for the agent is held. Clearance of individual consignments shall be arranged by forwarding instructions to the C&F agent on Appendix X to Chapter 5.6

5.6.5.5

Clearance Documents Handling Commission (CDHC)

Branches will recover CDHC as per banks schedule of charges. Recovered commission amount shall be shared between originating branch and the designated branch on 50% basis.

5.6.6 TANK TERMINALS & HANDLING STOCKS OF LIQUID CARGO In addition to logistical reasons for storage of liquid cargo at Tank Terminals, from banks perspective it also serves two purpose, 1. An imported liquid cargo is a prime security for the finance amount. When off-loaded at the port it needs to be immediately placed under banks pledge. The Tank Terminal operators take custody of the liquid cargo and acts as a Custodian of the bank. Tank terminal releases the pledged cargo upon
12

Undertaking from C & F agent not enlisted on Banks panel ( Appendix XI to Chapter 5.6)

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payment of banks dues (principal + markup) and after receiving of Delivery Order from the bank. 2. Tank Terminal operators also act on behalf of the bank to ensure that the liquid cargo is released after compliance of all legal formalities of Custom clearance. If the importer fails to clear the formalities of customs then the state can lay claim to the imported goods to settle the amount of its taxes. In such a case the claim of state over the imported goods takes precedent over all other rights/claims/charges thus override/ nullify the collateral status of the imported liquid cargo against the availed finance. The Customs in such an irregular case can impound all of the imported cargo even the portion which is still in the custody of the Tank Terminal Operator. The list of approved Tank Terminals is circulated by CRCD from time to time. 5.6.6.1 Service Mechanism

Execution of Tripartite Agreement Before opening any L/Cs involving liquid cargo, concerned branch/circle office shall obtain a Tripartite agreement13 from the importer specifying name of a banks enlisted Tank Terminals where such liquid cargo shall be stored on its arrival at Karachi and send this agreement to Karachi Main Branch for further execution with the Tank Terminal Operator. This agreement shall be obtained/ executed for every LC involving liquid cargo. The Tripartite agreement will remain in force for the entire duration of the LC. Karachi Main Branch after getting the agreement executed shall send back the duly executed agreement to concerned branch, after retaining a photocopy. Clearance of shipments shall be arranged as per service mechanism described in Section-5 C&F Agents and Clearing of Imported Goods and a letter of authorization (Appendix VIII to Chapter 5.6) will be obtained for appointment of both C&F agent and Terminal operator. Considering the risk that customer may not accept or retire the documents received under Sight L/C and Bank may have to make arrangements for storage and clearance of goods at its own cost, this Tripartite Agreement shall be executed for both Sight and Usance L/Cs. Off-Loading of Liquid Cargo To off-load liquid cargo, sea departing tanker is piped out in the Tanks of approved Terminal at Karachi ports (i.e. namely Kemari Port, Port Bin Qasim or Gawadar sea port). Customer arranges clearance of consignment from custom authorities via banks enlisted clearing agent. After off-loading of liquid cargo, branches will ensure that Terminals storage certificate/letter restricting liquid delivery upon receiving banks Delivery Order must be obtained from clearing agent.
13

Draft of Tripartite agreement for storage of oil (Appendix XII to Chapter 5.6)

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Issuance of Delivery Orders

Credit Handbook

Concerned Branch Manager or any other banks officer/executive authorized by the concerned General Manger shall sign all delivery orders (DO) for release of liquid consignments from Tank Terminal at Karachi port or Port Qasim and forward these DO to Karachi Main Branch. All such DO shall be countersigned by the person(s) authorized by General Manager overseeing Karachi Main branch. Concerned branches shall maintain separate files for all such customers and update record of stock position and outstanding against issuance of each delivery order. 5.6.6.2 Precautions

The General Manager overseeing Karachi Main Branch shall advise name, employee number and signature of such countersigning persons to Vendor Management Unit at Credit Risk Control Division so that the same may be advised to all our approved Tank Terminals with an instruction not to allow delivery of any cargo under Banks Lien unless Delivery Order is countersigned by such person(s). Name of such authorized persons will be reviewed at least once in a year by the designated (Karachi Main) Branch and in case of any change a revised list along with specimen signature shall be conveyed by the General Manger to CRCD for advising to Tank Terminals. 5.6.6.3 Reporting

Karachi Main Branch shall forward report showing performance of all enlisted Tank Terminal Operators14. In addition to monthly reporting, Karachi main branch shall also report any irregularity faced in case of specific Tank Terminal. 5.6.7 Vendors Providing Services of Credit Reports, Search Reports and Legal Services Knowledge of customers credit worthiness is vital for taking any lending related decision as it helps in gauging of credit risk and supports in mitigation of default risk. In addition, it also assists in analyzing industry and business risks pertaining to individual clients and their respective industries. Practically, there can be no one source that could provide conclusive information about all such facets and process of obtaining such information is both methodological and unstructured. In addition, market intelligence cannot reasonably be obtained in one go but is acquired through a process of gradual analysis over a period of time from a host of various sources, such as other customers, other bankers, competitors, newspapers, etc. Therefore, it is crucial for a banker to have accurate knowledge about the developments in the economy and key industries being focused by the Bank.
14

Monthly reporting format (Appendix XIII to Chapter 5.6)

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Banks enlisted external vendors provide different reports/searches that provide disclosure about customers financial strength, business/marketing strategy, managements interests and competence, technology employed, competitors, customers, suppliers, regulatory and economic environment. Different reports/ searches/ services providing support in risk management are as below. Local Credit Report (direct interview with borrower) Market Reputation Checks (without contacting borrower) SME Credit Reports (direct interview with borrower) Charges Search Reports Certified True Copies of Form29, Form-A, or any other document from SECP office. Charge Registration Legal Service International/Cross-border Credit Report

Presently following firms are enlisted on banks panel for provision of above mentioned risk management reports/services. Any further enlistment of firm(s) shall be notified by CRMD. International Credit Information Ltd (ICIL)

ICIL primarily works as credit information provider and is distributor of Dun & Bradstreet (D&B) products in Pakistan. Presently it is engaged in providing global as well as local business-to-business credit and legal services to the bank. IFI Consultants (IFIC) IFI Consultants are associated with Coface Euro DB and Graydon International as collaborators, which are based in Belgium and UK respectively and provide risk management services for Cross-border Credit Reports. 5.6.7.1 Service Mechanism

Selection of Vendor Vendor for various risk management services shall be selected in accordance with CRMD circulars (on various vendors) issued from time to time. Requiring Services / Reports and Payments i) Branches/Trade Services Centers (TSCs)/ Regional offices shall send request to local representative of the vendor for providing required letter15 documents or execution of required service. Branches/TSCs may also forward Cross-border credit reports requests to IFI consultants via email or web based ordering. In order to reduce Turnaround

15

Format of request letter to vendors (Appendix XIV to Chapter 5.6).

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Time (TAT), all TSCs are advised to contact IFI Consultants to obtain username and password to arrange web based requests. ii) a) On receipt of banks request letter, vendor shall perform required services and confirm the requesting branch/TSC/office for execution of required formality. Moreover, they shall also forward all requisite documents/reports along with an invoice. b) In case of delay, branches shall contact vendors Head Office and send copy of this letter to CRCD. iii) The concerned branches on receipt Report or completion of formality shall remit the charges within 48 hours through Pay-order/ Demand Draft quoting vendors Invoice number and date. In case payment is to be made in Pak Rupee equivalents, TT/OD selling rate will be applied Before requesting for the services, branches are advised to obtain either Debit Authority or cheque for the charges amount from the customer. Where a customer is not maintaining an account with the Branch and report is deemed necessary; such expense may be debited to MISC Expense Account, or recovered in advance from the party, at the discretion of Branch Manager / concerned office.

iv)

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Credit Handbook

Credit Handbook

Section 5

Appendices

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Credit Handbook
Appendix I to Chapter 5.1

Eligible Collaterals under Standardized Approach to Credit Risk Simple Approach S.No. Name of the eligible collateral Cash & Cash Equivalent* Minimum conditions for eligibility/Operational requirements Risk translation (specific)

Cash (as well as certificates of deposit or comparable instruments) on deposit with the bank, which is incurring the counterparty exposure.

0%

2 3a

Gold. Debt securities (rated)

Gold Bullion, ornaments etc. Rated by a recognized external credit assessment institution where these are either: a) at least rated 4(SBP rating grade) when issued by sovereigns or PSEs that are treated as sovereigns by SBP or b) at least rated 3 when issued by other entities (including banks and securities firms); or c) at least rated S3 for short-term debt instruments.

20% 0-150% depending upon issuing entitys external rating and its asset class. Their benefit can only be taken if their risk translation is lower than that of the counterparty.

3b

Debt securities (unrated)

Not rated by a recognized external credit assessment institution where these are: a) Issued by a bank; and b) Listed on a recognized exchange; and c) Classified as senior debt; and d) All rated issues of the same seniority by the issuing bank are rated at least 3/S3 by a recognized ECAI; and e) The bank holding the security as collateral has no information to suggest that issue justifies a rating below 3/S3 and f) SBP views such securities as liquid and marketable.

50% Their benefit can only be taken if their risk translation is lower than that of the counterparty.

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4 Equities (including convertible bonds)

Credit Handbook
Appendix I to Chapter 5.1
0-150% depending upon issuing entitys external rating and its asset class. Their benefit can only be taken if their risk translation is lower than that of the counterparty.

Included in the main index i.e. KSE

Undertakings for Collective Investments in Transferable Securities (UCITS) and mutual funds

a) Price for the units is publicly quoted daily; and b) The UCITS/mutual fund is limited to investing in the instruments listed in the main index. However, the use or potential use by a UCITS/mutual fund of derivative instruments solely to hedge investments listed above and under the Comprehensive Approach to credit risk mitigation shall not prevent units in that UCITS/mutual fund from being eligible financial collateral. i) A guarantee (counter-guarantee) must represent a direct claim on the protection provider and must be explicitly referenced to specific exposures or a pool of exposures, so that the extent of the cover is clearly defined and incontrovertible. Other than non-payment by a protection purchaser of money due in respect of the credit protection contract it must be irrevocable; there must be no clause in the contract that would increase the effective cost of cover as a result of deteriorating credit quality in the hedged exposure. It must also be unconditional; there should be no clause in the protection contract outside the control of the bank that could prevent the protection provider from being obliged to pay out in a timely manner in the event that the original counterparty fails to make the payment(s) due. iii) In addition to the legal certainty requirements, the following conditions must be satisfied: a) On the qualifying default or nonpayment of the counterparty, the bank may in a timely manner pursue the guarantor for any monies outstanding

0-150% depending upon issuing entitys external rating. Their benefit can only be taken if their risk translation is lower than that of the counterparty.

Guaranteed transactions

0-20% and a lower risk weight than the counterparty. The protected portion is assigned the risk weight of the protection provider. The uncovered portion of the exposure is assigned the risk weight of the underlying counterparty. A lower risk weight may be applied to a banks exposure guaranteed by a sovereign (or central bank) where the exposure is denominated in domestic currency of that sovereign and funded in that currency

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Appendix I to Chapter 5.1

under the documentation governing the transaction. The guarantor may make one lump sum payment of all monies under such documentation to the bank, or the guarantor may assume the future payment obligations of the counterparty covered by the guarantee. The bank must have the right to receive any such payments from the guarantor without first having to take legal actions in order to pursue the counterparty for payment. b) The guarantee is an explicitly documented obligation assumed by the guarantor. c) Except as noted in the following sentence, the guarantee covers all types of payments the underlying obligor is expected to make under the documentation governing the transaction, for example notional amount, margin payments, etc. Where a guarantee covers payment of principal only, interests and other uncovered payments should be treated as an unsecured amount. iv) Eligible guarantors (counterguarantors). Sovereign entities, PSEs and other entities with a risk weight of 20% or better and a lower risk weight than the counterparty. Comprehensive Approach All of the instruments eligible under Simple Approach along with the following changes i) Equities (including convertible bonds) UCITS/mutual funds Listed on a recognized exchange and/or part of the main index Based on their respective Haircut

ii)

a) Price for the units is publicly quoted daily; and b) the UCITS/mutual fund is limited to investing in the instruments listed on a recognized exchange and/or part of the main index. However, the use or potential use by a UCITS/mutual fund of derivative instruments solely to hedge investments listed above and under the Comprehensive Approach to credit risk mitigation shall not prevent units in that UCITS/mutual fund from being eligible financial collateral.

Based on their respective Haircut

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Standard Supervisory haircuts Issue rating for debt securities 1-5

Credit Handbook
Appendix I to Chapter 5.1
Sovereigns Other issuers 1 4 8 2 6 12

2 3 and unrated bank securities as defined in Para 2.6.2.1(iv) All 4 Main index equities (including convertible bonds) and Gold Other equities (including convertible bonds) listed on a recognized exchange UCITS/Mutual funds Cash in the same currency

Residual Maturity ~~1 year >1 year, ~~5 years >5 ~1 year >1 year, ~ 5 years >5 years

0.5 2 4 1 3 6 15 15 25

Highest haircut applicable to any security in which the fund can invest 0

Specific Treatment of Proportional Cover and Multiple CRM Technique Where the amount guaranteed is less than the amount of the exposure and the secured and unsecured portions are of equal seniority, i.e. the bank and the guarantor share losses on a pro-rata basis, capital relief will be afforded on a proportional basis: i.e. the protected portion of the exposure will receive the treatment applicable to eligible guarantees/credit derivatives, with the remainder treated as unsecured. In the case where the bank has multiple CRM techniques covering a single exposure (e.g. the bank has both collateral and guarantee partially covering an exposure), it will be required to subdivide the exposure into portions covered by each type of CRM technique (e.g. portion covered by collateral, portion covered by guarantee) and the risk-weighted assets of each portion must be calculated separately. *when a cash on deposit, certificate of deposit or comparable instruments issued by the
lending bank are held as collateral at a third party bank in a non-custodial arrangement, if they are openly pledged/assigned to the lending bank and if the pledge/assignment is unconditional and irrevocable, the exposure amount covered by the collateral (after any necessary haircuts/adjustments for currency risks) will receive the risk weight of third party bank.

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Eligible Collateral acceptable by Bank for financing Sr. # A Type Immovable Properties Movable Properties Tangibles Examples Fixed Assets Land, Building, Machinery (immovable) Stocks/ Raw Material/ Finished Good/ Machinery/ Commodities Receivables, book debts Shares listed on Stock Exchange

Credit Handbook
Appendix II to Chapter 5.1
Approval Level Allowed at all levels Type of Charge Mortgage/ Fixed/ Floating Charge

B i)

Hypothecation/ Pledge/ Floating Charge Hypothecation/ Assignment Electronic Pledge (Please refer to Chp # 6.7 For Guidance) Pledge

Allowed at all levels

ii) iii) a)

Intangibles Marketable Securities Equities

Allowed at all levels

Allowed at all levels

b) b1)

Debts Government

Securities issued by NSC (DSCs, SSCs, RICs etc.). Pakistan Investment Bonds (PIBs) Treasury Bills Any other Government Security TSCs, Commercial Papers etc

Pledge

Allowed at all levels. For purpose of CA/ RA to be considered to Cash/ Near Cash Collateral Pre fact Review required at RMG. Approval/ review level within RMG and above will be as per exposure (minimum SCO 1) Pre fact Review required at RMG. Approval/ review level within RMG and above will be as per exposure (minimum SCO 1) Pre fact Review required at RMG. Approval/ review level within RMG and above will be as per exposure (minimum SCO 1)

b2)

Private Entities

Pledge

c)

Mutual Funds

NIT Units, other mutual fund certificates securities MCB Own Deposit (Pak Rs.) MCB Own Deposit FCY Other Bank Deposit (Pak Rs.) Other Bank Deposit (FCY) MCB Deposit Receipt

Pledge

iv)

Cash Collateral

Lien

Lien

Allowed at all levels

Pledge

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Other Bank Deposit Receipt, COI etc. SBLCs or guarantees of Banks for which FID line allocation is obtained MCBAMC Dynamic Cash fund/ Cash Management Optimizer fund Personal Guarantees, Financial/ Corporate Guarantees Any other collateral that do not fall under any category

Credit Handbook
Appendix II to Chapter 5.1

Guarantee

Lien

v)

Other Forms of Collateral

Guarantee

Allowed at all levels

Pre fact Review required at RMG. Approval/ review level within RMG and above will be as per exposure (minimum SCO 1)

Collateral not acceptable as security Items specifically banned by SBP. Items whose trade declared illegal by Government. Properties/ Securities in the name of Minor. Precious stones, gems, antique etc. (Those with highly fluctuating value) Gold, Jewelry, ornaments (including artificial/ imitated jewelry etc.

Eligible Collateral under Basel II Bank is following standardized approach (Simple Approach) for calculation of capital charge under Basel II. Please refer to Annexure 5.1.9 for details regarding eligible collateral under Basel II. Under simple approach, where a transaction is secured by eligible collateral and meets the eligibility criteria and minimum requirements, banks are allowed to reduce their exposure under that particular transaction by taking into account the risk mitigating effect of the collateral for the calculation of capital requirement The operational and legal requirements have been built in this chapter regarding eligible collateral under simple approach

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Land Revenue Record Registered Sale Deed/ Gift Deed/ Exchange Deed etc. Registered Sale Deed/ Gift Deed/ Exchange Deed etc. of previous owner Extract from Register Haqdaran Verified by Tehsildar Copy of Mutation, in favor of the present owner as well as the Previous owner, duly issued through Naqool Agency

Credit Handbook
Appendix III to Chapter 5.1
Private housing Schemes First Allotment Letter

Properties of Public Sector (Government/Semi Government) Development Authorities Cantonment Areas Army Housing LDA/ KDA/ CDA etc. DHA (Leasehold rights) Schemes Allotment Letter/Exemption Allotment Letter Extract from Letter of intimation of Letter General Land balloting Register (GLR) Transfer Letter establishing the chain of ownership Transfer Letter establishing the chain of ownership Sale Deed/Gift Deed/ if any.
Membership Certificate Permission to Mortgage Site Plan

First Lease Deed

Paid receipt/s Terminal Payment

of

Chain of Transfer Letter or the previous Transfer Letter Sale Deed/ Gift Deed etc. if any. Letter of possession Membership Certificate Site Plan Approved Map (in case of constructed property) Tax Payment Documents (in case of constructed property) Share Certificate of the society Permission to Mortgage (in case of allotment, not the sale) NEC if there is a registered document in the chain

Sale Deed/Gift Lease`Deed etc. if any. Membership Certificate (Where applicable) Permission to Mortgage Site Plan Approved Map (in constructed property)

Deed/

Sale Deed of Allotment rights (if sold by first lessee) Completion Certificate Site Plan Approved Map (in case of constructed property) Tax Payment Documents (in case of constructed property) Permission to Mortgage

Letter of Possession

Formal Letter Site Plan

Allotment

case

of

Approved Map (in case of constructed property) Tax Payment Documents (in case of constructed property)

Approved Map (in case of constructed property) Tax Payment Documents (in case of constructed property) Schedule IX (B) Extract of GLR

Tax Payment Documents (in case of constructed property) Pass Book, available Aks Shajra NEC if Possession Letter Completion Certificate (in case of constructed property) Transfer/ Exchange Deed (If required in the allotment letter) NEC if there is a registered document in the chain

Possession Letter Completion Certificate(in case of constructed property) NEC if there is a registered document in the chain

NEC if there is a registered document in the chain

Permission to Mortgage (in case of allotment, not the sale)

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CHECKLIST OF DOCUMENTS REQUIRED

Credit Handbook
Appendix IV to Chapter 5.1
YES NO N/A REMARKS

GENERAL PART A
1. 2. Reapplication for finance / Form MF-5 in case of Agri-Credit and borrowers Basic Fact Sheet (BBFS). Limited Liability Companies a. b. c. d. e. f. 3. Memorandum of Association Articles of Association Certificate of Incorporation Certificate of Commencement of Business (Only required for Public Limited Companies) Form 29 (List of Directors)/ Form A Attested copies of CNICs of all directors

Partnership a. b. c. Partnership Deed signed by all partners Attested photocopies of CNICs of all partners Attested copy of Registration Certificate with Registrar of Firms. (In case partnership is registered)

4.

Sole Proprietorship a. b. c. Attested photocopy of CNIC Trade body Association Letter/NTN, if applicable Sole proprietorship declaration

5.

Board Resolution (BR) a. Does the BR authorize

borrowing entitlement Authorization to offer assets of company as security

Name of the person(s) authorized to deal with Bank is/are mentioned. b. c. BR duly typed on companys letter head or on white paper with company stamp. Signature of Company Secretary/Director and rubber stamp affixed on all pages.

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d. e. f. g. Name of the authorized signature(s) (Company Secretary and/or Director) noted in pencil. Cuttings are authenticated. Has the BR been dated? Does the date of BR correspond to the facilities extended to the client, i.e. date of BR should be prior to the date of extending facilities.

Credit Handbook
Appendix IV to Chapter 5.1

If not, then does the wording in the BR highlight / cover all borrowings prior to this BR. h. i. 6. Does the BR provide specimen signature(s) of authorized signatories? Signature verified by Branch / Relationship Manager (in case of Ltd

Personal guarantee of Directors specifying Companies):

7.

Names of those exempted Names of remaining directors Mark-up Agreement (IB 6 K/ IB-6A / IB-6B / 6-C / IB-7 / IB31 duly stamped), for the total amount involved i.e. purchase price and mark-up for the agreed period at standard mark-up rate Demand Promissory Note (IB-12) duly signed by authorized signatories bearing company seal (where applicable) Sufficient, tangible prime / collateral securities of stable value and of an easily realizable nature, and

8. 9.

10. Adequate insurance, as appropriate, covering assets charged in Bank's favor, the cost of insurance to be borne by the borrower. 11. eCIB report 12. Charge Registration in case of Limited Liability Companies a. b. c. d. e. f. g. Certified Copy of Charge Registration certificate Certified Copy of chain of Form 10/ 16 where applicable Certified copies of Instrument creating Mortgage/ Charge (IB 25-A/ IB 24 etc.) Ranking of charge is as per Approval of Finance and Search report to the effect held Ranking of Charge properly mentioned in Form 10/16/ Security Documentation NOC obtained from Senior Lenders (If applicable) obtained Final Legal Clearance to the effect of Charge Perfection and Ranking of charge is held

13. CORPORATE FINANCING CONSORTIUM FINANCE A. In case where MCB is Lead bank/ Security Trusty

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1. 2. 3. 4. 5. Complete Original Documentation is held by MCB in capacity of Lead Bank/ Security Trusty Documentation is complete as per Syndicate/ consortium finance agreement/ Credit Approval No Objection Certificate held from all concerned banks (If applicable) Clear Legal opinion from Transaction lawyer Other Mandatory/ Credit requirements (insurance policies, stock report, valuation report etc.) have been fulfilled as per credit approval/ consortium agreement.

Credit Handbook
Appendix IV to Chapter 5.1

B. In case MCB is not Lead Bank 1. 2. 3. Certified True Copies of complete documentation (certified by lead bank) No Objection Certificate held from all concerned banks (If applicable) Confirmation from lead bank that all formalities have been completed in terms of syndicate finance agreement and all original documents are held with them as security trusty. Clear Legal opinion from Transaction lawyer Certified true copies of Insurance policies/ report/stock reports etc. have been obtained valuation

4. 5. 6.

Other Mandatory/ Credit Requirement have been fulfilled as per Credit approval/ Consortium agreement.

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CHECKLIST OF DOCUMENTS REQUIRED GENERAL PART B
HYPOTHECATION (STOCKS AND DEBTS)

Credit Handbook
Appendix IV to Chapter 5.1
YES NO N/A REMARKS

1. 2. 3. 4. 5.

Standard letter of hypothecation (IB-25A) Schedule of agreement properly filled in, description as per Approval of finance Signature of the companys authorized person (as per Board Resolution) Company rubber stamp on all pages of Letter of Hypothecation (IB-25A) and Form 10 or 16. Name of persons signing these document to appear on last page. Rubber Stamp of the company duly placed on the last page of Hypothecation Agreement and Form 10 or 16 (in case of limited Cos). Are cuttings authenticated? Is letter of hypothecation properly stamped Are signatures verified by Branch / Relationship Manager Facility amount, charge description and charge amount are as per Approval of Finance (AOF).

6. 7. 8. 9.

10. Stock reports. In case of charge on Book debts, statement to be held and to be ensured that they are of required value. Periodic stock report / book debt statement to held. 11. Are assets and location details matching with the CP and the insurance policy? 12. In case of consortium finance, MCBs share mentioned

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CHECKLIST OF DOCUMENTS REQUIRED GENERAL PART B
EQUITABLE MORTGAGE 1. 2. Original title deeds pertaining to the immovable property obtained. Other supporting documents taken:

Credit Handbook
Appendix IV to Chapter 5.1
YES NO N/A REMARKS

Letter of allotment. Approved site plan Completion Certificate Non-encumbrance certificate/search certificate. Extract from Record of right (where the property record is maintained by Land Revenue Department. Not applicable in case of KDA / LDA / KMC / SDA / CDA / DHA etc.). Conveyance deed (where applicable) Memorandum of Deposit of Title Deeds (IB-24) backed by Agreement to create Registered Mortgage. Agreement to Create Registered Mortgage Token Registered Mortgaged Deed, if required Independent valuation of property by Banks enlisted evaluator which should not be more than three years old during tenancy of loan No Objection Certificate (where applicable). Charge Registration on Form 10 / 16 for complete (in case of Ltd Companies). Affidavits attesting copies of documents (in case of Ltd Companies.)

3. 4. 5. 6.

Ensure that customer / mortgagor signatures as may be relevant are verified on all security documents Insurance of property in the name of the bank, as beneficiary Clear Legal Opinion on Title and Final Legal Clearance on complete documentation obtained Noting of MCB mortgage charge with relevant land authorities

REGISTERED MORTGAGE 1. 2. 3. 4. All documents applicable to Equitable Mortgage Mortgage Deed (bank standard) Has Mortgage Deed been duly executed and registered in favor of MCB? Noting of MCB authorities mortgage charge with relevant land

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CHECKLIST OF DOCUMENTS REQUIRED GENERAL PART B
PROMISSORY NOTE (PN) 1. PN Signed by authorized signatories of the Borrower (as per board resolution duly certified by company secretary or as per partnership deed etc.) and the stamp of the company is in place. Signature verified by the branch/ Relationship Manager. Name of the person signing the PN written in pencil. The amount in PN to be marked up price (principal markup @ SMR up to expiry) Are the revenue / adhesive stamps properly defaced? Photo copies of National Identity Cards of signatories should also be obtained. Fresh PN to be obtained at the time of renewal / enhancement or every 3 years. +

Credit Handbook
Appendix IV to Chapter 5.1
YES NO N/A REMARKS

2. 3. 4. 5. 6. 7.

MARK-UP AGREEMENT 1. 2. 3. 4. 5. 6. 7. 8. 9. Signed by authorized signatories as per board resolution. The companys rubber stamp available on all pages. Signature and names of witness affixed / mentioned. Cutting are authorized and approved by Legal Affairs Department. Name of the person signing the document written in pencil. Is the document witnessed properly? Signature of the companys authorized signature has been verified by Branch Manager / Relationship Manager The document has been signed by the Banks authorized signatory. Purchase price filled is as Sale prices + Markup @ SMR up to expiry. Sale price & prompt payment rebate also filled in and no column left blank.

Note For all other IB Forms points # 1 to 8 should be observed. Other columns should be properly filled in as per requirements of relevant IB form.

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CHECKLIST OF DOCUMENTS REQUIRED GENERAL PART B
PLEDGE OF DEPOSIT CERTIFICATE/RECEIPTS (TDRS) / GOVT. SECURITIES (DSC/SSCS ETC) 1. Pledge of Original financial instrument duly discharged in Banks favor Letter of Lien (IB-28 & IB-31) from depositor, IB-12 & Markup agreement from borrower. Depositor's signature of discharge on original deposit receipt(s) / certificate(s) duly verified by issuing Bank / Office and Branch. If not, does the pledge agreement say that the discharge on instrument is not required? Noting of MCB's lien on deposit application form and deposit register (In case, the Deposit Receipts / Certificates were issued by other Bank / Branch / Saving Centre, written confirmation should be obtained from the branch & attached with the instrument). 3rd Party deposit: Letter to be sent by branch to 3rd party confirming that their deposit has been placed under Bank's lien against financing to the customer. If 3rd party is limited company / non-profit organization, verification that their memorandum/ trust deed permits encumbrance for another company / person. Has the 3rd party (in whose name deposit receipt / certificates are) have signed the letter of lien and discharged the certificate in Banks favor.

Credit Handbook
Appendix IV to Chapter 5.1

YES

NO

N/A

REMARKS

2. 3.

4.

5.

6.

Are the IB Forms / charge documents signed by the authorized signatories of the borrower company (as per Board Resolution) / borrower & verified by the Branch / Relationship Manager Is the name of the person(s) signing Pledge Agreement/ other documents properly written? Is the stamp of the company in place, not applicable for individual pledger? Are the details of the securities (DSCs, SSCs and other certificates) properly mentioned on the agreement?

7. 8. 9.

10. Has the pledger provided an authority letter to pledge the securities and authorized MCB to encash them at any time? PLEDGE OF MOVABLE PROPERTY / STOCKS 1. 2. 3. 4. 5. 6. Is the Pledge Agreement (IB-26) signed by the authorized signatory (s) of the company (as per Board Resolution) Is the stamp of the company in place Is the name of the person(s) signing the Pledge Agreement written in pencil? Are details of the stocks and their locations properly given on the agreement Are the signatures on the Pledge Agreement verified by the Branch / Relationship Manager In case of limited companies, has the pledge been registered via hypothecation (ranking charge on current assets)?

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CHECKLIST OF DOCUMENTS REQUIRED GENERAL PART B
PERSONAL GUARANTEE OF DIRECTORS (P-G) 1. 2. 3. 4. 5. 6. 7. 8. Is the P-G dated Amount of P-G is equal to the sum of total facilities of the client. In case of F.B. limits purchased price applicable. Name of the director(s) signing P-G is written. P-G signed by all director(s) as per latest certified copy of Form 29. Signatures verified by Branch Manager. Personal Net Worth Statements available. Photo copies of computerized National Identity Cards obtained. Recent photograph of P.G. executor obtained if photograph on CNIC not clear.

Credit Handbook
Appendix IV to Chapter 5.1
YES NO N/A REMARKS

CROSS COMPANY GUARANTEE (X-G) 1. 2. 3. Do the Articles and Memorandum of Company authorize the company to stand as guarantor for another company Is the Board Resolution available for issuance of X-G. Has the X-G been signed by authorized signatures of the company (as per the board resolution) and is company seal properly in place. Name of the authorized signature(s) noted in pencil. Signatures verified by the Branch Manager.

4. 5.

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CHECKLIST OF DOCUMENTS REQUIRED GENERAL PART C
RUNNING FINANCE 1. 2. 3. Promissory note, duly stamped (IB-12) Mark-up Agreement Sufficient, tangible securities with or without collateral, realizable of stable value with necessary documentation [e.g. Letter of Hypothecation (IB-25A) / IB-28 & IB-31 in case of Deposit Certificates, Shares / Securities etc. For property including IB-22or IB-24, etc.], and; Adequate insurance, as appropriate, covering assets charged in Bank's favor. The cost of insurance is to be borne by the borrower.

Credit Handbook
Appendix IV to Chapter 5.1
YES NO N/A REMARKS

4.

CASH FINANCE 1. 2. 3. 4. Markup Agreement Promissory Note (IB-12) Letter of Pledge (IB-26) Where collateral property is obtained, relevant documents including IB-22 / IB-24 to be obtained.

DEMAND FINANCE 1. 2. 3. Mark-up Agreement Promissory Note (IB-12) Legal opinion, property documents and non-encumbrance certificate, where applicable including IB-22 / IB-24 / IB-28 / IB-31 etc. Balance Sheet/P&L Accounts for the past three years, for appraisal and analysis. And projections for the period at least up to final repayment/ expiry of limit.

4.

Financing against Cash/Near Cash Collateral 1. Application for Finance 2. Letter of lien from depositor self or 3rd party (IB-28 & IB31). CF-19 to be used for earmarking of account.

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3. Depositor's signature of discharge on original deposit receipt(s) / certificate(s) duly verified by issuing Bank / Office and Branch. Noting of MCB's lien on deposit application form and deposit register (In case, the Deposit Receipts / Certificates were issued by other Bank / Branch /Saving Centre, written confirmation should be obtained from the branch). 3rd Party deposit: Letter to be sent by branch to 3rd party confirming that their deposit has been placed under Bank's lien against financing to the customer. If 3rd party is limited company / non-profit organization, verification that their memorandum by laws for trust deed permits so. 6. Debit authority in case of lien over deposits/letter of authority for encashment/redemption of the pledged certificates without referring to the borrower, in case the borrower fails to adjust the finance. PAYMENT AGAINST DOCUMENTS (PAD) 1. 2. 3. Import Bills Sight LC and shipping documents Agreement with Bank for purchase of Shipping Documents (IB8) Other import documents

Credit Handbook
Appendix IV to Chapter 5.1

4.

5.

INLAND BILLS PURCHASED 1. 2. 3. 4. 5. 6. Inland Bills Letter of Credit (original) Other documents as per L/C (invoice / packing list / indent / order form etc.) & transport documents. Letter of Buy-Back-cum-Indemnity (IB-9) Mark-up Agreement Promissory Note (IB-12) Agreement for discounting / purchase of Bills (IB-20)

FINANCE AGAINST IMPORTED MERCHANDISE (FIM) 1. 2. 3. Letter of Indemnity for clearance of consignment (IB-8) Letter of Pledge (IB-26) Letter of Request from the importer

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4. 5. 6. Bill of Exchange duly accepted by customer in the case of Usance L/C Markup Agreement Demand Promissory note (IB-12)

Credit Handbook
Appendix IV to Chapter 5.1

FINANCE AGAINST TRUST RECEIPTS (FATR) 1. 2. 3. 4. 5. 6. 7. 8. 9. Bill of Exchange duly accepted by the party Letter of Trust (IB-27) Collateral security & documentation thereof if any Invoice. Packing List, wherever necessary Personal Guarantees of Directors (IB-29) in case of limited cos. Letter of Request from the customer Demand Promissory Note (IB-12) Markup Agreement

FINANCE AGAINST FOREIGN BILLS (FAFB) SIGHT / DA BASIS 1. 2. 3. 4. 5. 6. 7. D.P. Note (IB-12) Markup Agreement Duly accepted Sanction Advice / FAL from customer Usual Security documents as per sanctioned limit Personal guarantees of Directors, wherever necessary Letter of Buy-Back-cum-Indemnity (IB-9) Agreement for discounting / purchase of Bills (IB-20)

FOREIGN BILLS PURCHASED / NEGOTIATED UNDER L/C 1. 2. Original authenticated through L/C or Telex / Mail / SWIFT (full text) as per UCP Documents of Title to Goods (Bill of Lading / Airway Bill etc.)

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3. 4. 5. 6. 7. 8. 9. Bill of Exchange / Draft duly stamped (where required) Commercial Invoices Consular Invoice (where required) Certificate of Origin as per terms of L/C Packing List (where required) Insurance Policy (in case of CIF Shipment) Letter of Buy-Back-cum-Indemnity (IB-9)

Credit Handbook
Appendix IV to Chapter 5.1

10. Agreement for discounting / purchase of Bills (IB-20) 11. Any other document as per L/C

FINANCE AGAINST PACKING CREDIT (FAPC) 1. 2. 3. 4. Letter of Request Letter of Hypothecation / Pledge of Stock (IB-25A / IB-26) Original Copy of Irrevocable Letter of Credit or firm order duly attested by exporter under Banks Lien. Usual Documents as per sanctioned limit (copy of Resolution in case of Limited Company, Partnership Deed and Partners undertaking in case of Partnership Firm). Markup Agreement Promissory Note (IB-12)

5. 6.

FINANCE AGAINST GOVERNMENT COMMODITY OPERATIONS WHEAT 1. 2. 3. 4. 5. 6. Agriculture Finance Agreement (IB-4) Letter of Hypothecation (IB-25A) Photo copy of Government Guarantee [original is held at CRRS, PO] Authorization to negotiate Promissory. Note / Bills to SBP in case of need. (Annexure III) Promissory note (IB-12) Stock Report

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AGRICULTURE FINANCE 1. Application Form MF-5, bearing signature of the Applicant, Guarantor and Witnesses (where required) duly verified/admitted by the Branch Manager. Duly stamped Demand Promissory Note (IB-12) letter of markup Agreement / Undertaking cum-Guarantee (IB-7 or as may be amended/bifurcated) and IB-29 (where applicable) duly signed by borrowers / guarantors / witnesses. Bank charge is on the agriculture land through Pass Book System by the Revenue Authorities and a charge creation certificate schedule - II is to be obtained. OR Mortgage of property rural/urban &/or earmarking of deposits, lien on DSC/SSC/Regular income certificates/other financial instruments as applicable. In case of finance against mortgage of land through Pass Book to the extent of 80% of PIU value or 50% of Market Value of agriculture land. Finances up to PKR 100,000/ are allowed against two guarantees, certified copy of Khasra Girdawari /Fard Jamabandi Form VII and VIIA Certificate of Bonafide to be held. Valuation of rural/urban property with 50% margin on Market Value. Earmarking of deposits, lien on DSC/ SSC, Regular income certificates and other financial instruments with 25% margin. Registration of Tractor/vehicle etc in joint name of Bank & Borrower (where applicable) Copy of Computerized National Identity Card & National Tax Number (if any)

Credit Handbook
Appendix IV to Chapter 5.1

2.

3.

4.

5. 6.

7. 8.

TERM FINANCE /INDUSTRIAL CREDIT 1. 2. Credit report on the manufacturers of machinery from their bankers (it should be comprehensive and of recent date) Request to Circle Office to depute technical/ professional staff of Bank to carry out an inspection report on the manufacturer. The inspection report must contain essential information on their manufacturing capability of the machinery involved, adequacy of technical personnel, know how, their design facilities and the manufacturers' previous experience. Reference from previous users of machinery and equipment manufactured and supplied by the same manufacturers may be called. Such references are often of considerable value. Comprehensive credit report on the sponsors of the project. Credit Proposal Quotations (at least three for every item). Feasibility report/write-up on the project feasibility, where required

3.

4. 5. 6. 8.

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9. Legal opinion, property documents and non-encumbrance certificate, where applicable

Credit Handbook
Appendix IV to Chapter 5.1

10. Valuation Certificate/Survey Report, where applicable. 11. Balance Sheet/P & L Accounts for the past three years, for appraisal and analysis

FOREIGN CURRENCY IMPORT FINANCE Following documents will be obtained from the customer : Promissory Note in US Dollars, Letter of Continuity and Letter of Lien & Set-off. Agreement for financing on mark-up basis in US Dollar (incorporating authority from customer, in favor of bank, to raise the US Dollar from any source it deems fit (including inter-bank market) to adjust the loan with mark-up and also the fact that the customer would be liable to reimburse the bank from its own sources, the rupee equivalent of the US Dollar purchased to settle the loan plus mark-up plus all incidental charges as well). Letter of Hypothecation / Letter of Pledge / Trust Receipt amounts to be mentioned in US Dollar. Usual Documents as per Sanctioned Limit.

LOAN SECURED BY SHARES a. Mark-up Agreement Letter of Lien on Marketable Securities (IB-28). Demand Promissory Note (IB-12). Agreement for Sale and Buy Back of Marketable Securities (IB-31). Pledge of shares in marketable lots as per list of eligible shares issued by CRMD Appropriate margins have been kept as per banks policy Third party Mandate (where applicable) Shares electronically pledged in banks favor IB 28A for third party shares.

FOREIGN CURRENCY EXPORT FINANCING Request for Loan against valid export L/C or Firm Contract. Promissory Note in US Dollars, Letter of Continuity and Letter of Lien & Set-off.

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Agreement for financing on mark-up basis (incorporating authority from customer, in favor of bank, to raise the US Dollar from any source it deems fit to adjust the loan with mark-up in case of non-realization of export proceeds and also the fact that the customer would be liable to reimburse the bank from its own sources, the rupee equivalent of the US Dollar purchased to settle the loan plus mark-up plus all incidental charges as well). Letter of Hypothecation / Letter of Pledge amounts to be mentioned in US Dollar. Letter of Lien on Export bills. Accepted offer letter of Facility (One time) incorporating acceptance from Customer that US $ proceeds of the Finance to be immediately surrendered to Bank against Pak Rupees at T.T. Buying rate and undertaking from Customer to adjust the excess amount if due to adverse fluctuation in exchange rate, the total exposure exceeds the aggregate limit sanctioned in favor of the party. Usual Documents as per Sanctioned Limit.

Credit Handbook
Appendix IV to Chapter 5.1

FOREIGN CURRENCY BILLS DISCOUNTING Following documents will be obtained from the customer : Request for Finance against valid export L/C. Promissory Note in US Dollars, Letter of Continuity and Letter of Lien & Set-off. Agreement for financing on mark-up basis (incorporating authority from customer, in favor of bank, to raise the US Dollar from any source it deems fit to adjust the loan with mark-up in case of non-realization of export proceeds and also the fact that the customer would be liable to reimburse the bank from its own sources, the rupee equivalent of the US Dollar purchased to settle the loan plus mark-up plus all incidental charges as well). Letter of Lien on Export bills. Accepted offer letter of Facility (One time) incorporating acceptance from Customer that US $ proceeds of the Finance to be immediately surrendered to Bank against Pak Rupees at T.T. Buying rate and undertaking from Customer to adjust the excess amount if due to adverse fluctuation in exchange rate, the total exposure exceeds the aggregate limit sanctioned in favor of the party. Usual Documents as per Sanctioned Limit.

GUARANTEE / PERFORMANCE BONDS, ETC. Undertaking Counter guarantee (IB-30) duly Stamped as applicable Collateral documentation, such as hypothecation letter of mortgage agreement.

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Credit Handbook
Appendix V to Chapter 5.1

CALCULATION OF MARGIN
This Appendix provides methods of calculating margin requirements for 1. Where margin is loaded on security (Hypothecation/ Pledge Receivable/ Fixed Asset/ Property) and Cash/ Near Cash Collateral) of stocks/

Where margin is loaded on security, following formula shall be used to calculate the amount of facility to be allowed against a specific security: Facility (exposure) Amount in case of a specific security = Example If a loan is secured against the security of commercial property with FSV of PKR 100M with margin of 30% on FSV, maximum finance which can be allowed shall be calculated as: Facility Amount = Facility Amount = PKR 100M X 30 100 PKR 70M Security Value X Margin (As per Approval) 100

2. Margin requirement in case of prime/ secondary collateral (Hypothecation/ Pledge of stocks/ Receivable/Fixed Asset/ Property) and Cash/ Near Cash Collateral, where margin is on facility: Situation 1 If a loan of Rs.100M is required to be disbursed at 25% Margin, the value of required Prime/ secondary Collateral shall be calculated using the following formula Prime/ Secondary Collateral required (value) = Prime/ Secondary Collateral required (value) = Prime/ Secondary Collateral required (value) = Situation 2) Where Prime Collateral offered is Pledge of stocks. In all such cases Secondary Collateral requirement will be as follows Example Pledge Based Limit/ Loan Amount = PKR 150 M Collateral Coverage Required = 25 % Loan Amount (100 Margin) 100 (100 25) PKR 133.333 Million X 100

100

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Credit Handbook
Appendix V to Chapter 5.1

Calculation of Requirement of Secondary Collateral in shape of property/ Fixed Assets Secondary Collateral required (value) = Secondary Collateral required (value) = Secondary Collateral required (value) = Loan Amount X Collateral Coverage 100 150 X 25 100 PKR 37.5 Million

3. Margin requirement in case of Non-Fund based financing In case of non-fund based financing, the margin amount is calculated using following formula: Margin Amount in case of NonFund Exposure = Non-Fund Exposure X Margin (As per Approval) 100

Letter of Credit (L/Cs): In case of L/Cs, such margin is usually in the shape of cash collateral and is usually held in Margin Account on which no return is payable by bank. However, except for Regulatory Cash Margin requirement, banks on competitive considerations may allow margin amount to be held under lien in customers deposit account (current or other-wise or as term deposit receipts/certificates). Where, such relaxation is allowed, it is always subject to the deposit of the Regulatory Cash Margin requirement in the Margin Account. Further, it may be noted that in case of L/Cs, the margin is in addition to lien on documents of the relevant L/Cs. In case of Usance L/C, further additional collateral may also be stipulated to cover the exposure at acceptance stage. Bank Guarantees (BG): Coverage (often called Margin) in case of BG may be in the shape of any tangible security acceptable to the bank. It may be fixed property or cash collateral or any other tangible security as required by sanctioning authority. In case of property, MV (FSV in case of commercial property) should at least be equal to guarantee amount. In case of cash collateral, encashment value (net of Zakat and WHT, where applicable), should at least be equal to guarantee amount.

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Precautions Regarding Pledge of Stocks

Credit Handbook
Appendix VI to Chapter 5.1

Since Pledged stocks becomes in possession of the bank, they require additional precautions regarding storage of goods. Following measures shall be exercised by the branches/field offices to have an effective control on pledged stocks:1. Location of Godowns i. It should be ensured that Godowns are situated at a suitable place where the chances of forceful lifting, theft and robbery are minimal. ii. Godowns must not be inside shops or the residential premises. iii. Godowns must have direct and independent approach for safety as well as movement of stocks. iv. It should not have dual control or control through any other Godowns, which is in the control of some other borrower or a third person. 2. Condition of Godowns i. The construction / structure must be sound and must not have any such openings Which may facilities theft and pilferage etc. ii. Doors of Godowns should be strong as may not be easily breakable. iii. Roof should be strong, water-proof and sufficiently strong so as to protect Godown from rains and / or other weather effects. The plinth level should be sufficiently high so that it does not fall in the course of rain water out-flow. iv. Godowns should be totally dry with sound and satisfactory flooring. v. Disinfectants to kill germs and insects are used periodically. Complete safety of stocks from effects of dampness, moisture and insects is ensured. vi. It should be checked that required firefighting equipment have been installed in the Godowns. 3. Locks to be used for Godowns i. Locks purchased by Bank itself to be used for Godowns where stocks are pledged. Locks purchased and/or provided by borrowers should not be accepted. ii. Both original and duplicate keys should be held in safe custody with the branch where Muccadums are not posted. 4. Display of Banks Name plate It is very essential that banks name plate written in Bold Letters must be displayed inside and out-side the Godowns where pledge stocks are kept and also on stocks hypothecated to bank and lying in open. 5. Taking Charge of Godowns A letter for taking over the Godown in the possession of bank must be obtained and kept in banks record (as prescribed in Section 5.6). Muccadum on taking-over

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Credit Handbook
Appendix VI to Chapter 5.1

charge of a Godown be required to submit detailed stock report and that of storage conditions. Where Godowns / premises are not owned by the borrower, a letter of disclaimer should be obtained from owner for un-hindered access to Bank. 6. Stacking/ Storage of Stocks i. It is to be checked that incoming and outgoing stocks are accurately recorded in the Godowns Register with required details and proper authentication. ii. It should be ensured that stocks are stacked in a countable manner and Bin Cards are attached to each lot. iii. The stacking of stocks will be done in conformity with relative original invoice and / or packing list as the case may be. iv. At random test check of packed bales / bundles / bags will be made by breaking / open few bales / bundles or bags. Where necessary, laboratory test report may be obtained to assess the quality of stocks. 7. Procedure for Fumigation of Stock In case fumigation of stocks is required, following procedure shall be adopted: a. The borrower shall request the Bank in writing. b. Branch Manager/ Incharge Advances, Relationship Manager / Unit Heads (WBG / Islamic Banking) shall jointly approve the schedule of fumigation / de-fumigation. c. Branch Manager / Incharge Advances, Relationship Manager / Unit Heads (WBG / Islamic Banking) will personally visit the site prior to fumigation to check / count the pledged stocks and will maintain such record. d. Fumigation will be allowed after Branch Manager / Incharge Advances, Relationship Manager / Unit Heads (WBG / Islamic Banking) have checked / counted the stocks. e. After fumigation, Branch Manager / Incharge Advances, Relationship Manager / Unit Heads (WBG / Islamic Banking) shall prepare a certificate to this effect as follows: We confirm that (No. of) bags of (Stock) are lying in Godown No. ______________ in the owned / leased / rented (cross whichever is not applicable) premises of M/s. (customer), which have been fumigated on (Date) in our presence. The stock will be de-fumigated on (Date). f. The above certificate will be jointly signed by bank officials, borrower and muccadum. g. A copy of such certificate shall be affixed at gate of the said godown. Another copy will be forwarded to respective GM Audit for information. h. The fumigated godown shall be locked under dual locks, keys of one lock will remain with the bank officials and keys of second lock shall remain with muccadum staff. i. After de-fumigation lock of bank officials shall be removed.

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j.

Credit Handbook
Appendix VI to Chapter 5.1

Stocks under fumigation shall be reflected in the stock statement separately.

8. Movement of Stock from one godown/premises to another premises/godown All approvals of finance shall specifically mention the site (along with complete address) where pledged stocks shall be stored. For movement of stock from the approved godown/premises to other godown/premises, Branch will arrange necessary approval from the concerned Regional Manager (for both CBBG and WBG). Stocks pledged with the bank shall not be moved out of the godown to any other site for value addition / processing (husking, polishing, etc.), without obtaining proper Delivery Order from authorized official of the concerned branch. Stock statement shall be prepared by muccadums before and after the pledged stocks are sent for processing and will be held on record. At the second premises / godown, concerned muccadum will ensure that the moved stocks are added / shown in stock statement of the borrower. While stocks are in transit, Trust Receipt (IB-27) shall be obtained from the borrower. Insurance will be arranged for stock in transit and at the second premises at the borrowers cost. 9. Adjustment of Finance At the time of full and final adjustment of the finance, it shall be the responsibility of the branch officials to inform the muccadum in writing regarding adjustment of the finance with copy to CRCD.

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STATEMENT OF STOCK POSITION HYPOTHECATED GOODS

Credit Handbook
Appendix VII to Chapter 5.1

MCB Bank Ltd. ________________Branch Date:_____________ Borrower's Name:____________________

We certify that the quality, quantity and rates of the stocks noted below and hypothecated to the Bank as security are true and that the stocks are as under;
Where held Location Owner of the place Detail of Hypothecated Stocks Description Quantity Unit Value Total Value Other Banks Outstanding Name of Banks Outstanding Value of respective stocks Amount Insurance Details Name of Insurer Policy No. Risks Covered Expiry

For Office/ Bank Use only: Total Value of Stocks: _________________________ Less Margin @ %: _________________________ Drawing Power: _________________________ Outstanding As of(_________): _________________________ Excess/ Less: _________________________

We further certify that we are observing the conditions and warranties of insurance(s) which is/are valid and subsisting in full.

Customer Signature: _________________ Name: _________________ Designation: _________________

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Credit Handbook
Appendix VIII to Chapter 5.1

STOCK REPORT
MCB Bank Limited _________________ Branch Dear Sir, We M/s. _______________________ submit herewith the under mentioned particulars of stocks in our Godown No.__________ known as ____________________ situated at________________________________________ held under your favor and our account under lien & pledge in your name_____________________ (Branch name).

Description of Goods

Balance per last Report (DTD)

Goods Received

Goods Delivered

Balance on hand

Weight Measurement per unit

*Rate per Unit/ Cost/ Purchase

*Approximate Value Rs. Million

*To be filled in by Bank Officials (Branch Manager / Relationship Manager)

Insured by us for Rs____________ for risks of _____________________________________. Policy No. _______________________Expiry______________. We declare that the above mentioned goods, produce or merchandise are either our bona fide property or we have such an interest therein as to fully entitles us to pledge with you the full extent to the Bank's loans advances to us charges and encumbrances and have actually been stored by us . That our titles to the goods are cleaned, undisputed and that on one except you, have any lien or charges over them. We further guarantee that the above entries are correct, thoughtful and accurate in all their details and specification and that we shall be responsible for any defect, shortcoming and inaccuracies discovered at any time hereafter. That no responsibility will lie with the bank or its Muccadum in respect of the quantity, quality or condition on final outcome to the goods, produce and merchandise now or hereafter to be pledged. It shall be the responsibility of the borrower that goods produce & merchandise from the times being pledge shall be in accordance with and conform to the description and declaration of and made by the borrower in the schedule and /or pledge letter. We shall further be responsible for any deterioration, damages or

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Appendix VIII to Chapter 5.1

losses for the goods arising for any cause whatsoever. We certify that the above stocks are fully insured by us all time.

_________________________________ Authorized Signatures (Borrower) Certified that the goods mentioned in this stocks report are available at the above customers premises in mixed condition/ quality/lots etc. Weight/quality/measurement checked and confirm by us/me at the time of received the delivery of all stocks. Bank's name board has been duly displayed. We have not arranged any insurance for these goods. Please confirm receipt of insurance policy from the customer.

(Muccadum)____________________ For Banks Use only: Total Value ...Rs.______________ Less D/O ...Rs.______________ Less Margin @%......................Rs.______________ Drawing Power.....Rs.______________ Outstanding Liability.....Rs.______________

Signatures

_________________________________________ (Branch Manager / Relationship Manager)

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Credit Handbook
Appendix IX to Chapter 5.1

Schedule of Inspection of Hypothecated and Pledged Stocks

A) Schedule of Inspection of Hypothecated Stocks for Commercial (CBBG) and Islamic Banking (IB):
A

HYPOTHECATED STOCK
PERIODICAL STOCK INSPECTION SCHEDULE FOR GOODS HYPOTHECATED IN FAVOUR OF MCB AGAINST LIMITS PRIMARILY COVERED BY STOCKS Upto Rs.20.000M (2)
Quarterly In case of fresh finance, stock must be inspected before allowing disbursement, & thereafter as per above.

OFFICIALS AT VARIOUS LEVELS RESPONSIBLE FOR INSPECTION (1)

1 Incharge of Advances or Branch Manager/ Relationship Manager IB

Over Rs.20.000M & Upto Rs.50.000M (3)

Monthly In case of fresh finance, stock must be inspected before allowing disbursement, & thereafter as per above.

Over Rs.50.000M (4)

Monthly

In case of fresh finance, stock must be inspected before allowing disbursement, & thereafter as per above.

Regional Manager CBBG/ Senior Relationship Manager or Unit Head IBG a) Regular: b) NPL: (where classified principal amount is upto Rs.50M) General Manager CBBG/ General Manager or Business Head IBG a) Regular Once at the time of the relevant exposure being classified and subsequently on need basis. Once a Year (From Rs.5M ) Once at the time of the relevant exposure being classified and subsequently on need basis. Half Yearly Once at the time of the relevant exposure being classified and subsequently on need basis. Quarterly Once at the time of the relevant exposure being classified and subsequently on need basis.

On discretion Once a year. Half yearly

b) NPL: (where classified principal amount is above Rs.50M) 4 Audit & RAR Group Audit i) Circle Chief ii) Inspectio n Team

Once at the time of the relevant exposure being classified and subsequently on need basis.

Once at the time of the relevant exposure being classified and subsequently on need basis.

Periodic or surprise as prescribed by Group Head-Audit/Audit Manual.

Periodic or surprise as prescribed by Group HeadAudit/Audit Manual.

Periodic or surprise as prescribed by Group HeadAudit/Audit Manual.

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Credit Handbook
Appendix IX to Chapter 5.1

B) Schedule of Inspection of Pledged Stocks for Commercial (CBBG) and Islamic Banking (IBG):
Other than Commodity Seasonal Financing:
B OFFICIALS AT VARIOUS LEVELS RESPONSIBLE FOR INSPECTION 1. (1) Incharge of Advances or Branch Manager/ Relationship Manager IB

PLEDGED STOCK
PERIODICAL STOCK INSPECTION SCHEDULE FOR GOODS HYPOTHECATED IN FAVOUR OF MCB AGAINST LIMITS PRIMARILY COVERED BY STOCKS Upto Rs.20.000M (2) Quarterly In case of fresh finance, stock must be inspected before allowing disbursement, & thereafter as per above. Over Rs.20.000M & Upto Rs.50.000M (3) Monthly In case of fresh finance, stock must be inspected before allowing disbursement, & thereafter as per above. Over Rs.50.000M (4) Monthly In case of fresh finance, stock must be inspected before allowing disbursement, & thereafter as per above.

2.

Regional Manager CBBG/ Senior Relationship Manager or Unit Head IBG a) Regular: b) NPL: (where classified principal amount is upto Rs.50M) General Manager CBBG/ General Manager or Business Head a) Regular: b) NPL: (where classified principal amount is above Rs.50M) Audit & RAR Group
i) Audit Circle Chief Inspection Team

Half yearly (From Rs.5M ) Once at the time of the relevant exposure being classified and subsequently on need basis.

Half Yearly Once at the time of the relevant exposure being classified and subsequently on need basis.

Quarterly Once at the time of the relevant exposure being classified and subsequently on need basis.

3.

Once a year. (From Rs.5M ) Once at the time of the relevant exposure being classified and subsequently on need basis. Periodic or surprise as prescribed by Group Head-Audit/Audit Manual.

Half yearly Once at the time of the relevant exposure being classified and subsequently on need basis. Periodic or surprise as prescribed by Group Head-Audit/Audit Manual.

Once in four months. Once at the time of the relevant exposure being classified and subsequently on need basis.

4.

ii)

Periodic or surprise as prescribed by Group HeadAudit/Audit Manual.

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Seasonal Agro Based Commodity Financing to: a) Cotton Ginners b) Rice Mills
B

Credit Handbook
Appendix IX to Chapter 5.1

c) Wheat [Flour Mills / Traders, etc.] d) Sugar Mills

PLEDGED STOCK
PERIODICAL STOCK INSPECTION SCHEDULE FOR GOODS HYPOTHECATED IN FAVOUR OF MCB AGAINST LIMITS PRIMARILY COVERED BY STOCKS Upto Rs.20.000M (2) Monthly In case of fresh finance, stock must be inspected before allowing disbursement, & thereafter as per above. Over Rs.20.000M & Upto Rs.50.000M (3) Monthly In case of fresh finance, stock must be inspected before allowing disbursement, & thereafter as per above. Over Rs.50.000M (4) Monthly

OFFICIALS AT VARIOUS LEVELS RESPONSIBLE FOR INSPECTION 1. (1) Incharge of Advances or Branch Manager/
Relationship Manager IB

In case of fresh finance, stock must be inspected before allowing disbursement, & thereafter as per above.

Regional Manager 2.
CBBG/ Senior Relationship Manager or Unit Head IBG

a) Regular: b) NPL: (where classified principal amount is upto Rs.50M) 3. General Manager CBBG General
Manager or

Thrice in a season. Once at the time of the relevant exposure being classified and subsequently on need basis.

Quarterly Once at the time of the relevant exposure being classified and subsequently on need basis.

Once in every 60 days. Once at the time of the relevant exposure being classified and subsequently on need basis.

a) Regular: b) NPL: (where classified principal amount is above Rs.50M) 4.

i)

Audit & RAR Group

Audit Circle Chief Inspection Team

ii)

Once in a season. (From Rs.5M ) Once at the time of the relevant exposure being classified and subsequently on need basis. Periodic or surprise as prescribed by Group HeadAudit/Audit Manual.

Once in a season. Once at the time of the relevant exposure being classified and subsequently on need basis. Periodic or surprise as prescribed by Group HeadAudit/Audit Manual.

Twice in a season. Once at the time of the relevant exposure being classified and subsequently on need basis.

Periodic or surprise as prescribed by Group HeadAudit/Audit Manual.

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Credit Handbook
Appendix IX to Chapter 5.1

C) Schedule of Inspection of Pledged / Hypothecated Stocks for Corporate Banking Group:

OFFICIALS AT VARIOUS LEVELS RESPONSIBLE FOR INSPECTION (1)

1.

Relationship Managers

PERIODICAL STOCK INSPECTION SCHEDULE FOR GOODS PLEDGED/HYPOTHECATED IN FAVOUR OF MCB AGAINST LIMITS PRIMARILY COVERED BY STOCKS Upto Rs.250M Over Rs.250M (2) (3) Half Yearly Quarterly In case of fresh finance, stock must be inspected before allowing disbursement, & thereafter as per above.

2. 3.

Team Leaders Corporate Heads

Yearly a) Regular cases:

Half Yearly At their discretion, but must pay supervisory visit to at least 5% of sites once in a calendar year. However, where approved limit is over Rs.500.000M, the same must be inspected at least once in a year/season. The visits must be documented and record kept with the record of stock inspections. Once at the time of the relevant exposure being classified and subsequently on need basis.

b) NPL: (where classified principal amount is Rs.100M or more)

5.

Audit & RAR Group 1) Audit Circle 2) Inspection Team

Periodic or surprise visits as prescribed by Head of Audit Group/Audit Manual.

NOTES: APPLICABLE TO COMMERCIAL, ISLAMIC AND CORPORATE BANKING GROUPS. a. If any short-fall/irregularity is noted by Stock Inspecting Official, the report must be signed-off by the next higher authority in the business group to signify having noted the position. A copy of stock inspection report must be endorsed to the branch where the exposure is booked. b. c. Sanctioning Authority (Group Head & above) may specify higher / lower frequency of visits in AOF on case-to-case basis. In case of Commercial Clients only, where banks exposure is under pledge arrangement and account is watch listed owing to shortfall or servicing of principal / mark-up liabilities then frequency of stocks inspection at the levels of Branch Manager & Regional Manager will be monthly and at the level of General Manager will be quarterly, irrespective of amount of exposure, till the account is regularized.

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Credit Handbook
Appendix X to Chapter 5.1

STOCK INSPECTION REPORT (FORMAT)

Name of Customer Location (Address) Name and Designation of Inspecting Officer

Date of Inspection

Date of last inspection

Short Particulars of the Limit / Outstanding secured by hypothecation over stocks/Book Debts
Type of Limit Limit Amount Outstanding

A) B) C) D)

(a)

Latest valuation of security by Customer prior to inspection date. Stocks as on (Date) i) A copy of the customer stock statement to be attached.

AMT ( Rs,000) Raw Material Work in Process Finished Goods Total Less Margin (%) Book Debts Less Margin (%) Total A <Less> O/S

-I

(b)

Book Debts (Where applicable)

- II - (I + II) A
(For consortium, please see Annexure 8.4)

(c) 3 (a)

Short/Excess position of security Do the premises in which goods are stored belong to the customer or are rented?

Self-Owned / Rented

(b)

If rented, has the rent been paid up-to-date in accordance with the terms of the lease? If rented does the branch hold letter of disclaimer from owner.

Yes / No / NA

(c)

(a) (b)

Was the security in order? What is the aging of the goods?

Yes / No (If No give details of why the security was not in order) Minimum : Months Maximum : Months

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(c) Were stock Registers of the customer up-to-date? Does the stock register agree with stock list? Were storage satisfactory? Was the Building condition? conditions Yes / No

Credit Handbook
Appendix X to Chapter 5.1

(d)

Yes / No

(e)

Yes / No

If no, give details.

(f)

in

good

Yes / No

(g)

Were firefighting arrangements in evidence? INSURANCE

Yes / No

(a) (b)

Expiry date Are any goods of a hazardous nature stored on the premises? If so, state the nature of the goods and if covered or allowed by the Policy of insurance. If not covered or allowed, what steps did you take for their removal.

(c)

IF UNDER BANK'S LIEN 6 (a) Were MCBs Name boards on the property displayed? Were our padlocks in use?

(b)

Irregularities and / or any other item of interest in connection with the security or the premises where it is stored.

In case of a factory give No. of shifts and whether they were fully operational If factory closed give: is Date of closure Reason for closure Expected date of commencement of business

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9 Signature of Inspecting Officer Date (Within 7 days of Inspection date)

Credit Handbook
Appendix X to Chapter 5.1

Name Designation Date Seen by Officer-in-charge (Branch Manager) Signature of Officer-in-charge

Copies to:

Credit Risk Control / Advances Department Branch Manager / Credit File

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Credit Handbook
Appendix I to Chapter 5.2

Folio for "Outward" No Objection Certificates (NOCs)

Borrower Name: A/C. M/s.____________________

Branch (Custodian)/CRCD:_____________________________________

Safe-In No.

Favoring

Reference No.

Date

Amount

Nature of Charge

Full Description of Property Charged

Approving Authority

Initials

Folio for "Inward" No Objection Certificates (NOCs)

Borrower Name: Branch

A/C. M/s.____________________

(Custodian)/CRCD:_____________________________________

Safe-In No.

Favoring

Reference No.

Date

Amount

Nature of Charge

Status of Registration Full Description of Property Charged Date Amount Initials

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Credit Handbook
Appendix I to Chapter 5.3
Responsibility By
Legal Affairs/ Legal Counsel

Credit Responsibility Schedule

Credit Risk Control

Wholesale Banking Group

Retail Banking Group

I. Credit Approval (CA): 1 Business Unit will send Credit proposal along with LAF (Loan Application form), BBFS, and eCIB report to Credit Approval/ Review Authority for comments. CA/ RA will review raise queries (if any) on these documents Fresh, Renewal, Enhancement, etc. case. Credit limits expired/ expiring in next two months shall be intimated to business units through exception tickler as part of Unit Exception report (UER) Business Unit Business Unit CA/ RA 2

CRC

II. Facility Advising Letter (FAL) 1 2 3 Preparation of Draft of Facility Advising letter (FAL). Review of Draft of Facility Advising Letter and suggest any amendment in FAL. Preparation of Final Facility Advising letter (FAL) and jointly signing off by CRC & Business Unit Arrange acceptance of FAL from client within 15 days. Exception/Tickler regarding FAL generated but not received is intimated to Business Units through UER. CRC CRC CRC Business Unit Business Unit

4 5

Business Unit

Business Unit

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III. Preparation of Standard Documents (IB Forms) 1 2 Generate Request for preparation of Standard Documents. For Fresh /Changed Facilities: Preparation of IB forms after receipt of duly accepted Facility Advising Letter or request from business to prepare documents. For Renewed Facilities: Preparation of IB forms along with Facility Advising Letter upon request from business to prepare documents. Arrange execution, the signature verification (by lead Pencil) on Standard Documents. (Signature Verification will be done by Branch Operations mentioning IBS/ AS number) 4 5 Review of executed Standards Documents. Arrange removal of discrepancy in documents with waiver/ Deferral/Document. CRC

Credit Handbook
Appendix I to Chapter 5.3

Business Unit

Business Unit

CRC

Business Unit/ (Marketing Through Branch Operations)

Business Unit

Business Unit

Business Unit

IV. Preparation and Review of Non-Standard Documents i.e. Syndicate Finance, JPPAs & Corporate Guarantees etc: 1 2 Generate Request for preparation and review of Non Standard Documents. All drafts of non-standard documentation shall be prepared and review by Legal Affairs / banks approved legal counsel along with opinion on ranking of charge and obtainment of NOC after reviewing of latest search report prior to execution. Preparation of Documents or issuance of NOCs as per draft approved by Legal Affairs / banks approved legal counsel. Arrange execution and signature verification (by lead Pencil) on Non Standard Documents. (Signature Verification will be done by Branch Operations mentioning IBS/ AS number) 5 6 Review of executed Non Standards Documents. Arrange Registration of documents with SECP / other agencies (if required) through Legal Retainers / Outsource Agencies. CRC Business Unit Business Unit Legal Affairs / Legal Counsel

3 4

CRC Business Unit / (Marketing through Branch Operations) Business Unit

CRC

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7 Arrange to get executed documents/ NOC from lead bank in Syndication Arrange removal of discrepancy in documents with waiver/ Deferral/Document.

Credit Handbook
Appendix I to Chapter 5.3
Business Unit Business Unit Business Unit Business Unit

V. Legal Opinion 1 Title/Property documentation to be reviewed by LAD/ Legal Retainer/ legal counsel as per policy and obtaining clear legal opinion. Arrange Final Vetting of Security Documents. CRC Business Unit Business Unit

VI. Insurance: 1 2 3 Business Unit will arrange Insurance Policy from the client and forward to CRC. Review of Insurance Policy as per bank policy Arrange removal of discrepancy / waiver / Deferral ----In case of discrepancy in insurance. Insurance Policies expired/expiring in next 2months will be intimated to Business Units through Exception/Tickler as a part of UER. CRC Business Unit CRC Business Unit Business Unit Business Unit

VII. Stock Reports (Hypothecation) 1 Business Unit will arrange Stock Report from client as per bank's policy and verify the signatures. (Signature Verification will be done by Branch Operations) along with insurance and DP analysis Review of Stock Report, verify Drawing Power including consortium O/S with requisite margin. In case of shortfall CRC advises business unit to reduce the limit as per DP. In case of shortfall Business will Arrange removal of discrepancy / waiver / Deferral and post-facto approval. After removal of discrepancy / waiver / Deferral CRC will issue instructions for restoration of limit. CRC will convey 30-days advance Tickler as a part of UER for the stock reports/receivable statements. Missing stock reports/receivable statements shall be intimated to Business Units through Exception as a part of UER. Business Unit / (Marketing through Branch Operations) CRC CRC Business Unit CRC CRC Business Unit Business Unit

2 3 4 5 6

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Credit Handbook
Appendix I to Chapter 5.3

VIII. Stock Reports (Pledge Stocks): 1 Receipt of Pledged Stock Report from Muccadum and Disbursal request letter from client. Rates for calculation of drawing power are advised by CRC as per policy. Preparation of Drawing Power Calculation Sheet, its check and verification with insurance amount (Insurance of pledge stock to be maintained by business), checking of cushion, and disbursement as per Drawing Power. Monthly statement on outstanding & stocks with date of pledge, maturity & insurance as per specimen to CRC. Delivery Orders for release of stocks are issued by the business. Business Unit/ Branch Operations Business Unit/ Branch Operations Business Unit/ Branch Operations Business Unit Business Unit

Business Unit

Business Unit/ Branch Operations Business Unit/ Branch Operations

Business Unit Business Unit

IX. Appointment/Site Allocation Muccadum 1 2 Request for the arrangement for muccadum. Selection of Muccadum as per approved list, checking criteria for appointment and appointment of muccadum thereon Standard Muccadumage arrangement to be signed with each muccadum whose services are being utilized, at the CRC Level. CRC will process centralized payment of Muccadumage charges. Maintenance of per party limits of muccadum. Business Unit will confirm/validate of Muccadum payment. CRC Business Unit Business Unit

CRC

CRC

5 6

CRC Business Unit/ Branch Operations Business Unit

X. Stock Inspection 1 Stock Inspection & Preparation of Stock Inspection Report as per Schedule given in Credit Handbook. Stock Inspection overdue/ due in next one Business Unit Business Unit

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2 Month shall be intimated to Business Units through Exception/Tickler as a part of UER. CRC

Credit Handbook
Appendix I to Chapter 5.3

XI. Collateral Management (Lodgment): 1 All collateral, including title documents, governments securities, shares etc. shall be maintained under dual custody of CRC in safe / fire proof cabinets. Each borrowing customer shall have a Security Documentation Folder with the specified following sections 1. AOF/FAL 2. LAF/ BBFS/ eCIB Report 3. IB-Forms 4. Board Resolutions (in case of Ltd Co) 5. Legal Opinions/Vettings 6. Security/Title documents. 7. Valuation Reports 8. Charge/Mortgage documents 9. Search Reports 10.Client Info.documents i.e, MOA, AOA, Form-29.COI,COCB,Form-A (in case of Ltd.Co) /Partnership Deed etc. 11. Misc Documents (Application for Finance, BBFS, any other document etc.) Credit Documentation Folder should be kept in safe custody in good condition under dual control, regularly updated / purged and replaced as required. A log to be kept to monitor the withdrawal of each file. Collateral Lodgment Receipt (CLR) will be issued for securities/ collateral. Business Unit will keep the Collateral Lodgment Receipt as a proof. Release partially or fully of collateral should be at Business Request and as per bank's Policy. CRC CRC

CRC

CRC

4 5 6

CRC Business Unit Business Unit

XII. Searches, Valuation, Credit Report: 1 2 3 Generate Request for Search/ Valuation Report. Arrange Search/ Valuation Report through banks approved outsource vendors Valuations expired/expiring in next two months shall be intimated to Business Units through Exception/Tickler as part of UER. CRC CRC Business Unit Business Unit

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4 Arrangement/preparation of Credit Reports on the clients.

Credit Handbook
Appendix I to Chapter 5.3
Business Unit Business Unit

XIII. Documentation Review: 1 All credit accounts documentation shall be checked for accurate completion at least once a year (at Renewal) or before issuance of DAC and Detail Review Report (DRR) will prepare.

CRC

XIV. Disbursement Authorization Certificate (DAC): 1 No new disbursements are allowed prior to completion of documentation / compliance with (approval) terms and conditions. Disbursement to be allowed after the issuance of DAC/ Limit unblocking instructions by CRC. Business Unit will disburse limits after receipt of DAC/Limit Unblocking Instructions from CRC. CRC Business Unit/ Branch Operations Business Unit Business Unit/ Branch Operations Business Unit

2 3

XV. Limit Block Instructions 1 If the documents are not in order or deferral is not provided, CRC will issue Limit Block Instructions. Business Units will block limit in Symbols. CRC Business Unit/ Branch Operations Business Unit

XVI. Compliance with Covenants, Other Terms and Conditions, Credit Circulars / Policy: 1 Non Compliance/Compliance within due date of Specific Terms & Conditions/Covenants shall be intimated to business units through Exception/Tickler as a part of UER. CRC

XVII. Collateral Appraisal: 1 Following guidelines to be followed for various types of collateral; Mortgage property / real estate: Updated valuation to be undertaken once every three years from an independent (bank approved) surveyor. Marking of Lien on pledged Govt. Securities (DSCs, SSCs, RICs etc.): Valuation to be conducted as required under each line of credit before annual review. Source of information to be major newspapers / trade bulletins. Drawing Power against collateral to be based on valuation as above.

CRC

CRC

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Credit Handbook
Appendix I to Chapter 5.3

XVIII. Consortium Bank Outstanding: 1 For all credits booked under consortium bank arrangements, outstanding of other banks to be obtained Quarterly on a best effort basis (Except as required by PR 12 that is mandatory and will be required on monthly basis). Calculation of DP from consolidated stock reports for facilities secured by way of hypothecation of inventories / receivables.

Business Unit

Business Unit

CRC

XIX. Limit/ Outstanding Monitoring: 1 After implementation of a CRC system, Monitor on a daily basis, Limit/ outstanding on all borrowing relationships. After implementation of a CRC system, Monitor, on a daily basis, all temporary overdrafts / excesses. CRC

CRC

XX. Maintenance of Other Documents: 1 Request for issuance of NOC to be generated by business unit after obtaining approval from competent authority. Issuance of NOC to other banks. Expired/Expiring Deferral of Document cases shall be intimated to business Units through Exception/Deferral as a part of UER. CRC CRC Business Unit Business Unit

2 3

XXI. Financing against Shares in Stock Exchange: 1 Generation of request for pledge of shares. Business Unit / Marketing through Branch Operations CRC CRC CRC Business Unit

2 3 4

Uploading of shares in CMRMM by merging file in CMRMM from CDC. Calculation of DP and Limit in CMRMM. Daily monitoring of Shares with outstanding/market price, reporting thereon.

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XXII. Credit Reporting:

Credit Handbook
Appendix I to Chapter 5.3

Unit Exception Report: Any exception to the guidelines (detailed above), in the following areas, must be reported in the Unit (Branch) Exception Report. -Expired Credits. - Commitment/outstanding monitoring (including excesses over drawing power) -Stock/receivable reports. -Inspections -insurance -Facility Advising Letters. -Searches. - Compliance with covenants / other terms and conditions, credit policies, annual term loan reviews. - Documentation (includes Names of persons signing the document (including witnesses) clearly identified by writing their names in pencil below the signature on the documents.) -Line utilization/disbursement authority. -Legal review of documentation. -Collateral control. -Running finance rollover. -Registration of charge. -Unit exception report to be prepared to be sent to Business Units, weekly for WBG and Islamic, fortnightly for CBBG 2 3 Nil report is required. Proceed to remove reported discrepancies CRC Business Unit Business Unit CRC

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Credit Handbook
Appendix II to Chapter 5.3

SECURITY DOCUMENTATION FILE TO BE HELD BY CRCD

Following documents should be held in security documentation folder 1. APPROVAL OF FINANCE & FACILITY ADVISING LETTER: i. ii. iii. iv. 2. Approval of finance Facility Advising Letter Letter regarding Temporary Extension in Validity of Expiry Others (including emails if approval provided in electronic form)

APPLICATION OF FINANCE, BBF, eCIB REPORT i. ii. iii. iv. Application of Finance BBFS eCIB Report Others

3.

IB FORMS i. IB-6, 6(A), 6(K), 12, 24, 25 (A), 26, 31 ii. CF-13, 19 iii. Others

4.

BOARD RESOLUTION FOR LIMITED LIABILITY COMPANY i. Board Resolution ii. Others

5.

LEGAL OPINION/VETTING i. Legal Opinion on Property Documents ii. Legal Vetting on Property Documents iii. Legal Opinion any Specific Point i.e. Charge on Assets, NOC for Pari Passu Charge, Draft of any Non Standard Documents/ Agreement. iv. Any other correspondence with Legal Affairs Division/ Retainer. v. Vetting Certificate vi. Others

6.

TITLE & SECURITY DOCUMENTS i. Sale Deed, Gift Deed, Transfer Letter, Conveyance Deed, Allotment Letter, Exchange Deed, Surrender Deed, Rectification Deed, Agreement to Sell, Affidavit ii. PT-1 iii. Clearance Certificate iv. Extracts form Record of Rights/ Fard (in case of Properties falling under Revenue Record) v. Goshwara-e-Malkiat vi. Nakal Intikal vii. Aks Shajra viii. Shajra Qila Bandi ix. Aks-e-Masawi

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x. xi. xii. xiii. xiv. xv. xvi. xvii. xviii. xix. xx. xxi. 7.

Credit Handbook
Appendix II to Chapter 5.3

Tatimma (For subdivision of Khasra No.) Khasra Amarti Succession Certificate Certificate of Death Non Encumbrance Certificate Form B/Sanctioned Plan/ Site Plan/ Demarcation Plan/Plan of Society & Plaza/Part Plan Membership Certificate from Societies General Power of Attorney Completion Certificate Letter of Possession Deposit Certificates/ Shares duly Discharged by Depositor verified by Issuing Office Others

VALUATION REPORT i. By Independent Surveyors on our Approved Panel ii. By Branch Manager iii. Others

8.

CHARGE/MORTGAGE DOCUMENTS i. ii. iii. iv. v. vi. vii. Memorandum of Deposit of Title Deed/ IB-24 Agreement to Create Registered Mortgage Mortgage Deed/ Redemption Deed Irrevocable General Power of Attorney/ Revocation thereof (if arranged) Mortgage Mutation on Fard/ Nakal Intikal/ Intimation to Societies for Placing Charge on Property in Record/ PT 1 Permission to Mortgage Form 10, 16 along with charge creating Documents for Charge on: Stocks Receivables/Book Debts Machinery Land & Building Certificate of Registration of Charge/Acknowledgement of Filing Form 17 for Satisfaction of Charge Others

viii. ix. x. 9.

SEARCH REPORTS i. Search Report ii. Others

10. CLIENT INFO DOCUMENTS i. ii. iii. iv. v. vi. vii. Certificate of Incorporation Memorandum & Article of Association Certificate of Commencement of Business List of Directors/Particulars of Directors/Form 29 Form A Partnership Deed Others

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Credit Handbook
Appendix II to Chapter 5.3

11.

MISC. DOCUMENTS

i. CNIC ii. Request Letter for Noting of Charge on Properties/ Deposit Certificates & other Securities/ Removal thereof iii. Encashment Letter/Third Party Confirmation iv. Letter regarding Pledge of DSCs, SSCs, RICs v. Detail of Deposit Certificates vi. Bank Guarantees (Expired & Photocopies of Existing Guarantees) vii. Any Correspondence/ Acknowledgement with Housing Societies/ viii. Certificate Issuing Offices/ Borrower ix. Letter of Access to Go downs/ Business Place x. Others 12. INSURANCE i. ii. iii. iv. Insurance Policy Premium Paid Receipt Endorsements Insurance Cover Notes (optional)

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Credit Handbook
Appendix I to Chapter 5.4

A-

INSURANCE POLICIES / RISKS

Fire Policy Our Comments 1. It is compulsory to obtain a Fire Policy in all cases because it is a Main Policy without which no extension (RSD, Terrorism, MD Etc.) shall be available. However, for goods/assets for which the peril is low, the insurance charges are low & vice versa. 2. Fire Policy also provides coverage to fire caused by lightning. 3. Loss caused by spontaneous fire is not covered under fire policy unless an extension to this effect is obtained. So it is prudent to obtain a Fire Policy with extension to cover loss caused by spontaneous fire, where such risk exist (e.g. Cotton / Gasoline etc.). Recommendations i) Baled Cotton. ii) Phutti / Loose Cotton. iii) Yarn / Cloth / Fabrics / Plastic Materials / Other flammable Item / Finished Goods (on case to case basis) / Grains. iv) Other items where Fire Risk is relevant. v) Coverage of stocks in process to be obtained, wherever applicable.

It is one of the Main Insurance Policy document. Fire Policy provides insurance coverage to the Property insured if destroyed or damaged by Fire and / or Lightning. The Insurance Company may pay at market value at the time of destruction / damage or at its option reinstate / replace such property or any part thereof. Such compensation not to exceed sum insured. Other risks are covered by extensions to this main policy and as such its terms & conditions apply to extensions as well, unless varied other-wise.

B-

Burglary

It covers loss or damage by theft following upon or followed by Burglary or Housebreaking accompanied by actual forcible and violent breaking into or out of the premises herein described provided the premises are guarded by armed Chowkidars every night from 9 p.m. to 6 a.m. The policy does not cover loss or damage due to any theft or to any attempt by any member of the insureds family, business staff, domestic servants, or any persons lawfully on the premises whether such person or persons are concerned as principals or accessories.

Our Comments 1. It is compulsory to obtain this main policy in case of hypothecation / pledge of stocks. 2. The deployment, of round the clock Chowkidar / guard is essential with the standard condition that Armed Chowkidar be posted by insured during every night from 9.00 p.m. to 6.00 a.m. 3. It covers loss consequent to actual forceful and violent breaking into or out of the premises and do not provide coverage to such loss caused by any member of insured family or employee or any other person lawful on the premises. 4. The policy provides coverage to only those theft which are followed by / consequent to burglary. Recommendations i) This should be obtained in case all moveable goods or unmovable / assets, which can be easily removed. ii) In case of cotton / sugar / other bulky stocks, where banks approved Muccadums are posted & communication system is

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Credit Handbook
Appendix I to Chapter 5.4
appropriate, the policy may be obtained on 1st loss basis (i.e. goods whose lifting is possible within a night / 8 hours, subject to the condition that the same is at least 10% of goods under banks pledge / lien.

1-

Riot and Strike endorsement

Riot and Strike Endorsement is usually an extension of fire Policy and extends the coverage to loss of damage directly caused by :1. Disturbance of the public peace (whether in connection with strike or lock-out or not) not being an occurrence mentioned in Condition 6 of the Special Conditions hereof. 2. The action of any lawful constituted authority in suppressing or attempting to suppress any such disturbance or in minimizing the consequences of any such disturbance or in preventing or attempting to prevent any such act or in minimizing the consequences of any such act.. 3. The willful act of any striker or locked-out worker done in furtherance of a strike or in resistance to a lock-out.

Our Comments 1. RSD extension must be obtained with Main Policy where the stocks / goods are stored in godowns situated in mill / factory premises / other places where such risk exists. 2. In case of hypothecation too RSD extension must be obtained. 3. It must be noted that any loss caused due to war, hostilities, civil commotion, terrorism and other causes listed in special conditions of the standard RSD extension are not covered in this policy.

SPECIAL CONDITIONS Following standard conditions of the Fire (Main) policy shall be substituted with the following :CONDITION 5 i) This insurance does not cover : a) Loss of earnings, loss by delay, loss of market or other consequential or indirect loss or damage of any kind or description whatsoever. b) Loss or damage resulting from total or partial cessation of work or the retarding of interruption or cessation of any process or operation. c) Loss or damage occasioned by permanent or temporary dispossession resulting from confiscation, commandeering or requisition by any lawfully constituted authority including physical damage. d) Loss or damage occasioned by permanent or temporary dispossession of any building resulting from the unlawful occupation by any person of such building including physical damage. e) Loss or damage, directly or indirectly caused by or arising from or in

Recommendations i) Stocks stored in Factory Premises / Large Trading Houses. ii) Disturbed area / Shopping entries or period of political unrest. iii) All other situation, where chances of loss due to such peril is significant.

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consequence of or contributed to by nuclear weapons material. By ionizing radiations or contamination by radioactivity from any nuclear fuel or from any nuclear waste from the combustions of nuclear fuel (any self-sustaining process of nuclear fission). CONDITION 6 This insurance does not cover any loss or damage occasioned by or through or in consequence, directly or indirectly, of any of the following occurrences, namely :a) War, invasion, act of foreign enemy, hostilities or warlike operations (whether war be declared or not), civil war. b) Mutiny, civil commotion assuming the proportions of or amounting to a popular rising military rising, insurrection, rebellion, revolution, military or usurped power. c) Acts of terrorism committed by a person or persons acting on behalf of or in connection with any organization. For the purpose of this Condition, terrorism means the use of violence for political ends and includes any use of violence for the purpose of putting the public or any section of the public in fear. 2Malicious damage endorsement

Credit Handbook
Appendix I to Chapter 5.4

This is an extension of RSD and extends coverage to loss of or damage to the property insured directly caused by the malicious act of any person (whether or not such act is committed in the course of a disturbance of the public peace) not due to war / invasion / by foreign enemy / Mutiny / Civil commotion / Terrorism etc. as act amounting to or committed in connection mentioned in Special Condition 6 of Riot and Strike Endorsement. Does not cover damage by fire or explosion nor for any loss or damage arising out of or in the course of burglary, housebreaking, theft or larceny or any attempt thereat or caused by any person taking part therein. All conditions and provisos of Riot and Strike Endorsement apply.

Our Comments 1. This extension must be obtained, unless it can be ruled out without any doubt. 2. In case of any finance extended to traders / shopkeepers obtaining of MD extension is essential. 3. Any property mortgaged in Banks favor must be covered under this extension. Recommendations i) Please see our comments 1, 2 & 3. ii) Areas where feudal / competitive rivalry is significant. iii) Liquid cargo due to leakage etc. is significant should be necessary obtained in case of flammable items or liquid cargo stored in drums / less durable tanks or where security system is inadequate.

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MCB Bank Limited

3Terrorism endorsement

Credit Handbook
Appendix I to Chapter 5.4
Our Comments 1. This extension is not available generally when risk is high e.g. at present. Keeping this factor in view this may be waived. 2. It does not provide coverage to war, hostilities & civil commotion etc.

Terrorism Endorsement is an extension of RSD and extends coverage of the policy to loss of or damage to the property insured by explosion or otherwise directly caused by an act of terrorism committed by a person or persons acting on behalf of or in connection Recommendations with any organization. Please see our comment 1 & 2. SPECIAL CONDITIONS For the purpose of this extension but not otherwise :I. Terrorism means the use of violence for political ends and includes any use of violence for the purpose of putting the public or any section of the public in fear. II. Special condition 6 of the said Riot and Strike Endorsement shall read as follows :(6) This insurance does not cover any loss or damage occasioned by through or in consequence, directly or indirectly, of any of the following occurrences, namely: a) War, invasion, act of foreign enemy, hostilities or warlike operations (whether war be declared or not), civil war. b) Mutiny, civil commotion assuming the proportions of or amounting to a popular rising military rising, insurrection, rebellion, revolution, military or usurped power.

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MCB Bank Limited

4Standard Explosion endorsement

Credit Handbook
Appendix I to Chapter 5.4
Our Comments 1) This policy should be used where probability of explosion is significant or in those industries where obtaining of coverage for such peril is customary. 2) Please note that loss of or damage to boilers, economizers, or other vessels, machinery or apparatus in which pressure is used or their contents resulting from their explosion is not covered.

Standard Explosion Endorsement is an extension of Fire (Main) Policy & covers loss of or damage to the property insured by fire or otherwise directly caused by explosion, (except insofar as Condition No. 7(h) of Standard Fire Policy is hereby expressly varied) loss or damage occasioned by or through or in consequence, directly, of acts of terrorism (use of violence for political ends and includes any use of violence for the purpose of putting the Recommendations Please refer item 1 & 2 of our comments. public or any section of the public in fear.) i) committed by a person or persons acting on ii) More relevant to storage of flammable behalf of or in connection with any liquid or liquids stored in premises. organization. In case of fire insurance coverage, the Company shall be liable only pro rata with such other fire insurance for any loss or damage by explosion whether or not such other fire insurance be extended to cover loss or damage by explosion.

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MCB Bank Limited

Credit Handbook
Appendix I to Chapter 5.4

5-

Earthquake endorsement & Clauses Our Comments Please not that this endorsement provide coverage to loss or damage by fire or earthquake shock or consequence thereof.

EARTHQUAKE FIRE COVER This covers loss or damage by fire to any of the property insured by this policy occasioned by or through or in consequence of earthquake.

Recommendations i) Please refer our comment. EARTHQUAKE SHOCK RISK This covers loss or damage (including loss or ii) Area falling in Earthquake zones. damage by fire) to any of the property insured iii) Period during which the adjacent areas are by this policy occasioned by or through or in hit by earthquake or there are scientific consequence of earthquake. reports about possible of earthquake. Provided always that all the conditions of this policy shall apply (except in so far as they may be hereby expressly varied) and that any reference therein to loss or damage by fire shall be deemed to apply also to loss or damage directly caused by any of the perils which this insurance extends to include by virtue of this endorsement. Each and every loss under the policy caused by Earthquake (other than loss or damage by Fire so caused) shall be subject to a deductible of Rs.15,000/- (Not applicable to goods and / or materials stored or lying in the open). 6- Atmospheric Disturbance endorsement Our Comments 1. Loss caused by normal rain or flood on a/c AD extend to include :LOSS OR DAMAGE directly caused by :of normal water course or leakage from pipe/ tap etc are not covered under this A. Hail, Snow Wind, Hurricane, Cyclone, Tornado; or Typhoon, and / or, extension i.e. atmospheric disturbance endorsement. Therefore, field must ensure B. Rain, provided the building(s) in respect of which the claim made or containing the that the place, where the stocks are to be property in respect of which the claim is pledged, is so safe that normal rain, or flow made is so damaged by any of the perils or accumulation of water resulting from specified in A supra as to admit rain normal rain cant spoil or destroy it. water to the interior of the said building(s); and / or, C. Flood, which shall mean :1. The overflowing or deviation from their normal channels of either natural or artificial water courses. and 2. Any flow or accumulation of water on the ground except when such flow or accumulation be of water emitted from any water supply main, tap, pipe, valve or the like. Provided nothing herein shall be deemed to cover stocks and / or contents in open and / or in open sided sheds and / or in open sided

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buildings, underground tanks in the open containing solvents, fuel, oils, chemicals or any other liquid. Provided always that all the conditions of this Policy shall apply (except in so far as they may be hereby expressly varied) and that any reference therein to loss or damage by fire shall be deemed to apply also to loss or damage directly caused by any of the perils which this insurance extends to include by virtue of the above mentioned clause. No consequential loss or damage of any kind or description, nor any loss or damage caused by confiscation or willful destruction by Government or any Municipal or Local Authority is covered under this Policy. It is understood and agreed that each and every loss under the above mentioned perils shall be subject to a deductible of Rs.25,000/=.

Credit Handbook
Appendix I to Chapter 5.4

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7Aircraft Damage endorsement

Credit Handbook
Appendix I to Chapter 5.4

Our Comments This endorsement extend to include loss or 1. This extension is necessary if the property damage to the property insured (by fire or mortgaged or stocks pledged or otherwise) directly caused by Aircraft and hypothecated are in an area which is near other aerial devices and / or articles dropped to an airport whether civil or of army there from. Provided always that all the especially if stored in the direction of flying conditions of the policy shall apply as if they course. had been incorporated herein and for the 2. Clarification must also be obtained that the purpose hereof any loss or damage as extension shall cover loss due to vibration aforesaid shall be deemed to be loss or of Aircrafts low flight over the premises. damage by fire. Recommendations SPECIAL CONDITIONS Please refer our comments 1 & 2. This insurance does not cover any loss or damage caused by any Aircraft to which permission to land has been extended by the Insured / loss exceeding insured amount. 8Impact Damage endorsement Our Comments Cover loss or damage to the Building & / or 1. This extension can be waived if the its contents, gate, boundary wall due to property mortgaged / hypothecated / impact by any road vehicle not belonging to or pledged in an area which is not near or under the control of the insured. surrounded by road where traffic volume is high. 2. It should be noted that any damage or loss caused to property by impact of road vehicle, belonging to or under the control of the insured, is not covered under this extension. Recommendations Applicable for stocks stored in area of high & fast road traffic. Please refer item # 2 of our comments.

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9Bush Fire

Credit Handbook
Appendix I to Chapter 5.4

Our Comments It is hereby declared and agreed that loss or To be obtained where such risk is possible. damage to the property insured under this policy occasioned by or through or in Recommendations consequence of the burning of forest, bust, Please refer our comments. prairie pampas or jungle and the clearing of lands by fire (except such clearing by or on behalf of the insured) shall be deemed to be loss or damage within the meaning of the policy and condition # 7(i) of this policy shall to the extent be modified accordingly. Provided that if there shall be any other fire insurance on the property insured under this policy the company shall be liable only prorata with such other Fire insurance for any loss or damage as aforesaid whether or not such other fire insurance be so extended. 10- Spontaneous Combustion Clause Our Comments It is hereby declared and agreed that To be obtained where the stock may catch fire notwithstanding anything herein contained to due to its own combustion. the contrary the insurance by (Items of) this policy shall extend to include destruction or Recommendations damage by fire only of or to insured property To be obtained on Cotton / stock which ignite caused by its own spontaneous fermentation at low / less than atmospheric temperature. heating of combustion. Provided that all the conditions of the policy, except as expressly varied herein, shall apply as if they had been incorporated herein. 11- Electrical CLAUSE A This Company is expressly declared to be free from liability for loss of or damage to any electrical machine, apparatus, fixture or fitting (including electric fans, electric household or domestic appliances, wireless sets and radios) or to any portion of the electrical installation, arising from or occasioned by overrunning, excessive pressure, short circuiting, arcing, self-heating or leakage of electricity, from whatever cause (lightning, included); provided that this exemption shall apply only to the particular electrical machine, apparatus, fixture, fitting or portion of the electrical installation so affected and not to other machines, apparatus, fixtures, fitting or portion of the electrical installation which may be destroyed or damaged by fire set-up. Our Comments Exonerates the insurance company from paying on account of loss to insured machinery & apparatus etc. on account of / or overrunning, excessive pressure, short circuiting, arcing, selfheading or leakage of electricity, but any loss to other machinery covered under policy due fire created on account of aforesaid reason shall be compensated. Recommendations These coverage should be covered, where chance of such loss is significant. Shall not be required for building.

Our Comments Provides coverage to machinery on account of aforesaid electrical reasons, if the same is a consequence of Fire or Lightning. Recommendations These risks should be covered, where chance of such loss is significant. Shall not be required CLAUSE B Loss or damage by fire to the electrical for building.

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MCB Bank Limited

appliance and installations insured by the item of this policy arising from or occasioned by overrunning excessive pressure, short circuiting arcing self-heating or leakage of electricity, from whatever cause (lightning included), is covered subject to the terms and conditions of this policy but it is expressly understood that no liability exists under this policy for loss or damage to any electrical machine, apparatus, fixture or fitting or to any portion of the electrical installation unless caused by fire or lightning.

Credit Handbook
Appendix I to Chapter 5.4

For details Branches are advised to study copy of standard Insurance policy of individual cases. Please note that Fire & Burglary Policy are Main Policies and as such extensions shall be of either of the two main policies. Thus conditions / exclusions / applicable to the Main Insurance Policies are also applicable to extensions, unless varied. Branches / Field Offices should obtain detailed policy of standard & insurance policies. Besides, aforesaid it is essential that branches are also aware of Warranties / Declarations / Others clauses, so that branches ensure that goods are stored in-accordance with the conditions laid down in these warranties / documents.
1Form K - (Building Warranties 2Construction type / Silent Risks / Night Works / Electric Light) Bank Mortgage clause Removal of debris clause Declaration clause 468Cotton Mill Warranties - (General Godowns / Open Not allowed) Automatic increase clause TPXWarranties Commodities) (Agricultural Produce / /

357-

Reinstatement clause

After going through aforesaid contents / Annexures, branches shall be better equipped to asses themselves the pertinent risk(s) and should cover all risks relevant to the assets / stocks under our lien. The content / comments / recommendation of this announced provides general guidance & pertinent risks to be covered to be decided on case to case basis keeping in view the ground realities.

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MCB Bank Limited INSURANCE GRID

Credit Handbook
Appendix II to Chapter 5.4

To further facilitate understanding of branches/field offices on the subject, Appendix I to Chapter 5.4 provides details of perils for which insurance cover (other than marine insurance) are generally available for assets held as security. F Commodities Under Pledge / Hypothecation B R&S MD T EFR ES AD Ar D ID E

Risk coverage should be taken keeping in view nature, location and storage conditions of the asset held as security. Waiver of the risk covers not applicable, if any, should be in place.

Plant & Machinery Ginning Factories Spinning Factories Weaving Factories Flour Mills Sugar Mills Rice Mills Cigarette Manufacturing Factories Fertilizer Factories Beverage Factories

Buildings Residential Factory Building Commercial Building (Multi Storey) F Fire Policy B Burglary R & S Riots and Strikes MD Malicious Damage T Terrorism EFR Earthquake Fire Risk ES Earthquake Shock AD Atmospheric Disturbances Ar D Aircraft Damage ID Impact Damage E Electrical

Risk coverage should be taken keeping in view nature, location and storage conditions of the asset held as security. Waiver of the risk covers not applicable, if any, should be in place.

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Credit Handbook
Appendix I to Chapter 5.5

DEFERABLE DOCUMENTS AND APPROVAL LEVEL

*In-house deferral (for CBBG clients only) can be availed once i.e. either at General Manager Level or Business Head level, as per the requirement. Subsequent deferral shall be allowed as per deferral approval matrix. Maximum *In-House Tenor* of Deferral Deferral as per (for CBBG SR Deferral clients only) Document Conditions for allowing deferral # Approval GM BH Authority Matrix Time in days.

(i) Insurance policy is not available, however, Cover Note and Premium Paid Receipt (PPR) / Letter from insurance company (that premium has been paid and policy is effective), are in place. Companies with MCB CRR of 1 to 4 1 Insurance Policy Companies with MCB CRR of 5 to 7 X X X X 30 15

No Deferral X X Companies with MCB CRR of 8 and above. Maximum time allowed without deferral shall be 30 working days from the date of Premium Paid Receipt. (ii) Insurance Risk covers have not been obtained as per the Approval of Finance. This is requirement of prudential regulations and normally RM/ Branch should make efforts to obtain this at earliest after month end for monitoring purposes. FOR WBG Corporate Customers only Few large corporate customers furnish stock statements late due to genuine reasons e.g. presence of stocks at different locations, multi bank

07

15

30

30

Monthly Stock Statement along with outstanding with other banks

30 in case of month end

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environment etc that results in inevitable delay on part of borrower to compile information. In that case deferral for longer period can be considered.

Credit Handbook
Appendix I to Chapter 5.5

45 in case of Quarter End

Maximum time allowed without deferral is thirty 30 working days after month end. Charge Registration Certificate and other related issues (i.e. missing certified true copy of the document / legal vetting). Cross Company Guarantee

Acknowledgement of receipt is in place.

15

30

15

Only to be allowed if Cross Corporate Guarantee is not 1st way out. (i) As per policy, valuation is required to be conducted after every three years. This relaxation to be allowed in event of expiry of valuation report after 3 years. Fresh valuation report required on initiation of finance is nondeferrable (ii) The Valuation Report obtained contains discrepancies.

15

Valuation Report (After 3 years)

15

30

30

15

30

30

Facility Advising Letter duly accepted by the client not received back Mortgage Mutation / Noting of Banks Mortgage charge in record of

Proper reason should be recorded e.g. differences over markup rate or any term / condition (i) This relaxation is being allowed owing to time consumed by concerned authorities to record mortgage mutation/ noting of charge in their records. Acknowledgement of filing of

15

15

30

60

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concerned Authority (Revenue/ LDA/Excise, etc.) mortgage documents with concerned authorities to be held before allowing the deferral except where no such acknowledgement is issued by concerned authority. All other legal documentation is complete and clear legal opinion except mortgage mutation is held. (ii) PT-1 showing Bank Mortgage. 8 Final Legal Clearance Stock Inspection By Branch Manager Regional Manager General Manager This requirement can be deferred subject to the condition that all other formalities are complete.

Credit Handbook
Appendix I to Chapter 5.5

15

30

30

Reasons for not conducting stock inspection should be documented.

15

30

30

Deferral of the following supporting documents may be allowed only: 10 Property Documents a. b. c. d. e. Approved Site Plan Completion Certificate Aks Shajra Demarcation of property Previous Title Documents 15 30 30

11

Discrepant Approval of Finance (AoF) eCIB Report (with discrepancies)

In case of discrepancies in AoF, matter should immediately be referred to relevant AoF issuing authority. eCIB report contains discrepancies (data related issues). Rectification from SBP is pending / awaited. a. Overdue mark-up b. Overdue Bills (FIM, CF, TR, Trade Bills) / Installment c. Approval for condonation of mark-up in excess of TPMR is pending. a. Certified True Copies of Ownership Mutation, Mortgage Mutation, Memorandum of Association, Articles of Association, Form-29 and

07

15

30

12

30

60

60

13

Past Liabilities

Due

07

15

30

14

Miscellaneous Documents

15

30

30

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/or Form-A. b. Copy of CNIC of mortgager. c. Copy of partnership deed. d. Search Reports. Sanctioning authority while allowing deferral must be satisfied that 1. Deferred Documents do not fall under category 1 (Documents providing evidence to legal claim) & 2 (Documents required by regulatory bodies) 2. Deferral will not expose bank to any pecuniary risk and banks security position is not weakened.

Credit Handbook
Appendix I to Chapter 5.5

15

Any other document

30

* From Deferral approval date

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MCB Bank Limited

Credit Handbook
Appendix II to Chapter 5.5

DOCUMENT DEFERRAL MEMO MEMO TO: DATE: _________ RE: DEFERRAL OF DOCUMENT (S)

UNIT: 1 Name of the Borrower/Business group 2 C.P. NO. and Date 3 CRR 4 Facility Description

5 6

Securities Description Document (s) to be Deferred

7 8 9

Deferred Up to (Date) 1st Deferral / 2nd Deferral Reasons for Deferral Request

RM Name: _______________

RM Signature:________________

Approval Authority Signatures/ Recommendations:

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MCB Bank Limited, __________Branch, ___________________ Dear Sir Authority Letter

Credit Handbook
Appendix I to Chapter 5.6

The undersigned do hereby authorize you to arrange on my / our behalf valuation of the following referred immovable / movable property (ies), held by you, or offered, as collateral security, from the following name Valuer, enlisted on your Approved Panel, in accordance with your requirements in context of my / our request for financial facility (ies) or my / our finance account with you. In addition, you are authorized to pay on my / our behalf, professional charges for valuation of the property to the Valuer, amounting to Rs. _________/- being prenegotiated; and duly conveyed to and agreed by me / us; and to debit my / our account with you for the said payment, OR to make the payment of the said charges on my /our behalf, by way of Cheque # ______________, furnished to you. Further, the undersigned do hereby waive all and any rights of objection or claim in this respect, towards you or the Valuer. Property __________________________________________________________________________________ ____________________________________________________________________________, owned by ______________________________. Valuer __________________________________________________________________________________ __________________________________________________________________________________ ____________

(_______________________) M/s. / Mr. __________________.

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MCB Bank Limited

Credit Handbook
Appendix II to Chapter 5.6

TERMS OF REFERENCE (TOR) FOR FSV OF PROPERTIES We have noted that following is the Standard TOR for FSV:Forced Sales Valuation Reports are required to invariably provide us following information about the surveyed property:1. The basis of evaluation, present market value and forced sale value etc. 2. The realizable values of mortgaged/pledged assets must be an estimate of the amount that could currently be obtained by selling the assets in a forced/ distressed sale conditions. 3. In determining the forced sale value you should consider various factors affecting the sale ability of the property including any difficulty in obtaining possession of the property, its location and condition and the prevailing economic conditions in a particular sector business or industry. 4. Elaborate details of the building structure and construction quality of the properties/ machineries/ stocks surveyed. 5. Highlight any negative features relating to Asset surveyed which may prove detrimental to the interest of the Bank either in the short or long term. This would include not only structural aspects but also matters concerning ownership, planning approvals, alternate use, restrictions and proximity to hazardous factors etc. 6. The valuation report should comment in detail regarding any tenancy or leasehold effect on the value of assessed property/asset. 7. It should be clearly mentioned in the report that the above matters have been duly considered and that the work was carried out in accordance with the terms of reference. 8. The valuation report of Plant & Machinery should clearly mention the condition of the Plant & Machinery by dividing it into the following categories:o o In Operation. Close/ in liquidation at the time of valuation.

9. Factors that have been taken into consideration to arrive at the valuation to be also mentioned. 10. The report will be used by the external auditors/SBP/Bank/ any other entity of the bank/ SBP for forming an opinion on the adequacy of the provision requirement or for any other purpose that Bank may requires.

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MCB Bank Limited

Credit Handbook
Appendix II to Chapter 5.6

11. There is a specific auditing standard IAS-18 which covers the procedures to be followed by auditors for using the work of an expert. The report, therefore, should fulfill the requirement of IAS 18 and in accordance with guidelines provided in Prudential Regulation # VIII of SBP or any other guidelines pertaining to the mater issued by any controlling authority. 12. The report prepared by Valuer at the instruction of MCB shall not be handed to Banks customer or any other person and the same may be considered as Banks property. 13. The TOR may be modified by MCB before assigning any assignments or thereafter. We have read above mentioned banks requirements and these are accepted to us. SURVEYOR/EVALUER Name_________________ Signature________________

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MCB Bank Limited

Ref No. Date: The Manager MCB Bank Limited (Branch Office) Dear Sir,

Credit Handbook
Appendix III to Chapter 5.6

AUTHORIZATION FOR APPOINTMENT OF MUCCADUMAGE STOCK / ASSETS UNDER BANKS PLEDGE I/We --------carrying on business at ------------- authorize you to appoint ------------or any other Muccadum as approved by Bank for supervision of stocks / assets under your pledge against financing allowed / to be allowed by ----------of MCB Bank Limited. The goods/assets under pledge of MCB Bank Ltd., are / shall be stored at ------------------or any other place of storage at the discretion or instruction of Bank. We shall keep the goods held under bank's behalf / lien separately from all other goods and name of MCB Bank Limited shall be displayed at all places where such goods are stored / kept and shall allow authorized representatives of the bank free access to such goods at all times. I / We shall keep the goods in such a way that the same may be in countable / measurable condition. Stacking / restacking / making of separate compartment / partitioning to be made where advised. To determine the quality of goods due to long storage / life of goods or for any other reason whatsoever, I / We agree to undertake that you may get the sample of goods extracted & removed and get valued / tested by a laboratory / institution / professional of your choice and expenses incurred on this account will be borne by me / us. I / We also agree that Bank may advise the Muccadum to place sufficient number of Chowkidars / Godown Keepers as deemed necessary by the Bank to ensure proper protection, supervision, check and safety of the pledged goods / stock / machinery and we undertake to pay Muccadumage charges for --- Chowkidar(s) / Godown Keeper(s) for Rs.-------/ per month per site or part thereof. I/We hereby undertake to maintain sufficient credit balance in my/our Current Account/cushion in Running Finance Limit in order for you to settle monthly Muccadum Service Charges there from. In this respect, you are hereby authorized to pay on my/our behalf Muccadum Service Charges to above mentioned muccadum, amounting to Rs---- per month ,duly conveyed to and agreed by me/us, to debit of my/our Current/Running Finance Account # ------------with you. In case of insufficient funds in my/our above referred account, you have my/our irrevocable authority to recover Muccadum Service Charges from our other deposit/loan account(s) at my/our cost. Further the undersigned do hereby waive all and any rights of objection or claim in this context towards you or muccadum.

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MCB Bank Limited

Credit Handbook
Appendix III to Chapter 5.6

I / We also agree and undertake that no delivery of pledged goods / stock or any portion thereof shall be affected / released / requested from the godown / premises without Banks delivery order duly signed by the Banks authorized signatories. Since the above mentioned stock are / shall be stored / lying in our Godown / any Godown as per our authorization, we hereby absolve the Bank as well as--------------------------- of any liability as to deficiencies / shortage / theft / damage or deterioration of any kind in said stock of ------------- mentioned above. It shall be our responsibility to ensure to make proper arrangements that the pledged goods / stocks / machinery are not removed / lifted from the Premises / Godowns without any delivery order signed / issued by at least two authorized signatories of the Bank as well as Muccadum and we undertake to make good for any loss sustained by the Bank on this account. For goods stored at premises not owned by us, we enclose Disclaimer Certificate to the effect that the owner of the Godowns do not have / shall have any claim / lien on pledged goods & storage certificate duly signed by the owner of the Premises / Godowns. It shall be our responsibility to keep the pledged goods insured for all the required risks including but not limited to fire, riot, rain, earthquake, civil commotion, terrorism, flood, storm, theft, burglary, lightening, looting, war etc. from a Banks approved Insurance Company under bank clause and meet all terms and conditions (firefighting, storage & security arrangement etc.) of the policy. Moreover, Bank at its own discretion may obtain the required risks covered at our cost, without being responsible for obtaining the same. Nothing contained in this letter / above shall prejudice Bank's right as per any other agreement or indemnity / guarantee signed by us in favor of Bank. Yours faithfully,

Authorized Signatory (Signature & Company Stamp)

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MCB Bank Limited

M/s. ___________________ Dear Sir(s), MUCCADUMAGE SERVICE

Credit Handbook
Appendix IV to Chapter 5.6

1. You are advised to take control / possession of _______________________________________ (Details of Goods / Stocks / Machine) kept in _______________________________ (Address of godown / premises), in trust for the Bank. (MCB Bank Ltd) and on behalf of the Bank and to release as per instructions of the bank. 2. The said Goods shall be stored and kept in the said Godown/Premises under the lock and key effective control and your custody. 3. The said goods are exclusively pledged and/or under the lien of the Bank to secure the Fund and Non Fund Based banking and financial facilities allowed and/or agreed to be allowed to the customers of the Bank. The said goods shall only be released on the basis of Delivery Orders duly signed by the authorized officers of the Bank to the person mentioned therein.

4.

5. The delivery of the goods shall be as per details mentioned in the Delivery Orders and in the presence of godown keeper. 6. You shall provide at your own expenses and responsibility, the services of sufficient staff to carry out the obligations / duties under this Agreement to the entire satisfaction of the Bank. However, nothing contained herein shall render such staff, provided/sent by the Muccadum to the Godowns to reform the duties undertaken in any way as an employee of the bank. 7. You shall be liable for all losses, theft, damages, pilferage, claim demands expenses, charges actions and suits etc., which the bank shall suffer due to shortages, loss and detraction of the goods for any reason whatsoever. 8. You shall keep bank indemnified against all losses, damages, payments demands dues, claims, expenses, charges, suits and action etc., if sustained hereunder due to any reason or negligence on your part. 9. You shall keep the goods, held by you on banks behalf, separately from all other goods and each customers goods shall be kept separately & name of MCB Bank Limited, Branch shall be displayed at all places where such goods are stored/kept, and shall allow all authorized representatives of the bank fee access to such goods at all time. 10. You shall take all precautions to save the goods / stocks from any claim / charges / lien / demand of any person whatsoever.

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MCB Bank Limited

Credit Handbook
Appendix IV to Chapter 5.6

11. You shall take all steps in order to ensure that while the stocks are lying on the plinth / godown / warehouses, rented or approved by the Bank, the same are not subjected to any damage or loss for any reason whatsoever and shall take such steps as may be necessary against damage, loss pilferage and theft. 12. You shall submit to the bank stock / goods report on each receipts / delivery. A monthly stock report shall be necessary submitted on 3rd working day of the following month. More frequent stock reports shall be submitted if required by the branch for specific case. 13. The stock / goods report shall be verified and duly signed by the authorized representative(s) / staff of the bank. 14. The bank reserves the right to inspect and verify the said goods at any time and in case of any loss and/or damage and/or short fall the MUCCADUM shall made the payment, cost and expenses determined by the bank immediately without any objection / question, contents or otherwise. 15. Nothing contained in this letter above, shall prejudice Banks right or as per any other agreement or indemnity / guarantee signed by you in favor of our Bank. Yours faithfully,

Credit Risk Control Officer/Manager MCB Bank Limited ______________________________ CRC Hub/Branch

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MCB Bank Limited

M/s.

Credit Handbook
Appendix V to Chapter 5.6

Dear Sir(s), INSPECTION OF GOODS PLEDGED / HYPOTHECATED TO BANK Enclosed is statement of stock of goods for the month of / as on ______________ of our borrowers M/s. ______________________________________. Please inspect the goods lying in their premises and send us your report for record. You usual charge in this respect be advised to us. A copy of his letter is endorsed to the borrowers requesting them to allow you to inspect the goods on our behalf.

Yours faithfully,

Credit Risk Control Officer/Manager MCB Bank Limited ______________________________ CRC Hub/ Branch C.C.TO: M/s. _____________________________________ Kindly extend your cooperation to the inspecting officer of M/s. __________________ for inspection of goods hypothecated / pledged to us on proper identification.

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MCB Bank Limited

Circle: _____________________________________________________ Sites Under Super Vision of Muccadum as on: _____________________ Description of Stocks Value of Stocks Current Outstanding against Pledged stocks Number of chowkidars appointed Status Fresh(F)/ Adjusted (A) Complete Address of Pledged Sites Date of Entrusting Site

Credit Handbook
Appendix VI to Chapter 5.6

Borrower

Branch

Muccadum

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MCB Bank Limited

MUCCADUM COPY (ORIGINAL)

Credit Handbook
Appendix VII to Chapter 5.6 S.No. Ref.# Date d

DELIVERY ORDER _______________________________________ To, M/s. Please deliver the following goods stored at Godown/Plinth __________________________________________________________________________________ under ______________________ on Account M/s. ________ ___________________________________________________ to their authorized agent against surrender of this delivery order: Description / Quality Quantity & Unit of measurement Marks and Number Rate per Unit Value

For:

MCB Bank Ltd Branch:

Authorized Signature Prepared By: __________________________

Authorized Signature

The Bank is not responsible for the contents or the condition of the contents of any packages or for the leakage or damage by white ants or vermin etc. Received from MCB Bank Ltd ________________________________ Dated: _______________________ (Customers signature) 1- This delivery order should be presented to the Muccadums specified herein and delivery of Cotton Bales should be obtained within 24 hours of the issue of the

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order. Any complain regarding non-delivery of goods should be made to the Bank within two days of the date of issue of this order otherwise the Bank shall not be responsible for any delay in delivery of the goods or for any loss or damage caused by such delay. 2- Delivery of the goods shall be made by the Muccadums on payment of all their charges and dues in respect of the goods delivered. 3- If the delivery order is not presented to the Muccadums within 24 hours as mentioned in Item # (1) above or if the Cotton Bales are left or allowed to remain with the Muccadums after 24 hours of the issue of this order for any reason whatsoever the Muccadums shall be deemed Customer and the Bank shall not be responsible for any consequences arising out of such delay.

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MUCCADUM COPY

(DUPLICATE to be returned to bank) S.No. Ref.# Date d 00001

DELIVERY ORDER _______________________________________ To, M/s. Please deliver the following goods stored at Godown/Plinth __________________________________________________________________________________ _______ under ______________________ on Account M/s. ___________________________________________________ to their authorized agent against surrender of this delivery order: Description / Quality Quantity & Unit of measurement Marks and Number Rate per Unit Value

For:

MCB Bank Ltd Branch: Authorized Signature Prepared By: __________________________ The Bank is not responsible for the contents or the condition of the contents of any packages or for the leakage or damage by white ants or vermin etc. Authorized Signature

Received from MCB Bank Ltd ________________________________ Dated: _______________________ (Customers signature)

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To be returned to Branch duly completed & singed by you after delivery of stocks.
Quantity/Quality Opening Stock Delivered Present Stock

Dated:

Signature of Muccadum / Authorized person

1- This delivery order should be presented to the Muccadums specified herein and delivery of Cotton Bales should be obtained within 24 hours of the issue of the order. Any complain regarding non-delivery of goods should be made to the Bank within two days of the date of issue of this order otherwise the Bank shall not be responsible for any delay in delivery of the goods or for any loss or damage caused by such delay. 2- Delivery of the goods shall be made by the Muccadums on payment of all their charges and dues in respect of the goods delivered. 3If the delivery order is not presented to the Muccadums within 24 hours as mentioned in Item # (1) above or if the Cotton Bales are left or allowed to remain with the Muccadums after 24 hours of the issue of this order for any reason whatsoever the Muccadums shall be deemed Customer and the Bank shall not be responsible for any consequences arising out of such delay.

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BORROWER COPY S.No. Ref.# Dated DELIVERY ORDER _______________________________________ To, M/s. Please deliver the following goods stored at Godown/Plinth __________________________________________________________________________________ _______ under ______________________ on Account M/s. ___________________________________________________ to their authorized agent against surrender of this delivery order: Description / Quality Quantity & Unit of measurement Marks and Number Rate per Unit Value 00001

For:

MCB Bank Ltd Branch: Authorized Signature Prepared By: __________________________ The Bank is not responsible for the contents or the condition of the contents of any packages or for the leakage or damage by white ants or vermin etc. Authorized Signature

Received from MCB Bank Ltd ________________________________ Dated: _______________________ (Customers signature) C.C.TO: M/s. _____________________________________________________________________ (Borrower) we have debited your account with a sum of Rs.________________ against the delivery order issued in terms of your letter No. _____________________ dated _______________.

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1- This delivery order should be presented to the Muccadums specified herein and delivery of Cotton Bales should be obtained within 24 hours of the issue of the order. Any complain regarding non-delivery of goods should be made to the Bank within two days of the date of issue of this order otherwise the Bank shall not be responsible for any delay in delivery of the goods or for any loss or damage caused by such delay. 2- Delivery of the goods shall be made by the Muccadums on payment of all their charges and dues in respect of the goods delivered. 3- If the delivery order is not presented to the Muccadums within 24 hours as mentioned in Item # (1) above or if the Cotton Bales are left or allowed to remain with the Muccadums after 24 hours of the issue of this order for any reason whatsoever the Muccadums shall be deemed Customer and the Bank shall not be responsible for any consequences arising out of such delay.

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BRANCH COPY S.No. Ref.# Dated DELIVERY ORDER _______________________________________ To, M/s. 00001

Please deliver the following goods stored at Godown/Plinth __________________________________________________________________________________ _________ under ______________________ on Account M/s. ___________________________________________________ to their authorized agent against surrender of this delivery order: Description / Quality Quantity & Unit of measurement Marks and Number Rate per Unit Value

For:

MCB Bank Ltd Branch: Authorized Signature Prepared By: __________________________ The Bank is not responsible for the contents or the condition of the contents of any packages or for the leakage or damage by white ants or vermin etc. Authorized Signature

Received from MCB Bank Ltd ________________________________ Dated: _______________________ (Customers signature) C.C.TO: M/s. _____________________________________________________________________ (Borrower) we have debited your account with a sum of Rs.________________ against the delivery order issued in terms of your letter No. _____________________ dated _______________. M/s. _____________________________________________________________________

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Appendix VII to Chapter 5.6 (Muccadum) to be returned to Branch duly completed & singed by Muccadum after delivery of stocks. Quantity/Quality Opening Stock Delivered Present Stock

Dated:

Signature of Muccadum / Authorized person

1- This delivery order should be presented to the Muccadums specified herein and delivery of Cotton Bales should be obtained within 24 hours of the issue of the order. Any complain regarding non-delivery of goods should be made to the Bank within two days of the date of issue of this order otherwise the Bank shall not be responsible for any delay in delivery of the goods or for any loss or damage caused by such delay. 2- Delivery of the goods shall be made by the Muccadums on payment of all their charges and dues in respect of the goods delivered. 3- If the delivery order is not presented to the Muccadums within 24 hours as mentioned in Item # (1) above or if the Cotton Bales are left or allowed to remain with the Muccadums after 24 hours of the issue of this order for any reason whatsoever the Muccadums shall be deemed Customer and the Bank shall not be responsible for any consequences arising out of such delay.

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(TO BE TYPED ON NON-JUDICIAL STAMP PAPER) LETTER OF AUTHORIZATION The Manager __________Branch MCB Bank limited Dear Sirs, PAD/FIM I/We request you to arrange clearance of the goods cover by (dt. On) the above noted Bill received under Letter of Credit No.______ opened by you on my/our request. The documents may be sent to Messers __________________________or to any other Clearing Agent of your choice for clearance of the goods on my/our account on my/our behalf and to store them at _______________ or to rail / transport them to _________________and insure the same. In consideration of your agreeing to arrange for clearance as aforesaid, I/We hereby agree and undertake to indemnify you and to keep you indemnified and harmless against all claims, demands, detriments damages, expenses, costs, charges, etc. arising on your acting upon my/our said instructions. We further agree to undertake and confirm as under:1) That Messrs______________________________, Clearing Agents or, any other Clearing Agent to whom the documents have been forwarded shall for all intents and purpose be deemed to be my/our Clearing Agents, as if they were appointed by me/us directly and you shall not be liable or responsible for any negligence or default of the said Clearing Agents. Moreover, we undertake to bear all the losses arising due to negligence, fraud or default of the above clearing agent. 2) That you will not under any circumstances, be responsible for the contents or condition of the packages of consignments, shortages, if any, and demurrage incurred in clearance of the goods, damage caused to goods in Clearance or storage whether in the Godown of the said Clearing Agent or in the Godowns of your Bank or any other person. 3) You shall be entitled, without being bound to do so, to pay Custom Duty, Sales tax as well as other taxes, Clearing and storage charges of the said Clearing Agent, demurrage and or any other cost or expenses incurred by the said Clearing Agent without making any reference to me/us and you shall be entitled to debit such payments, charges or expenses to my/our account with you or to my/our account with any other branch of your Bank. If the balance in my/our account be not sufficient to cover such payments, costs or expenses incurred by you, I/We undertake to reimburse the same to you or to adjust debit balance in my/our account on demand, Clearing Agents bill will be the conclusive proof of the duties, sales tax and other taxes, storage Charges, demurrage or any cost or expenses incurred by the Clearing Agents and will not be questioned by me/us.

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4) That documents mentioned above and/or the goods covered by the above mentioned documents shall at all stages remain under your lien and/or pledge for the Principal amount of the bill, mark up and bank charge and for any payments made by you or any costs, charges and expenses incurred by you or the said Clearing Agents or for any amount that may be owing to you either in connection with the import of the said goods or on my/our account maintained with you or on account of any Advance, Loan, Overdraft or any other banking facility allowed by you to me/us. 5) That the Bank shall not be responsible for any delay in clearance of the goods whether due to any default or negligence of the Clearing Agent, or otherwise or for any loss or damage which may be caused to me/us by such delay or otherwise and/or by any variation in the Tariff, Rates, Duties, or Taxes or by imposition of any Penalty, Rates, Taxes or Duties which may directly or indirectly affect the goods covered by the above documents, due to any reason whatsoever. 6) That it will be my/our responsibility to arrange for wagons for railment of goods to_____________. In case wagons are not allotted or procured, we shall not hold the Bank or Clearing Agents responsible for any damage whatsoever caused in storing the consignment at____________ PROVIDED ALWAYS that the Banks right to claim payment against the bill from me/us will not in any manner be prejudiced or affected by its agreeing to undertake clearance of the consignment and that the Bank will at any time or stage be entitled to claims payment of the bill with Mark-up @_____% p.a. from me/us and such cost or costs and charges that might have been incurred by the Bank without being able to present the relative documents, the same having been parted with and sent to the Clearing Agent under my/our Instructions, as aforesaid. 7) In case bank needs to store goods in bonded ware house, delivery of aforesaid goods during to the transit/its storage in Bonded Ware House/Tank Terminal shall not be taken by us nor we shall make request from Customs Authorities / Incharge of Bonded Ware House/ Incharge of Tank Terminal, for delivery of aforesaid goods, without obtaining Delivery order from your Branch. 8) We agree and undertake to indemnify MCB Bank Limited and Keep it harmless from and against all losses, damages, claims, detriments, expenses, charges, taxes, costs, etc. if sustained by the Bank while acting under this letter of Authorization or acting on our instructions. This letter of Authority is irrevocable and shall remain binding on us, our successors-in-interest and assigns. Yours faithfully, ____________________ Authorized Signatory Dated: ______________ Place: _______________

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(TO BE TYPED ON NON-JUDICIAL STAMP PAPER) The Manager __________Branch MCB Bank limited Dear Sir, PAD/FIM LETTER OF AUTHORIZATION

Credit Handbook
Appendix IX to Chapter 5.6

I/We request you to arrange clearance and storage of the _______________ (quantity) metric tons _____________oil from ______________ (hereinafter called as the Goods) cover by (dt.______ on). This Bill was received under Letter of Credit No._________ opened by you on my/our request. The said Goods has arrived at Karachi __________port vide vessel _______________Against Bill of landing No.______________ dated _______________issued by ___________________to the order of the bank. The documents may be sent to Messrs __________________________ (Clearing Agent) or to any other Clearing Agent of your choice for clearance of the goods on my/our account on my/our behalf and goods after clearance will be stored in Tank(s) # ___________________ of M/s ________________________ (Terminal), or to any other Terminal of your choice. These goods shall also be insured for all pertinent risks. In consideration of your agreeing to arrange for clearance and storage as aforesaid, I/We hereby agree and undertake to indemnify you and to keep you indemnified and harmless against all claims, demands, detriments damages, expenses, costs, charges, etc. arising on your acting upon my/our said instructions. We further agree to undertake and confirm as under:1) That above mentioned Clearing Agent and Terminal or any other Clearing Agents and/or Terminal to whom the documents have been forwarded or with whom goods has been stored, shall for all intents and purpose be deemed to be my/our Clearing Agents and/or Terminal, as if they were appointed by me/us directly and you shall not be liable or responsible for any negligence or default of the said Clearing Agents and Terminal. Moreover, we undertake to bear all the losses arising due to negligence, fraud or default of the above Clearing agent and Terminal. 2) That you will not under any circumstances, be responsible for the contents or condition of the packages of consignments, shortages, if any, and demurrage incurred in clearance of the goods, damage caused to goods in Clearance or storage whether in the godown of the said Clearing Agent, Terminal, Bank or in godown of any other person assigned by the bank. 3) You shall be entitled, without being bound to do so, to pay Custom Duty, Sales tax as well as other taxes, Clearing and Storage charges, Demurrage and or any other cost or expenses incurred by the said Clearing Agent, Terminal without making any reference to me/us. And you shall be entitled to debit such payments, charges or expenses to my/our account with you or to my/our account with any other branch of your Bank. If the balance in my/our account be not sufficient to cover such payments, costs or expenses incurred by you, I/We undertake to reimburse the same to you or to adjust debit balance in my/our account on demand, Clearing Agent or Terminals bill will be the conclusive proof of the duties, sales tax and other taxes, storage Charges, demurrage or any cost or expenses incurred by the Clearing Agents and Terminals, and will not be questioned by me/us. 4) That documents mentioned above and/or the goods covered by the above mentioned documents shall at all stages remain under your lien and/or pledge for the Principal

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amount of the bill, mark up and bank charge and for any payments made by you or any costs, charges and expenses incurred by you or the said Clearing Agents and Terminal or for any amount that may be owing to you either in connection with the import of the said goods or on my/our account maintained with you or on account of any advance, Loan, Overdraft or any other banking facility allowed by you to me/us. 5) That the Bank shall not, under any circumstances, be responsible for delay in clearance of the goods whether due to any default or negligence of the Clearing Agent, or otherwise or deterioration in contents/quality, condition and specification of the said Goods, shortage if any and any loss or damage which may be caused to me/us by such delay or otherwise and/or by any variation in the Tariff, Rates, Duties, or Taxes or by imposition of any Penalty, Rates, Taxes or Duties which may directly or indirectly due to any reason whatsoever. 6) In case Bank needs to store goods in tanks other than the Tanks of Terminals, it will be my/our responsibility to arrange Wagons and Tankers for delivery of Goods from the Tanks of the Terminal to the banks prescribed location of storage. This transfer of oil will be at our cost and expenses and all expenses incurred by the bank for such quantity or quantities of oil plus all other charges relating to the same shall be recovered from us. In case wagons are not allotted or procured, we shall not hold the Bank, Clearing Agents or Terminal responsible for any damage whatsoever caused in storing the consignment at____________ PROVIDED ALWAYS that the Banks right to claim payment against the bill from me/us will not in any manner be prejudiced or affected by its agreeing to undertake clearance of the consignment and that the Bank will at any time or stage be entitled to claims payment of the bill with Mark-up @____________________% p.a. from me/us and such cost or costs and charges that might have been incurred by the Bank without being able to present the relative documents, the same having been parted with and sent to the Clearing Agent under my/our Instructions, as aforesaid. 7) Delivery of aforesaid goods during to the transit/its storage in Bonded Ware House/Tank Terminal shall not be taken by us nor we shall make request from Customs Authorities / Incharge of Bonded Warehouse/ Incharge of Tank Terminal, for delivery of aforesaid goods, without obtaining Delivery order from your Branch. 8) We agree and undertake to indemnify MCB Bank Limited and Keep it harmless from and against all losses, damages, claims, detriments, expenses, charges, taxes, costs, etc. if sustained by the Bank while acting under this letter of Authorization or acting on our instructions. This letter of Authority is irrevocable and shall remain binding on us, our successors-in-interest and assigns. Yours faithfully, ____________________ Authorized Signatory Dated: ______________ Place: _______________

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MCB Bank Ltd _________________Branch Date.____________ To, _____________________ _____________________ _____________________

Ref. No. __________

M/s________ (Name of Importer) _____ Address __________________________ _________________________________ Phone No._________________________

CLEARANCE OF CONSIGNMENT
Dear Sir(s), We are enclosing following shipping documents for goods of above importers, under pledge of our Bank. Please clear these goods at your earliest and follow the instructions detailed hereunder:1. 2. Duty & Sales Tax would be paid by the importers. Please contact / collect the same from them at the address given above. Goods after clearance would be stored in the godown/tank terminal/bonded ware house at __________________. In case goods are stored in bonded ware house, Storage certificate/ receipt will be obtained from approved Muccadum/ Tank Terminal/ bonded ware house and same is to be provided to us. The storage certificate must be addressed to MCB and it should include that delivery of goods will be upon banks instructions.

3.

After clearance, goods would be transported by/under your control or approved C&F Agent / Muccadum M/s.__________________________ by Rail / Truck to __________________. _______________ 4. The damaged / short landed goods should be surveyed immediately and a claim be filed with the insurance company or with the concerned authorities, as the case may be, under advice to us. 5. 6. 7. 8. 9. The goods covered under shipping documents should be attended to, as expeditiously as possible. In case of any delay in clearance of the consignment, please inform position to us in writing. Bank would not be responsible for demurrage, if caused due to delay on your part in clearance. Please note, not to deliver goods, without authority from authorized of our____________ branch person. Please provide In-Bond, Original Importers copy of General Declaration to us / to_____________________ branch, under advice to us. Transportation Receipt must be made in Banks name, mentioning _____________________ branch and forwarded immediately to the branch concerned. Please advise transporter to call at our branch office for unloading instructions. Send us, Transportation Receipt for onwards submission to our Branch.

PARTICULARS OF SHIPPING DOCUMENTS: Bill No.__________________________________ L/C No.________________________ for Rs._____________________ Vessel ________________________ No. of Packages ______________ Particulars of goods______________________.

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PARTICULARS OF ENCLOSURES: a. Invoice ______________________ b. Bill of Lading _________________ c .Draft _______ d. Weight & Packing List ___________ e. Insurance Policy & Memo ____________________ f. Inspection Certificate _______________ g. Sales tax exemption certificate ___________ h. Miscellaneous others _______________. Please obtain storage receipt, after the consignment stands cleared and stored, as per above instructions and forward the same to designated branch (B/O. Karachi Main / Nila Gumbad Lahore), along with C&F bill and other documents and copies to us. Yours faithfully, ______ Officer ACKNOWLEDGEMENT We hereby acknowledge receipt of the shipping documents mentioned above under Trust and undertake to comply with the above said instructions / terms. We will arrange goods clearance by (electronic/manual) filing of General Declaration. Karachi/Lahore Date_________ ___________________________________ Authorized signature of clearing agent with seal/rubber stamp __________________ Authorized Signatory

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(TO BE TYPED ON NON JUDICIAL STAMP PAPER) Date: The Manager ___________Branch MCB Bank Limited

Credit Handbook
Appendix XI to Chapter 5.6

We M/s _____________________________a sole proprietor concern(s) /partnership firm registered under the Partnership Act, 1912 / limited company incorporated under Companies Act, 19-- carrying on a business as Clearing & Forwarding Agents and having its Office at ________________________. Upon our request the BANK (MCB bank Ltd) has agreed inter alia to entrust us, the assignment relating to Clearing of goods amounting of Rs.________M imported by one of BANKs CUSTOMER M/s _______________________. In this regard, we hereby undertake; 1. We shall work on behalf of and under instructions of the Bank as Clearing & Forwarding Agent in respect of goods under lien of the Bank. We shall comply all time to time instructions received from the Bank; 2. All documents such as bill of lading, RR's, delivery orders, invoices etc., and or the goods covered by such documents or others entrusted by the Bank to us during the course of business shall be held strictly in trust for the Bank and we shall carry out all directions that may be given by the Bank to us for storage/import and/or export of goods for and on behalf of the constituents of the Bank, and we shall deliver to the Bank all documents, invoices, bills of lading, railway receipts, delivery orders, general declarations of and concerning storage, import and export of the goods forthwith on the goods being released from godown or from the Customs and/or forthwith after the goods are stored shipped and/or railed for export. 3. We shall submit to the Bank correct, accurate and complete reports from time to time regarding quantity and number of packages of all goods cleared by us and stored with us or entrusted by the Bank to our custody. Such reports shall be duly authenticated by the signatures of our authorized representatives and we shall be responsible to the Bank for the particulars and correctness of such reports. 4. That the Bank shall have irrevocable lien on and against all the goods in our custody or part thereof and also on and against the documents relating to such goods and we shall not pass on delivery of the goods, which may come in our possession in due course in any manner except in accordance with the delivery order/instructions, issued by authorized signatories of the Bank and the Bank shall be entitled to recall, stop and cancel the action on such documents and we undertake to abide by all or any of the instructions issued by the Bank in this regard without any reference to anyone else. 5. Under no circumstances we shall use the goods/documents or part with our possession excepting for the purpose of clearance, bailment or export without the Bank's order and specific permission to the use which in either case shall always be in writing. No instructions other than those in writing by the Bank's authorized representative shall be carried out by us.

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6. We shall not during the continuance of this agreement or otherwise pledge/assign/encumber/charge/hypothecate/mortgage any goods or merchandise consigned to us nor shall do or permit other act whereby the interest of the Bank is in any way is impaired or prejudicially affected. 7. We shall keep constant liaison with customs and KPT authorities and all other agencies with a view to effecting prompt clearance and expeditious delivery of cleared goods. 8. We undertake to comply with all instructions of the bank as to mode of dispatch of consignment or for handling of the goods otherwise. 09. That all moneys for the purpose of custom duty or any other taxes and expenditure shall be received directly from Banks CUSTOMER and bank shall not be liable for any of such payments. 10. We undertake to perform all functions, and duties incidental to the clearing & forwarding of the consignment from time to time assigned to us with due diligence, care and high professional standards at top priority basis. Any damage, caused to any consignment entrusted to us, due to negligence or willful delay on our part, shall be reimbursed by us on demand from the Bank and that it shall not be contested by us for any reason. 11. We hereby undertake to indemnify and keep the Bank always indemnified against any and every loss, damage, costs, charges and expenses which the Bank may at any time suffer on account of our failure to perform or perform with due diligence all duties, functions, responsibilities and acts entrusted to us hereunder or which may at any time be entrusted by the Bank to us including any inaccuracy, defect, fault, discrepancy or omission contained in any of the documents or assurances provided by the Agents to the Bank in relation to any of the matters entrusted by the Bank to us at any time for above mentioned Customer of the Bank. 12. Bank shall have absolute power to stop assigning us clearing assignments at any time without giving any reasons on serving a fortnight's notice to us of such termination and without being liable for any compensation, damage or cost whatsoever. We shall forthwith deliver to the Bank or to such persons as may be nominated by the Bank goods/consignment and/or any other documents that may be lying in our custody at that time. 13. At no stage and in no circumstances we shall assign, handover, delegate the clearing and forwarding job entrusted to us by the Bank, to any other agent(s) without prior permission in writing of the Bank. The indemnity shall continue to remain in full force/binding and be applicable on us for individual transactions/dealing during working by us for banks Customer M/s ___________________ and until bank specifically discharge us in writing. ______________________ (C & F AGENT)

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TRIPARTITE AGREEMENT FOR STORAGE OF OIL

THIS AGREEMENT is made at ___________, this _____________day of _______________, A M O N G M/s. _______________________________ a company, incorporated under the laws of Pakistan and having its Registered Office at _____________________________ (hereinafter referred to as the TERMINAL, which expression shall mean and include its successors-in-interest and assigns) of the ONE PART. A N D M/s. _____________________________ a company, incorporated under the laws of Pakistan and having its Registered Office at ____________________(hereinafter referred to as the IMPORTER, which expression shall mean and include its successors-in-interest and assigns) of the SECOND PART. A N D MCB BANK LTD, a Banking company, incorporated under the laws of Pakistan and having its Registered Office at MCB Building, F6/G6, Jinnah Avenue Islamabad, Principal Office at MCB Building, 15 Main Gulberg, Lahore; and a Branch Office at _________________________, (hereinafter referred to as the BANK, which expression shall mean and include its successors-in-interest and assigns) of the THIRD PART. WHEREAS, the IMPORTER is a Customer of the BANK; and has been allowed by the BANK a financial accommodation by way of Letter of Credit Limit / Facility (hereinafter referred to as the "Facility"), for a period commencing on __________ and ending ______, for import of ____________________(hereinafter referred to as the said oil"). AND WHEREAS, the IMPORTER is desirous of availing of the TERMINALs facilities and services, for handling, clearance and storage of the said oil, as and when imported by the CUSTOMER under the BANK's LC, under certain specific terms and conditions agreed between the IMPORTER and the BANK; and the TERMINAL has agreed to provide the requisite facilities and services on the terms and conditions appearing hereinafter. NOW THEREFORE THIS AGREEMENT WITNESSETH AS FOLLOWS: 1. That the TERMINAL has agreed to handle, clear and store the said oil for the IMPORTER/BANK, at the cost of the IMPORTER, as and when imported by the IMPORTER under the BANK's LC. The TERMINAL has understood that the said oil as and when imported as such shall be under the BANK's PLEDGE/LIEN. 2. That the TERMINAL shall arrange, as and when a consignment of the said oil reaches Karachi, for offloading and transmission of the said oil from the Vessels to the TERMINALs TANK(S) located on Plot ____________________, Oil Installation Area, Karachi (hereinafter referred to as the said Tank); and shall store the said oil at the Tank as Bailee and trustee for the BANK as the said oil imported shall remain under pledge/lien of the BANK. 3. That the BANK on arrival of the consignment shall convey to the TERMINAL in writing the following details: a) b) c) d) LC Number & date and other details thereof; Quantity / Weight of the consignment / said oil; Details of the respective Vessel; Bill of Lading Number and date thereof; and other relevant details thereof.

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4. That the TERMINAL on arrival of the consignment shall provide Storage Certificate/ Letter and convey in writing to the BANK the TANK Number, Description of oil, Quantity, Storage date and all other relevant details thereof, wherein the said oil shall be / has been stored; and this Storage Certificate shall clearly describe that the goods shall be delivered by the TERMINAL upon receiving Deliver Order from the BANK. 5. For the purpose of facilitating the clearance, handling and storage of the said oil at the TERMINAL's Tank, the IMPORTER shall obtain from the BANK and furnish to the TERMINAL, a complete set of import shipping documents, including the Bill of Lading in original at least three days before the arrival of the Vessel. The IMPORTER hereby agrees and undertakes to provide all other documents and assistance as may be reasonably required by TERMINAL for smooth and prompt clearance and discharge of the Consignment of the said oil as and when a request in this behalf is made by the TERMINAL without jeopardizing the BANKs PLEDGE/LIEN thereon. The release of documents by the BANK will also be in trust for the BANK and the documents will be returned to the BANK by the IMPORTER/TERMINAL after doing the needful. 6. Once the said oil reaches the TERMINALs TANK, the TERMINAL shall issue its receipt for the same in duplicate, the original of which shall be handed over to the BANK and/or to its nominated Muccadums or agents and the duplicate shall be handed over to the IMPORTER. 7. The said oil shall be kept stored at the said Tank of the TERMINAL and shall be held by the TERMINAL in trust for the BANK. Neither the TERMINAL shall release the said oil or any quantity (ies) thereof nor the IMPORTER shall procure the release of the said oil or any quantity(ies) thereof, except against manually signed Delivery Orders issued by the BANK under the signatures of its authorized officers whose names and specimen signature shall be provided separately by the BANK to the TERMINAL to enable the TERMINAL to verify the signatures. The BANK shall have the right to substitute the authorized officers and notify their names with specimen signatures from time to time. Under no circumstances whatsoever shall the IMPORTER obtain deliveries from the TERMINAL or the TERMINAL shall affect deliveries of any quantity(ies) without the production of the original Delivery Orders. All Delivery Orders shall be issued by the BANK only against full payments for the quantity(ies) lifted, including import duty, port dues, octroi, storage charges and other levies and costs mentioned in Clause 8 herein below. 8. The IMPORTER shall be solely responsible for payment of import duty, port dues, octroi, clearing, forwarding, handling and transportation charges and other levies as well as all costs and expenses, before the BANK shall permit any deliveries of any quantity(ies) of the said oil from the Tank of the TERMINAL. The BANK shall not be responsible for such levies and costs, except where the BANK at its sole discretion and for the purposes of protecting of its interest or enforcing any of its rights as a holder of pledge/lien may decide to pay such duty, dues, levies, cost, expenses, etc., for and on account of the IMPORTER. The IMPORTER hereby indemnifies and undertakes to hold the BANK harmless from and against all losses, damages, costs and expenses, which the BANK may suffer or sustain as a result of any demand, claim, action or proceedings made, raised or initiated by any authority, person or agency with regards to any such levies, charges, costs and expenses in connection with or in relation to the said oil. 9. The TERMINAL shall make the deliveries of the quantity(ies) received at the Tank at minimum of 99.80% of the actual quantity(ies) of the said oil actually received

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Appendix XII to Chapter 5.6

allowing a provision of spillage at a maximum 0.20% of the total quantity(ies) received. 10. Delivery (ies) shall be made from the Tank during the normal working hours of the day and only on working days of the BANK and only against Delivery Orders of the Bank. Deliveries shall be made in usual customary manner; and usual modes of transportation as is customarily and normally allowed. 11. For bonded said oil, the IMPORTER shall submit bills of entry through the clearing agents nominated by the BANK and get the said oil ex-bonded and delivered against the delivery order of the BANK. 12. The BANK shall have the right to monitor the storage, clearance, handling delivery of the said oil through its authorized representatives and/or Muccadums or clearing agents appointed by the BANK. In the event, discrepancy or irregularity should come to light, the TERMINAL as well as IMPORTER shall immediately remove and rectify the deficiencies. and the any the

13. The TERMINAL shall not deliver / release the said oil without delivery orders from the BANK even against an understanding from the IMPORTER to procure the relative delivery orders. Delivery Orders shall not be issued in blank. 14. The TERMINAL shall also not lend any quantity(ies) of the said oil to the IMPORTER or to anybody else out of the TERMINALs own duty paid stocks against the quantity to be stored under this Agreement. The quantity of the said oil stored shall not be diminished or reduced except for provision for wastage mentioned in Clause 9 hereinabove. 15. The TERMINAL shall have no lien against the said oil stored under this Agreement to secure any quantity delivered privately to the IMPORTER. Any such bilateral arrangement between the TERMINAL and the IMPORTER would not be binding upon the BANK and no quantity of the said oil shall be adjusted or set off against any quantity released by the TERMINAL without the BANKs delivery order. 16. The TERMINAL represents and warrants that the TERMINAL holds proper license and permission to store the said oil and to provide the services covered by the Agreement, and shall keep the IMPORTER and the BANK indemnified and harmless against all costs, damages and proceedings in respect of any action taken by any authority as a result of failure to maintain proper license or otherwise failure to abide by the prevailing laws, rules and regulations. 17. The IMPORTER and the TERMINAL shall fulfill and abide by all rules and regulations in handling storage and delivery of the said oil. 18. The TERMINAL represents and warrants that the Tank where the said oil will be stored, would be technically sound and strong enough to withstand the hazards of weather and environmental condition. The TERMINAL warrants, assures that proper security measures have been taken to ensure safe storage of the said oil. 19. The TERMINAL and the IMPORTER shall be liable for any negligence or omission in the storage, handling and delivery of the said oil. 20. The said oil shall be insured by the IMPORTER with an insurance company approved by the BANK. The insurance policy shall be endorsed in favor of the BANK and deposited with the BANK.

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Appendix XII to Chapter 5.6

21. The importer shall pay to the TERMINAL all relevant charges including handling, storage etc. 22. The TERMINAL shall be responsible for obtaining Fire Insurance Cover of the said oil. 23. No amendment in this Agreement will be valid until and unless it is made in writing and signed by all the parties. IN WITNESS WHEREOF, the Parties above named do hereby set their respective hands hereinto the presence: WITNESSES 1) 2) (IMPORTER) 2) 3) (BANKER) 1) (TERMINAL)

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Appendix XIII to Chapter 5.6

Storage with Tank Terminal (Name)

Quantity of Import

Tank Terminals report as on: _____________________________________________________ Limit Date of Initial Date of Date of Limit Pak Liquid Disbursement Tripartite Import Expiry Rupees cargo Agreement Date description

Borrower

Branch

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Appendix XIV to Chapter 5.6

Ref. To : Mr. From : (Name) (Address of Vendor) (Name of Branch) (Branch Address) (Branch Phone#, FAX # & Email)

Dated

(Branch Code)

REQUEST FOR ____________ (Details of required service) ________________ Please arrange ___ (Complete details of required service) _____ for the following customer:A) B) C) D) E) Full name of the concern (In Block Letters): Complete Mailing Address, Telephone / Fax Numbers: Their Bankers (If required) Special Instruction if any; Type of Report Requested (Please tick): Local Credit Report (direct interview with borrower) International/Cross-border Credit Report Market Reputation Checks (without contacting borrower) SME Credit Reports (direct interview with borrower) Charges Search Reports

Certified True Copies of Form29, Form-A or any other document from SECP office. Charge Registration Legal Service

International/Cross-border Credit Report We have noted the charges to be remitted within 48 hours on receipt of above required documents/ completion of the ____________________________ through Pay Order / Draft in favor of M/s._______________________ quoting the Invoice Number.
Signature & Stamp of Branch Manager

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Credit Handbook Section 6 Mark-up Calculation & Facility Structures

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Section 6: Mark-up Calculation Facility Structures

6.1 Mark-up Calculation 6.2 Funded Facilities 6.3 Non-Funded Facilities 6.4 Seasonal Finance 6.5 Government of Pakistan Commodity Finance Wheat 6.6 Financing against Cash/Near Cash Collateral 6.7 Financing Against Shares 6.8 Financing to Financial Institutions 6.9 Market Risk Leading to Credit Risk

and

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6.1
6.1.1 6.1.2 6.1.3 6.1.4 6.1.5 6.1.6 6.1.7 6.1.8 6.1.9 6.1.10 6.1.11 6.1.12 6.1.13 6.1.14 6.1.15 6.1.16 6.1.17

Mark-up Calculation
Introduction Mark-up Mark-down Sales Price Purchase Price / Marked-up Price Finance Period / Transaction Period Grace Period Fixed Vs. Floating Rate Pricing of Loans on KIBOR Basis Timely Payment Mark-up Rate (TPMR) Standard Mark-up Rate (SMR) Timely Payment Rebate (TPR) Repayment Reminder Mark-up Recovery Frequency for Short Term Loans Term Loans Periodic Calculation of Mark-up Income and Annualized Mark-up Rate Mark-up Calculation on Classified Advances Non-Performing Loans

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6.1.1 Introduction

Credit Handbook

This chapter explains the key concepts relating to Markup, and presents illustrative markup computations and rules relating to recording of Markup. Under the Non Interest Based (NIB) financial system, banks undertake a purchase and sale transaction with a customer/borrower and earn markup/profit on the transaction. The key terminologies within the NIB system are explained below. 6.1.2 Markup It is the rate of return on Banks finances. Bank continues to charge the rate of markup mutually agreed upon between the bank and borrower but charging mark up on markup is strictly prohibited. 6.1.3 Mark-down It is the rate of return on Banks finances in case of upfront recovery of mark-up. Mark-down normally applies in case of discounting of bills. 6.1.4 Sale Price Financing is to be made on the basis of purchase and sale of goods for which a buy-back agreement is executed. The amount of finance made or to be made is the sale price, which is generally the amount of the limit. 6.1.5 Purchase Price / Markedup Price Under the buy-back agreement, the customer agrees to repurchase the asset from the bank after a specified period against the payment of total amount, which comprises the following: Banks total finance; Markup for the finance period; and Markup for the grace period, if any. This is termed as purchase price. Documents are to be executed for the Purchase Price / Markedup Price. For determining the Agreement Price, mark-up should be applied on the amount of facility for the period of the limit @ Standard Mark-up Rate (SMR), but for charging the mark up, it would be calculated @ Timely Payment Mark-up Rate.

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6.1.6 Finance Period / Transaction Period

Credit Handbook

The period from the date of finance to the date of full and final adjustment of the finance / expiry of limit is the finance period / transaction period which may be expressed in number of days, number of months or number of years.

6.1.7 Grace Period (applicable in case of term loans) Grace period is related to the installmentbased finances. To facilitate the customer for utilizing the asset for which the finance is to be made, in certain cases, a specific period is allowed after expiry of which the installment period begins. The length of grace period depends upon the nature of the asset and the circumstances. Grace period is generally expressed in number of months. For example, a loan can be approved for a term of three years inclusive of a six month grace period. Example If a loan with six years maturity including a grace period of six months with biannual repayments is approved, the first installment will fall due after twelve months. 6.1.8 Fixed Vs. Floating Rate In case of fixed rate structure mark-up rates are fixed for the period of finance whereas in case of a floating rate structure, mark-up rate is pegged to a yardstick market rate which ensures that the lenders spread remains intact irrespective of the way yardstick rates move. For example it could be 1 % over LIBOR, T-Bill rate, KIBOR etc. 6.1.9 Pricing of Loans on KIBOR Basis As per SBPs guidelines; the Karachi Inter Bank Offer Rate (KIBOR) is required to be used as the benchmark rate for determining pricing / mark-up rate for all rupee based Corporate, Commercial and SMEs lending as defined in the Prudential Regulations. SBP has issued following instructions to banks for benchmarking their lending rates to KIBOR: KIBOR has been defined as the Average rate, Ask Side, for the relevant tenure, as published on Reuters page or as published by the Financial Markets Association of Pakistan in case the Reuters page is unavailable. The banks and the borrowers will be free to decide the relevant tenure of KIBOR and the spread over KIBOR at their discretion. KIBOR will be set for the lending facility on the date of drawdown or on the mark-up reset date. The offer letters from the banks to their clients should clearly indicate the KIBOR tenure, agreed spread, frequency of revision etc.

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Note: Re-setting frequency of KIBOR must be done according to the matching KIBOR tenure which ranges from one week to three years in terms of instructions available in section 3. The requirement to use KIBOR as the benchmark rate is not applicable for the following: Export Finance Scheme (EFS) or any other financing scheme of the State Bank of Pakistan, where markup-up rates shall be charged as per SBP instructions. Term Finance Certificates/Commercial Papers approved by the Securities and Exchange Commission of Pakistan (SECP) and/or submitted to any Stock Exchange prior to January 31, 2004 and All Time Loans with agreements executed before January 31, 2004. However, if the pricing is renegotiated, the pricing of such loans will need to be benchmarked to KIBOR within the available tenors.

The financing rates under EFS will continue to be determined as per instructions issued by the State Bank of Pakistan. 6.1.10 Timely Payment Markup Rate (TPMR) It is the markup rate at which the bank wants to finance the customer, where timely payments / repayments of principal and mark-up are being made in accordance with the stipulated repayment schedule (after grace period, if any). TPMR is used for the calculation of markup to be recovered in the repayment schedule and for the making of accounting entries in the books of account. TPMR shall also be applicable where: Principal and/or markup is paid within 25 days from the due date or earlier than that. In case payment is not made by the customer within this grace period available after the due date, SMR will be charged for the entire period for which the markup was due. This is also applicable to all tranche based finances. Relevant Business Group Head would be authorized to condone the mark-up in excess of TPMR in all those cases where TPMR is paid after a lapse of 25 days. Such proposals shall not require processing by RMG. Business Units shall process all such requests at their own. However, an MIS of all such cases shall be presented to the President on monthly basis by relevant Business Group Head. In late payment cases when SMR becomes applicable, efforts should be made by the Business Units to recover the same to ensure credit discipline. However, in case where SMR cannot be recovered and the customer has made the payment of markup at TPMR, request for condoning of differential amount of SMR and TPMR should be elevated to the competent authority without delay. Such

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requests for condoning should be elevated to the competent authority immediately Such difference should not be reported in monthly reporting of credit data in CRMIS 6.1.11 Standard Markup Rate (SMR) It is the markup rate which is stated in the legal documents and is to be applied when the customer to whom finance has been accommodated defaults, or any dispute arises and the case goes into litigation. SMR shall be advised by CRMD from time to time, keeping in view the changing scenarios. 6.1.12 Timely Payment Rebate (TPR) It is the markup rebate rate, to be calculated as under: TPR = SMR TPMR 6.1.13 Repayment Reminder Where principal and/or mark-up due from customers / borrowers is not received on due date / quarter-end, a letter should be sent to client immediately but not later than 5 working days from the due date. Specimen of repayment reminder is available at appendix I to chapter 4.6. 6.1.14 Mark-Up Recovery Frequency for Short Term Loans Recovery frequency on different short term lending products:
Products Running Finance Recovery Frequency Quarterly for all other Running Finance facilities. Monthly for consumer finance products: Credit Cards and Business Sarmaya (i.e. Equity Unlock through mortgage) only. To be recovered proportionately at the time of the adjustment of each tranche / bill and also on balances outstanding at quarter ends Where mark-up at the quarter end have been fully recovered, the proportionate mark-up at the time of subsequent delivery shall be calculated from the date succeeding the quarter up to which mark-up have been fully recovered instead of from initial date of advance. For Corporate Large Customers mark-up on Cash Finance / FIM / FATR / FAPC may be recovered on quarterly basis only. Upon maturity of each tranche Upon maturity of each tranche Quarterly / as per SBP directives Quarterly / as per SBP directives

Cash Finance (CF) / Finance Against Imported Merchandise (FIM) / Finance Against Packing Credit (FAPC) / Finance Against Foreign Bills (FAFB) / Finance Against Trust Receipt (FATR)

Foreign Currency Import Finance Foreign Currency Export Finance Export Refinance pre-shipment / post-shipment Export Refinance P-II

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Note: Re-setting of KIBOR must be done according to the agreed / matching KIBOR tenor which ranges from one week to three years. 6.1.15 Term Loans Methods of calculating Purchase Price: Traditional Method Example: Amount of Loan Tenor Grace Period Principal Repayment Mark-up Repayment Mark-Up Rate (TPMR) SMR Rs.100,000 4 years 6 months 7 equal half yearly installments Half-yearly 6 MK + 3 % 20 %

Sale price is supposed to be calculated at the Standard Mark-up Rate.

SN (1) 01 02 03 04 05 06 07 08 09 Date (2) 01.01.2007 30.06.2007 31.12.2007 30.06.2008 31.12.2008 30.06.2009 31.12.2009 30.06.2010 31.12.2010 14,286 14,286 14,286 14,286 14,286 14,286 14,284 Principal Repaid (3) Balance Amount (4) 100,000 100,000 85,714 71,428 57,142 42,856 26,570 14,284 0 Mark-up @ 20 % (5) Sale Price (6) = (3) + (5)

9,918 10,082 8,548 7,202 5,667 4,321 2,635 1,440

9,918 24,368 22,834 21,487 19,953 18,607 16,921 15,724

Annuity Method Under the percentage method, markup is calculated by directly applying Mark-up rate on the principal amount outstanding at the year or quarter or month-end, as the case may be.
Formula F = A 1 ( 1 + i/m ) i/m Where the data is the same as in previous example: Annual Mark up rate I = Rate of Markup = Number of installments in a year A = Installment amount = ? n*m

16 % = 4 quarters

= 0.04 4%

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100,000 = A 1 ( 1 + .16/4) .16/4 100,000 = A 1 (0.7307) 0.04 6.733 100,000 6.733 14,852 8

Credit Handbook

100,000 = A A = A = Finance/ Principal Amount (A) Add: Mark-up Sale Price (A + B)

100, 000 18, 816 118,816

100,000 = A

If we follow half yearly installments, following procedure may be used,

1 (1 + .16/2) 0.16/2 4

1 (0.735) 0.08 100000 = A (3.312) = 30,192 Finance/ Principal Amount (A) Add: Mark-up Sale Price (A + B)

100,000 20,768 120,768

All installments having any frequency may be calculated through same formula. Annual interest rate (i) must be divided by number of installments in a year (m) and finance period (n) must be multiplied by number of installments in a year, so that rate and period may be presented on yearly basis. Annuity Based Method: Quarterly Schedule
Mark-up c = a 16 % p.a. (4% per quarter) 4,000 3,566 3,115 2,645 2,157 1,649 1,121 565 18,816 Portion of Finance Recovery d = (b c) 10,852 11,286 11,738 12,207 12,695 13,203 13,731 15,287 100,000 Net Financing sum at end (a d) 89,148* 77,862 66,124 53,917 41,222 28,019 15,288 0

Date

Financing sum at start of period (a) 100,000 89,148* 77,862 66,124 53,917 41,222 28,019 15,288

Installment (b) 14,852 14,852 14,852 14,852 14,852 14,852 14,852 14,852 118,816

31/03/01 30/06/01 30/09/01 31/12/01 31/03/02 30/06/02 30/09/02 31/12/02

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6.1.16 Periodic Calculation of Mark-Up Income and Annualized Mark-Up Rate Markup income should be accrued at each quarter end by applying the appropriate Mark-up rate on the outstanding principal amount. The Timely payment mark-up rate (TPMR) shall usually be used for such accrual. The TPMR shall be the normal mark-up rate as approved by credit approval/ review authority or as per latest circulars/ pricing grid. 6.1.17 Mark-Up Calculation on Classified Advances - Non-Performing Loans As per Prudential Regulation # 8 unrealized Mark-up on classified accounts cannot be credited to Income account. Any mark-up accruals shall be reversed and a memorandum record shall be maintained. No accounting entry shall be passed for markup on any advances classified as under the Prudential Regulations of State Bank of Pakistan. Thus, no amount will be taken to Mark-up Income A/c. Moreover, any unrealized mark-up taken to Income account prior to classification shall also be reversed. However, Branches will calculate the markup on each classified advance every quarter and note the same in a separate column on each loan sheet as a memorandum record, along with the unrealized mark-up for period prior to classification reversed as per above. Mark-up shall be calculated in terms of CRMD circulars issued from time to time.

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6.2
6.2.1

Funded Facilities
Funded Facilities PKR 6.2.1.1 6.2.1.2 6.2.1.3 6.2.1.4 Running Finance Cash Finance Demand Finance / Term Finance Payment Against Documents (PAD) 6.2.1.5 Inland Bills Purchased (IBP) 6.2.1.6 Finance Against Imported Merchandise (FIM) 6.2.1.7 Finance Against Trust Receipts (FATR) 6.2.1.8 Finance Against Foreign Bills (FAFB) 6.2.1.9 Foreign Bills Purchased 6.2.1.10 Finance Against Packing Credit

6.2.2

Funded Facilities Foreign Currency 6.2.2.1 6.2.2.2 6.2.2.3 Foreign Currency Import Financing Foreign Currency Bill Discounting Foreign Currency Export Financing

6.2.3

Funded Facilities SBP Schemes 6.2.3.1 6.2.3.2 6.2.3.3 SBP Export Re-Finance Scheme SBP LTF-EOP Scheme Other SBP Financing Schemes

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6.2.1 Funded Facilities - Pak Rupees 6.2.1.1 Running Finance

Credit Handbook

Concept Running finance facility is provided to a customer by way of allowing withdrawals from the Current Account in excess of the credit balance, maintained by the customer with the Bank. The account is allowed to be operated freely by way of multi-transactions, provided that the sanctioned limit is not violated and the account is operated strictly in accordance with the approved terms and conditions at all times. However, borrower is required to adjust the finance provided by the Bank within the stipulated expiry period (normally once a year) as per clean up requirement. Special Precautions It should be ensured that: Running Finance facility is not being used for long-term financing needs. In this respect, the financing needs of a borrower should be ascertained with regard to its seasonal cycle / cash flows. Current utilization level must be constantly monitored to ensure that the credit limit is not breached. The customer is compulsorily required to make complete adjustment of finance at least once a year, with minimum clean up period of three consecutive days, within expiry period of the approved limit. Clean up period may be increased by relevant credit sanctioning authority depending upon business nature of the customer (i.e. cyclical industries). Annual cleanup is not mandatory if 100% Cash/Near Cash security held as collateral. However, markup must be paid as and when due. Waiver of clean up requirement of RF facilities can be allowed at the original approval/ review level, provided that the customer operates in the sectors that operate round the year and either of the following conditions is complied with; o Credit turnover of the account (during validity of limits) is equal to at least four times of the approved RF line; or Clean up of up to 75 % of the RF line is achieved during the year for a consecutive period of three days.

Waiver for cleanup requirements can also be allowed at original approval/ review level for clients undertaking trading activities (where no manufacturing and or value additions is involved) provided that either of the following conditions are complied with o Credit turnover of the account (during validity of limits) is equal to at least six times of the approved RF line; or

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Clean up of up to 75 % of the RF line is achieved during the year for a consecutive period of three days.

However, in following cases, the waiver for cleanup requirement can be allowed at the level of GH RMG; Client operating in textile sector (including cotton ginning, but excluding the finished sub-sector) sugar & rice husking sectors. Clients that are operating in more than one sector, if any of its business activities falls within those businesses which are not covered for cleanup waiver above. For all other clients which are not covered above.

Compliance with the above requirements should be properly documented with appropriate bank statement. Charging of mark-up on mark-up is prohibited under NIB system. No disbursement shall be allowed against expired limit. The finance shall be disbursed to the customers after taking into account their drawing power. Drawing power to be calculated on the basis of stipulated margin required to be maintained on the security (at least primary) as per approval terms. In order to safe guard the banks interest and avoid the business risk i.e. shrinkage in value of security, it must be ensured that the stipulated margin covers at least one quarter mark-up (at SMR) at all times. Adequate insurance, as appropriate, covering assets charged in Bank's favour should be obtained/ arranged.

Note: Where one year limit stipulates that mark-up shall be paid at every quarter end, then for facility availed on 1st January, the mark-up at the end of January and February shall accrue but would not be payable / due for payment. It shall become due for payment on 31st March along with mark-up for the month of March. Application Policies The Running Finance facility should be sanctioned / renewed in a manner that the expiry date of such financing would fall at the end of calendar quarter.

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Possible Security Structure

Credit Handbook

Primary Security Hypothecation over Current Assets (Sole proprietorship/Partnership) / Charge over Current Assets of the Company (for Private & Public Limited Companies as per requirements of Companies Ordinance 1984). Pledge of Shares. Pledge / lien over cash/ near cash security

Secondary Security Registered / Equitable Mortgage of Fixed Assets Charge on Fixed Assets of the Private and Public Limited Companies as per requirements of Companies Ordinance, if the fixed assets are in the name of the borrowing company. Hypothecation of Plant and Machinery

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6.2.1.2 Concept Cash Finance

Credit Handbook

Cash Finance is a facility where an amount is disbursed against pledge of local / locally procured goods and / or merchandise. The amount after retaining the prescribed percentage of margin on stocks is transferred in a separate C/F account of the customer. Delivery of pledged stocks is allowed on repayment of finance along with markup for relevant tranche. Special Precautions It should be ensured that: Proportionate mark-up has been recovered at the time of issuance of each Delivery Order (DO) and at quarter ends, whichever comes earlier. Each tranche is adjusted within 90 to 180 days or as per approved terms (tenor of tranche may vary depending upon the seasonal financing requirements). Each tranche must be adjusted within the stipulated timeframe. Relevant Credit Approval Authority within the business group, capped at Business Group Head (without counter sign of Credit Review Authority) may allow relaxation of another 5 days provided there are due justification for the same. For each transaction, it must be ensured that pledge of fresh stocks is provided by the borrower. In order to confirm the same purchase invoice showing recent date of purchase must be obtained. However, in case of a debt swap transaction (i.e. taking over of stocks already pledged with any other bank); total tenure of the pledge including the period respective stocks remained pledged with other banks must not exceed the stipulated / approved pledge tenure for a specific borrower.

Goods pledged are required to be kept in the Banks effective control under lock and key and under Banks nominated Muccadum. Open pledge to be allowed with specific approval from competent credit approval/ review authority. Approved Muccadums are hired and deputed, in accordance with Banks Muccadumage policy, as well as various circulars issued by CRC/CRMD. Application Policies Draw down is allowed on receipt of goods for pledge. Drawing power is to be determined, based on value18 of goods placed under pledge along with stipulated margin. Finance is recovered on each delivery. Each drawdown is required to be adjusted within the stipulated period (generally 90 to 180 days) along with proportionate mark-up.
The value of goods is determined on the basis of the benchmark price determined by CRC. If no benchmark price is determined, invoice value should be used.
18

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Rollover can be allowed against fresh stocks only. Any exception shall be approved at original approval/ review level. Fresh accounting entries shall be passed in this case. Possible Security Structure Primary Security Pledge of local / locally procured goods and / or merchandise. Secondary Security In order to avoid the possibility of shrinkage in value of pledged stocks in worse cum worse scenario, tangible collateral must be obtained. In case of private & public limited Companies it must be ensured that in addition to the pledge of stocks, a ranking charge over Current Assets of the Company must also be arranged (other than pledged stocks).

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6.2.1.3 Concept Demand Finance / Term Finance

Credit Handbook

Under this type of facility, finance is allowed to the borrower for a fixed period usually exceeding one year, repayable either in periodic installments or in lump sum, at a future date. This type of finance is of non- revolving in nature. The primary purpose is to finance Fixed Assets such as Plant and Machinery, Land, Building, etc. with core analysis to focus on forecast for future years. Possible Purposes for Obtaining Term Loan New / Fresh Project: Green field project with no existing operations. Expansion: Increase in existing production / operation capacity. Balancing, Modernization & Restructuring (BMR): o o Replacement of existing old / obsolete machines with new ones. Adding back process / other machines in existing production line to improve balance.

Financing financial mismatches: Long Term needs being financed through short term sources. The demand finance facility may also be created as a consequence of loan rescheduling or as a consequence of forced financing.

Key Consideration for Approval of Term Loans Understanding Borrowers Operations Production/ Manufacturing Process: What are major raw material / inputs? What is the end product? Stages of production Example Textile Weaving Unit: Input: Yarn End Product: Grey Fabric Stages of Production: o Back Process: Warping, Sizing o Main Process: Looming Plant & Machinery Details: Production Capacity Make, Model, Year of Manufacturing Technology

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Example Textile Weaving Unit: o Make of Looms (Japanese / others) o New or second-hand o Air-Jet or Projectile Understanding Borrowers Industry Forecast finished Products Demand during tenure of the loan. Forecast availability of raw material. Forecast unit price of finished goods and inputs during the tenure of the loan. Foreseeable Regulatory environment. Forecast competitive environment of the industry and customers market share.

Comparison of Cost with Peers Cost of other similar projects that bank has financed. Independent market checks.

Credit proposal shall cover following critical areas A. Project Cost Complete cost of the project being financed by the bank to be provided with the proposal. This cost should explicitly highlight banks financed portion. Proposal should contain detailed stage wise and asset wise (i.e. land, building, machinery and initial working capital) breakup of cost. Determining a reasonably accurate cost estimate is important to ascertain the loan size and to ensure proper utilization of funds. Identification of the Project Stage wise project completion schedule along with key milestones and respective timelines to be provided. MCBs funds disbursement pattern Financing Source for CAPEX Complete project cost and its financing plan to be submitted along with explicit calculation of following ratios, Total Debt : Equity Project LT Debt : Equity Equity to be contributed in what form (i.e. cash, land etc.) Debt to finance which assets (i.e. land, building or machinery) Projections

B. C.

D.

Projections covering entire duration of the loan shall be submitted along with CP. Purpose of obtaining projections is:

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E.

To estimate the borrowers ability to repay loans Establish Loan Structure Identify suitable covenants Disbursement and Repayment Availability period to be determined and provided Grace period, if required, to be provided Principal repayment schedule shall be made part of the proposal and approval

Types of Term Finance Demand Finance - Fixed Assets Finance (DF-FAF) Security: Charge over fixed assets (land, building, machinery) / mortgage of fixed assets (land & building) Lease Finance (LF) Security: Ownership of fixed asset usually machinery / vehicle(s)

Types of Lease Finance Direct Lease Sale and Lease-Back

Special Precautions It should be ensured that: The security possessed is commensurate with the terms of finance. Where the installment payment is delayed, additional mark-up is charged for the delayed period, unless approved otherwise. Delayed payment of installments is carefully monitored, followed up and reported to the senior management.

General Conditions for Term Loans / Lease Finances Any cost overruns/ contingencies of the project will be met by the borrower from its own sources and no further finance will be allowed by the bank. Sponsors / Directors loans shall always remain subordinated in favor of Banks loan and shall not be repaid during currency of our financing. Necessary subordination agreement to the effect must be executed. Sponsors / Directors loans shall be interest free. No long term financing from any other Bank/DFI will be obtained without prior written approval of the MCB.

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Undertaking from Suppliers of machinery / equipment must be obtained that machinery / equipment being imported is brand new and its estimated useful period of working is at least ten years. The Sponsors will not dispose off / transfer their shareholding and/or transfer management of the Company during tenure of finance without prior written approval from the Bank. Banks financed assets should always remain identifiable / segregated from overall project. Non-payment of any single installment towards due obligation (Principal as well mark-up) will classify the exposure as "Default". In the event of any single default of the contractual obligation, Bank reserves the right to commission a special cost & management audit by a firm of auditors of bank's choice at borrower's cost. Material Adverse Clause Cross Default Clause

Post Disbursement Monitoring In all cases where long-term facilities are being availed by customers along-with short-term / working-capital facilities, annual review of CPs for short-term / working-capital facilities must include all long-term facilities for review. In all cases where customers are availing only long-term facilities, CPs for only long-term facilities should invariably be put-up for annual review. In all such cases, the Credit Proposals accompanied by revised projections for the remaining tenure of the long-term facilities should be elevated up to the level of the Sanctioning Authority or Group Head Risk Management, whichever falls earlier in the Credit Approval / Review Authority chain. Regular plant/ site visits shall be conducted by the concerned business officials and recent visit report shall be submitted to approval/ review authority at the time of review.

Business Units shall submit comparison of Projections with actual numbers. Identify reasons for deviation from projections, if any, whether negative or positive. Analyze Banks risk in terms of changing scenarios. Devise account strategy. Moreover, revised projections shall be submitted, in case there is a material change in operational and /or financial standing of the project.

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(These above mentioned monitoring Infrastructure Project Finance) Possible Security Structure Primary Security aspects

Credit Handbook
should also be observed in

Registered / Equitable Mortgage of Fixed Assets Charge on Fixed Assets of the Private and Public Limited Companies as per requirements of Companies Ordinance, if the fixed assets are in the name of the borrowing company. Hypothecation of Plant and Machinery Any other security acceptable to bank.

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6.2.1.4 Concept Payment Against Documents (PAD)

Credit Handbook

PAD (Payment Against Documents) is not a regular lending facility, rather, it arises when the Bank receives documents under a Letter of Credit issued by the bank and makes payment against the documents. The importer enters in buy back agreement with the bank at the time of submitting request for opening of LC. Banks prescribed LC request Performa (i.e. IB-8) also serves as buy back agreement. Afore mentioned arrangement binds the importer to meet the obligation to purchase the import documents at Markedup Price (purchase price). The import documents, as per Markup Agreement, would be purchased by the Bank for the amount of finance and sold to the importer at the Markedup Price. When an import bill is received and lodged, two types of transactions shall be deemed to have taken place; purchase and sale of import documents. Retirement occurs when the importer receives the documents from the Bank and pays the bill amount along-with mark-up. The same may also be affected through available / approved limit. In case of sight LC, approved limit may be Finance Against Imported Merchandise (FIM) or Finance Against Trust Receipt (TR). In case of Usance LC, it may be DDAA line. Sometime, customers have approved DDAA line but do not provide funds at the time of maturity of DA bills. Then bank shall make payment against the bills at maturity and create Forced PAD.

Special Precautions In some cases, the customers do not provide necessary funds for retirement of sight LCs / DA bills on maturity, as a result of which the Bank is compelled to book PAD / Forced PAD (respectively) to honor the import bills. Considering this situation and for discouraging such customers who do not manage their finances properly; following instructions are to be complied with: o The branches are restricted from granting DDAA (Delivery of Document Against Acceptance) facility to such customers. Therefore upon creation of forced PAD/FIM for the first time in a year, the branches need written clearance from Regional Manager / General Manager where such forced financing has occurred and for the second and third time from original approval/ review authority. If the forced financing is not settled within 30 days, then the General Manager should report the matter directly to respective Group Head for seeking further course of action. The branch should not allow the opening of new Letters of Credit to customers having overdue / forced PAD without approval from relevant credit approval/ review authority (to be capped at the level GH RMG).

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It is strongly recommended that once the documents are received by the Bank from the correspondent Bank and the customer does not come forward to have the goods cleared and retire the documents, the concerned official should take steps to transfer the facility from PAD to Forced FIM. As soon as the documents of import bills are received, these should be scrutinized in accordance with the TSCs procedural manual. PAD should be created in case of Sight L/Cs only. In case of usance import bills, if the customer does not make payment at maturity date, the branch should create Forced PAD (Usance Bills Unpaid). Classification of Advances, where applicable, is to be done strictly in accordance with period specified in Prudential Regulation. The trade bills are required to be classified as loss directly if overdue by 180 days. Branch should keep themselves abreast of whereabouts of goods and obtain storage certificates, where applicable. Mark up on PAD/ forced PAD shall be recovered/ charged as per CRMD circulars/ Banks schedule of charges as issued/ amended from time to time.

Possible Security Structure Primary Security Lien on import documents

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6.2.1.5 Concept Inland Bills Purchased (IBP)

Credit Handbook

This type of facility is created when the Bank purchases the goods (documents of title to goods) from the drawer (seller) of the bill and sells the same to the drawee (buyer), both located within the country. Bank acts as an agent of the drawer under an agreement with the drawer that he will repurchase it back from the Bank, if drawee would not promptly retire the bill. Normally, the facility shall be extended after receiving acceptance of the drawees bank. However, the same may be extended for selected customers on preacceptance basis, in case of clean export documents. IBP facility shall not be extended against discrepant documents (or documents arranged against firm order). On exceptional basis, explicit approval shall be obtained from relevant approval/ review authority. The facility shall be extended after ensuring adequate collateral arrangements. An Inland Bills Purchased facility should be extended on the basis of Markup / Markdown system. The concept / working of this system is explained hereunder: Mark-up This mode of financing would be applied only in case where Bank charges are to be recovered from the drawee i.e. the correspondent bank will honor the payment of the bill of exchange. Mark up shall be charged/ recovered as per CRMD circulars/ Banks schedule of charges/ latest approved pricing grid, as issued/ amended from time to time. Mark-down This mode of financing will be applied only when the Bank charges are recoverable from drawer. Commission + Mark-down for 20 days (in case of sight bills) / up to maturity period (in case of usance bills) shall be recovered upfront. Customer gets Bill amount less Commission / other charges, Mark-down amount and margin (if any), while finance is booked at Bill amount. Mark-down to be recovered upfront and recorded as liability under Mark-up recovered in advance. This liability is accounted for as Mark-up income on realization / adjustment or on quarter ends, whichever is earlier. Where bill amount is not realized within above period, Mark-down will be charged at the higher rate as per CRMD circular (to be amended from time to time) and in that scenario difference amount will be recovered from the client i.e. difference between normal mark-down rate (recovered on an upfront basis) and the overdue mark-down rate. Special Precautions Among the normal precautionary measures to be taken by Branch Manager, while allowing this facility; the following are particularly important:

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Reports on the credit worthiness of the drawee / drawer of the bills should be solicited from their bankers. Upon obtaining such reports, they should be closely examined. Even the slightest adverse indication in any of these reports should immediately be brought to the notice of the approving authority. Proper consideration as to the type or quality of the goods, if any, covered under the bills. Adequate security/margin should be obtained to minimize Bank's risk of lending against the security of the bill. Total value of bills outstanding within the approved limit is to be carefully assessed. Finance outstanding for an abnormal period is to be examined / investigated, including bills that have matured but have not been paid. Bank's legal title to the goods, if any, covered by the inland bills should be verified. Transport documents should usually be made out in the name of the drawees bank. Goods consigned under the bills presented should be insured in favor of the Bank at the expenses of the customer (the drawer) against pertinent risks, including fire, theft, riot, civil commotion and any other risk, as may be required. In case of documentary Letters of Credit, the terms of Letters of Credit, including transportation requirements should be followed. Exposure to be booked after receipt of acceptance from L/C opening bank , however pre-acceptance exposure can be booked subject to the condition that Documents must be clean i.e. fully comply with terms & conditions incorporated in the LC. Facility may be extended to MCB customers only (who may or may not have borrowing relationship with the Bank). In case a customer does not have a borrowing relationship with MCB, name clearance shall be obtained from relevant the Business Group Head on one time basis. No formal credit approval/ review shall be required for such requests. a. Inland bills drawn under DA/Usance LC of any customer shall be purchased/discounted, subject to the following conditions: Receipt of authenticated acceptance from LC issuing Bank / DFI. Rating of bank should be as per under-mentioned table. FI clearance and limit allocation on case to case basis by Financial Institutions & International Division (FIID), which should be in place upfront.

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b. Joint approval on transaction basis should be obtained from the following authorities for CBBG and WBG customers as follows: For CBBG Customer: 1-Head TFD 2-Credit Head CBBG For WBG Customers: 1-Division Head TPD 2-Group Head WBG. c. Pricing shall be as per the latest approved Pricing Grid. d. The discounting shall be as follows: - On mark-down basis (i.e. discounting charges shall be recovered upfront)if discounting charges are on account of LC beneficiary. - On mark-up basis if discounting charges are on account of LC applicant. e. Trade Service Centers (TSCs) shall be responsible for handling all operational requirements including but not limited to obtaining authenticated acceptance from LC issuing bank. f. All KYC and AML formalities on client shall be the responsibility of the concerned Branch.

g. Agreement for Discounting / Purchase of Bills (IB-20) shall be obtained in all the cases.

Transfer of exposure to Bankers Acceptance Outstanding against Inland Bills Purchased (IBP) facility may be excluded from customers exposure subject to following: o Receipt of authenticated acceptance from inland LC opening Bank rated by Standard & Poor, Moodys, Fitch Ibca, Japan Credit Rating Agency (JCRA) or credit rating agency on approved panel of State Bank of Pakistan as under:

Aggregate amount of bill(s) Maturity of the bill(s) purchased/discounted purchased/discounted on account of one person a) Short term (not more Up to US$ 250,000 than 1 year) b) Short term (not more More than US$ than 1 year) 250,000 -Anyc) Long term (more than 1 year)

Minimum rating of the L/C issuing and accepting banks/DFIs No restriction At least BBB and above At least A and above

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The export bills shall be converted into equivalent USD using Ready rates as per Exchange rates for mark to market revaluation by Authorized Dealers in foreign exchange sheet which is updated daily and is available on SBP website. o Approval from FIID (Financial Institution & International Division). Upon receipt of authenticated acceptance from inland LC issuing bank, branches shall approach FIID for limit allocation against the inland LC issuing bank on case to case basis. FIIDs approved shall be held on record. Following FIIDs approval, customer exposure may be transferred to Banker Acceptance IBP.

In case the LC opening customer and the LC beneficiary are related parties then bank may be at a risk of being exposed for money laundering and even a fraudulent activity may take place. Branch/ Relationship manager has to show extra vigilance while purchasing/ discounting the bills of such parties. Buyer and seller, though related, their credit report shall be obtained separately form their bankers/ ICIL. All the aspects of AML and KYC policy be religiously followed and customer should be tested on a scale of EDD (enhanced due diligence). The customers may also be requested to submit a certificate of credit history from their previous bankers stating their credit worthiness and also submit a certificate of membership from a trade body. Also, the transaction should be consistent with the customer's profile / usual course of business.

Non-Payment of Bills In case the bill is not paid-off in 30 days, the drawee Branch would either return the bill or seek further instructions through TCD from the drawer branch. In the event of the relative bill is returned to the Drawer Branch, the following procedure shall be followed: Drawer Branch may face two situations: The drawer of the bill may have a credit balance in the account. The drawer of the bill may have a debit balance in the account.

If there is sufficient balance in the Drawer's Account, outstanding amount is to be recovered from the same. If there is a debit balance in the Drawers Account, outstanding bill amount is to be transferred to Unpaid IBP A/c and the drawer should be intimated immediately and should be asked to arrange for sufficient funds in his Account for adjustment of Unpaid IBP. Proportionate rebate would be given to Party for earlier adjustment of account. Disposal instructions regarding the bill should also be obtained from him.

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IBP against deferred payment LC

Credit Handbook

IBP may be allowed against Deferred Payment / Acceptance type LCs which shall be considered at parity with remaining LC types provided following guidelines are meticulously followed. 1. The document forwarding covering schedule of MCB, for all export documents drawn against Deferred Payment/Acceptance type LCs will explicitly mention the following clause:We have honored documents valuing __________ (value and currency of the documents) against your LC number _______________. 2. Clean Export Documents In case clean documents are presented by the exporter for prepayment/purchase under Deferred Payment type unrestricted LC, MCB will incur Deferred Payment Undertaking and may prepay (as per usual procedure for creating FBP / FCBD etc.) under approved customer limit. The document forwarding schedule of MCB shall explicitly mention the following clause: We have honored documents valuing __________ (value and currency of the documents) against your LC number _______________ and the beneficiary has been prepaid 3. Discrepant Export Documents In case discrepant documents are presented by the exporter to MCB under Deferred Payment type LC, any one of the following may be adopted: a. Exporter may be prepaid by booking the exposure under customers approved discrepant documents line, if available. b. Dispatch the documents to the LC issuing bank and upon receipt of authenticated acceptance of the discrepancies / Deferred Payment Undertaking (due date confirmation ) from the issuing bank, exporter may be prepaid after giving an explicit notice to the issuing bank regarding incurring Deferred Payment Undertaking and prepayment to the beneficiary against Deferred Payment LC. 4. Banker Acceptances In either of above cases (2 or 3) exposure may be moved to bank risk under Banker Acceptance upon receipt of deferred payment undertaking of the issuing bank containing a definite maturity date subject to the condition that all instructions in the Credit Handbook (as amended from time to time ) are meticulously complied. i.e. a. Receipt of authenticated acceptance/deferred payment undertaking from LC issuing bank (rating of the bank as per above mentioned table).

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b. Approval and limit allocation from FIID (Financial Institutions & International Division) to be obtained on case to case basis. Possible Security Structure Primary Security Lien on Export documents

Secondary Security Hypothecation over Current Assets (Sole Proprietorship/Partnership) / Charge over Current Assets of the Company (for private & public limited Companies as per requirements of Companies Ordinance 1984). Pledge / lien over cash/ near cash securities Registered / Equitable Mortgage of Fixed Assets Charge on Fixed Assets of the Private and Public Limited Companies as per requirements of Companies Ordinance, if the fixed assets are in the name of the borrowing company. Hypothecation of Plant and Machinery

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6.2.1.6 Concept

Credit Handbook

Finance against Imported Merchandise (FIM)

Under the Finance against Imported Merchandise (FIM), financing shall only be made available on the basis of mark-up for imported goods against Letters of Credit established and goods pledged with MCB. The imported goods are to be pledged with MCB and the borrower is required to get each consignment released within a specified period, but not exceeding 120 days. Financing under FIM may be allowed in following situations: The importer has a regular FIM limit for financing of import value of goods/custom duties/ government dues, or both. Financing of custom duties and government dues should be discouraged and FIM should be allowed to finance the imported goods preferably at invoice price rather than at landed cost. However, incase client requests for financing at landed cost, specific approval must be obtained from the relevant credit approval / review authority. This specific form of facility may be sanctioned in following circumstances, Importer is unable to dispose of the goods immediately and these shall be sold / consumed over a period of time; Collateral provided seems to be relatively less liquid and it becomes imperative to retain the stocks as security; Given the risk profile of the customer; it becomes necessary to allow sale / consumption of goods to importer after payment of banks finance; Importer business activity shall not be disrupted, if goods are released in piece meals. This is more relevant for manufacturing processes/ businesses. Sometime bank has to create FIM in order to clear consignment. Such facilities are treated as forced FIM. Deliveries to importers under forced FIM should only be allowed upon payment and after seeking approval from competent authority.

Special Precautions Margin should be recovered from the importer at prescribed rates subject to SBP restrictions. The application for FIM facility is scrutinized in the normal way like any other advances facility, with emphasis on the following matters: o o o Credit worthiness of the customer. Profit and income generating capacity of imported merchandise. Marketability of product to be financed.

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Margin should be recovered from the importer as prescribed in Sanction Advice.

Due consideration must be given to the nature of imported commodities while structuring tranche adjustment tenure. If the goods are not sold / consumed within their life cycle, their condition may deteriorate and they may become unsaleable or sold at a discount. Moreover, goods must not be perishable. Margin should be imposed based on the risk associated with the sale ability or perish ability of the goods. Additional care shall be exercised while financing those goods whose measurement and valuation is difficult (i.e. coal, concrete, unpacked grain, timber, stone, scrap from ship breaking etc). Pledge of such commodities shall be allowed only to top tier customers. The facility to be allowed against goods imported through MCB only. Where FIM facility is allowed to the customer, after consent of the customer, documents shall be handed over to banks approved clearing agent for clearing of the consignment and delivery of goods to pledge site. FIM shall be booked by adjustment of PAD after receipt of goods at the pledge site and confirmation of banks muccadum of receipt of goods. Till such time entry shall remain in PAD and relative mark-up shall be charged. Normal markup rates may be allowed for this period, to the customer subject to approval from the relevant authority. It must also be ensured that proper margin requirements shall be observed at various stages of facility. The warehouse may be owned or rented by the customer, but goods stored therein shall remain in the banks custody under approved Muccadumage arrangement. Goods shall only be released to the importer by issuing delivery order instructing the Muccadum to release the goods bank has recovered principal and markup related to that particular tranche of goods. The delivery order must specify detail of goods to be delivered (consignment / batch, serial identification numbers of either the goods or the packages containing those goods, their quantity and monetary value) Each tranche must be adjusted within the stipulated timeframe, however, Group Head or relevant Credit Approval Authority within the business group (without counter sign of Credit Review Authority) may allow relaxation of another 5 days provided there is due justification for the same. However, in case of a facility is made available by the Competent Authority (i.e. GH RMG) to finance the goods imported through other banks also, following procedure must be strictly followed: o Payment must be made directly to the L/C Opening Bank.

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o o

Bill of Entry should not be more than 30 days old. Total tranche of FIM including the bill of entry period should not exceed the approved tenor.

Mark-up Agreement The Mark-up Agreement should be executed for the Sale Price of the goods (i.e. Marked-up price) which should be specific and should comprise of the following: Amount of PAD. Add amount of unpaid Mark-up on PAD (to be transferred to Mark-up Recoverable A/C FIM). Preferably client must be insisted to settle / adjust the Mark-up due on PAD prior to initiation of FIM. Add amount of duty, sales tax, surcharge, demurrage, etc. Add Mark-up for validity of limit, at SMR.

Bank financing means PAD amount transferred to FIM plus duty, sales tax, surcharge. Possible Security Structure Primary Security Pledge of imported goods/ merchandise. Secondary Security In order to avoid the possibility of shrinkage in value of pledged stocks in worst case scenario, tangible collateral must be obtained. In case of Private & Public Limited Companies it must be ensured that in addition to the pledge of stocks, a ranking charge over Current Assets of the Company must also be arranged (other than pledged stocks).

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6.2.1.7 Finance Against Trust Receipts (FATR) Concept

Credit Handbook

The facility is allowed by way of releasing title documents (related to goods) arranged against sight letter of credit to importers after they sign Trust Receipt. TR is an evidence of the fact that customer is getting custody of the goods as trustees of the bank and not as owner of the goods. This post import facility enables the importers to obtain delivery and custody of goods and arrange to retire the bill out of the sale proceeds of those goods. The documents of title are delivered against the customers' signature on the prescribed Trust Receipt form/related security documents. Thus the borrower is bound under legal obligation to pay the outstanding out of the sale proceeds of the relevant goods and before the sale, the Bank has lien over goods held by customer, which are released by Bank on trust to them. The facility implies that, customer shall comply terms of the trust receipts executed at the time of obtaining title documents (of goods) and promptly deposit sale proceeds of the goods with the bank Special Precautions The bank should ensure that: Fund Based Finance against Trust Receipt should not be allowed under Usance L/Cs. Facility is allowed against sight L/Cs only. This facility is for transaction under Sight L/Cs and is not allowed when a customer has availed DA/DDAA facility and wishes to avail the facility by making payment of DA bills through T.R. Although State Bank of Pakistan (SBP) does not compulsorily require obtaining of collateral / securities in addition to Trust Receipts, however, in order to ensure that the sale proceeds of the goods are deposited by the date stipulated in the limit, proper collateral shall be obtained. Imported goods are directly released by the customer and moves directly to customers godowns without involvement of banks approved clearing and forwarding agent or muccadum. The Trust Receipt facility is allowed to top tier customers only. These customers have an established good credit history with bank and are known not to have financial problems. Theoretically, banks interest remains secure as long as goods are unsold. But practically, field needs to understand the life cycle of imported commodities and insist payment against imports after a reasonable time period. This requires special care, particularly when imported goods have a short life cycle. Trust receipt facility is extended to the importer under following conditions,

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o

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The importer is trustworthy and it is unlikely that the importer/ customer shall consume or sell the imported goods without payment of proceeds to the bank; Importers business or manufacturing process necessarily requires uninterrupted availability of the goods. The piecemeal release of goods, as in case of FIM, may hamper customers business/ cash flows. In case importer in not cash enriched, but collateral provided contains reasonable value and is readily marketable.

Application Policies Trust Receipt Financing facility shall be granted for retirement of the following documents / delivery of goods: Documentary bills (on DP basis) drawn under sight L/Cs (Foreign / Inland). Documentary bills (on DP basis) on collection basis.

The TR financing facility shall only be extended to such parties who have been sanctioned limits under Trust Receipts. If limit is not available, separate approval should be obtained from the relevant credit approval/ review authority. This facility under TR financing will, normally, be for a maximum period of sixty (60) days. Each tranche must be adjusted within the stipulated timeframe, however, relaxation of 5 days may be allowed by relevant approval authority (capped at Business Group Head) provided there are due justification for the same. Possible Security Structure Primary Security Trust Receipt

Secondary Security Hypothecation over Current Assets (sole proprietorship/partnership) / Charge over Current Assets of the Company (for private & public limited Companies as per requirements of Companies Ordinance 1984). Pledge / lien over cash/ near cash securities Registered / Equitable Mortgage of Fixed Assets Charge on Fixed Assets of the Private and Public Limited Companies as per requirements of Companies Ordinance, if the fixed assets are in the name of the borrowing company. Hypothecation of Plant and Machinery

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6.2.1.8 Concept Financing Against Foreign Bills (FAFB)

Credit Handbook

Financing against Foreign Bills (FAFB) is a post shipment finance facility, which is allowed against export bills drawn under L/C and / or Firm Contract and are sent for payment under documentary collection against DP / DA basis. Documentary collection consists of export bills accompanied with documents evidencing the shipment of goods. The facility is extended for exporters on post shipment basis, whereby, customer arranges exports from own sources. Subsequently, seeks finance from the bank against documentary bills drawn under LC and /or firm Contract. FAFB facility is primarily secured by a lien over the export bills that the exporter draws on the importer after affecting shipment. The term "documentary bills" is used for Bills of Exchange accompanied by the relevant documents of title to goods. For banks perspective; repayment source shall be proceeds of the export bill. Bank require lien over export bill to ensure recovery of export bill proceeds. Lien allows the bank to use bill proceeds for settlement of the facility along with markup. Bank has right to call upon the exporter to settle the facility from other sources, if bill proceeds are not realized. Since export documents have not been purchased by the bank and title of the asset denominated in foreign currency is held with the customer. So, exchange rate risk shall not be borne by the bank. In case of any adverse exchange rate fluctuation, customer shall have to bear loss. If a bill is dishonored upon presentation / maturity; the bank shall exercise its recourse to the exporter. Application Policies FAFB would normally be granted for a maximum period of 10 days in case of Documents Against Payment (DP)/ Sight Export Bills and for tenure of the bill in case of Documents Against Acceptance (DA) Bills. Special Precautions Before extending FAFB facility, branch/TSC should obtain credit report of the foreign buyer (importer). Branch/TSC should mark in bold letters on Export Bill File that FAFB finances have been given by stating CARE FAFB Rs._____________ allowed on _____________. This would ensure that export proceeds are utilized for adjustment of financing facility.

Transfer of exposure to Bankers Acceptance Outstanding against export documents drawn under DA (usance) L/C of international banks may be excluded from customers exposure subject to following:

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Receipt of authenticated acceptance from LC opening Bank rated by Standard & Poor, Moodys, Fitch Ibca, Japan Credit Rating Agency (JCRA) or credit rating agency on approved panel of State Bank of Pakistan as under: Aggregate amount of bill(s) Maturity of the bill(s) purchased/discounted purchased/discounted on account of one person a) Short term (not more Up to US$ 250,000 than 1 year) b) Short term (not more More than US$ than 1 year) 250,000 c) Long term (more than -Any1 year)

Minimum rating of the L/C issuing and accepting banks/DFIs No restriction At least BBB and above At least A and above

In case export bills are in currencies other than USD, in order to ensure compliance with the above criteria, the export bills shall be converted into equivalent USD using Ready rates as per Exchange rates for mark to market revaluation by Authorized Dealers in foreign exchange sheet which is updated daily and is available on SBP website. Approval/ Limit allocation from FIID (Financial Institution & International Division). Upon receipt of authenticated acceptance from LC issuing bank, branches shall approach FIID for limit allocation against the LC issuing bank on case to case basis. Following FIIDs approval/ limit allocation, customer exposure may be transferred to Banker Acceptance.

Treatment of Mark-up Mark up shall be charged/ recovered as per CRMD circulars/ Banks schedule of charges as issued/ amended from time to time. Recovery of Income Mark-up should be recovered at the time of each calendar quarter or on realization of bill whichever is earlier. Possible Security Structure Primary Security Lien on Export documents

Secondary Security Hypothecation over Current Assets (Sole Proprietorship/Partnership) / Charge over Current Assets of the Company (for private & public limited Companies as per requirements of Companies Ordinance 1984). Pledge / lien over cash/ near cash securities

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Registered / Equitable Mortgage of Fixed Assets Charge on Fixed Assets of the Private and Public Limited Companies as per requirements of Companies Ordinance, if the fixed assets are in the name of the borrowing company. Hypothecation of Plant and Machinery

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6.2.1.9 Concept

Credit Handbook

Foreign Bills Purchased (Negotiated Under L/C)

Exporters requiring funds immediately against their export bills drawn under LCs (both Sight and Usance), approach the Bank who then negotiates / purchases / discounts the bill and pay exporter the value in Pak Rupees. Export documents arranged against firm order or contract cannot be negotiated / purchased under FBP In other words, negotiation of export bills drawn under L/C is Banks purchase and claiming /obtaining reimbursement there against is Banks Sales. From banks perspective, negotiation imbeds the risk of documentation errors, not detected by the bill buying bank and non-realization of the bill. The difference of exchange earning between purchases and sales of foreign currency is banks profit, whereas in case of rupee bills, banks profit is in the shape of negotiation commission. However, it is a condition that all direct Bank expenses i.e. foreign correspondents charges claimed by the opening Bank / Reimbursing Bank, if any, should be recovered from the Exporters unless it is explicitly stated in the Letter of Credit that the charges are on LC Opener's Account. Special Precautions Branch/TSC should examine that all terms and conditions of L/C are duly complied with. Negotiated documents obtained in no case should be handed over to the exporter for the purpose of dispatch. Field is required to obtain adequate collateral, if realizability of the export bill is questionable. This happens in case of negotiation of discrepant bills under LC (Sight / Usance). Facility may be extended to MCB customers only (who may or may not have borrowing relationship with the Bank). In case a customer does not have a borrowing relationship with MCB, name clearance shall be obtained from relevant Business Group Head on one time basis. No formal credit approval/ review shall be required for such requests. a. Foreign bills drawn under DA/Usance LC of any MCB customer shall be purchased/discounted, subject to the following conditions: Receipt of authenticated acceptance from LC issuing Bank / DFI. Rating of the bank as per below mentioned table.

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FI clearance and limit allocation on case to case basis by Financial Institutions & International Division (FIID), which should be in place upfront.

b. Joint approval on transaction basis should be obtained from the following authorities for CBBG and WBG customers as follows: For CBBG Customer: 1-Head TFD 2-Credit Head CBBG For WBG Customers: 1-Division Head TPD 2-Group Head WBG. c. Mark up shall be charged/ recovered as per CRMD circulars/ Banks schedule of charges/ latest approved pricing grid, as issued/ amended from time to time. d. Trade Service Centers (TSCs) shall be responsible for handling all operational requirements including but not limited to obtaining authenticated acceptance from LC issuing bank. e. All KYC and AML formalities on client shall be the responsibility of the concerned Branch. f. Agreement for Discounting / Purchase of Bills (IB-20) shall be obtained in all the cases.

Transfer of exposure to Bankers Acceptance Outstanding against export documents drawn under DA (usance) L/C of international banks may be excluded from customers exposure subject to following: Receipt of authenticated acceptance from LC opening Bank rated by Standard & Poor, Moodys, Fitch Ibca, Japan Credit Rating Agency (JCRA) or credit rating agency on approved panel of State Bank of Pakistan as under: Aggregate amount of bill(s) Minimum rating of the Maturity of the bill(s) purchased/discounted L/C issuing and accepting purchased/discounted on account of one banks/DFIs person a) Short term (not more Up to US$ 250,000 No restriction than 1 year) b) Short term (not more More than US$ At least BBB and above than 1 year) 250,000 c) Long term (more than -AnyAt least A and above 1 year)

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In case export bills are in currencies other than USD, in order to ensure compliance with the above criteria, the export bills shall be converted into equivalent USD using Ready rates as per Exchange rates for mark to market revaluation by Authorized Dealers in foreign exchange sheet which is updated daily and is available on SBP website. Approval/ Limit allocation from FIID (Financial Institution & International Division). Upon receipt of authenticated acceptance from LC issuing bank, branches shall approach FIID for limit allocation against the LC issuing bank on case to case basis. Following FIIDs approval/ limit allocation, customer exposure may be transferred to Banker Acceptance.

Application Policies Export Bills drawn against Irrevocable L/Cs issued by the foreign bank are purchased from exporters in Pakistan. Branches should ensure that all necessary precautions suggested in the Banks Trade Services Manual are undertaken and due care is exercised before advising L/Cs to the customer and purchasing/negotiating documents. Branches/TSC should purchase only those documents which fully conform to the terms of L/C. After purchase, documents are forwarded to the L/C opening bank for obtaining reimbursement. Branches receive reimbursement / payment through the Banks foreign correspondents maintaining MCBs Nostro Account in various currencies. Reimbursement instructions in L/Cs should be carefully read before Letters of Credit/negotiating documents. Discrepant Documents Documents containing discrepancies shall be allowed for negotiation. For such negotiation, a separate discrepant line within the overall FBP/FAFB line must be approved by the relevant approval authority. After approval of relevant approval authority or under the approved arrangement, as the case may be, the transaction shall be done against buyback agreement (IB-9). Various discrepancies and their possible solutions are explained in the Trade Services Manual. Approval for Negotiating Discrepant Documents Buy-Back Agreement Buy Back Agreement (IB-9) from the borrower / exporter should necessarily be obtained in all cases unless mentioned or other - wise in Approval of Finance.

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Buy Back Agreement will be entered into between the Bank and the exporter whereby the Bank agrees to buy the bill from the exporter and sends the documents to the foreign bank for its payment under L/C, with the undertaking of the exporter that in the event of the bill being returned unpaid, the exporter will buy it back at the selling price of the Bank. For the purpose of this agreement, the selling price shall contain Purchase Price only. Purchase Price is a pre-determined price necessary to recover outstanding finance and Markup from the Exporter through persuasion and/ or recovery proceedings in case of defaults) plus difference in exchange and Markup thereon. Markup Mark up shall be charged/ recovered as per CRMD circulars/ Banks schedule of charges as issued/ amended from time to time. FBP against deferred payment LC International Chamber of Commerce (ICC), by virtue of the Article 2, Article 7(c) and Article 12(b) of latest UCP revision (ICC Publication No. 600), has permitted prepayment against Acceptance / Deferred Payment type of LCs. So export finance / bill purchase facility may be allowed against Deferred Payment / Acceptance type LCs which shall now be considered at parity with remaining LC types provided following guidelines are meticulously followed. 1. The document forwarding covering schedule of MCB, for all export documents drawn against Deferred Payment/Acceptance type LCs will explicitly mention the following clause:We have honored documents valuing __________ (value and currency of the documents) against your LC number _______________. 2. Clean Export Documents In case clean documents are presented by the exporter for prepayment/purchase under Deferred Payment type unrestricted LC, MCB will incur Deferred Payment Undertaking and may prepay (as per usual procedure for creating FBP / FCBD etc.) under approved customer limit. The document forwarding schedule of MCB shall explicitly mention the following clause: We have honored documents valuing __________ (value and currency of the documents) against your LC number _______________ and the beneficiary has been prepaid 3. Discrepant Export Documents In case discrepant documents are presented by the exporter to MCB under Deferred Payment type LC, any one of the following may be adopted:

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a. b.

Credit Handbook

Exporter may be prepaid by booking the exposure under customers approved discrepant documents line, if available. Dispatch the documents to the LC issuing bank and upon receipt of authenticated acceptance of the discrepancies / Deferred Payment Undertaking (due date confirmation ) from the issuing bank, exporter may be prepaid after giving an explicit notice to the issuing bank (through authenticated SWIFT) regarding incurring Deferred Payment Undertaking and prepayment to the beneficiary against Deferred Payment LC.

4. Banker Acceptances In either of above cases (2 or 3) exposure may be moved to bank risk under Banker Acceptance upon receipt of deferred payment undertaking of the issuing bank containing a definite maturity date subject to the condition that all instructions in the Credit Handbook (as amended from time to time ) are meticulously complied. i.e. a. Receipt of authenticated acceptance/deferred payment undertaking from LC issuing bank (rating of the bank as per above mentioned table). b. Approval and limit allocation from FIID (Financial Institutions & International Division) shall be obtained on case to case basis. Possible Security Structure Primary Security Lien on Export documents

Secondary Security Hypothecation over Current Assets (Sole Proprietorship/Partnership) / Charge over Current Assets of the Company (for private & public limited Companies as per requirements of Companies Ordinance 1984). Pledge / lien over cash/ near cash securities Registered / Equitable Mortgage of Fixed Assets Charge on Fixed Assets of the Private and Public Limited Companies as per requirements of Companies Ordinance, if the fixed assets are in the name of the borrowing company. Hypothecation of Plant and Machinery

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6.2.1.10 Concept Finance Against Packing Credit (FAPC)

Credit Handbook

Finance Against Packing Credit (FAPC) is Pre-shipment or Pre-export Finance, extended to the exporters against valid export letter of credit / firm order. It is also applicable to items not eligible under the concessionary Export Refinance Scheme of the Government. The finance is extended to exporters to meet the expenses listed below: Freight Charges. Clearing Forwarding Charges. Export Duty, etc. Handling Charges. Purchase of Goods. Packing Requirement.

The facility under packing finance is secured by creating a lien on the irrevocable letter of Credit / firm order and stocks required for the export thereof. It also entails the signing up of a buy-back agreement between the exporter and the Bank. Additional collateral are also obtained from the borrower to safeguard Banks interest. The concept of purchase and sale, applied to FAPC, is as follows: Finance is provided to the exporter for the purchase of goods to be exported. In other words, the goods or product are to be purchased by the Bank on behalf of the exporter who then repurchases them from the Bank at Marked-up price. The marked-up price comprises cost of goods / documents and mark-up is added to the total cost of goods at a mutually agreed price between the exporter and the Bank. The exporter will pay amount of the Mark-up plus cost of goods /documents upon negotiation of export documents drawn under L/C or upon receipt of export proceeds. In the event of non-payment of overdue Export Bill, the exporter undertakes to re-purchase the documents of title to goods or export bill from the Bank at marked-up price agreed in the buy-back agreement.

Eligibility FAPC is allowed to the exporters who are in possession of an Irrevocable Letter of Credit, or a firm order for export and to whom a regular limit of Finance against Packing Credit is granted, or prior approval of competent authority is obtained, on a case-to-case basis.

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Period of Financing

Credit Handbook

Finance against Packing Credit is to be granted up to the period the shipment of goods as per contract/LC and the pre-shipment finance shall be adjusted from the post shipment finance. In case customer client chooses to send the respective export documents on collection basis without conversion of pre-shipment into post-shipment finance, in that scenario the pre-shipment finance can remain outstand for a maximum period of 180 days from the date of shipment, however, in case the tenure of L/C / Contract is less than 180 days or is on sight basis, adjustment must be ensured accordingly from the repatriation of export proceeds of the respective export bill. Special Precautions The L/C / Contracts shall be checked to the following effects: Whether goods are permissible for export or not. Any clause or condition mentioned in the export order / L/C, is difficult to fulfill due to: o Export Trade Regulations. o Foreign Exchange Regulations. A check to be kept on the price of exported goods in the International Market. Tenure of the bill and that of the L/C is to be taken into account. Documents of title of goods to be received directly from the clearing agents as per instructions contained in the Foreign Exchange Manual. FAPC must be adjusted from Export Proceeds in case client opts for sending the bill merely on collection basis without conversion of pre-shipment into postshipment finance. In case client fails to make the shipment as per shipment date incorporated in the L/C or Contract, the outstanding will be considered as past due / overdue and notice is required to be sent for immediate adjustment from clients own sources or submission of an export documents, proceeds of which could be realized to settle the finance later on. In case client uses FAPC line as an evergreen facility i.e. without providing performance against the same on an ongoing basis matter must be brought into the notice of Business Group Head & following remedies can be taken. o o Discipline the client. Revisit the facility structure.

Moreover, all such instances must be reported in credit proposal during next review to update customer behavior to competent credit sanctioning authority.

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Credit Handbook

A certain percentage is to be kept as Margin as per the approval terms.

Possible Security Structure Primary Security Lien on export contracts / L/C Hypothecation over Current Assets (Sole Proprietorship/Partnership) / Charge over Current Assets of the Company (for private & public limited Companies as per requirements of Companies Ordinance 1984). Pledge of stocks Pledge / lien over cash/ near cash securities

Secondary Security Registered / Equitable Mortgage of Fixed Assets Charge on Fixed Assets of the Private and Public Limited Companies as per requirements of Companies Ordinance, if the fixed assets are in the name of the borrowing company. Hypothecation of Plant and Machinery

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6.2.2 Funded Facilities - Foreign Currency 6.2.2.1 Concept

Credit Handbook

Foreign Currency Import Financing (FCIF)

The Bank will provide financing in foreign currency, normally US Dollars, against import purchases. The product will be offered to our prime customers, who are already availing credit facilities with a good track record and have sufficient earnings stream. The Bank will finance the funding from Funds of F.E. 25 deposits and as such is subject to availability of funds of such deposits. Special Precautions The Bank should ensure that it complies with the various requirements of the State Bank of Pakistan. The existing limits (i.e. CF, RF, FIM, FATR etc.) should be blocked to allow US Dollar based limits. The limits should be regularly monitored by the branch and controlling offices of the relevant Business Group to ensure that the exposure does not exceed the aggregate limits of the Borrower, due to depreciation of Rupee against US Dollars. The lending shall be in US Dollars. However, in special cases where L/Cs are expressed in other currencies, loan can be granted in US Dollars with permission from Treasury.

Eligibility Customer to meet all other lending criteria of State Bank of Pakistan and MCB.

Application Policies T&FX, shall allocate aggregate limit to each Business Group for FCY financing and the FCY exposure of all customers at a business group must not exceed the aforesaid limit. Accordingly Sanction Advice sent to customer must mention that the facility shall be available subject to the availability of FCY funds. The customer will be allocated a limit denominated in US$ by blocking their existing limit(s) of Cash Finance/Running Finance/FIM facilities etc. etc. Approval authority shall be governed by existing Credit Approval/ Review Authority in Pak Rupees, converted in Pak Rupees at T.T. Buying rate and Mark-up Rate as per special authorization to be applicable as per Treasury quoted LIBOR / term rate. The customer would establish L/C as per sanctioned limit.

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Credit Handbook

At the time of payment of L/C; the branch after getting acceptance from customer will request to Treasury for FCIF (on payment of import bills) from FE25 Deposits in US Dollar on account of the Branch for a period of 30 to 180 days, depending on customers request giving following details: o o o o o Name of Customer L/C No. Amount of Limit LIBOR (advised by Treasury on phone) Maturity Date

a) Branches shall make payment to beneficiary according to instruction of beneficiary's bank at C&F value of imports and book FCIF loan in the name of the customer for same amount. b) The FE-25 funds shall be provided by Treasury to Branch account at LIBOR through Annexure B (in use by branches for reporting F.E. transactions) originated at branch under code # 42 (already in use for reporting out-ward remittances).

On maturity, the customer would pay the loan and mark-up or any other incidental charges by procuring required foreign currency amount from interbank through MCB. Branches shall report the transaction against code 41 on Annexure A (in use by branches for reporting F.E. transactions) to Treasury. Pre-Payment of the Loan: Prepayment of FCIF by client is permissible. No prepayment penalty shall be charged to the customer on such payment before maturity.

Possible Security Structure Primary Security Hypothecation over Current Assets (Sole Proprietorship/Partnership) / Charge over Current Assets of the Company (for private & public limited Companies as per requirements of Companies Ordinance 1984). Pledge of stocks TR favoring MCB Pledge / lien over cash/ near cash securities Secondary Security Registered / Equitable Mortgage of Fixed Assets Charge on Fixed Assets of the Private and Public Limited Companies as per requirements of Companies Ordinance, if the fixed assets are in the name of the borrowing company. Hypothecation of Plant and Machinery

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Tenor

Credit Handbook

The tenor of the facility will be determined on a case-to-case basis but will not exceed 180 days. No rollover shall be permissible, beyond 180 days from the date of initiation of the finance. Accordingly, customer to execute additional documentation to the effect that where customer fails to adjust the finance by maturity, bank may finance repayment of the liability in FCY through Forced Rupee finance. Mark-up The mark-up terms will be LIBOR plus Banks spread. The rate will be set on the date of disbursement based on the prevailing LIBOR for that tenor on that date. Treasurys share shall be restricted to LIBOR while the spread will represent the income of the branch. Spread over LIBOR would be recommended on a case to case basis. Mark-up on US$ FCIF would be recovered as per agreed cycle with the customer, i.e. on quarterly basis or on maturity. The branch would accrue this mark-up on monthly basis as per existing procedure. In case of Forced rupee Finance to adjust the FCY loans, mark-up to be recovered @ SMR. Delivery of Pledged Stock In case of finances secured by pledge of goods, the customer may require partial delivery of pledged stock. In this case, the customer would be required to deposit an amount inclusive of 5-10% margin on the drawing power value of the stock being released or as per Approval Advice. These funds may be kept in cost bearing deposits (PLS 365 Days, TDRs) and no-cost bearing deposits (Margin Account) and may be released after complete adjustment of the loan. Exchange Rate Risk Since, there would be no forward cover booking to hedge the exchange rate fluctuations in the said transaction, therefore, exchange rate risk will be borne by the customer. To mitigate this risk, an undertaking / indemnity from the customer would be obtained that they will provide Pak Rupees to purchase US Dollar equivalent of Principal plus Mark-up or any other charges at prevailing market rate. Revaluation on monthly basis for both principal and mark-up recoverable amount will be done at branch level. Documentation Following documents will be obtained from the customer: Promissory Note in US Dollars, Letter of Continuity and Letter of Lien & Set-off. Agreement for financing on mark-up basis in US Dollar (incorporating authority from customer, in favor of bank, to raise the US Dollar from any source it deems fit (including inter-bank market) to adjust the loan with mark-up and

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also the fact that the customer would be liable to reimburse the bank from its own sources, the rupee equivalent of the US Dollar purchased to settle the loan plus mark-up plus all incidental charges as well). Letter of Hypothecation / Letter of Pledge / Trust Receipt amounts to be mentioned in US Dollar. All security documents required for the credit line being blocked to allow FCIF exposure must be in place. Usual Documents as per Sanctioned Limit.

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6.2.2.2 Concept

Credit Handbook

Foreign Currency Bill Discounting (FCBD)

The Bank will provide financing in foreign currency, normally US Dollars. The product will normally be offered to our prime export oriented customers, who are already availing credit facilities with a good track record. The Bank will finance the funding from Funds of F.E. 25 deposits and as such is subject to availability of funds of such deposits. Special Precautions The Bank should ensure that it complies with the various requirements of the State Bank of Pakistan. The existing limits should be blocked to allow US $ based Export Bill Purchase / Discount limit. The limits should be regularly monitored by the branch and controlling offices of the relevant Business Group to ensure that the exposure does not exceed the aggregate limits of the Borrower, due to depreciation of Rupee against US Dollars. The lending shall be in US Dollars. However in special cases where L/Cs are expressed in other currencies, loan can be granted in US Dollars with permission from Treasury.

Transfer of exposure to Bankers Acceptance Outstanding against export documents drawn under DA (usance) L/C of international banks may be excluded from customers exposure subject to following: Receipt of authenticated acceptance from LC opening Bank rated by Standard & Poor, Moodys, Fitch Ibca, Japan Credit Rating Agency (JCRA) or credit rating agency on approved panel of State Bank of Pakistan as under: Aggregate amount of bill(s) Maturity of the bill(s) purchased/discounted purchased/discounted on account of one person a) Short term (not more Up to US$ 250,000 than 1 year) b) Short term (not more More than US$ than 1 year) 250,000 c) Long term (more than -Any1 year)

Minimum rating of the L/C issuing and accepting banks/DFIs No restriction At least BBB and above At least A and above

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In case export bills are in currencies other than USD, in order to ensure compliance with the above criteria, the export bills shall be converted into equivalent USD using Ready rates as per Exchange rates for mark to market revaluation by Authorized Dealers in foreign exchange sheet which is updated daily and is available on SBP website. Approval/ Limit allocation from FIID (Financial Institution & International Division). Upon receipt of authenticated acceptance from LC issuing bank, branches shall approach FIID for limit allocation against the LC issuing bank on case to case basis. Following FIIDs approval/ limit allocation, customer exposure may be transferred to Banker Acceptance.

Eligibility A minimum export business of Pak Rs.250.000M or three times of the proposed FCBD amount, whichever is higher to be routed through MCB. However, the same may be relaxed by Business Group Head. The facility will be available against Export L/Cs for commodities / countries not on negative list and shall also not be available in case financing has been availed against SBP Export Refinance Scheme under the same L/C. Customer to meet all other lending criteria of State Bank of Pakistan and MCB.

Application Policies T&FX shall allocate aggregate limit to each Business Group for FCY financing and the FCY exposure of all customers at a business group must not exceed the aforesaid limit. Accordingly Sanction Advice sent to customer must mention that the facility shall be available subject to the availability of FCY fund at the time of availment. The customer will be allocated a limit denominated in US$ by blocking his existing Post-shipment limit(s). The security structure will be the same as that of the blocked facility or as per approval. Approving authority shall be governed by existing Credit Approval Powers in Pak Rupees vis--vis FCBD US Dollar Limit, converted in Pak Rupees at T.T. Buying rate and Mark-up Rate special authorization as applicable to finance against Treasury quoted fixed term rate. Similar procedure for Discounting of export bill in US Dollar as is presently being done where we book FBP in Pak Rupees at our branches with some modifications, as detailed below should be followed: Possible Security Structure Primary Security Lien on Export documents

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Secondary Security

Credit Handbook

Hypothecation over Current Assets (Sole Proprietorship/Partnership) / Charge over Current Assets of the Company (for private & public limited Companies as per requirements of Companies Ordinance 1984). Pledge / lien over cash/ near cash securities Registered / Equitable Mortgage of Fixed Assets Charge on Fixed Assets of the Private and Public Limited Companies as per requirements of Companies Ordinance, if the fixed assets are in the name of the borrowing company. Hypothecation of Plant and Machinery

Mark-up The mark-up terms will be LIBOR plus Banks spread. The rate will be set on the date of disbursement based on the prevailing LIBOR for that tenor on that date. Treasury share shall be restricted to LIBOR. While the spread will represent the income of the branch. Spread over LIBOR would be recommended on a case to case basis. Mark-up on US$ bill amount to be recovered upfront for up to the tenor of bill and recorded as Liability under Mark-up Recovered in Advance. Tenor The tenor of the facility will be determined on the basis of tenor of the bill. However, it should not exceed 180 days from the date of shipment or as allowed by the SBP from time to time whichever is lower. Documentation Following documents will be obtained from the customer: Request for Finance against valid export L/C. Relevant Export Documents / Bill of Exchange, Letter of Continuity and Letter of Lien & Letter of Set-off. Agreement for financing on mark-up basis (incorporating authority from customer, in favor of bank, to raise the US Dollar from any source it deems fit to adjust the loan with mark-up in case of non-realization of export proceeds and also the fact that the customer would be liable to reimburse the bank from its own sources, the rupee equivalent of the US Dollar purchased to settle the loan plus mark-up at agreed rate (LIBOR + spread) plus all incidental charges as well). Letter of Lien on Export bills and all other security documents for the credit line being blocked to allow FCBD must be in place. Accepted offer letter of Facility (One time) incorporating acceptance from Customer that US $ proceeds of the Finance to be immediately surrendered to Bank against Pak Rupees at T.T. Buying rate. Usual Documents as per Sanctioned Limit.

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6.2.2.3 Concept

Credit Handbook

Foreign Currency Export Financing (FCEF)

The Bank will provide financing in foreign currency, normally US Dollars, against Pre-Shipment Finance and Post-Shipment Finance. The product will be offered to our prime export oriented customers, who are already availing credit facilities with a good track record. The Bank will finance the funding from Funds of F.E. 25 deposits and as such is subject to availability of funds of such deposits. Pre-shipment Finance This will be allowed by blocking the existing Cash Finance / Running Finance / FAPC / ERF Pre 1 and 2 limits against export contracts or L/C. Post-shipment Finance This will be allowed by blocking the existing ERF Post Shipment /FAFB/ FBP limits. Special Precautions The Bank should ensure that it complies with the various requirements of the State Bank of Pakistan (SBP). The existing limits should be blocked to allow US $ based limits. The limits should be regularly monitored by the branch and controlling offices of the relevant Business Group to ensure that the exposure does not exceed the aggregate limits of the Borrower, due to depreciation of Rupee against US Dollars. The lending shall be in US Dollars. However in special cases where L/C is expressed in other currencies, loan can be granted in US Dollars with permission from Treasury. Please note that the product shall be offered to customers on very selective basis, keeping in view the yield of account and competitive considerations. Prior approval of Group Heads to be obtained in each case.

Transfer of exposure to Bankers Acceptance Outstanding against export documents drawn under DA (usance) L/C of international banks may be excluded from customers exposure subject to following: Receipt of authenticated acceptance from LC opening Bank rated by Standard & Poor, Moodys, Fitch Ibca, Japan Credit Rating Agency (JCRA) or credit rating agency on approved panel of State Bank of Pakistan as under:

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Aggregate amount of bill(s) Maturity of the bill(s) purchased/discounted purchased/discounted on account of one person a) Short term (not more Up to US$ 250,000 than 1 year) b) Short term (not more More than US$ than 1 year) 250,000 c) Long term (more than -Any1 year)

Credit Handbook

Minimum rating of the L/C issuing and accepting banks/DFIs No restriction At least BBB and above At least A and above

In case export bills are in currencies other than USD, in order to ensure compliance with the above criteria, the export bills shall be converted into equivalent USD using Ready rates as per Exchange rates for mark to market revaluation by Authorized Dealers in foreign exchange sheet which is updated daily and is available on SBP website. Approval/ Limit allocation from FIID (Financial Institution & International Division). Upon receipt of authenticated acceptance from LC issuing bank, branches shall approach FIID for limit allocation against the LC issuing bank on case to case basis. Following FIIDs approval/ limit allocation, customer exposure may be transferred to Banker Acceptance.

Eligibility Customer must have an Export Letter of Credit or Firm Export Order to qualify for FCEF. Minimum export of PKR 250.000M is affected through all banks / as per latest SBP approved form EE. The facility will be available against Export L/Cs / Firm Contract for commodities / countries not on negative list and shall also not be available in case financing has been availed against SBP Export Refinance Scheme under the same L/C / Firm Contract. Customer to meet all other lending criteria of State Bank of Pakistan and MCB.

Application Policies T&FX, shall allocate aggregate limit to each Business Group for FCY financing and the FCY exposure of all customers at a business group must not exceed the aforesaid limit. Accordingly Sanction Advice sent to customer must mention that the facility shall be available subject to the availability of FCY fund at the time of availment. The customer will be allocated a limit denominated in US$ by blocking his existing limit(s) of Cash Finance/Running Finance/Export Refinance PreShipment facilities, etc., etc. The security structure will be the same as that of

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the blocked facility i.e. hypothecation or pledge and/or collateral. Approval authority shall be governed by existing Business Discretionary Powers in Pak Rupees vis--vis FCEF US Dollar Limit, converted in Pak Rupees at T.T. Buying rate and Mark-up Rate special authorization as applicable to finance against Treasury quoted fixed term rate. On receipt of limit approval and completion of Documentation, the branch will send a request to Treasury for placement/borrowing of US$ for onward lending to the customer. Once approval from Treasury is received specifying the cost: i.e. LIBOR rate and maturity, a ready sale request will be put up to the Treasury. The customer would simultaneously sell the proceeds of the loan to Treasury at the agreed spot-buying rate on the same day. The proceeds in Pak Rupees would then be credited to the customer's Rupee account maintained at the branch. Please note that FE-25 circular also has this precondition that the US$ proceeds of the loan should be surrendered to the bank for conversion into Pak Rupees at prevailing rates. Repayment within Maturity: o Each tranche disbursed under the loan along with Mark-up, would be adjusted from Export proceeds in US Dollar as per tenor on maturity as per arrangement/agreement. The loan can be extended for further 30 days provided the total period does not exceed 180 days (for extension beyond the 180 days period, SBP approval is requited). However, loan will be re-priced at the prevailing market rate on the date of extension. Prepayment of FCEF by client is permissible. No prepayment penalty shall be charged to the customer on such payment before maturity

Delayed Payment: o In case of inability of the customer to make the shipment or non-realization of export proceeds on due date, the customer would be required to immediately arrange and pay the loan and mark-up in US Dollar from own sources. It may be noted, that however, in case of non-realization the customer is allowed, with prior approval of the SBP, to purchase US dollar from the Inter-bank at the prevailing rate on the date of maturity and settle the bill. Similarly in case of delayed payment the customer is also allowed, with prior permission of the SBP, extension in maturity but this will be done at prevailing interest / mark-up rate applicable on the maturity. In case of delayed payment, any loss will be borne by the customer. Apart from that, SMR shall apply from the date of maturity to final adjustment.

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Security

Credit Handbook

For pre-shipment finance, please refer to possible security structure available at FAPC (6.2.1.10). For post-shipment finance, please refer to possible security structure available at FAFB (6.2.1.8). Any shortfall in security value (on the basis of revaluation to be undertaken at least monthly) to be topped up. This will be the responsibility of Branch and controlling offices of respective Business Group. Normally, financing should be restricted up to 85% to 90% of the Contract / LC / Bill amount.

Mark-up The mark-up terms will be LIBOR plus Banks spread. The rate will be set on the date of disbursement, based on the prevailing LIBOR for that tenor on that date. It has been agreed with Treasury that their share will be restricted to LIBOR while the spread will represent the income of the branch. Spread over LIBOR would be recommended on a case-to- case basis. Mark-up on US$ FCEF would be recovered as per agreed cycle with the customer, i.e. on quarterly basis or on maturity. The branch would accrue this mark-up on monthly basis as per existing procedure. Tenor The tenor of the facility will be determined on a case-to-case basis but will not exceed 180 days. Delivery of Pledged Stock In case of finances secured by pledge of goods, the customer may require partial delivery of pledged stock. In this case, the customer would be required to deposit an amount inclusive of 5-10% margin on the drawing power value of the stock being released or as per Approval Advice. . These funds may be kept in cost bearing deposits (PLS 365 Days, TDRs) and no-cost bearing deposits (Margin Account) and may be released after complete adjustment of the loan from export proceeds. Where export proceeds are not received or less proceed is received, on maturity the aforesaid fund / deposit held with Bank may be utilized for purchase of US Dollar from any source for adjustment of the loan. Exchange Rate Risk The exchange rate risk is being borne by the customer. Banks risk in this respect would be limited to the mark-up amount, the gain / loss against which shall be accounted for at branch level.

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Documentation

Credit Handbook

Following documents will be obtained from the customer: Request for Loan against valid export L/C or Firm Contract. Promissory Note in US Dollars, Letter of Continuity and Letter of Lien & Set-off. Agreement for financing on mark-up basis (incorporating authority from customer, in favor of bank, to raise the US Dollar from any source it deems fit to adjust the loan with mark-up in case of non-realization of export proceeds and also the fact that the customer would be liable to reimburse the bank from its own sources, the rupee equivalent of the US Dollar purchased to settle the loan plus mark-up plus all incidental charges as well). Letter of Hypothecation / Letter of Pledge amounts to be mentioned in US Dollar. Letter of Lien on Export bills. Accepted offer letter of Facility (One time) incorporating acceptance from Customer that US $ proceeds of the Finance to be immediately surrendered to Bank against Pak Rupees at T.T. Buying rate and undertaking from Customer to adjust the excess amount if due to adverse fluctuation in exchange rate, the total exposure exceeds the aggregate limit sanctioned in favor of the party. Usual Documents as per Sanctioned Limit.

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6.2.3 6.2.3.1 Concept

Credit Handbook

Funded Facilities - State Bank of Pakistan Schemes SBP Export Re-Finance Scheme

Under the Export Refinance Scheme, refinance facility is available to banks from State Bank of Pakistan at a concessionary rate of Mark-up. The low mark-up rate is part of the Government's policy to offer various incentives to boost the country's exports. For the details of the scheme, refer to State Bank of Pakistans BSD Circular No. 35, dated 28 September 2001. Circulated vide PO/FEX/T&FX/166 dated 4th October, 2001 and amendments from time to time. Incentives Under the Prudential Regulations, exporters are exempt from certain restrictions, available to both direct and indirect exporters. These are as under: o Both pre/ post shipment credit provided to finance export of goods covered by letter of credits / firm contracts are not included in the definition of accommodation, as per Prudential Regulation I. Facilities provided to finance for export of commodities eligible under Export Finance Scheme are exempt from the per party limit on clean facilities, (Prudential Regulation-4). Linkage between total accommodation availed by any borrower from banks / financial institution, that it does not exceed 10 times of the value of Capital and Reserves (free of losses) as disclosed in borrowers Audited Financial Statements do not apply to Export finance as the same do not come within meaning of accommodation as per P.R.I, (Prudential Regulation-5). The banks are free to determine the rates of charges in respect of various services they may provide to their constituents except in the case of rates of charges relating to export refinance which is notified by SBP.

In order to promote export and to ensure that small, medium, emerging direct and indirect exporters have an access to the credit facilities, cover obtained by the exporters from the Pakistan Export Finance Guarantee Agency Limited (PEFG) agency will substitute the collateral requirements of banks and hedge the financial risks of commercial banks against manufacturing, nonperformance, non-delivery risk and non-payment.

Export Finance Scheme General This scheme provides finance, at the stage of pre or post-shipment, of eligible items under two parts i.e., Part I and II. The facility under this scheme will continue to be available to small and medium sized enterprises having exports up to US $ 2.5 million equivalent

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during the preceding fiscal (July 01 to June 30) year. Emerging direct exporters who have not previously exported products, indirect exporters who manufacture or supply goods or material which can be used for exports and direct exporters including commercial exporters and trading companies, shall be eligible for financing facilities under the scheme as hitherto fore. An exporter can avail the facility under both the parts of the scheme provided the facility availed in one part is not in duplication of the facility availed under the other part of the scheme. The period of finance extends to a maximum of 180 days in case of direct exports and 120 days in case of indirect exporters. However, where facilities against a particular firm order/ export letter of credit are availed both by direct and indirect exporter, the combined period shall not exceed 180 days or as per the validity of the L/C, whichever is earlier.

Export Finance Part I Under Part-I, finance is provided on the basis of a Firm Order/Contract or L/C or upon presenting requisite documentary evidence confirming shipment under export LC or a firm sales contract on a case-to-case basis. The facility can be extended in both pre-shipment and post shipment scenarios. For direct exporters, the finance from banks will be to the extent of 100% of the value of firm export order / contract/letters of credit, both at pre and post shipment stages. Indirect exporters who supply inputs i.e. materials and goods to a direct exporter to be used for further processing and /or to be exported, will also be eligible to avail finance from banks under the scheme at preshipment stage. The direct exporter, who has a firm export order / contract / letter of credit may request his bank to open an inland letter of credit (ILC) / or the direct exporter may issue Standardized Purchase Order as per (SBP Annexure-E) in favor of the Indirect Exporter i.e. domestic supplier. Indirect exporter will be eligible to avail finance from banks against such Inland Letter of Credit (ILC) or Standardized Purchase Order (SPO), to the extent of the amount mentioned therein. Commercial bank, after providing finance to the Direct / Indirect Exporters shall become eligible to avail refinance from the State Bank of Pakistan. The total amount of financing extended by any bank against any one firm export order or letter of credit to both Direct and Indirect exporters shall not exceed the total amount of the firm export order / contract or letter of credit. The combined period of financing against an export order to the Direct Exporter as also to his suppliers i.e. Indirect Exporter shall also not exceed the permissible period of 180 days from the date of first draw-down / disbursement. The period of financing by bank under the Scheme to an indirect exporter shall be determined as per the terms of the relevant Inland Letter of Credit / Standardized Purchase Order, but subject to a maximum of 120 days. The bank shall, however, ensure that the total amount withdrawn by the Direct Exporter and value of ILC/ SPO established on his behalf does not exceed the

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value of the export finance admissible to the Direct Exporter against the particular Export Order/Contract/Letter of Credit. Security For pre-shipment finance, please refer to possible security structure available at FAPC (6.2.1.10). For post-shipment finance, please refer to possible security structure available at FAFB (6.2.1.8).

Export Finance Part II Under Part-II, however, the Firm/Order/Contract or L/C is not required, since finance is to be provided to the exporter on the basis of his last fiscal year's export earnings. An exporter is entitled to obtain finance up to a prescribed extent of the previous fiscal year's export performance, on a revolving basis, subject to fulfillment that a given percentage of the amount so obtained is exported during the financial year. (Presently 2 times of last fiscal years exports. For latest requirements of entitlements refer to latest SBP circulars on the subjects as notified by our Foreign Trade Division from time to time.

Submission of Documents (Part I) The Direct exporter shall be liable to submit the proof of shipments to the bank concerned against the loan, evidencing shipment made against the relevant Firm Export Order/Export Letter of Credit within 30 days from the date of shipment { last shipment in the case of fragmented shipment(s)} of from the date of expiry of loan, whichever is earlier. The loan granted to the Indirect Exporter, along with markup thereon, shall be adjusted upon delivery of the inputs and payment of documents drawn under the ILC/SPO or at the expiry of the period of 120 days, whichever is earlier. The Indirect exporter shall be under obligation to produce documents, evidencing utilization of the loan to the banker of the Direct Exporter within 15 working days of the supply of goods to the direct exporter.

In case shipping documents are not received by bank on or before 30 days from the date of the expiry of loan, the bank shall recover fine from the concerned exporter treating the case as that of non-shipment and pass on the fine so recovered to the concerned office of State Bank within three working days. The exporter concerned shall be entitled to refund of fine so recovered, on submission of the relevant document and after adjusting the fine that may be applicable for delayed /short shipment and delayed submission of shipping document. While the export of the commodity, against a Firm Export Order / Export Letter of Credit, shall remain the responsibility of the direct exporter, the indirect exporter would be under obligation to supply the required inputs in accordance with the terms of the ILC/SPO, failing which he shall be liable for fines under

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the Scheme. Payment of such fines shall, however, not absolve him for his liabilities to the Direct Exporter. On deliveries of the domestic inputs and receipt of payment by the supplier i.e. indirect exporter, the amount(s) of the finance earlier granted in his favor shall be adjusted. Likewise as the Direct Exporter would have received inputs from his designated Indirect Exporter, as per terms of ILC / SPO the amount disbursed by his bank, to the bank of Indirect Exporter, shall become a loan liability of the Direct Exporter as per normal lending practice. It shall be obligatory on the part of the Direct Exporter that all the ILCs established or SPO issued in favor of IDEs are in relation to the supply of inputs for export and would contain the name of the exporter and Number of firm export order / contract/ letter of credit. The financing bank of the Indirect Exporter shall be under obligation to certify that the facility availed by the Indirect Exporter was covered by an export order / contract or letter of credit of the Direct Exporter.

Substitution In case the Direct Exporter fails to make shipment under the relevant Firm Export Order / Export Letter of Credit on the basis of which finance / refinance has been availed by him, he shall be under obligation to produce shipping documents evidencing shipment of the export of same or any other eligible commodity valuing the amount of loan, in respect of another Firm Export Order / Export Letter of Credit. The Direct Exporter will, however, undertake and confirm separately that he has neither availed of finance under EFS against any such new contract / letter of credit nor has reported or would report any entry of relevant E Forms already utilized by him under Part II of the EFS. The Bank concerned is authorized to accept such substitution offered by the Direct Exporter. A request in this regard shall be submitted by DE to his bank along with submission of shipping documents. The Direct Exporter shall be eligible to obtain finance against a Contract or L/C partially and substitute any other export under the same contract or L/C showing it under another loan of Part I or to use it for reporting performance under Part II provided no E-Form is used simultaneously under both parts of EFS so as to avoid duplicate financing under the Scheme. No facility of substitution is available to the Indirect Exporter in respect of supply of inputs to the Direct Exporters.

Rate of Mark-up Banks being able to obtain finance from SBP at a concessional rate are in a position to charge a corresponding low rate of mark-up. The maximum rates of Mark-up for limit period shall be as notified by SBP from time to time.

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System of Fine In the event of non-shipment by the exporters availing of finance, they shall be subjected to fines in addition to the Mark-up. The scale of fines is explained in the relevant circulars of SBP. Refund of Fines and Penalties The exporter may lodge request for refund of fine if recovered for non-shipment to the bank concerned along with shipping documents. Such request shall be processed by the bank within 7 days of receipt of the request; the bank shall record a certificate of correctness of the refund claim and would approach the concerned Office of SBP for refund of fine as per instructions. The SBP office concerned will examine the case and allow refund of fine within a maximum period of 5 working days of its receipt. In cases of failure to export or delay in export for the reasons beyond the control of the borrower, State Bank may, at its absolute discretion, waive / refund the entire fine or part thereof. Such representations are required to be made by the borrower concerned with full facts / supporting cogent reasons to the SBP Office concerned which will be considered in the Central Directorate and relief granted if found justified.

Shortfall in Export Performance In case an exporter, who had obtained finance under Part-II of the Scheme, fails to match the same by his export performance, he will be subjected to the prescribed fine. This shortfall is to be calculated as per present procedure. On Expiry of Export Re-Finance In case where an exporter has defaulted in his obligations to export goods by/on the due date, i.e. to a maximum period of 180 days of the finance provided, the exporter's account shall have to be debited by the following amounts: o o o Amount of export refinance. Fine to be imposed on behalf of the State Bank of Pakistan. The amount of Mark-up, at the prevailing rate (up to 180 days as per SBP and thereafter on repayment by Bank to SBP at Forced DF rate or as per arrangement), for actual number of days, the finance was outstanding.

Amounts mentioned in the foregoing sub-paragraphs (a) and (b) shall be deposited with State Bank of Pakistan immediately.

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Further Reference

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Amendments by State Bank of Pakistan in their various instructions regarding the Export Finance Scheme, is an on-going process. As such, the rates, percentages and other details of mark-up, margin, penalties, etc., indicated in the foregoing guidelines/ examples are only of academic value and used mainly for illustrative purpose. TSC shall issue necessary operational guidelines in this regard and shall also maintain proper MIS on a bank wide basis. Such MIS shall be shared with all stake holders, as and when required. Thus, in every such instance, actual reference should always be made to the latest SBP/ TSC Circulars on the subject, as advised to Branches from time to time, by our Principal Office. The portions contained in this Manual on Funded/ Non Funded facilities should be read in conjunction with the relevant chapters in our Manual of Instructions on Foreign Exchange, as the latter covers many other important aspects, particularly those relating to Exchange Control.

Possible Security Structure Primary Security Lien on approved (from SBP) EE statement Hypothecation over Current Assets (Sole Proprietorship/Partnership) / Charge over Current Assets of the Company (for private & public limited Companies as per requirements of Companies Ordinance 1984). Pledge of stocks Pledge / lien over cash/ near cash securities

Secondary Security Registered / Equitable Mortgage of Fixed Assets Charge on Fixed Assets of the Private and Public Limited Companies as per requirements of Companies Ordinance, if the fixed assets are in the name of the borrowing company. Hypothecation of Plant and Machinery

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6.2.3.2

SBP-LTFF

The purpose of the Scheme is to enable the banks/DFIs to provide financing facilities to the eligible borrowers / projects for the import of plant, machinery, equipment, generators and accessories. Under the LTFF Scheme, refinance facility is available to banks from State Bank of Pakistan at a concessionary, rate of Markup. The low mark-up rate is part of the Government's policy to offer various incentives to boost the country's exports. For the details of the scheme, formalities, procedures and documentation, please refer to State Bank of Pakistans BPD Circular No. 14, dated 18th May 2004 and MFD circular no. 07 dated 31-12-2007 and its amendments from time to time. TSC shall issue necessary operational guidelines in this regard and shall also maintain proper MIS on a bank wide basis. Such MIS shall be shared with all stake holders, as and when required. 6.2.3.3 Other SBP financing Schemes

For the development of many economic sectors, SBP launches many schemes for time to time. For the details of those schemes, formalities, procedures and documentation, please refer to State Bank of Pakistans various circulars and their amendments from time to time. TSC shall issue necessary operational guidelines in this regard and shall also maintain proper MIS on a bank wide basis. Such MIS shall be shared with all stake holders, as and when required.

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6.3
6.3.1 6.3.2 6.3.3

Non-Funded Facilities
Letters of Credit (Foreign/ Inland) DA Bills & DDAA Guarantees, Performance / Bid Bonds, etc.

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6.3.1 Letters of Credit (Foreign/ Inland)

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Introduction A Letter of Credit is a document issued by a bank on behalf of a customer, authorizing a beneficiary to draw a draft or sometimes without requirement of a draft(s), which will be honored on presentation by the bank if drawn in accordance with terms and conditions specified in the letter of credit. It is a written undertaking by a bank (issuing bank) given to the seller (beneficiary) at the request and on the instructions of the buyer (applicant) to pay at sight or at a determinable future date a stated sum of money against the required documents. The documents include commercial invoice, certificate of origin, transport document relating to the mode of transport used and other documents required as per terms of letter of credit. Documentary credits are, therefore, an arrangement of security for the parties involved provided by the bank in the form of a conditional guarantee. The conditional guarantee is related to the documents only and not to the underlying goods, services and/or performances to which the documents may relate. Parties to a Letter of Credit The Applicant (Opener of L/C) Opening Bank (Issuing Bank) Advising Bank Beneficiary (Exporter) Confirming Bank Negotiating Bank Reimbursing Bank

Details of each of the above are available in TSCs Procedural Manual. Types of Documentary Credit Revocable Letter of Credit Irrevocable Letter of Credit Irrevocable Confirmed Letter of Credit Revolving Credit Transferable Credit Back to Back Credit Red Clause or Packing Credit Stand-by Credit

Details of each of the above are available in TSCs Procedural Manual Modes of Payment A credit must state whether it is available by sight payment, deferred payment, acceptance or negotiation. (UCP 600 - Article 6- b). Following are the types:

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Available Available Available Available

by by by by

Negotiation Acceptance Sight Payment Deferred Payment

Brief details of each of the above are available in TSCs Procedural Manual Broad Classification Broadly, L/Cs may be classified as under: Sight - Letters of Credit (L/C - Sight) Usance Letters of Credit (L/C - U)

In case of L/C - Sight, the underlying draft (bill of exchange) is drawn at sight and the relevant documents are held by the Bank as security, until the same are retired. This is payable by the LC issuing bank as soon as the documents required under the LC are sighted (received and scrutinized) by the LC issuing bank. For LC Sight, payment terms can be by negotiation or sight payment. In case of L/C - U, the underlying draft is for a tenor stipulated in the L/C, payable by the customer on the due date. All limit proposals (whether detailed, short form, etc.) should invariably mention the broad classification of L/C that the branch intends to issue, and special type of L/C should be clearly described. Procedure for Establishment of Letter Of Credit Please refer to TSCs Manual for all procedural formalities related to establishment of LC and scrutiny of LC application. Fixation of Margin The competent credit approval/review authority fixes margin considering customer's credit worthiness as well as SBP margin requirements. Thus, a higher margin than SBPs prescribed minimum margin may be stipulated. Credit Report of Exporter Before establishing L/C the branch should obtain credit report of beneficiary directly from Foreign Correspondent or through enlisted Credit Report Preparing Agency. Presently banks are required to obtain credit report on exporters where the amount of L/C is PKR 1,500,000 or above. Factors Motivating Credit Decision In arriving at a credit decision, the respective credit approval/ review authority would need to take into account various pertinent factors, such as:

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Extra care should be exercised in cases where the L/C is a one-off transaction with a customer who does not have a regular approved credit line. In such cases, the creditworthiness of the customer must be verified by means of credit reports from other banks/financial institutions/other reliable sources and through market checks. Requirements of S.B.P. Prudential Regulations should be properly fulfilled. Bank's risk should be carefully assessed and adequate cash margin should be stipulated. In case of high risk L/C transactions, 100% cash margin should be obtained. Although S.B.P. margin restrictions on L/Cs vary from time to time, appropriate margins may be prescribed by the bank keeping in view Banks credit policy and the degree of risk involved in each particular L/C transaction. In case of Inland LC, branch/ relationship manager should ensure that all KYC formalities are properly fulfilled. Where beneficiary and applicant are related parties in case of an inland LC, branch/ relationship manager should ensure that customers request is based on a genuine business transaction. Upon receipt of the import documents, adequate follow up, should be initiated and maintained with the customer, in order to ensure prompt retirement of the bill. The Bank should protect its interest and, wherever feasible, make adequate arrangements for clearance and safe storage/insurance of the imported merchandise, through Banks approved Clearing Agent, with prior approval of the competent authority. Through the various periodic statements submitted by the Branches the respective Regional / Circle Offices are to exercise effective control over all L/Cs opened, as well as the bills drawn there under, particularly the outstanding items. In case of all long outstanding items, where due dates have passed, the Regional Office should promptly contact the Branch Manager/Chief Manager and follow-up for early settlement. Reasons for default / delay in effecting payment should be thoroughly investigated and prompt remedial measures should be adopted. All accounts that are past due should be watchlisted. Outstanding PAD / DA bills not yet matured or outstanding L/C (DA / Sight) to reduce limit by same amount.

Documentation Intimation is sent to the importer for acceptance of usance draft. On acceptance of usance draft, stamps of appropriate value are affixed on usance draft. The maturity is determined and conveyed to the negotiating bank. Due

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date diary is maintained for all the accepted usance bills of exchange. Upon maturity date, payment is received from the importer and remittance is affected to the negotiating bank as per their instructions. Sometime, importers do not pay off the liability on due date; but on the other hand the opening Bank is liable to pay the bill amount at maturity. In such a case, Forced PAD is created and bill amount is remitted to the negotiating bank. Subsequently recovery efforts are initiated against the importer. Possible Security Structure Primary Security Lien on import documents

Secondary Security Hypothecation over Current Assets (Sole Proprietorship/Partnership) / Charge over Current Assets of the Company (for private & public limited Companies as per requirements of Companies Ordinance 1984). Pledge / lien over cash/ near cash securities Registered / Equitable Mortgage of Fixed Assets Charge on Fixed Assets of the Private and Public Limited Companies as per requirements of Companies Ordinance, if the fixed assets are in the name of the borrowing company.

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6.3.2 DA Bills and DDAA

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Concept The facility is extended when the Bank has already handed over the documents to the importers against their acceptance of usance bill, which means they may already have taken custody, and / or disposed off the imported goods. Such facility is allowed only to reputable clients and / or backed by collateral. The Bank has in its possession only the accepted usance bill / draft for which payment by the importers is awaited. However, it is Banks policy that the goods against such accepted bill shall remain under Banks pledge / control unless the customer has approved limit of Document Delivered Against Acceptance (DDAA) which is usually backed by T/R. Whether or not the importers make the payment, the Bank is bound to provide reimbursement, as per terms of L/C, to the correspondent negotiating bank on the date of maturity already conveyed to them. The DA Bills may be retired on maturity through any of the following means: Through debit to the customers account, if there is adequate credit balance / limit available. Through initiating a forced PAD / DF in case customer fails to make the payment at maturity.

Special Precautions It must be ensured that: The importer has duly accepted the Draft / Bill of Exchange duly stamped upon presentation. Branch has diarized and communicated the date of acceptance and maturity to the correspondent negotiating bank. The importer should be reminded at least 10 days before maturity date to arrange payment of his accepted bill within the maturity period.

Marked-up Price Marked-up price is to be calculated by applying SMR. Payment of Accepted DA Bills Within Maturity In case the importers make payment of the accepted DA Bill within the maturity period, no mark-up is charged as banks finance is not involved. The amount shall be kept in margin account and shall be adjusted towards final payment on date of maturity.

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The Bank shall recover its usual handling charges and DA commission per month for any period beyond the validity of the L/C and our postage/ cable charges along with the bill amount plus correspondent bank's charges, if any, less the amount of margin held, if any. The rates of handling charges, DA commission, and postage / cable charges are to be recovered as per banks schedule of charges/ circulars issued from time to time. Payment of Accepted DA Bills After Maturity There may be a situation where the importer does not make payment of the accepted DA Bill within the period of maturity; therefore, in that case Bank will create a Forced PAD-Usance to remit the payment to negotiating bank. The same must be brought to the notice of the relevant General Manager for taking further actions to recover the forced loan. Possible Security Structure (DDAA) Primary Security Accepted Bill of exchange TR favoring MCB

Secondary Security Hypothecation over Current Assets (Sole Proprietorship/Partnership) / Charge over Current Assets of the Company (for private & public limited Companies as per requirements of Companies Ordinance 1984). Pledge of stocks Pledge / lien over cash/ near cash securities Registered / Equitable Mortgage of Fixed Assets Charge on Fixed Assets of the Private and Public Limited Companies as per requirements of Companies Ordinance, if the fixed assets are in the name of the borrowing company.

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6.3.3 Guarantees, Performance / Bid Bonds, etc.

Credit Handbook

Concept Section 126 of Contract Act 1872, defines Contract of Guarantee, Surety Principal Debtor and Creditor. A contract of guarantee is a contract to perform the promise, or discharge the liability of a third person in case of his default. The person who gives the guarantee is called the surety / guarantor. The person in respect of whose default the guarantee is given is called the principal debtor. The person to whom the guarantee is given is called the creditor. In other words Bank Guarantee is an irrevocable undertaking of a bank (guarantor) to effect payment against presentation of a Written Statement of the Guarantee-holder (beneficiary) to the effect that a given contractually agreed obligation has not been fulfilled. The guarantee is a unilateral agreement between the bank and the beneficiary, which is concluded on behalf of a third party. Special Precautions As per the State Bank of Pakistan Prudential Regulations, following must be observed: o All guarantees to be issued shall be fully secured, except in the cases mentioned at Appendix I to Chapter 6.3 where it may be waived up to 50%, provided that least 20% of the guaranteed amount shall be obtained as margin in the form of liquid assets as security. o The requirement of security can also be waived in cases of guarantees issued to Pakistani firms and companies functioning in Pakistan against the back to back / counter guarantees of branches of guarantee issuing bank rated at least A or equivalent by a credit rating agency on the approved panel of State Bank of Pakistan or Standard & Poor, Moodys and Fitch-Ibca etc. Besides, in case the counter-guarantee issuing bank is situated in a foreign country, the rating of at least 'A' or equivalent by a local credit rating agency of the respective country shall also be acceptable, provided that guarantee issuing bank in Pakistan is comfortable with and accepts the counter guarantee of such foreign bank. However, the prescribed rating requirement for banks situated in foreign countries may be relaxed for transaction amount up to US$250,000, subject to internal credit controls and approvals of the bank. For transaction amounts greater than US$250,000, State Bank of Pakistan may be approached for specific approvals / exemption, on case by case basis,

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where the prescribed minimum rating requirement cannot be complied with. o In case of back to back letter of credit issued for export oriented goods and services, proper security arrangements there against may be approved subject to the condition that the original L/C has been established by MCB or a bank rated at least A by Standard & Poor, Moodys or Fitch. The guarantees shall be for a specific amount and expiry date and shall contain claim lodgment date. Open-ended guarantees in favor of Government departments, corporations / autonomous bodies owned/controlled by the Government and guarantees required by the courts may be approved without clearance from State Bank of Pakistan provided adequate collateral or other arrangements acceptable to the bank shall be obtained.

While executing a guarantee, the terms/conditions of the guarantee should be closely examined in order to determine o the extent of Bank's obligation and/or financial liability under the guarantee and the type of guarantee, unusual conditions contained therein, if any, and whether such terms/conditions could create unforeseen circumstances at a later stage, leading to the guarantee being called up for encashment. Hence a proforma of the guarantee to be issued should, first of all, be obtained and thoroughly reviewed and it should also be examined and approved by Bank's Legal Affairs Division/Bank's lawyers. After the guarantee has been issued, a copy of the same should be attached to the counter guarantee executed by the customer.

Approval of guarantees shall be obtained in terms of banks Credit Approval/ Review document.

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ASSUMING OBLIGATIONS ON BEHALF OF NBFCs (PR Requirements) Banks / DFIs shall not issue any guarantee or letter of comfort nor assume any obligation whatsoever in respect of deposits, sale of investment certificates, issue of commercial papers, or borrowings of any non-banking finance company. Banks / DFIs may, however, underwrite TFCs, commercial papers and other debt instruments issued by NBFCs, and issue guarantees in favor of multilateral agencies for providing credit to NBFCs, provided the banks / DFIs such exposure remains within the per party exposure limit as prescribed in Regulation R-1. Banks / DFIs may also allow exposure to any of their client against the guarantee of an NBFC which is rated at least A or equivalent by a credit rating agency on the approved panel of State Bank of Pakistan. The total amount of guarantees issued by an NBFC, and accepted by the banks, on the strength of which the exposure will be allowed by the commercial bank / DFI, will not exceed per party limit of the bank / DFI as mentioned in Regulation R-1. Before taking exposure against the guarantee of NBFC, banks / DFIs shall ensure that total guarantees issued by an NBFC in favor of banks / DFIs do not exceed 2.5 times of capital of the NBFC as evidenced by the latest available audited financial statements of the NBFC and such other means as the banks / DFIs may deem appropriate. Broad Classification Bank guarantees may be broadly classified under the following heads: Performance Guarantees Bid Bonds / Tender Deposit Guarantees Retention Money Guarantees Shipping Guarantees Guarantees for Advance Payments / Mobilization Guarantees Security Deposit Guarantees Guarantees for Payment of Dues / Court Guarantees Loan Repayment Guarantees Permanent Guarantees Guarantees Expressed in FCY

Performance Guarantees These are generally requested by customers, guaranteeing completion of work(s) or supplies, as per terms of contract and/or mutual agreement. In such instances, special care should be exercised by the Branch Manager that: The guarantees are uncertain/speculative. not for projects, which are in any way

The contractor / customer is well experienced in his line of work, having executed similar contracts satisfactorily in the past.

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Bid Bonds / Tender Deposit Guarantees

Credit Handbook

The Bank is often requested by its customers to issue Bid Bonds in lieu of deposit of earnest money against bids for tenders. In case of breach of the terms of the Bid Bond, on the customer's part, the Bank could be called upon to make payment. Retention money Guarantees A retention money guarantee is a non-payment guarantee and is an irrevocable obligation of the bank to pay (the beneficiary) a monetary amount agreed in advanced in the event that, after receiving the retention money, the supplier / contractor (applicant) does not perform its contractual obligations during the term of guarantee. Following requirements should be observed while reviewing / issuing a retention money guarantee,

Guarantee amount and validity period must be in accordance with the terms and conditions of the contract between the customer and the beneficiary. Documents containing the conditions and requirements under which the guarantee is required to be issued shall be obtained and extent of banks obligation shall also be ascertained. Facility advising letter must contain the clause that, the customer expresses its agreement that if it (i.e. the customer), in accordance with the conditions of the guarantee, is asked for performance under the guarantee, it will provide irrevocable performance in favor of the guarantees beneficiary. Bank provides performance under the guarantee only in the event it receives an invitation to perform duly submitted by the guarantees beneficiary in accordance with the terms and conditions of the guarantee. Such guarantees are issued to selected trustworthy customers with adequate capacity and established track record

Shipping Guarantees There are instances where the importers need to obtain delivery of goods without production of the relevant Bill of Lading. In such cases, the Bank is requested by the customers (importers) to issue a Shipping Guarantee in favor of the concerned Shipping Company. Shipping guarantee should be issued against 100 % cash margin or as per approved arrangement (DDAA/ FATR) with the customer, after approval from relevant approval/ review authority, where goods shall be cleared under supervision of Banks approved C&F Agent. The request for issuance of shipping guarantee should comprise of the following documents: Letter of request from the customer Copy of invoice

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Copy of non-negotiable bill of lading or transparent document Format of shipping guarantee to be issued Counter guarantee in favor of the bank duly signed by customer (where forward exchange not booked) Undertaking to accept the draft in case of issuance letter of credit Undertaking to accept all discrepancies in the documents Undertaking to bear the difference in import bill amount due to upward fluctuation of exchange rate

Guarantees for Advance Payment Mobilization These bank guarantees cover the amount of advance payment made to the customers (Contractors) in this connection, for satisfactory performance of the Contract. The beneficiary of guarantee wants to ensure that funds released by beneficiary against mobilization guarantee shall be released through Bank and Banks should ensure that funds so released are used on the project. Liability against Advance Payment / Mobilization Advance guarantee shall gradually reduce upon successive billing by the customer to the beneficiary. At any point in time; outstanding liability under this guarantee shall represent a certain percentage of the contract value related to incomplete part of the project / supplies. Liability shall be gradually reduced after receiving confirmation for the portion of work done / supplies provided and reduction in respective liability from the beneficiary. Security Deposit Guarantees These guarantees are issued in lieu of security deposit, generally to Utility Service organizations for connection / supply of electricity, telephone, gas, etc. to the customers. Guarantees for Payment of Dues Under these guarantees, there is an unconditional commitment to pay a certain amount on definite dates. For example, to a landlord, guaranteeing payment of rent, by the specified due date or to a court for payment to be made in case the suit is decided in favor of the "Beneficiary." Loan Repayment Financial Guarantees Our customer may obtain loan from other Banks / FIs, who may require the customer to provide guarantee from their Bankers(us) guaranteeing repayment of loan. Request for issuance of such guarantee should be entertained in case of very good customers & proper security. Where, loan repayment guarantee is for long term, proper assessment & care should be exercised.

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Permanent / Open-ended Guarantees Guarantees where period of validity is not mentioned and which is valid for an indefinite period or where validity is specified with an overriding clause that the beneficiary can claim extension of the guarantee for any length of time at its option can be termed as permanent / open-ended guarantee. Bank shall not be prepared to entertain a proposal for such guarantee. However, may consider preferably against cash / liquid collateral for purposes permitted by SBP on case to case basis. Guarantees Expressed in Foreign Currency Guarantees involving remittance in Foreign Currency must be backed by valid Permits / Authorizations / State Bank of Pakistans Approval. Revaluation of guarantees expressed in foreign currencies shall be done in terms of CRMD circulars issued from time to time. Guarantees should be for a fixed duration and the Bank should obtain forward cover to keep its exposure fixed or be secured by FCY deposit. Alternatively, rupee valued readily realizable security should provide adequate margin to be further supported by letter from customer to make up for the risk of exchange fluctuations as well.

Procedure A proforma of the guarantee required to be executed should invariably be enclosed along with an application form. The clauses of guarantee must be precise and clear. Text of all guarantees shall be referred to Legal Affairs Division at Principal Office and should only be accepted / executed when cleared by or duly amended by our Legal Department. Guarantee in lieu of earnest money should be discouraged and in no case should be issued unless full amount of guarantee is deposited with Bank by way of margin. Guarantee should be issued after approval is received from the sanctioning office / competent authority. Before issuing guarantee a counter-guarantee (appropriately stamped) should be obtained from the party. The stamped paper for the guarantee should also be furnished by the customer. All the guarantees should be neatly typed and checked from the approved Draft / Proforma. Cutting / Amendment particularly about the validity period and amount should be avoided otherwise proper of branch should be made on cutting/ overwriting. Before issuing guarantee, following formalities must be observed / completed:

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o

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Physical possession of all liquid securities in acceptable position should be obtained so that there may not be any hitch in realizing the securities in case of need. Margin / Liability vouchers must be passed and entered on same date when guarantee is issued. Commission at the existing rate of tariff should be recovered and recorded in guarantee Register. Terms and conditions of the respective sanction should be meticulously complied with. Separate file should be maintained for each guarantee.

All guarantees shall bear a unique serial number as per existing practice having following components: o o o Branch Code; Number of years since MCBs year of incorporation, i.e. 1948; and Serial number staring from 1 for every calendar year.

Security / Margin All guarantees must be 100% covered / secured by realizable tangible security, preferably in cash or easily realizable securities. Further, coverage / security may be obtained where necessary. There is however, a relaxation in the SBP requirement of 100% coverage in case of construction companies bidding against International tenders. Preferably guarantee should not be issued at less than 25% cash margin, however the same can be either relaxed or made further stringent on case to case basis by relevant approval/ review authority. However 50% cash margin must be a mandatory requirement in case of guarantees favoring Custom / Government Revenue Department. Remaining guarantee amount (after deducting the margin requirement) should be covered by other acceptable tangible/easily realizable securities.

Validity Guarantees should usually not be valid for more than 12 months. For guarantees valid for more than 12 months, prior approval in terms of Credit Approval/ Review document is necessary.

Extension / Renewal Guarantee once expired cannot be renewed. The renewal must be done during the validity period of guarantee.

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Requests if received after expiry of the guarantee can be entertained by issuing fresh guarantee without changing the text of the guarantee subject to insertion of the terms and conditions on which guarantee was previously issued. Renewal / extension of guarantees will remain subject to approval of the Competent Authority. Prior approval will therefore be obtained by the branch before guarantee is renewed. Expired guarantees (only under special circumstances) may be allowed for renewals on a case to case basis after approval from Group Head RMG, subject to following:

All the parties i.e. Instructing party/Counter Guarantor/ Guarantor/ Beneficiary agree to the extension of already expired counter guarantee/guarantee Expired guarantee may be extended effective from its last expiry date to cover the transactions pertaining to the intervening period Extension of expired counter guarantee (Issued by Foreign Bank) should be obtained effective from the date of its last expiry Separate indemnity should be obtained from Foreign Bank in respect of all Counter Guarantee/Guarantees not governed under URDG 758 (Uniform Rules for Demand Guarantees ICC Publication No. 758). LAD opinion on text of guarantee should be obtained on a case to case basis.

Expiry For all guarantees which have expired, a letter or notice should be sent in writing to the beneficiary requesting to return the original guarantee duly redeemed. In case no reply is received, 2nd notice / reminder be issued after a reasonable time. Such notices should require acknowledgement that notice has been received by the beneficiary. If even on 2nd notice / reminder, the beneficiary does not return the original guarantee duly redeemed or give any reply to the letter / notice, the liability of the guarantee should be reversed and the security be released. Copies of notice / reminder letter to the beneficiary must also be endorsed to the customer. Copy of the letter / notice along with acknowledgement of the beneficiary should be filed in the relative file. In case, the beneficiary wants to retain the original guarantee with them as a matter of record, a certificate from them to the effect that the guarantee stands redeemed and there is no claim against the subject guarantee should be obtained. Such certificate should however be received by the

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branch directly from the beneficiary. Further as a matter of abundant precaution the receipt should also be acknowledged. In such case also the liability would be reversed and security / margin released if there is no other stuck-up liability against concerned borrower. If the guarantee is issued in favor of some Government Department, and the relative guarantee could not be returned to the issuing branch due to some reason, or when the same has been misplaced by such Government Department, a certificate would be issued by that Department to the effect that the terms of the guarantee have been fulfilled and the party is fully discharged and there are no claims on the issuing Bank.. Such certificate would be accepted by the issuing branch in lieu of original guarantee and the liability there-against would be reversed and margin shall be refunded. Such certificate should however be received by the branch directly from the Government Agencies (beneficiary). Similarly liability of continuing guarantee shall not be reversed unless original guarantee is received back from beneficiary &/or redemption cumno claim request is received from beneficiary directly.

Payment of Claims The liability undertaken by the bank varies from case to case. It may be: Unconditional Conditional

In case of unconditional guarantee, the payment shall be made to the beneficiary without any objection. The following procedure would be observed before making payment: On receipt of claim from the beneficiary the same would be immediately processed / scrutinized with the terms of guarantee. A reference to customer, if not stipulated under the terms of the guarantee issued not be made or reaction awaited before effecting payment. If upon scrutiny the claim is not found in terms of the guarantee, the beneficiary may be informed immediately of such discrepancies and the claim rejected. This should however be done without least delay. If the claim is found in-order, the branch will pay the claim through Pay Order / Demand Draft by debit to Margin Account Guarantee / Partys Current Account as the case may be. By virtue of payment of the claim if an account is overdrawn, this will need no separate approval as this would be treated as forced loan.

However the same must be brought into the notice of the relevant General Manager.

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After payment of the claim, the party will be immediately asked to deposit the amount of the claim paid by the Bank within 15 days time. In case party fails to settle the claim by adjusting the account as stipulated above, procedure prescribed for the recovery of overdue advance should be followed-up vigorously. Till final settlement, further credit facilities / accommodation of any nature to this party / group would be suspended. In case of conditional guarantees or when the guarantee is subject to fulfillment / non-fulfillment of some terms and conditions by the principal, the claim shall be judged accordingly and the principal be consulted before making payment of the claim.

Possible Security Structure Primary Security Hypothecation over Current Assets (Sole Proprietorship/Partnership) / Charge over Current Assets of the Company (for private & public limited Companies as per requirements of Companies Ordinance 1984). Pledge / lien over cash/ near cash securities

Secondary Security Registered / Equitable Mortgage of Fixed Assets Charge on Fixed Assets of the Private and Public Limited Companies as per requirements of Companies Ordinance, if the fixed assets are in the name of the borrowing company. Hypothecation of Plant and Machinery

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6.4
6.4.1 6.4.2 6.4.3 6.4.4 6.4.5

Seasonal Finance
Working Capital Financing to Sugar Mills Working Capital Financing to Rice Mills Working Capital Financing to Flour Mills and Traders Working Ginners Capital Financing to Cotton

Working Capital Financing to Textile Mills

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6.4.1 Working Capital Financing to Sugar Mills Concept

Credit Handbook

The main raw material for sugar mills in Pakistan is Sugar Cane (though sugar beet is also used to produce sugar). Sugar mills remain operative only during Sugar Cane season necessitating seasonal financing needs. Commercial Banks in Pakistan provide financing to sugar cane growers through sugar mills, and to Mills for their working capital requirements and at times for fixed investment needs. However, financing for major capital expenditures are mostly allowed under consortium arrangement. Working Capital financing to sugar mills are usually allowed against pledge of refined sugar and a small portion in exceptional case may be allowed against Stores / Spares / Chemicals / Molasses. Production Process The sugar mill manufacturing process in Pakistan is based either on (i) Double Sulphitation Double Carbonation process or (ii) Defection Remelt process. The choice of process depends on prevailing condition but Defection Remelt process is considered better as it eliminates use of hard coke and reduces cost of lime, Sulphur / Filter / Cloth etc. which results in reduction of production costs. By products of sugar industry are Bagasse, Molasses etc. from which particle board, cattle feed, citric acid, acetic acid, furfurol and industrial alcohol are few to mention. One of the key factors for profitable sugar production is sucrose recovery percentage. Major Risks Price Risk: o Permission by Government to import sugar / excess production by local sugar mills may lead to fall in prices in local market. Cost of local standard/price. production is higher as compared to International

Sugar being an essential commodity, Government monitors its sale prices.

Liquidity Risk o o o o Fixation of high prices of sugar cane to support farmers by Government. Ban by Government on export of sugar. High sugar cane price due to shortage of water / other adverse conditions. Inter-provincial ban on movement of sugar by Government.

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Structuring Working Capital Limit Cash Finance

Credit Handbook

Cash Finance to sugar mill is provided keeping in view the production capacity and lending principles. Security: Pledge of Sugar Stocks. Margin (Minimum): 15% (Relevant Business Group Head may reduce the same to 10%).

Working Capital Requirement: Working Capital requirement of Sugar Mill should be calculated on the basis of their refined sugar production capacity after taking into consideration the operating capacity. Limit for a Sugar Mill must not exceed 25 % of the last years refined sugar production. Working: Crushing Capacity No of days in operations Recovery % Sugar Cane crushed Refined Sugar produced Price per tons Total CF limit to be allowed 5000 TCD 160 days 10 % 8,000,000 Tons 80,000 Tons PKR 22,750/= 1820 M 1820 X 25 % = PKR 455M

Operating capacity of the Mill must also be taken into account i.e. if a mill is operating at say 60 % of the capacity the CF limit may be calculated as follows: Crushing Capacity No of days in operations Recovery % Capacity utilization Sugar Cane crushed Refined Sugar produced Price per tons Total CF limit to be allowed Running Finance Any hypothecation based line (Running Finance) must not exceed 15 % of the approved CF limit at any given point in time. However, in exceptional cases hypothecation based exposure can be allowed to the extent of 25 % of the approved CF line as an independent line subject to following conditions: Established track record of at least five years. 5000 TCD 160 days 10 % 60 % 480,000 Tons 48,000 Tons PKR 22,750/= 1092 M 1092 X 25 %= PKR 273 M

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No instances of any past due / overdue / default. Collateral does not include agricultural land. Financial Leverage (Total liabilities / net worth) does not exceed 3 X in the latest audited financials (in case of breach of this covenant in future, Hypo based limit will be revisited to brought it down up to 10 % of the approved CF line for the next season. No losses are reported in the last two years. Clean up requirements are meticulously followed.

Import of Sugar Non-Fund Based: As per SBP restriction, banks are not allowed to open L/C on Usance basis. However, Sight L/C may be opened retaining adequate margin. Fund Based: FIM against imported sugar stocks to be considered on merit and shall be subject to SBP minimum margin requirement for advances.

Export Finance Normally, sugar is not exported. However, when Government permits export, request for such financing to be considered on merit. The SBP minimum margin requirement as applicable to advances shall apply. Margin Minimum margin requirement for financing against Sugar must not be less than 15% and in case SBP imposes a higher margin the same would supersede our internal requirement. Where margin requirement specified by Sanctioning Authority is other than 15%, the drawing power shall be calculated accordingly. Financing to be allowed on the basis of bench mark-price advised by Credit Risk Control Division, however, where wholesale price quoted in the local market or invoice price is below the BMP , the same shall apply and immediate step should be taken by General Managers/ Regional Managers / Branches to ensure adjustment to cover the shortfall. Monitoring Renewal of Working Capital / Cash Finance limit shall be subject to complete adjustment and payment of up-to-date Mark-up / Installments / Dues. The Branch/ Relationship Manager should make random periodic unannounced and detailed inspections during the peak months and at the end of the season of the pledged stocks; Inspections should be scheduled as per schedule mentioned in Appendix IX to Chapter 5.1 Where finance is allowed from more than one branch, the control point should ensure the goods under Banks lien is in conformity to the overall limit amount. General Manager / Regional Managers should also visit the mill premises in the peak season for the inspection of plant

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& stocks under pledge / hypothecation of the bank. General Manager however, would be responsible for effective monitoring & stock inspection. In addition, the Bank selects and posts a Muccadum from the list of approved Muccadums who provides continuous security for the sugar. The stocks pledged should remain insured against all pertinent risks. However, it should be ensured that the last seasons stock do not remain under banks pledge. Proper storage / control should be exercised in this respect, so that mills make adequate arrangement for sale / disposal of stocks produced / procured by them within aforesaid period. It must be ensured that the purpose of CF must be clearly determined. Storage capacity should be properly ascertained prior to allowing any financing especially in multi-bank environment. Where possible, joint inspection of stocks in respect of Sugar Mills availing financing from more than one bank should be arranged periodically. Where stocks against multiple borrowing are stored at same premises, mill will be asked to disclose quantum of stocks pledged with other Banks / FIs on stock report.

Draw-down / Clean-up Draw down to be allowed only during crushing season i.e. from November till April. In case disbursement is made more than 30 days after close of the crushing season of the mill. Specific permission for the same must be obtained from Sanctioning Authority / business Group Head, whichever is lower.

Clean Up of the limit to be achieved latest by 15th of November or at least 15 days prior to commencement of next crushing season, whichever is earlier; Following schedule for cleanup would be mandatory:
30th September 31st October 15th of November / 15 days prior to commencement of new crushing season, whichever is earlier 20 % 60 % 100 %

Clean up should be achieved as a percentage of approved limit unless otherwise restricted by SBP, internal circulars or specifically mentioned in approval of finance. If clean-up is not achieved as per the above schedule, the account shall be watchlisted and lines frozen.

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Financing Price

Credit Handbook

The Bench Mark Price and Drawing Power notified for Refined Sugar, by CRC from time to time shall be adhered to. In case of imported sugar, landed cost or BMP of local sugar (whichever is lower) shall form the basis. Drawing Power Position The Drawing Power is to be determined on weekly basis. Any shortfall in margin must be covered within 7 days by reducing outstanding or obtaining additional bags as per the calculated shortfall. On the eighth day, limits to be restricted according to the Drawing Power and approval must be taken for the excess thus created.

Insurance Appropriate insurance policy must be obtained keeping in view the goods under open pledge. The policy / policy cover note should clearly mention that the insured stocks / assets are stored in open and there should be no restrictive clause regarding such storage arrangement to avoid any dispute in the event of any claim.

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6.4.2 Working Capital Financing To Rice Mills Concept

Credit Handbook

Rice Mills (Husking / Processing Units) / Traders require financing for procurement of Paddy, its processing and against semi-finished product (Brown Rice) or finished product (Rice). Traders / Exporters require financing for purchase of rice, its storage for curing (Quality of rice improves with storage, provided properly stored & fumigated) and/or awaiting its sale. Rice storage should usually not be allowed beyond 90 days in case of traders. However, processing and exporting units may be allowed for longer period depending upon their business cycle. Delay do not adversely affect the quality of supreme quality rice if properly stored, however, it becomes un-economical if storage period extends to commencement of next season, due to holding costs. In case of exports, financing need may be extended to receipt of export proceeds. Traders shall be discouraged to avail financing against pledge of paddy / rice as a matter of policy. Transaction Sequence Rice Mills purchase paddy and require finance to pay to Farmers / Zamindars / Middlemen. The Paddy is stored in open within mill premises under Banks pledge in custody of Banks approved Macadam, where-after finance is released proportionate to its value retaining margin on receipt of stock report from Banks approved Muccadum. The pledged paddy is spread and dried in sun and / or in drier. It takes about 7 days in case of sun drying and 3 days in case of drier. Dried paddy is stored either in open or sheds / godown in heaps. Thereafter, paddy undergoes the following process.
i) iii) v) vii) ix) Paddy Pre-cleaner Cumby Paddy Separator Chaki Electric Panel Rotary Flat Sieve ii) iv) vi) viii) Red Machine with Grader De-stoner Elevator Air Compressor

In bigger units processing export quality rice, following modern machines are additionally available: o o o o Air Dryer with Dust Fans. Polished Shining Machines. Grading and Colour Sorting. Whitening Machine / Length Grader etc.

It takes further 2-3 days for the aforesaid finishing, packing into bags and placing in godowns under Banks lock & key.

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Rice produced is usually packed in Jute Bags of 100 Kgs and stored in godown under lock & key. Exportable rice is pledged in 5 Kgs bags X 10 per pallet, 20 Kgs bags & 50 Kgs bags. When obligor wishes to sell the pledged rice, it repays the Bank, who then issues the Delivery Order (D.O.) to the obligor, who presents it to Muccadum for release. For shipment to sea-port for exports, borrower may require delivery against transit limit (transport under supervision of Banks approved clearing agent) and also post-shipment facility against export documents. Proper approval for such arrangement should be obtained from relevant approval/ review authority.

Major Risks Price Risk: There are chances that adverse changes in local price of rice may reduce the coverage of our loan. In case of exportable rice, price may fall in international market in case of bumper crop in other rice growing countries. Our margin and periodic monitoring of rice prices (Local or International, as the case may be) mitigates the risk. Liquidity Risk: There is a risk that obligor fails to repay, as it may not be able to find proper buyer or receipts of export proceeds may be held-up due to dispute over quality. Demand of rice being inelastic mitigates risk. Operational Risk: The quality of rice may deteriorate due to improper storage / fumigation or forced lifting of pledged stocks or fire or damage due to flood or rain. Proper Muccadumage, fumigation, insurance cover, stock inspection or pre-inspection clause in case of exports mitigates the risk.

Structuring Working Capital Limit Husking Units Limit Size / Nature o Financing requirements starts in the months of September (for those who deal in Coarse Rice) and October (for those who deal in Superior Rice). Limit amount for each party is determined in view of their capacity and offered collaterals. RF against hypothecation of stocks / TRF for 30 days may be allowed up to 5 to 10 % of CF limit (by reducing the same by like amount or within CF limit) to large / reputable units against hypothecation of stocks(other than pledged stock) of Rice/ Paddy/Sacks.

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However, in exceptional cases hypothecation based exposure (RF/ FATR) can be allowed to the extent of 25 % of the approved CF line as an independent line subject to following conditions: Established track record of at least five years. No instances of any past due / overdue / default. Collateral does not include agricultural land. Financial Leverage (Total liabilities / net worth) does not exceed 3 X in the latest audited financials (in case of breach of this covenant in future, Hypo based limit will be revisited to brought it down up to 10 % of the approved CF line for the next season. No losses are reported in the last two years. Clean up requirements are meticulously followed.

Determination of CF limit (for Husking Units only) Plants husking capacity, actual capacity utilization in last three years and storage capacity are three key determinants for estimation of CF limit for Rice Husking Unit. All proposals of rice husking customers shall contain detailed information on below mentioned pattern for all Husking units, Husking Capacity shall be calculated as under:
I Ii Iii Iv V Vi Plant Husking Capacity. Estimated Price of Paddy per KG. Total value of the Paddy in Husking Process per day. Production Period (i.e. October to March) Total value of the Paddy to be Processed / Converted into Rice. Maximum CF limit that could be allowed. @ [25% of production capacity. 500 Bags Paddy each Bag containing 65 Kgs or 32,500 Kgs per day. Rs.650 per 40 Kgs (say) 32,500 Kgs X Rs.350/= Rs.0.528 M 40 150 days Mills husking period. 32,500 Kgs X 150 days = 4,875,000 Kgs 4,875,000 Kgs X Rs.650/= Rs.79.218 M 40 Rs.20.000M for Paddy and Pledge of Rice.

Capacity Utilization (the same is required to be verified from last three years production records (i.e. No of bags of paddy husked per day) and an average capacity utilization of at least last two years must be considered. for calculating working capital requirements. However, in case husking Unit is forecasting an increased capacity utilization in coming season, the same can be taken into account provided there are due justification for the same. Storage Capacity.

Processing Units / Exporters / Composite Units For processing units, rice processing capacity, capacity utilization and storage capacity must be taken into account for calculating working capital requirements. All proposals of rice processing customers shall contain detailed information on below mentioned pattern for all processing units,

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Processing capacity shall be calculated as under,
i Ii Iii Iv V Vi Rice Processing Capacity. Estimated Price of Rice per KG. Total value of the Rice Processed per day. Production Period Total value of the Rice Paddy to be Processed. CF limit required. @ [50% of production capacity

Credit Handbook

2000 Bags with each Bag containing 100 Kgs or 200,000 Kgs per day. Rs.1100 per 40 Kgs (say) 200,000 Kgs X Rs.1100/= Rs.5.500 M 40 200,000 Kgs X 350 days = 70 M Kgs 70,000,000 Kgs X Rs.1100/= Rs.1925 M 40 Rs.962 MM for Paddy and Pledge of Rice.

Please note that following factors shall be kept in mind while calculating the working capital limit for a processing unit. o Capacity Utilization (the same is required to be verified from last three years production records (i.e. No of bags of Rice processed per day) and an average capacity utilization of at least last two years must be considered. for calculating working capital requirements. However, in case processing Unit is forecasting an increased capacity utilization in coming season, the same can be taken into account provided there are due justification for the same. Storage Capacity.

o
I Ii Iii Iv V Vi Vii

Details of CF and Export Finance Limits

Cash Finance Exp. Ref. P-I (Pre-shipment) Exp. Ref. P-I (Post-shipment) FAFB Exp. Ref. P-II FBP Tender Guarantees/ Performance Guarantees Against open pledge of Paddy for husking purpose. Against open pledge of Paddy and effective pledge of Rice with stock in transit facility for shipment abroad duly covered against Export LCs / Export Order. Against Export Bills Sight / DA (90 days covering shipment of rice). Finance against Foreign Bills drawn under LC Sight or DA / Confirmed Order. Against Hypothecation / Open Pledge / Pledge of Exportable Rice duly covered with Export LCs. Negotiation of Sight / DA LCs. International Buyer at Government level also demands such Guarantee to finalize Export agreements.

While determining limits, following shall also be kept in view: o Previous utilization of the limit(s) and its timely adjustments with up-to-date payment of mark-up. Off-season deposits maintained with branch. Reputation and dealing of borrower in market. Overall industry dynamics Godown Capacity of the mill as well as safety & security of pledged stock in the godown.

o o o o

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o

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The location of mill vis--vis possibility of damages to stocks due to flash flood / rain water flow [Further collateral security may be obtained where necessary]. The aforesaid working capital restrictions would not apply on post-shipment finances, which are on secondary risk basis i.e. backed for clean export documents drawn under L/Cs. However in case of post-shipment, primary risk based exposure (i.e. discrepant / contract based line), the same must not preferably exceed 20 % of the approved post-shipment line. And to be backed by mortgage of fixed property / mill premises providing collateral coverage. However, in case of pledge arrangement collateral requirement be relaxed to 25 %.

Primary Security for CF Limit Open pledge of Paddy and Rice stored in godowns under Banks lock and key. Usually rice packed in standard weight bags shall be eligible. Secondary Security for CF Limit Fixed property - mill premises or urban property. Margin Monitoring Renewal of Working Capital / Cash Finance limit shall be subject to complete adjustment and payment of up to date mark-up / installments / dues. The Branch/ Relationship Manager should make random periodic unannounced and detailed inspections during the peak months and at the end of the season of the pledged stocks; Inspections should be scheduled as per schedule mentioned in Appendix IX to Chapter 5.1 Where finance is allowed from more than one branch, the control point should ensure the goods under Banks lien is in conformity to the overall limit amount. General Manager / Regional Managers should also visit the mill premises in the peak season for the inspection of plant & stocks under pledge / hypothecation of the bank. General Manager however, would be responsible for effective monitoring & stock inspection. In addition, the Bank selects and posts a Muccadum from the list of approved Muccadums who provides continuous security for the cotton and the enclosure. Paddy: 25% Rice in standard weight bags: 20% Collateral fixed property or mill premises: 25 % for Pledge.

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The stocks pledged should remain insured against all pertinent risks. Proper storage / control should be exercised in this respect, so that mills make adequate arrangement for sale / disposal of stocks produced / procured by them within aforesaid period. It must be ensured that the purpose of CF must be clearly determined. Storage capacity should be properly ascertained prior to allowing any financing especially in multi-bank environment.

Draw-down / Clean-up Draw-down / disbursement against CF limit to be allowed between September to June against stocks of fresh/same seasons crop only. In case of paddy, the draw down period to be restricted up to March. For annual clean-up of advances to Rice Husking Units / Mills only, following schedule must be followed: Month April May June July August September Cumulative Adjustment Paddy Rice 50% 70% 20% 100% 40% 60% 80% 100%

Clean up should be achieved as a percentage of approved limit unless otherwise restricted by SBP, internal circulars or specifically mentioned in approval of finance. Remaining old stock, if any, should be cleared within next 30 days (subject to business Group Head approval) or further disbursement against new seasons Rice / Paddy be suspended. Additionally, the account shall be watchlisted and lines frozen. For rice processors / exporters, clean up requirement would not be mandatory, however, each tranche against rice must be adjusted within 9 months from the date of initiation (may be extended up to 1 year by concerned business Group Head). The maximum financing period for each tranche to be as under: IRRI 6 / Qualities not mentioned below: 60 days IRRI 9 / Saila / Basmati / Karnal: 180 days In case Rice processor is not an exporter or exporting only 25 % of their production, in that scenario, all Rice Processors should clean up their working capital lines except for post-shipment finances latest by 31st October ever year

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and cleanup of hypo based lines shall be ensured as per requirements mentioned in credit handbook for various hypo based facilities. Financing Price Benchmark price of rice / paddy stocks pledged with bank shall be circulated by CRCD. Drawing Power shall be calculated on the basis of benchmark price circulated by CRCD or the sales invoice price of the mill, whichever is lower. In those cases where business unit intends to offer special rates to their top tier clients for exportable quality rice, approval may be sought at the level of Group Head- RMG on a case to case basis. Such requests shall be routed through Head CRCD and shall carry recommendations of respective Business Group Head. Based on above and the margin applicable, the drawing power be ascertained. In case of fall in prices, the drawing powers should be adjusted accordingly. In case of any increase in price, the valuation of stocks already held shall not be revised upwards. Drawing Power Position The Drawing Power to be determined on weekly basis. Any shortfall in margin must be covered within 7 days by reducing outstanding or obtaining additional quantity as per the calculated shortfall. On the eighth day, limits to be restricted according to the Drawing Power and approval to be taken for the excess thus created. Requirement for frequency of Stock Reports from Muccadum and tallying it with a pledge register is monthly and on each receipt / delivery.

Insurance Appropriate insurance policy must be obtained, where goods are under open pledge, the policy / policy cover note should clearly mention that the insured stocks / assets are stored in open and there should be no restrictive clause regarding such storage arrangement to avoid any dispute in the event of any claim.

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6.4.3 Working Capital Financing to Flour Mills and Traders Concept Financing for procurement of Wheat by Government Agencies had reached to tune of Rs.4045 billion. With the paradigm shift in Government of Pakistans Policy to encourage Private Sector, Banks are required to gear-up their financing to Private Sector for the purpose. Financing to Private Sector against Wheat up till now had been mostly limited to flour mills to support the procurement of wheat by them from Provincial Food Department / PASSCO (Pakistan Agriculture Storage & Supplies Corporation) and lately against procurement from market as well. The Government initially estimates that financing requirement by private sector shall be around Rs.10 billion. The paradigm shift may be diagrammatically shown as under: Existing Farmer Farmer Envisioned

Middle Man / Anaj Mandi Wheat procureme nt Centres Govt. Godowns Flour Mills Whole Sale / Retail

Middle Man / Anaj Mandi Local Storage / Silos

Wheat procureme nt Centres Govt. Agencies

Private Exports

Flour Mills Whole Sale / Retail

Export Silos EXPORT SHIPMENT

Apart from Commodity Operation Finance (COF) to Public Sector Enterprises (PSEs); Bank extends financing to private sector against wheat to flour mills, wheat traders and exporters and wheat silos / storage facility operators. Transaction Sequence To facilitate self-liquidation, it is prudent that financing is allowed against the pledge of wheat and financing against finished stock (flour) is kept at minimum. The obligor procures wheat from Food Departments / PASSCO / Market. The wheat so procured is pledged by the obligor under charge of Banks Muccadum in a godown. In case of Flour mills within Mill premises.

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When obligor wishes to use / sell pledged wheat / flour, it repays the bank. Bank issues a Delivery Order (DO) to the obligor who presents it to Muccadum for release of wheat / flour.

Major Risks There is a risk that delay in sales may adversely affect prices, leading to reduction in coverage. Subsequent bumper crop may lead to glut in market, impacting price / margin. Improper fumigation / storage arrangement may lead to deterioration in quality. There is a risk that obligor may fail to liquidate Banks exposure against wheat. Being a staple food item, price control by Government limits its liquidation value and at the same time procurement costs may be jacked-up by Governments Support Price. Inter-province ban on movement of wheat are enforced from time to time. Our margin and periodic monitoring of wheat prices and persuasion for timely adjustment mitigate the risk. Inelastic demand mitigates the risk.

Structuring Working Capital Limit Cash Finance Determination / assessment of CF limit for flour mills: The following points are required to be taken into account: o o o o No of roller bodies installed. Capacity Utilization. Average Crushing capacity of per roller body. Storage capacity.

CF limit to any flour mill must not exceed 60 days of the wheat crushing capacity subject to the availability of the adequate storage capacity. Following calculations must be provided in Credit Proposal of each Floor Mill, Example: No of roller bodies: 10 Capacity Utilization: 100 % Average Crushing capacity of per roller body: 200 bags (100kg) of wheat. 60 days crushing requirement: 10 X 200 X 60 = 120,000 bags {100kg) 0f wheat Price per 100 kg bag of wheat (subject to change) PKR 1100/=

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Working Capital Requirement; 120000 X 1100 = PKR 132 M Note: Incase storage capacity does not match with the requirement the limit must be curtailed accordingly Finance to be allowed for procurement of wheat against pledge of wheat stocks, to be stored in mill premises. Where, finance has to be allowed to traders the same is to be stored in secured godowns. Flour Mills shall be accorded preference while extending finance against wheat stocks. Where in exceptional cases finance against flour stocks has to be allowed to flour mills, the same shall be allowed against its pledge and not to exceed 10% of the CF limit. Finance to traders against Wheat flour is banned, as per existing SBP restriction. Movement and proper storage / fumigation / insurance cover for wheat stocks under our pledge should to be essential condition of the CF limit. In case of flour stock, there should be a stipulation that the same is not held for more than 15-30 days. The tenor of facility for Millers shall be 1 year and eight months for traders. Running Finance Where financing has to be allowed against hypothecation of wheat / flour stocks & / or gunny bags stored in mill premises, the same may be allowed by sanctioning authority not below the level of RM within their power for grant of finance against hypothecation. DD/TT for goods in transit up to 10% of C/F limit may be allowed to very good customers but should not exceed the value of 100 to 200 bags at any one time, subject to close monitoring. Inclusive of T/R for a period not exceeding 30 days, the same should not exceed 10% of C/F limit. The T/R facility should be backed by collateral. To be considered for good clients only, to facilitate them in export of good under the supervision of Banks approved C&F Agent. NOTE: DD/TT in transit facilities shall be obviated where R/F limit is allowed. RF / in transit limit must not exceed 10 % of the approved CF limit at any given point in time.

However, in exceptional cases meeting the following criteria hypothecation based exposure can be allowed to the extent of 25 % of the approved CF line as an independent line: Established track record of at least five years. No instances of any past due / overdue / default. Collateral does not include agricultural land.

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Credit Handbook

Financial Leverage (Total liabilities / net worth) does not exceed 3 X in the latest audited financials (in case of breach of this covenant in future, Hypo based limit will be revisited to brought it down up to 10 % of the approved CF line for the next season. No losses are reported in the last two years. Clean up requirements are meticulously followed.

RF against hypothecation can also be availed against wheat products i.e. stock of flour, maida, suji, bardana and choker stored in mill premises, stores and spares and receivables can also be taken for joint stock companies. RF limit may also be approved as an independent limit. Margin Minimum Margin on CF for Flour Mills - 10 % or as per SBP directives whichever is higher. Minimum Margin on CF for Traders - 15 % or as per SBP directives whichever is higher. Minimum margin of 25 % must be kept under RF.

Security Pledge of wheat / flour stocks. Collaterally secured by exclusive charge / mortgage of mill premises / property at least valuing 25% of limit in case of pledge. Charge on current and fixed asset to be immediately registered with SECP in case of Limited Companies.

Other Limits Limits other than above, to be allowed after proper assessment. Export financing request, with buyer nominated pre-shipment inspection to be encouraged. In case of import financing of wheat proper clearance arrangement from port, storage arrangement, impact on local price and its marketability to be assessed while considering the financing requests. Monitoring Renewal of Working Capital / Cash Finance limit shall be subject to complete adjustment and payment of up-to-date mark-up / instalments / dues. The Branch/ Relationship Manager should make random periodic unannounced and detailed inspections during the peak months and at the end of the season of the pledged stocks; Inspections should be scheduled as per schedule

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mentioned in Appendix IX to Chapter 5.1 Where finance is allowed from more than one branch, the control point should ensure the goods under Banks lien is in conformity to the overall limit amount. General Manager / Regional Managers should also visit the mill premises in the peak season for the inspection of plant & stocks under pledge / hypothecation of the bank. General Manager however, would be responsible for effective monitoring & stock inspection. In addition, the Bank selects and posts a Muccadum from the list of approved Muccadums who provides continuous security for the wheat and the enclosure. Stocks pledged should be insured against pertinent risks. Proper attention to be given to movement of stock, storage arrangement, its maintenance / up keep, sealing of godowns against rodents / birds / moisture and fumigation. Special precaution is required where stocks to be stored for longer period. Vigilance should be exercised to ensure that old & substandard / decayed stocks are not placed under our pledge. Wheat and other stocks should be properly stacked by the customer and to be stored in the godown considered safe from damage or rain-falls, flood and fire. Special vigilance / supervision to be kept in flood season by Managers / Regional Managers. Customer should place / store wheat in the fields / godowns which are not located in main flood affected area. Godowns should be cemented, safe and secured. If godowns are located in flood-affected area, the party will be liable to bear the entire loss, if so occurred and the collateral offered should be strong. Holding of list of machinery duly insured showing original / depreciated value with date of purchase, in case of flour mills. Financing against flour stocks should be avoided. Moreover, movement and proper storage / fumigation arrangement of Wheat Stocks under our pledge should be ensured to avoid any damage to the Stock. Wheat Stocks placed under our pledge except those stored in silos should be in gunny bags/other standard packing, with known standard weight. Necessary insurance coverage must also be obtained. Where, in exceptional cases finance against Flour Stocks has to be allowed, the same should not exceed 10% of total CF/RF limit against pledge of Wheat and the Flour Stocks should not be allowed to be held for more than 30 days. Where financing against wheat stored in silos is allowed it should be ensured that there exists proper arrangement / plan for air circulation / aeration / fumigation and proper calibration chart is in place for determining the quantity/weight, which should be certified by a firm of engineers on the panel of Banks Valuers.

Draw-down / Clean-up Draw down / disbursements usually allowed during wheat procurement season (which usually lasts from May to November) against stocks of fresh crop only.

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Each tranche in case of wheat usually not be allowed to be stored for more than 60-90 days (may be extend to 180 days by Group Heads) and in case of flour stocks for not more than 30 days. At least 15 days clean-up to be ensured.

Financing Price As per Government Agencies procurement price or market price, whichever is lower. Where rates are advised by CRC, the same shall apply. It should be kept in view that during wheat harvesting season price of wheat falls substantially.

Drawing Power Position The Drawing Power is to be determined on weekly basis in terms of CRCD circulars issued from time to time. Any shortfall in margin must be corrected within 7 days by reducing outstanding or obtaining additional wheat bags as per the calculated shortfall. On the eighth day, limits to be restricted according to the Drawing Power and approval should be taken for the excess thus created. Requirement for frequency of Stock reports from Muccadum and tallying it with a pledge register monthly and on each receipt / delivery.

Insurance Appropriate insurance policy must be obtained. Where goods are under open pledge, the policy / policy cover note should clearly mention that the insured stocks / assets are stored in open and there should be no restrictive clause regarding such storage arrangement to avoid any dispute in the event of any claim.

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6.4.4 Working Capital Financing To Cotton Ginners Concept

Credit Handbook

Cotton ginners require working capital financing for procurement of Phutti / Seed Cotton, its processing and to finance ginned cotton awaiting sale. To facilitate selfliquidation of Banks exposure, it is prudent that financing to support storage of finished product (ginned cotton) is kept at minimum. The cotton ginning operation is simple and its processing time is short, thus funds held for work in process is negligible. Hoarding of the same for speculative price increase with the help of Banks financing is discouraged, therefore Banks financing should be limited to productive purposes only. However, to profitably utilize its by-product (cotton seed) a ginning unit may also have oil expelling unit within its premises, operations of which may also be financed by the Bank. Structuring Working Capital Limit Cash Finance - Cotton C/F cotton limits may be estimated at 25% of last seasons production, valued at the rates conveyed by CRCD on fortnightly basis less sales tax and margin. However, the same may be based on production capacity duly assessed, but in no case limit for the next season be allowed / approved in excess of 50% of the last years production for the existing mills (including MCBs existing clients & fresh solicitations) and as far as new mills, (who have just started their operations and in the first year of their commercial run) are concerned initial limit must not exceed 25% of the actual productions capacity duly assessed. Determination / assessment of CF limit for Cotton Ginning mills; Following things are required to be taken into account: Number of saw ginns installed. Average ginning capacity per saw ginn. Capacity Utilization. Storage Capacity.

Margin Requirement: For Phutti, 20% and for lint cotton 20%, at valuation as per CRC Circular or invoice price, whichever is lower. Security: Pledge of Phutti and ginned cotton. In addition, collateral of factory premises is usually obtained. However, if the ginning operation is in a factory, which is hired on lease and mortgage of the factory is not possible, sufficient collateral should be obtained.

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Trust Receipt Finance - Cotton

Credit Handbook

TRF facility within CF may be approved for 10 days on revolving basis for disposal of lint cotton bales as under: For CF limit up to Rs.20.00M 1 Lot (100 Bales) For CF limit over Rs.20.00M 2 Lots (200 Bales) For CF limit of Rs.50M & above 5 Lots (500 Bales)

Running Finance - Cotton An RF facility for meeting day to day working capital requirements & purchase of fertilizers & pesticides for onward supply to the growers is allowed to the extent of 10 % of the approved CF limit only. In case TRF facility is also allowed in addition to RF, total exposure against TR and RF must not exceed 15% of the approved CF limit. Preferably RF & TRF facility may be allowed as a sub limit of CF. However, in exceptional cases meeting the following criteria hypothecation based exposure can be allowed to the extent of 25 % of the approved CF line as an independent line: Established track record of at least five years. No instances of any past due / overdue / default. Collateral does not include agricultural land. Financial Leverage (Total liabilities / net worth) does not exceed 3 X in the latest audited financials (in case of breach of this covenant in future, Hypo based limit will be revisited to brought it down up to 10 % of the approved CF line for the next season. No losses are reported in the last two years. Clean up requirements are meticulously followed.

Cash Finance - Oil

For Oil Mills attached to ginneries, working capital limit i.e. CF-Oil may also be determined as per actual production capacity (capacity utilization of at least last two years must also be taken into account in this scenario), however in no case the limit to exceed 25 % of the actual assessed production capacity of the oil mill i.e. seeds crushing capacity.

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For independent Oil Units working capital limits i.e. CF Oil must not exceed 50% of the actual production capacity (capacity utilization of at least last two years must also be taken into account in this scenario). Prime security under said line will be only stocks of oil (cotton seed oil) with margin of 25%. Running Finance - Oil Hypothecation based facilities, i.e. RF / TRF / in transit facility, must not exceed 10% of the approved pledge based line. However, in exceptional cases meeting the following criteria hypothecation based exposure can be allowed to the extent of 25 % of the approved CF line as an independent line: Established track record of at least five years. No instances of any past due / overdue / default. Collateral does not include agricultural land. Financial Leverage (Total liabilities / net worth) does not exceed 3 X in the latest audited financials (in case of breach of this covenant in future, Hypo based limit will be revisited to brought it down up to 10 % of the approved CF line for the next season. No losses are reported in the last two years. Clean up requirements are meticulously followed.

Determination / assessment of CF limit for Oil mills; Following things are required to be taken into account: Number of expellers installed. Capacity Utilization. Average crushing capacity per expeller. Storage capacity.

Cash Finance Oil Cake

CF-Oil Cake facility to Cotton Ginners / independent oil mills may be allowed subject to following conditions:-

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The line would be in addition to existing CF-Oil limit. Prime security under said line will be only stocks of oil cakes with margin of 50%. Exposure would not increase 10% of approved CF (Cotton Ginning) and 50% of CF (Oil) in case of independent oil expelling / extracting units. Exposure under CF (Oil Cakes) would be collateralized against fixed assets Clean-up period of at least 15 days must be observed before allowing exposure under CF-Oil Cakes for the next season.

Cotton seed may also be included as security for the advances to ginners. Margin against cotton seed should not be less than 25%. Oil being finished good; each batch should not be allowed to remain under Banks pledge for more than 90 days. The sanctioning authority shall keep in view the above guidelines while analyzing the limits to be allowed to cotton ginners and oil mills. Ginners who have not cleared their last seasons dues should not be extended any further finance unless and until they have liquidated their old outstanding balances. For shortfall in their account, due to losses in the preceding season or any other reason, the borrower must provide private properties or other collateral of sufficient value to secure the outstanding and give a satisfactory repayment program, preferably not exceeding one year to be eligible for consideration for financing for the ensuing season. Such arrangements should have prior approval from at least Head RMG. At the time of grant of advances to ginners/Oil Mills, their plans for disposal/sale of cotton, cottonseeds & oil cakes should be ascertained and discussed. The ginneries/Oil Mills should indicate their ginning /production capacity, the quantity of cotton ginned/oil produced during last year and the quantity they expect to gin/produce during the ensuing season. The ginners/oil mills should also provide estimates of their planned ginning/oil expelling and production, sale of cotton bales and quantity of oil each month during the season. After documenting above and allowing for overhead and possible cotton/cotton seed/oil and oil cakes price fluctuations, reasonable credit limits should be laid down for each ginner/oil mill so that bank finances are not used for speculative purpose. Mortgage of Agricultural land should be discouraged.

Monitoring
Care should be taken to ensure that credit extended by the Bank is not diverted or utilized for speculative purposes. In such cases, facilities extended should be suspended immediately and advances should be recalled.

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It should be ensured that large stock of finished goods (i.e. Lint Cotton) stocks are not held against Banks financing and ginned cotton bales under banks lien should not exceed 10 days production or 2000 bales, whichever is higher. Movement of Phutti stocks should be ensured and in no case Phutti be allowed to remain under Banks finance for more than 60 days. Regional / General Managers should ensure that each ginner falling within their geographical area is visited at least twice during the season. While conducting their examination, the inspecting teams should ensure that: o The advances outstanding are adequately secured against proper quality stocks, valued conservatively as per Phutti and lint cottons Principal Office advised valuation / guidelines and against the prescribed margin. There is no build-up of large stocks. For this purpose the monthly estimated ginning production and sale schedule should be kept in view and its should be ensured that the stocks of both Kappas and Cotton bales at the time of checking are not materially different from the schedule.

A written report should be given to the General Manager by the inspecting teams for each of their visits to the ginners and the General Manager should initiate and implement corrective measures in case of any adverse developments. In particular the Regional Manager and General Manager should satisfy himself to ensure timely liquidation of all advances by each ginner by the close of the ginning season. Weekly statement of seasonal financing as per Appendix I to Chapter 6.4 should be regularly reviewed by controlling offices in the business group to ensure its proper reporting, adequacy of security held, movement of stocks and monitor timely adjustment. The Branch/ Relationship Manager should make random periodic unannounced and detailed inspections during the peak months and at the end of the season of the pledged stocks; Inspections should be scheduled as per schedule mentioned in Appendix IX to Chapter 5.1 Where finance is allowed from more than one branch, the control point should ensure the goods under Banks lien is in conformity to the overall limit amount. Random weighing of bales should also be carried out during the inspection. Stock of Phutti released for ginning and production of the day should be matched to ascertain conversion rate. General Manager / Regional Managers should also visit the mill premises in the peak season for the inspection of plant & stocks under pledge / hypothecation of the bank. General Manager however, would be responsible for effective monitoring & stock inspection. In addition, the Bank selects and posts a Muccadum from the list of approved Muccadums who provides continuous security for the cotton.

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Draw-down / Clean-up Drawdown against C.F. (Cotton) limits shall usually be allowed between August and February against stocks of fresh crop only. Annual clean-up should be conducted to reduce / adjust advances to cotton ginners / oil mills month-wise as under:
Month March April May June Cumulative Adjustment Ginners Oil Mills 25% 50% 50% 75% 75% 100% 100%

Clean up should be achieved as a percentage of approved limit unless otherwise restricted by SBP, internal circulars or specifically mentioned in approval of finance. In exceptional cases, Head of Business Group may consider extension of cleanup period up to July 30, on case-to-case basis and approve / recommend accordingly with due justification, provided total outstanding has since been reduced to 25 % of the approved limit. If clean-up is not achieved by the extension period, the account shall be watch listed and lines frozen. Independent Oil Expeller/Solvent Extraction Units In case of independent oil expeller/solvent extraction units 15 days cleanup is mandatory before expiry/ renewal/draw-down for next season. The aforesaid condition of 15 days cleanup is not required provided the independent oil expeller / solvent plants are also involved in crushing of imported seeds / seeds other than cotton seeds. In the aforesaid scenario each tranche must be adjusted within a maximum period of 90 days. However Business Group Heads or Relevant Credit Sanctioning Authority within the business group may allow relaxation of another 5 days provided there are due justification for the same. Co-Ginning C/F Cotton limits in case of co-ginning by different entities at same factory may be allowed with the written consent of the business Group Heads, subject to fulfillment of the following further safeguards: Co-ginning is restricted to MCB borrowers only and no other bank is involved. Finance of each Co-ginner is covered by sufficient collateral (at least 50% of combined limit) besides pledge of stock providing required margin.

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The control over the stock would be separate and ensured by the Manager and Regional Manager. Field / Audit Staff to exercise extra ordinary vigilance and frequent visits to the factory. This concession shall be immediately withdrawn where any shortage in pledged stocks is detected or mixing of pledged stock is found during the course of inspection. A letter of disclaimer should be obtained from the Co-Ginner who is the owner of the property / factory. Owners undertaking to the effect that co-ginning shall not be allowed to other than MCB borrowers to be also obtained.

Financing Price Financing to be allowed on the basis of bench mark-price advised by Credit Risk Control Division, however, where wholesale price quoted in the local market or invoice price is below the BMP , the same shall apply and immediate step should be taken by General Managers/ Regional Managers / Branches to ensure adjustment to cover the shortfall. Drawing Power Position The drawing Power to be determined weekly on the basis of CRC determined prices. Any shortfall in margin must be corrected within 7 days by reducing outstanding or obtaining additional bales as per the calculated shortfall. On the eighth day, limits to be restricted according to the Drawing Power and approval shall be taken for the excess thus created.

Insurance Appropriate insurance policy must be obtained keeping in view the fact that goods are under open pledge. The policy / policy cover note should clearly mention that the insured stocks/ assets are stored in open and there should be no restrictive clause regarding such storage arrangements to avoid any dispute in the event of any claim. It should also cover stocks in process and in the press.

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MCB Bank Limited

6.4.5 Working Capital Financing To Textile Mills Concept

Credit Handbook

Textile industry is divided into various different segments. These segments can be broadly categorized as follows: Ginning (already discussed in previous section) Spinning Weaving Knitting Processing / Finishing

Brief introduction of each segment is as follows: Ginning: It is the process of converting raw cotton/ phutti into lint cotton. The process involves separation of cotton seed from cotton fiber/ lint. Spinning: It is the process of converting lint cotton into yarn. A typical conversion involves the following main processes/ steps: Blow Room (beating action on cotton to remove external material/ impurities) Carding (conversion of cotton into sliver) Combing (removing entanglements and short fibers) Simplex/ Roving Frame (conversion of sliver into roving) Ring Frames (Ring frames have spindles which determine capacity of the spinning unit. They convert roving into yarn. The capacity of spinning unit can be assessed in terms of number of spindles) Autoconer (Yarn from ring frames comes on small size packages. Autoconer converts the yarn on small size packages to large packages called cones, which accommodate large lengths of yarn.)

There can be several alterations to the above mentioned process. For example if the combing process is not carried out, it would result in production of a yarn type called carded yarn. In case the combing action is carried out it would result in a type of yarn called combed yarn. Another alteration can be an open end spinning process. In open end spinning process ring frame and simplex/ roving frame do not exist. Sliver from Carding is directly converted into yarn by rotors. Rotors determine the capacity of an open end spinning process as opposed to spindles determining capacity for a ring spinning process. Specification of yarn is indicted in terms of its count, which is defined as length per unit of weight.

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Weaving: It is the process that follows spinning and involves conversion of yarn into grey cloth/ fabric. Weaving process primarily involves the following main steps: Warping: (conversion of yarn on cones, received from spinning, to yarn on big beams.) Sizing: (application of chemicals/ starch to give strength to yarn) Loom Shed: It consists of looms, which determine capacity of any weaving unit. Looms convert yarn into grey cloth/ fabric. Two types of yarn are fed into the loom (called warp yarn and weft yarn). The process of conversion into fabric mainly involves a shedding mechanism and a weft insertion mechanism. Capacity of weaving unit can be indicated in terms of number of looms of certain width and type. Most common types of looms are: o o o Air Jet looms (having highest speed) Projectile looms Rapier looms

Folding: The process involves inspection of the grey fabric and its grading according to quality. After inspection the fabric is packed. Specification of any woven fabric is indicated in terms of the following: o o o o o Warp yarn per inch Weft yarn per inch Count of warp yarn Count of weft yarn Width of fabric

Knitting: Knitting is an alternate process of weaving. Yarn is converted into the fabric either through the process of weaving or knitting. In knitting process single yarn entangles on knitting machines to form fabric. The knitting process does not involve the warping and sizing stages as discussed above in weaving. Capacity of knitting unit can be indicated in terms of the number of its knitting machines of certain diameter and type. More than the technical difference in knitting and weaving process, the difference in end use of the product is significant. Knitted fabric is used to produce garments like T-shirts, socks, track suits, west, etc whereas woven fabric is used to make made-ups like bed sheets, quilt covers, curtains, dress shirts etc. As knitted garments require more customized requirements from foreign buyers, quality control requirements are consequently high. Most of foreign buyers of knitwear products are leading brands, which emphasizes high quality requirements.

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Processing / Finishing: The process refers to converting fabric into finished/ end product. This follows the knitting or weaving process. It generally involves the following main steps: Singing and De-sizing: Singing is the process of removing hanging threads from the fabric surface. De-sizing is the process of removing starch which was employed on the fabric during weaving. Singing and de-sizing process is carried out only for woven fabric and not for knitted fabric. Bleaching: It is meant to reproduce natural white color of fabric by removing impurities. The process is applied both on woven and knitted fabrics. Mercerizing: It is meant to increase absorption qualities of fabric so that it absorbs dyes quickly. The process is applied on both woven and knitted fabrics. Dying and Printing: It is the process of imparting color to fabric (both woven and knitted). It is the process which determines production capacity of finishing unit. Production capacity would be broadly related to the number of machines used in this process and would be indicted in terms of meters of fabric dyed/ printed per day. Dying process is usually carried out on the following machines: o o Jigger or winches machine for batch wise dyeing of woven/ knitted fabric. Pat Thermosol or Pat Steam machines for continuous dying of woven/ knitted fabric.

Printing process is usually carried out on the following machines: o o Rotary printing machine for woven fabric. Table printing machine for knitted fabric.

Stenter: It is the process which adjusts width of the dyed/ printed fabric and gives the fabric its final finish. Final finish is given by employing special features like softness, water repellent qualities etc. The process is only relevant for woven fabric. Cutting, Stitching and Packing: The dyed / printed fabric is cut, stitched and packed in accordance with the required specifications.

Structuring Working Capital Limit Textile mills require working capital financing for various reasons as mentioned below: In case of spinning mill, finance is required for procurement of Ginned/ Lint Cotton, its processing, and to finance yarn awaiting sale and till receipt of sales proceeds thereof.

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To facilitate self-liquidation of Banks exposure, it is prudent that financing to support storage of finished product (yarn) is kept at minimum and major portion of working capital limits is advanced against lint/ ginned cotton. In case of weaving mill, finance is mainly required for procurement of yarn, sizing material/ chemicals, and packing material. Finance may also be required to finance inventory of cloth/fabric. It is prudent that financing to support storage of finished product (cloth/ fabric) is kept at minimum. In case of Finishing/ processing mill, finance is mainly required for procurement of fabric and dyes. Composite units mainly require finance for purchase of cotton, as subsequent processes are done in-house. However, the conversion and holding costs of various types of inventories may be substantial, which also require financing.

As a principal, risk involved in financing against cotton is lesser as compared to financing against yarn, fabric, or end products. As we move from yarn to fabric and to end product, the risk increases as it is difficult to accurately price these items and secondary market is not as liquid as in case of cotton (cotton is traded daily on Karachi Cotton Exchange). Therefore, finance against yarn, fabric, and end products should be kept at minimum. Similarly, finance against knitwear should be discouraged as far as possible, as pricing of knitwear garments / fabric is very complex. Extreme prudence must be carried out in evaluating credit worthiness of a knitwear client and effort should be made to secure finance against realizable assets not part of the knitting business e.g. realizable residential property etc. Cash Finance - Cotton Transaction Sequence o o The customer purchases cotton from the ginners or from the market; The cotton is secured by the Banks Muccadum in a godown, generally located in the customers premises in the care and custody of Muccadum(s). When the Muccadum confirms that the cotton bales have been received and secured, the Bank advances CF limit to Customer; When the obligor wishes to use the pledged cotton, it repays the Bank, who then issues a Delivery Order (DO) to the customer, for presenting it to the Muccadum for release of the bales. Weight note should also be obtained at the time of allowing draw down, which shall be considered for calculation of draw down amount. For shipment to seaport for exports, delivery against transit limit may be allowed for transportation on truck / rail, under supervision of Bank approved C&F agent / Muccadum.

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Major Risks o

Credit Handbook

Price Risk Price of cotton keeps on changing with change in demand and supply condition during any season. Therefore changes in the price of cotton may reduce the coverage on the Banks loan. Such risk is mitigated through periodic monitoring of margin available and periodic monitoring of cotton prices. Liquidity Risk There is risk that obligor may fail to liquidate Banks exposure against cotton. A ready national market for cotton, including active daily trading on the Karachi Cotton Exchange, mitigates Liquidity Risk. There is also a very liquid secondary market, ensuring ready disposal of any cotton stocks, should the need arise.

Structuring of Cash Finance - Cotton o Last years limit and its utilization record are reviewed (where applicable) and requirement is assessed for the mill on the basis of quality of plant/machinery, its production capacity and marketability of the product. An estimate of cotton consumption by mill is worked out prior to each season. This is based on the per spindle consumption of 8 oz., 10 oz. and 12 oz. per spindle per shift (3 shifts per day). Such consumption varies according to the count of the yarn produced and plant operation efficiency. Actual number of spindles in operation should also be kept in view. The formula for estimating lint cotton financing requirement of a textile mill along-with illustration appear in Appendix II to Chapter 6.4. For old textile mills, this may be estimated on the basis of last 2-3 years actual consumption, so as to ensure that Banks finances are not used for speculative stocks build-up. Based on above basis C.F. (Cotton) limit should be estimated. Where customer requests R.F. limits as well, then sum of C.F. and R.F. should not exceed total cotton financing requirement.

In case of individual weaving, knitting, or finishing units, where cotton is not the raw material, the client may request CF limit only against yarn or fabric. Such customers should be evaluated on case to case basis by exercising extra prudence in terms of credit evaluation. In such cases, where cotton is not part of prime security, effort should be made to adequately secure finance against realizable collateral (not part of the business assets) e.g. realizable residential property etc. Calculation of procurement/ consumption requirement for weaving and processing/ finishing units is relatively more complex as compared to spinning, as it involves large number of variables. However, working capital requirements of weaving and finishing units can be broadly assessed by analyzing the break-up of its past year purchases, as disclosed

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in audited financial statements. While analyzing a weaving unit, the value of its purchases of yarn and sizing material would broadly constitute its main procurement requirements. These may be analyzed against the customers borrowings from all banks after keeping a prudent margin percentage. Similarly, for finishing/ processing unit, the value of its purchases of fabric and dyes would broadly constitute its main procurement requirements. These may be analyzed against the customers borrowings from all banks after keeping a prudent margin percentage. Running Finance Running Finance facility is to be allowed up to a maximum of 15% of CF limit for reputable customers if requested. The percentage will vary from 5% to 15% depending on the credit worthiness of the client. This facility is secured with exclusive / first pari passu hypothecation charge on current assets. However, for the purpose of security evaluation, only cotton stocks other than the pledged stock will be taken into account. However, in exceptional cases hypothecation based exposure can be allowed to the extent of 25 % of the approved CF line as an independent line subject to following conditions: Established track record of at least five years. No instances of any past due / overdue / default. Collateral does not include agricultural land. Financial Leverage (Total liabilities / net worth) does not exceed 3 X in the latest audited financials (in case of breach of this covenant in future, Hypo based limit will be revisited to brought it down up to 10 % of the approved CF line for the next season. No losses are reported in the last two years. Clean up requirements are meticulously followed.

Finance against Yarn, Fabric / Cloth and Work-in-Process Finance against Yarn, Fabric/ Cloth, and Work in Process should be discouraged as far as possible. This if need be: In case of spinning unit, finance against yarn and work in progress should be limited to 10% of outstanding within CF cotton limit @ 25% minimum margin (on a case to case basis).

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Credit Handbook

In case of integrated units the facility against yarn and/or cloth should not exceed 20% of total outstanding against CF- cotton limit @ 25% minimum margin. The DD/TT for goods in transit up to 10% of CF limit may be allowed to credit worthy customers, subject to close monitoring inclusive of T.R. for a period not exceeding 30 days, the same should not exceed 10% of outstanding against C.F. limit. The T.R. facility should be backed by collateral and to be considered for good clients only, to facilitate them in export of goods under the supervision of Banks approved C&F Agent.

Other Facilities FAFB/FBP facility against discrepant documents (acceptable to bank) up to 20% of FAFB/FP limits may be allowed as a regular limit at the time of sanctioning of facility, on case to case basis. Foreign Currency Bill Discounting (FCBD) to be allowed up to 50% of FAFB/FBP limit, on case to case basis.

Margin Pledged Cotton Stocks Minimum 10%. Pledged Yarn / Cloth Minimum 25%.

Hypothecation of Finished Stocks / Stocks in Process / Receivables Minimum 25%.

Monitoring Renewal of all Working Capital limit shall be subject to complete adjustment and payment of up to date mark-up / installments / dues. No financing shall be allowed to mills who themselves or their allied concerns or their directors / owners are defaulters of MCB or any other Bank / Financial Institution or have been allowed write-off waiver in the past or gone into liquidation, during the last 10 years. The Branch/ Relationship Manager should make random periodic unannounced and detailed inspections during the peak months and at the end of the season of the pledged stocks; Inspections should be scheduled as per schedule mentioned in Appendix IX to Chapter 5.1 Where finance is allowed from more than one branch, the control point should ensure the goods under Banks lien is in conformity to the overall limit amount. General Manager / Regional Managers should also visit the mill premises in the peak season for the inspection of plant & stocks under pledge / hypothecation of the bank. General Manager however, would be responsible for effective monitoring & stock inspection. The Bank selects and posts a Muccadum from the list of approved Muccadums, who takes pledged cotton stocks in their custody;

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The Muccadum provides the Bank with a weekly stock report and on each receipt and delivery, specifies the movement of cotton, confirming the number / quantity of bales / other stocks in its custody; The branch reconciles the stock report with the Banks records; Cotton/ yarn/ fabric pledged & hypothecated should be insured against all pertinent risks including riot, fire and damage (RFD).

Draw-down / Clean-up CF-Cotton: o Drawdown / disbursements against CF - cotton limits only to be allowed between October and April. Repayment schedule for CF Cotton Limits (only); Cleanup should be achieved as a percentage of approved limit unless otherwise restricted by SBP, internal circulars or specifically mentioned in approval of finance. July August September o 20 % 50 % 100 %

A further relaxation can be allowed by the Business Group Heads to the extent of 30 days, subject to the following conditions: No drawdown will be allowed against fresh cotton crop. Clean up period of at least seven days to be observed before allowing drawdown against fresh season crop.

If clean-up against CF-Cotton limit is not achieved even after expiry of the 30-day extension period, the account shall be watchlisted and lines frozen. o The above reduction will apply to CF and FAPC but will not be applicable to FAFB and FBP.

Note: For Imported Cotton draw down can be allowed round the year provided the same is imported through MCB only, however each tranche is to be adjusted within a maximum period of 180 days. CF (Other than Cotton): o o Where CF is secured against stock other than cotton, financing period of each tranche must not exceed 90 days. Drawdown for CF limits secured against stock other than cotton may be allowed throughout the year.

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Financing Price for Cotton

Credit Handbook

Financing to be allowed on the basis of bench mark-price advised by Credit Risk Control Division, however, where wholesale price quoted in the local market or invoice price is below the BMP , the same shall apply and immediate step should be taken by General Managers/ Regional Managers / Branches to ensure adjustment to cover the shortfall. Normally financing shall be allowed at base grade with a minimum of 10% margin. Financing at above base grade price / drawing power may be allowed only in case of reputable textile mill / exporters with permission of G.M. only on being satisfied that lint cotton pledged is of better grade and staple length etc. (Laboratory report from the Textile mill or from an independent laboratory and export quality record of the mill may be of assistance). Where a margin higher than 10% is stipulated in Approval of Finance, the Drawing Power is to be adjusted accordingly. Financing price for Imported Cotton to be based on its landed cost or at Base grade local cotton rate, whichever is lower. These are conveyed through CRCD circulars from time. In case higher than base quality rate is requested the same shall require prior permission of G.M. to reputable mills only, who shall entertain such request after ascertaining from lab report / packing list / invoice, the nearest local grade with which the same may be bracketed. General Managers / Regional Managers / Branch Managers are required to keep a close watch over prices so as to ensure adjustment in drawing power due to fall in the KCA quoted rates / BMP. If invoice / local price is less than BMP advised, the required margin on the same shall be applicable for determining the Drawing Powers. In case of any increase in the advised Bench Mark Price, the valuation of stocks already held shall not be revised upwards. Drawing Power Position The Drawing Power is to be determined on weekly basis. Any shortfall in margin must be corrected within 7 days by reducing outstanding or obtaining additional bales as per the calculated shortfall. On the eighth day, limits are to be restricted according to the Drawing Power and approval to be taken for the excess thus created. Each month and upon each receipt / delivery, Stock reports should be obtained from the Muccadum and tallied with the Pledge Register.

Insurance Appropriate insurance policy must be obtained for stocks under pledge, open pledge, or hypothecation. Where goods are stored in open, the policy / policy cover note should clearly mention that the insured stocks / assets are stored in open and there should be no restrictive clause regarding such storage arrangement to avoid any dispute in the event of any claim.

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6.5

Government of Pakistan Commodity Finance - Wheat

Concept Operating Procedure Mark-up Rate Accounting Procedure Documentation

6.5.1 6.5.2 6.5.3 6.5.4 6.5.5

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6.5.1 Concept

Credit Handbook

Under this product, the customer is the Government of Pakistan or its agencies that require the Bank to make payments to farmers for procurement of wheat / food items on their behalf. The purpose of the facility is to provide working capital to farmers to finance their following seasons / years crop. The duration of this facility is one year. 6.5.2 Operating Procedure The following procedure shall be followed for financing Government Commodity Operations: The Bank shall purchase commodities from farmers and sell them on deferred payment for 365 days to Government or its agencies on the marked-up price. When wheat procurement season starts, the Bank receives a list of wheat procurement centers from State Bank of Pakistan. On receiving the list of centers from State Bank of Pakistan (SBP), the Bank shall accordingly advise its designated branches to start making payments to wheat sellers. At the start of each quarter, limit of finance facility to be granted is also fixed by the SBP. As per procedure, Branches make the payment to wheat sellers on the posted scrolls at the centers, which are prepared and signed by the Centre In charge, Food Department and Provincial Government. Mark-up and Commission are charged on the finance on quarterly basis. Commission is credited to the concerned Branches. Payment to wheat sellers is made by crediting the purchase price into their accounts maintained at the Banks Branches. Having made payment to wheat sellers, the Branches send the scrolls to designated Branches for reimbursement. At the designated branch, the scrolls are checked properly and then reimbursement is made to branches every week / twice a week by debiting the account of Provincial Government / Government Agency. Guarantee for the above financing is provided by the Federal Government. Loan agreements invariably include a clause by which the Bank is vested with the power to recall the advance(s) / credit facilities at any time if the same are utilized for hoarding or purposes detrimental to the public interest.

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An undertaking to the above effect should invariably be obtained in writing against each finance to ensure compliance of the aforesaid regulatory requirement. The branches designated for Government Commodity Operations Financing should ensure that they hold a photocopy of the latest Government Guarantee or should refer to CRRS or CRMD if the same is not held. The branch / controlling office in the field should request the concerned department to provide the godown-wise break-up of stocks, signed by the authorized persons of the concerned agencies, to ensure that as and when stocks fall short of the outstanding facility, a letter is be written to the borrower to make up for the shortfall. The value of hypothecated stocks and receivables constitute the primary security whereas the government guarantee constitutes only the secondary security. Therefore, steps should be taken immediately to reduce the outstanding borrowing amount to the value of the available stock and receivables. Furthermore, the Branches shall ensure that the value of hypothecated stock and receivables must cover the value of the advances made to the agencies. They should also refuse to grant the agencies mentioned above any further accommodation in accordance with the usual banking practice. Up-to-date monthly stock and receivables report should be available in the designated branch office. For further details, refer Circular no. CMD/GM-CL/43 dated November 17, 1999. No margin or insurance cover is provided by Government Agencies on stocks held against Government commodity financing operations.

6.5.3 Mark-up Rate The prescribed rate of Mark-up (TPMR), as approved and charged only on the principal on quarterly basis, will be kept separately in the mark up A/C. Bank will not, under any circumstances, charge mark-up on markup.. Standard Mark-up Rate (SMR) in case of Government Commodity financing operations shall be the Bank's Normal Mark-up Rate for general advances or as per terms of approval. In addition to the mark-up, the Bank may continue to charge a commission of 3/8% on disbursements in respect of procurement operations, which is to be recovered from the agency by the designated branch and transferred to the concerned disbursing branches. 6.5.4 Accounting Procedure For accounting purposes, the Bank will maintain two separate accounts for commodity operation financing - one for Principal and the other for mark up: The Bank will calculate and recover mark up, at TPMR, from the Government / Agencies / Corporation on quarterly basis. As commodity finance limits are allocated on quarterly basis, the approved TPMR will be applicable on the outstanding finance against Government / Agencies / Corporation during each quarter.

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The Bank will calculate and communicate the amount of mark up to Government / Agencies / Corporation within a period of seven (7) days from the end of each quarter and, thereafter, the latter will be required to pay the markup within fourteen days. Thus, the Government / Agencies / Corporations will have 21 (twenty one) days in all at their disposal from the end of each quarter for making payment of mark up to the Bank. In case of timely repayment within the stipulated period, the liability on markup for the last quarter will stand relinquished. However, where the Governments / Agencies / Corporations do not make payment of mark up within the allowed 21 days (grace period), the Bank will charge normal lending mark-up rate (or as per terms of approval) on the outstanding finance on which markup has not been paid by the Government / Agencies / Corporations, beginning from the first day of the subsequent quarter up till the date the mark up is paid. In light of SBP letter # BSD(RU-50)/14842/911/1001 dated 17th October 2001, circulated to All GMs / Credit Executives of concerned branches, the following must also be adhered to: o During the Procurement / Retention period (May to September) of wheat stocks, the branch shall continue to charge mark-up at the approved TPMR in case of Government Wheat Procurement Financing. The grace period for Mark-up of April to June quarter shall stand extended up to 21 days after Retention period. The demand letter for Mark-up falling due during the Retention period may not be raised up to September 30. Thereafter, demand for Mark-up due for April to June quarter and July to September quarter may be raised within 7 days of September quarter end, allowing a grace period of 21 days reckoned from Retention period / September end. In case Mark-up is not cleared by the above extended grace period, Normal / Standard Mark-up Rate (SMR) shall apply from the first day of quarter starting after retention period (i.e. October 01). The aforesaid relaxation in grace period shall not apply to any Mark-up due prior to start of the Retention period, i.e. for Principal Amount on which Mark-up is due and unpaid within usual grace period of 21 days at the end of January March quarter or earlier.

6.5.5 Documentation Agriculture Finance Agreement (IB-4). Letter of Hypothecation (IB-25A). Photo-copy of Government Guarantee [original is held at CRRS, P.O.]. Authorization to negotiate Promissory Note / Bills to SBP in case of need (AnnexureIII) Promissory Note (IB-12). Stock Report.

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6.6

Financing against Cash/ Near Cash Collateral

Concept Special Precautions Application / Policies Marked-up Price and Adjustments Documentation

6.6.1 6.6.2 6.6.3 6.6.4 6.6.5

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6.6.1 Concept

Credit Handbook

Financing facilities (fund based and/or non-fund based) may be allowed against cash/near cash collateral. List of cash/near cash collateral is available at Section 5.1.17 or as amended through CRMD Circulars from time to time. Financing facilities against cash collateral shall be provided for business purposes only. 6.6.2 Special Precautions In addition to precautions mentioned in Section 5.1.17, Branch/CRC should ensure pledge over the securities before releasing the funds to the customer by ensuring that the following conditions are met: o o Lien to be marked on securities offered. Confirmation to the effect should be obtained from the security issuing agency, where possible e.g. in case of DSCs / RICs / SSCs, confirmation should be obtained from the concerned authorities. Letter of encashment to be obtained from the owner of securities to encash the securities, if borrower fails to make the payment. Documentation to be completed as per the standard requirements.

The margin on value of security should be regularly monitored and mark-up due should be recovered promptly. It should also be noted that the credit facility is not available in the name or against deposit receipts or certificates of Minors or Non-Profit Organizations (unless their By-Laws / Trust Deed permits them to do so) or Partnership concerns (unless the name of partnership appear on the deposit receipts or certificates and no partner is minor). Bahbood Savings Certificates cannot be pledged as security. For financing against FCY deposits, valuation of the same to be done in accordance with CRMD Circulars at the time of initiation of finance and revaluation of the same to be done on monthly basis. In case of any shortfall the same must be adjusted / topped-up within three working days. The certificates under pledge shall remain in safe custody of Branch/CRC till full repayment of the principal and mark-up. The certificates issued under National Savings Schemes (i.e. DSCs, SSCs, RICs) shall be allowed for pledge for the purpose of financing after expiry of six months from the date of issuance of the certificates purchased through fresh investment. This condition shall not apply in respect of the certificates purchased through reinvestment. Third party deposit:

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Letter must be sent by the branch to the third party, confirming that their deposit has been placed under Bank's lien against financing to the customer. If the third party is a limited company / non-profit organization, verification should be conducted to ensure that their memorandum of by-laws for trust deed permits them to do so. Any such regulatory requirement must be adhered to. Any condition / restrictions imposed by Central Directorate of National Savings / SBP / any other regulatory body shall supersede the existing conditions and should be meticulously followed.

6.6.3 Application / Policies Appendix I to Chapter 6.6 (Credit Proposal cum Approval of finance) shall be used as proposal and approval of finance. Demand Finance / Running Finance may be provided for tenor not exceeding twelve (12) months. Time to time adjustment is not necessary. Financing up to 3 years (Demand Finance only) may be approved subject to the condition that customer undertakes to apply for the continuation of the limit every 12 months. Documentation and requisite IB Forms in such cases shall be for limit amount plus three years Standard Mark-up Rate (SMR). The minimum margin requirement is 5% of the encashment value [excluding Zakat and withholding tax, if any] of Deposit Receipts / Certificates on the date when finance is being availed / renewed.

6.6.4 Marked-up Price and Adjustments The calculation of mark-up for mark-up agreement purposes shall be based on SMR. 6.6.5 Documentation Documentation as per Appendix IV to Chapter 5.1

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6.7
6.7.1 6.7.2 6.7.3

Financing Against Shares

Introduction Concept Financing against Shares (existing/conventional financing) 6.7.3.1 6.7.3.2 6.7.3.3 6.7.3.4 6.7.3.5 Risk Management Considerations Special Precautions/Guidelines for Financing against Shares Monitoring Market Value of Shares Top-Up and SellOff of Shares Guidelines for Selling Shares

6.7.4

Margin Financing 6.7.4.1 6.7.4.2 Comparison between Margin Financing & Finance Against Shares Conditions for extending Margin Financing to Brokers

6.7.5

Compliance with - SBP PR (R-6) (Regulation In Respect of Financing against Shares) Shares Eligible for Financing Documentation

6.7.6 6.7.7

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6.7.1 Introduction

Credit Handbook

This chapter provides guidelines and regulatory requirements regarding Financing against Shares. This includes (a) Guidelines and regulatory requirements regarding financing against shares (Existing/Conventional financing); and (b) Guidelines and regulatory requirements regarding Margin Financing 6.7.2 Concept Financing (both fund and non-fund based) secured by shares requires certain risk management considerations due to the nature of the security. Financing against shares can be categorized / divided into two parts: Finance Against Shares (existing / conventional financing) Margin Financing

6.7.3 Finance Against Shares (existing / conventional financing)

6.7.3.1

Risk Management Considerations

Shares are riskier than debt as they have a residual interest in the company. Therefore, upon liquidation/winding up, they will get repaid after all other claims against the company have been settled. 1. There are various levels of liquidity of shares. Firstly, shares that are regularly traded on the Stock Exchange are most liquid. Secondly, shares that are listed but not actively traded on the Stock Exchange are less liquid. Lastly, shares that are not listed on the Stock Exchange are the least liquid. 2. The State Bank of Pakistan does not allow financing on the security of unlisted shares. 3. The Prudential Regulations allow financing against shares that are lodged with the Central Depository System (CDS). Under this system, the physical share certificates are replaced with residual holdings. The CDS offers a more secure and efficient system than the previous physical share system for settlement and pledge of shares. 4. The market price of shares listed on the Stock Exchanges fluctuates considerably, which requires adequate margin. 5. The price of non-actively traded stocks may not reflect the inherent value of the shares.

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6.7.3.2

Credit Handbook

Special Precautions/Guidelines for Financing against Shares

1. Complete adherence to SBP Prudential regulations and other regulatory requirements vis--vis financing against shares to be ensured. 2. Finance against shares shall be allowed at Stock Exchange Branches only except where special permission is granted by Head RMG. 3. Financial statements complying with Prudential Regulations and eCIB report (where applicable) shall be obtained prior to allowing finance. 4. Financing against shares below par value will not be allowed. However, in exceptional cases, CRMD may issue necessary circular / instructions for accepting any below par share as security. 5. Branch must hold authority from the borrower to sell the shares held as security, without reference to borrower in case margin reduces to 10% at any time or 75% of the required margin due to market fluctuations. This shall be invoked without any delay subject to prior permission from G.M. 6. The Bank reserves the right to increase margin at its discretion, while taking into account prevailing market conditions or regulatory requirement. 7. Bank, at its own discretion, may not accept shares of any company or may not accept replacement of shares with the shares of another company. 8. Shares accepted as security should be in marketable lots. 9. Exposure against any single scrip should not exceed one third (33.33%) of the approved limit of the customer. 10. As per Banks policy, securities owned by minors shall not be accepted for financing. 11. In case shares are owned by a company, a Board Resolution of the company is required which authorizes specified person(s) to pledge the companys assets with banks. 12. In case the shares are owned by a company, its Memorandum and Article of Association should be checked for powers vested in the company to secure the debts of a third party. 13. It should be ensured that the disbursements against approved facilities/ limits are made only after the collateral shares have been pledged with the bank. Any exceptions should be duly identified and approved by the competent authorities. 14. It must be ensured that beneficiary of the finance must be the absolute owner of the shares so pledged or has the necessary mandate to pledge the shares as security for availing financing facility from the bank.

6.7.3.3

Monitoring Market Value of Shares

Where the Bank holds shares as security, it is necessary to monitor the market value of these shares. It should be ensured that Drawing Power is calculated on a daily basis. A detailed share evaluation report (Margin Call Report) should be generated by the branch for the shares held under its lien. The report must clearly

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specify the borrowers name, outstanding loan / facility amount, market value of collateralized shares, margin requirement, and the shortfall / excess amount based on the margin requirement. 1. In case of any shortfall in the market value of shares against financing obtained, the concerned Branch Manager should briefly state the remedial strategy and sign-off against the name(s).The report should then be sent to respective Regional Manager / General Manager. 2. A letter should be sent to the clients whose accounts are subject to shortfalls. The client will be asked to either reduce the outstanding or bring in additional collateral to bring the outstanding within the agreed margin requirement or else bank may revoke the authority to sell.

6.7.3.4

Top-Up and SellOff of Shares

In case the market value of the pledged shares falls below our margin requirement, the customer must deposit additional shares (acceptable to the bank) within 3 days of receiving a letter for the same. However, if the margin available is less than 10% and the customer fails to provide additional shares after receiving letter from the bank, the shares can be sold as per guidelines for selling shares given below.

6.7.3.5

Guidelines for Selling Shares

The guidelines for the sale of shares being liquidated to adjust finances against which these shares are secured / collateralized are as follows: 1. The Branch Manager (BM) sends notices to the obligor and to any third party pledges for the sale of shares. 2. BM gets written quotes from various brokers (three written quotes are needed). 3. A selling broker is selected based on price quote and other terms and conditions. If there are any compelling reasons for not accepting the highest quote, they must be mentioned. 4. The BM forwards shares sales memo to Regional Manager, who seeks permission from General Manager on a sale of shares Memo. 5. All transactions are on delivery against payment basis (draft or SBP cheques).

6.7.4 Margin Financing In order to avoid speculative trading involved in bald, SECP in 2004 decide to replace badla with Margin Financing. Margin Financing means lending by banks / DFIs to Brokers for their clients to purchase approved shares of joint stock companies listed on the Exchange with the retention of at least minimum margins prescribed by the State Bank of Pakistan.

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a) Margin financing allows investors to buy securities by borrowing a portion of the purchase price. b) The buyer (brokers client) pays a portion of the purchase price and the broker lends the difference by borrowing from the bank against the purchased securities & margin deposited in the Broker Client Margin Account. c) The buyer in turn pays interest on the brokers loan. 6.7.4.1 Comparison between Margin Financing & Finance Against Shares Margin Finance To facilitate the investor in purchasing the approved shares New (as well as exiting) but the ownership is of investor, pledged by the investors broker mentioning the subaccount Investor (but for the bank it is broker) Finance Against Shares To facilitate borrower (broker / investor) by unlocking their tied up investment in shares

Key Deciding Features Purpose

Share offered as security

Existing Shares

Ultimate borrower

Investor / Broker

6.7.4.2

Conditions for extending Margin Financing to Brokers

Following are the guidelines provided by SBP regarding Margin Financing 1. Banks/DFIs are advised to encourage the brokers who are availing margin financing facilities from them to obtain credit rating from a credit rating agency on the approved panel of State Bank of Pakistan. State Bank is not making credit rating mandatory or prescribing any minimum credit rating for the eligibility purposes. The purpose is to emphasize the importance of credit rating and encourage the brokers to provide this important information to the lending bank/DFI for their decision-making. 2. The margin financing shall be provided by banks/DFIs only against approved securities provided that the approved shares should be in dematerialized form in the Central Depository. 3. The brokers availing the margin financing from banks/DFIs would be prohibited from lending the funds obtained from banks/DFIs or their own funds, directly or indirectly, to lending banks/DFIs connected entities, directors or major shareholders and relatives of directors or major shareholders. 4. Margin Financing shall be provided by banks/DFIs from designated branches only.

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6.7.5 Compliance with - SBP PR (R-6) (Regulation In Respect of Financing against Shares) In light of SBP prudential regulation R-6 (1 (B)-2), banks are not allowed to hold shares in any company (as pledgee, mortgagee or absolute owner) of an amount exceeding 30% of the paid-up share capital of that company or 30% of Banks own share capital and reserves, whichever is less (should be treated as ceiling). The computation of exposure to determine compliance with PR (R-6) is illustrated by the following examples: Illustration 1:
Calculation of 30% of a Companys Paid-Up Capital Paid-Up Share Capital of ABC Co. Ltd. (No. of Issued Share x Face value) 30% of Paid-Up Share Capital of APL Calculation of 30% of a MCBs Share Capital & Reserves MCBs Share Capital & Reserves 30% of MCBs Share Capital & Reserves 30,125,702,000 9,037,710,600 Rs. 400,000,000 120,000,000
Whichever is lower will be the ceiling

Since 30% of ABC Cos paid-up share capital is less than 30% of MCBs share capital and reserves, therefore 30% of ABC Cos paid-up share capital would be treated as ceiling i. e Rs. 120,000,000.
Say, MCBs holding of ABC Co.s shares is 1,111,000 shares MCBs holding (No. of Shares held x Face Value) Breach Ratio- 30% 1,111,000 x 10 = Rs. 11,110,000
Holding Ratio = MCBs Holding/Paid up Capital

9.23 %

11,110,000 / 120,000,000 = (NO BREACH)

As per R-6 (1. (A) f) banks shall not take exposure on any one person (whether singly or together with other family members or companies owned and controlled by him or his family members) against shares of any commercial bank / DFI in excess of 5% of paid-up capital of the share issuing bank / DFI.

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Illustration 2:
Client Name: Share Pledged: Paid-Up Capital of NBP: (No. of Issued Share x Face value) 5% of Paid-Up Capital of NBP (Ceiling): Say, MCBs exposure on XYZ Securities Ltd. against shares of NBP: Breach Ratio: Holding Ratio: MCBs Exposure / Paid-Up Capital

Credit Handbook

XYZ Securities Pvt. Ltd. National Bank of Pakistan Rs. 7,090,712,000 Rs. 354,535,600 Rs. 747,536,000 5% 747,536,000 / 7,090,,712,000 = 10.54% (BREACH)

For the purpose of monitoring of above mentioned regulations, the following procedure shall be followed: Monitoring of R-6 [Section 1 B (2)] MRMD shall carry out the monitoring exercise of Prudential Regulation R-6 [Section 1 B (2)]. Holding position shall be obtained from CRC and Capital Markets. FCD shall communicate holding position only in the event of a change in its holding position. MRMD shall Red Flag such cases where the Bank holds shares of companies, close to the limit19 defined as per Prudential Regulation R-6[Section 1 B (2)]. Prior approval from MRMD shall be obtained before any financing is allowed or acquiring any shares; 1. Where MCBs holding (as pledgee, mortgagee or absolute owner) of shares of any company is 25% of the paid-up share capital of that company or 25% of Banks own share capital and reserves, whichever is lower. Monitoring of R-6 Section 1 A (f) CRMD shall issue periodic circulars mentioning the maximum exposure allowed (5% of paid-up capital of the share issuing bank / DFI) to a client against shares of commercial banks / DFIs.

19

Where MCBs holding (as pledgee, mortgagee or absolute owner) of shares of any company is 25% of the paid-up share capital of that company or 25% of Banks own share capital and reserves, whichever is less.

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CRC shall be responsible for monitoring of maximum exposure allowed to a client against shares of commercial banks / DFIs as circulated by CRMD.

CRMD shall highlight cases on monthly basis where breach has occurred. 6.7.6 Shares Eligible for Financing A separate frame work has been developed in order to update the list of shares eligible for financing. This framework shall take into consideration Volatility in Share Prices, Average daily turnover and qualitative judgment at the time of updating the list. Keeping in view all these factors, different shares against which financing can be allowed are classified into three categories as A, B & C with margin requirements as follows: Category A B C Margin Requirement 30 % 40 % 50 %

Circular of eligible shares classified into these three categories will be issued on half yearly basis or as per directives from MCC. However, the frequency of the same can be increased or reduced keeping in view the market position. Where a higher margin requirement has been stipulated in the sanction advice, the same shall apply. Financing against shares below par value would not be allowed. Procedure for Exceptions Group Head CBBG and Group Head WBG may propose exceptions (addition / deletion to the list or change of category) to the list of shares eligible for financing along with due justifications on case to case basis. Justifications must include (among other factors) an analysis of volatility in price and turnover of the share proposed for exception. Such proposals shall be forwarded by Group Heads to Credit Risk Management Division (CRMD). Keeping in view the justifications, Group Head RMG will be the approval authority for these exception requests. 6.7.7 Documentation Documentation as per Appendix IV to Chapter 5.1

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6.8

Financing to Financial Institutions

Introduction Call Lending Certificates of Investment / Certificates of Deposit Placement Reverse Repo Lending Term Finance Certificates Trade Finance / Bank Guarantee Lines Rupee Drawing Arrangements Foreign Exchange and Derivative Exposures Limit Setting Limit Monitoring

6.8.1 6.8.2 6.8.3 6.8.4 6.8.5 6.8.6 6.8.7 6.8.8 6.8.9 6.8.10

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6.8.1 Introduction

Credit Handbook

The purpose of this chapter is to provide procedural framework for financing facilities offered by MCB to financial institutions. These facilities may be classified into fund based facilities and the non-fund based facilities. Fund based facilities are the conventional credit facilities like call lending, clean placements, investment in certificates of investment (COIs) or certificate of deposits (CODs), reverse repo lending, investment in TFCs etc. Treasury & FX Group is actively involved in extending credit facilities to financial institutions. Except investment in TFCs all other credit facilities mentioned above are short term in nature and are called money market activities. Besides these activities, the bank also extends running finance and term finance facilities to non-bank financial institutions. Non Fund based facilities are generally extended to financial institutions for trade finance and bank guarantee business. These facilities are covered under TF/BG exposure limits extended to a financial institution. These exposure limits are managed by FIID. The bank is also involved in FX and derivatives trading. While dealing with its counterparts MCB assume credit exposure. To manage these exposures, the bank assigns exposure limits like spot/settlement limits, forward limits and limits for derivative transactions. The description of these products is given in PPMs and the treasury operational manual jointly developed by Treasury & FX group and the Treasury Operations (TROPS). However, a brief product wise description is narrated below. 6.8.2 Call Lending Call lending is basically clean lending to meet short term requirements of financial institutions. Treasury & FX Group is authorized to invest in Call Lending. Operations Group is responsible for deal confirmations, book keeping, settlement and reconciliations. FIPS & MRMD is responsible for Call Lending limits monitoring. 6.8.3 Certificates of Investment (COI) / Certificates of Deposits (COD) Placement These are short term instruments and MCB invests in COIs / CODs up to a maximum tenor of six months. Treasury & FX Group is authorized to invest in these instruments. Operations Group is responsible for deal confirmations, book keeping settlement and reconciliations. Safe Custody of COIs is the responsibility of Treasury Operations (Operations Group). FIPS & MRMD is responsible for Call Lending limits monitoring.

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6.8.4 Reverse Repo Lending

Credit Handbook

Reverse Repo is basically lending secured by financial instruments .Treasury & FX Group is authorized to deal in Rev Repo Lending collateralized by TBills, PIBs, TFCs and Corporate Bonds. Separate credit approvals are required for accepting corporate bonds / TFCs as collateral. Haircuts should be applied where applicable in line with regulatory guidelines or credit requirements. Following procedure will be followed for approval of Rev Repo limits against TCF/Corporate Bonds. Treasury will recommend list of TFC / Corporate Bonds and exposure limits against each to FIID. 1. FIID shall recommend exposure limits to FIPS & MRMD as per existing procedure for FI limits. 2. FIPS-MRMD shall perform quantitative analysis (based on VaR, volume and credit rating), to determine the acceptability of TFC / Corporate Bonds plus haircuts / margins to be applied. 3. Rev Repo exposure Limits against each TFC / Corporate Bonds shall be considered as exposure against the Rev Repo counter party and the TFC / Corporate Bonds issuer. 4. The exposure limits (both against the Rev Repo counter party and the TFC/ Corporate Bonds issuer) shall be determined and monitored in line with Prudential Regulations following the credit approval process of MCB. 5. Exposure limits shall be approved according to the appropriate level of authority. 6. Treasury will be assigned two types of credit limits for TFC / Corporate Bonds Rev Repo. a) Portfolio limit for Rev Repo against TFCs b) Scrip wise Repo limits 8. TFCs / Corporate Bonds (against Repo) will be marked to market daily and if the MTM value of TFC/ Corporate Bonds falls below the Price-2 plus haircut/margin, the counter party will be asked immediately by the treasury front office to either increase the security or to reduce the exposure. 9. FIPS-MRMD shall monitor Rev Repo exposure limits against TFCs/ Corporate Bonds. For Repo/Rev Repo transactions Master Repo agreement must be signed between the counter parties. Operations Group shall be responsible for deal confirmations, book keeping, maintenance of Master Repo Agreement, reconciliations and reporting.

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The investment limits for Rev Repo Lending shall be tenor wise, counter party20 and Rev Repo Lending portfolio limits. FIPS & MRMD is responsible for Call Lending limits monitoring. 6.8.5 Term Finance Certificates (TFCs) TFCs are coupon bearing debt instruments issued by the corporate entities and financial institutions. These are capital market instruments classified under fixed income securities. TFCs may be listed or unlisted. TFCs may be secured (by some fixed/tangible assets or receivables) or unsecured to meet tier II requirements of the banks. Capital Markets and Treasury & FX Group are authorized to invest in listed TFCs for Trading, AFS and HTM portfolios (listed only). WBG/CBBG are authorized to invest in TFCs for their AFS and HTM portfolios only. WBG/CBBG are authorized to invest in unlisted TFCs for their HTM portfolio. Operations Group is responsible for deal confirmations, book keeping, reconciliations and reporting for the investments made by Capital Markets and Treasury & FX Group while WBG/CBBG are themselves responsible for these activities. Investment limits (case to case basis) for TFCs are proposed by the business groups to FIID.FIID prepares a credit proposal for approval by the business Group Head. Subsequently, the proposal is sent to FIPS & MRMD who processes these requests and recommends to appropriate level of authority for review/approval FIPS & MRMD is responsible for monitoring counterparty TFC limits for the investments made by Capital Markets and Treasury & FX Group while Credit Risk Management is responsible for monitoring TFC exposure booked by WBG and CBBG. 6.8.6 Trade Finance / Bank Guarantee Lines MCB has a broad customer base involved in both local and foreign trade. To facilitate trade business, MCB extends TF/BG lines to various banks of acceptable risk. These lines are utilized by the branches for i. ii. iii. For financing against export bills drawn under L/Cs Confirmation of L/C issues by them Acceptance of standby letters of credit and guarantees as security for financing

The TF/BG limits are managed by FIID. Branches request for exposure limits on case to case basis.
20

Counterparty limits will require normal credit approvals as stated Chapter 3.2 of the handbook.

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6.8.7 Rupee Drawing Arrangements

Credit Handbook

These lines are extended to smaller or mid-size banks whose branches are not present in the cities where they want to remit funds on behalf of their clients and make payment to the beneficiaries. Accordingly, RD agent banks utilize MCB branch network for the payment of their drafts, mail transfers or any other remittances. Following is the mechanism for transactions under rupee drawing arrangements. Client comes to the counter of the RD agent bank for issuance of draft payable in a city where the bank has no branch. The RD agent bank issues a draft drawn on the MCB branch in beneficiarys city. At the same time the RD agent bank issues SBP cheque favoring participating branch of MCB in that city against this draft. According the agreement, MCB branches pay the draft / remittance instrument if the amount falls within a minimum threshold amount. If the amount is more than the threshold amount, the paying branch confirms receipt of funds against the subject draft from the draft issuing branch and make payment upon receipt of funds.

The exposure limit is assigned to manage the exposure created due to delay in receipt of funds from RD agent bank to MCB. The limits are managed by FIID. 6.8.8 Foreign Exchange and Derivative Exposures Foreign Currency Placement Depending upon the liquidity position, withdrawal / deposit behavior of FCY deposits, interest rate differential between PKR and FCY and the SWAP premiums FCY placement are made with the correspondents. FCY Placements are made for short tenor not exceeding 1 year. Placements are made only with the stable and reputable international banks having banking relationships with MCB. Treasury & FX Group is authorized to deal in FCY placement with the financial institutions with approved FCY placement limits. FCY placement limits for banks are proposed by the Treasury to FIID.FIID prepares credit proposal approved by the Group Head. The proposal is sent to FIPS & MRMD who processes these requests and recommends to appropriate level of authority for review/approval. Operations Group shall be responsible for deal confirmations, book keeping settlement and reconciliations. Spot/settlement exposures FX Spot/settlement exposures are created while dealing with interbank clients. Spot exposure is booked on an interbank client when the remaining business days to maturity are two. If remaining business day to maturity is one the exposure is called as tom. If the settlement of the transaction is to be carried out today, the exposure is termed as intraday settlement exposure. However for USD PKR (sell) transactions the intraday settlement is not created because the PKR amount is received during SBP banking timings while USD is to be settled late in the evening.

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To cover this exposure, client wise spot / settlement limits are allocated. The exposure is calculated by summing all transactions in absolute terms within T+2 days. Derivatives The derivative products include the following: Currency Forward A Currency forward is the forward buying / selling of foreign currencies. These are non-fund based transactions and are converted into fund based only on settlement date. Currency forwards may be booked in any authorized foreign currency. Value of the forward transactions is determined by marking to market on daily basis. Since the value of the exposure changes based upon the market rates, the credit exposure is created due to exchange difference between the booked rate and the prevailing market rate. To manage this exposure, notional exposure limits are assigned to counterparties. Forward Rate Agreement (FRA) An FRA is an agreement between two parties where each party contracts to make interest payment to the other on the predetermined date in future based on a notional principal amount denominated in the same currency one party is the FIXED RATE PAYER - the fixed rate being agreed at the inception of FRA the other party is the FLOATING RATE PAYER the floating rate being determined on settlement/start date by reference to a specific market rate there is no exchange of principal only exchange of interest Each transaction is marked to market daily. Credit exposure is created due to the difference between the fixed rate and the floating rate. Before entering into the FRA transactions approvals / credit lines must be obtained from the appropriate level of authority including SBP. FRAs are permitted only in PKR. Separate counterparty limits may be approved for FRAs for interest rate derivatives as a combined limit for FRA and IRS. Interest Rate Swaps (IRS) IRS is an agreement between two parties where each party contracts to make periodic interest payments to the other on a predetermined set of dates in future based on a notional principal amount denominated in the same currency one party is the FIXED RATE PAYER - the fixed rate being agreed at the inception of the swap the other party is the FLOATING RATE PAYER the floating rate being determined during the lifetime of the swap by reference to a specific market rate

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there is no exchange of principal only exchange of interest

Before entering into the FRA transactions approvals / credit lines must be obtained from the appropriate level of authority including SBP. FRAs are permitted only in PKR. Separate counterparty limits may be approved for FRAs for interest rate derivatives as a combined limit for FRA and IRS. Options Options are financial instruments that give the right to the holder of the option to: buy (call option) the agreed amount of underlying if the transaction is favorable to holder at the exercise price sell (put option) the agreed amount of underlying the transaction is favorable to holder at the exercise price.

On the other hand, options are obligation to the option seller (Writer). Options can be written on currencies, commodities, interest rates, stock exchange index, etc. Options are of various types depending upon different factors e.g.: the date/period of execution like American, European, Asian, Bermudan Options etc. price like knock in knock out , barrier, look back Event like digital options

Options on exchange rate and interest rate like Cap, Floor or Collar etc. are authorized transactions subject to general or specific permission from SBP. Exposure limits for counterparties writing options are required. Structured Products Structured products are combinations of options, forwards and equity/fixed incomes investments. Before entering into the transactions separate approvals / credit lines must be obtained from the appropriate level of authority including SBP. Details of these transactions may be obtained from PPMs developed by Treasury. Operations Group shall be responsible for deal confirmations, book keeping, settlement, reconciliations and revaluation of these products. Derivative exposure limits are proposed by Treasury & FX Group to FIID who are responsible for managing the relationship of financial institutions. Presently limits are allocated / approved only for hedging purposes. FIPS & MRMD is responsible for limit monitoring. 6.8.9 Limit Setting Treasury & FX group or any other Business Groups shall make their propositions annually to FIID who is responsible for managing the relationship with the financial

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institutions. The proposals are recommended/approved by the Divisional Head FIID and the Group Head WBG. The proposals include following information where applicable. Financial analysis (capital adequacy, asset quality, liquidity, earnings profile and sensitivity) The products, customers, branch network/market presence and strategy Industry analysis (comparison with the peer group) The market and regulatory environment Comments on Management and sponsors along-with the shareholding pattern Existing limits , proposed limits , limits recommended by FIID and expiry dates Previous performance renewal/enhancement for utilization and justification for

The proposal is forwarded to FIPS & MRMD for review to forward the credit proposal to the appropriate level of authority for review/approval. Similar procedure is followed if amendment / enhancement in limits are required during the financial year. 6.8.10 Limit Monitoring

All exposures limits booked by treasury & FX groups are monitored by FIPS & MRMD. While the exposures booked by the other business groups shall be monitored by FIID. Limit exception is reported to the respective business group head and is advised to comment on the reason of breach. The business group head forwards the comments/reasons to FIPS & MRMD. FIPS & MRMD reviews the request, and forwards to the appropriate level of authority with comments. The regularization/remedial actions after receiving from the approving authority are communicated to the respective business for implementation.

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6.9

Market Risk Leading To Credit Risk

Introduction Off-Balance Related) Sheet Exposure (Market

6.9.1 6.9.2 6.9.3 6.9.4 6.9.5

Credit Exposure Limit Approval Process Credit Exposure (Foreign Currency Trade Finance Products) Credit Exposure created due to change in the value of security

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6.9.1 Introduction

Credit Handbook

Market risk arises from changes in market rates (such as Interest Rates, Foreign Exchange Rates and Equity Prices) as well as in their correlations and implied volatilities. As defined by SBP (in general) assets & liabilities booked under accounting classifications Held for Treading (HFT) and Available for Sale (AFS) with short term investment horizon are treated under the Trading Book. Assets & liabilities booked under accounting classification Held to Maturity (HTM) or booked in AFS but with the intent to carry the position for long term are treated under Banking Book. Generally trading book is managed by Treasury & FX Group and the Capital Markets Group. However, some of their assets are classified under banking book (fixed income securities classified under HTM and the capital market investments classified as strategic investments). Further all lending and borrowings plus forward commitments for purchase & sale (of foreign exchange, fixed income securities, equities) and lending /borrowings are subject to market risk. Financial assets & liabilities booked and managed by CBBG and WBG are treated under Banking Book as they are generally required to carry exposure till maturity of the financial instrument or the facility. Market risk leading to credit risk may be broadly classified into the following categories. a) Off balance sheet exposure (market related) b) Credit exposure (Foreign Currency Trade Finance Products) c) Credit Exposure created due to change in the value of security 6.9.2 Off-Balance Sheet Exposure (Market Related) Market risk created due to off-balance sheet exposures where commitments are made between the counterparty and the bank leads towards credit risk. Credit risk created due to rate/price movement may be segregated according the sources of market risk as described below. Interest rate Risk Interest rate risk is created due to movement in interest rate affecting / changing the market value of the exposure. This movement can be a single point shift or it may be due to changes along the yield curve (yield curve risk). Following are the products where the bank is exposed to credit risk due to movement in interest rates. a) Forward purchase / sale of securities: e.g forward purchase/short sale of T-bills and PIBs and forward legs of the repo/rev repo transactions. Credit risk in Forward purchase of securities is created when the interest rates fall and market price of the purchased instrument increases. Credit risk in Forward sale of securities is created when the interest rates rise and market price of the purchased instrument falls. These transactions are generally carried out by Treasury & FX Group.

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b) Forward borrowing / lending: Forward commitments by the financial institutions and the corporate lending/borrowing. These transactions are generally booked by WBG and Treasury & FX group. c) Interest rate derivatives: e.g. Forward Rate Agreements (FRAs), Interest Rate Swaps (IRS), Interest rate options (Caps/ Floors/Collars) quantos, Cross currency options etc. The transactions are booked by Treasury & FX Groups. However the relationship may be maintained by WBG/CBBG. Foreign Exchange Risk Foreign exchange risk is created due to movement in exchange rate. Forward exchange rates are based upon the spot rate and the interest rates of both the currencies. If any of these factor/(s) changes forward rate is changed. 6.9.3 Credit Exposure Limit Approval Process Following procedure shall be followed for approval of the above referred transactions. 1. FIPS & MRM division shall issue schedule for credit conversion factors periodically. The product-wise conversion factors to be used currently are given below.
Products Forward purchase/sale of fixed income securities or lending FRA IRS Currency forwards cross currency swaps Currency options (if MCB is buyer) /structured products Conversion Factors 1% 1% 5% 5% 5% 2%

2. The relationship shall multiply the notional amounts (exposure limits) corresponding to facilities. 3. The numbers so obtained shall be the credit exposure corresponding to the facility. 4. Relationship is authorized to decide for acceptance of securities against these exposures. 5. Business Groups managing the relationship shall forward limit requests to RMG as per the format given below. For Corporates and retail business they shall forward their request to Credit Review North/South according to their area of jurisdiction while for Financial Institutions and Public Sector entities the requests shall be forwarded to FIPS&MRM division.

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Products

Notional amount

Conversion Factors

Credit equivalent

Outstanding Mark to Market Value (last month balance)

Forward purchase/sale of fixed income securities or lending FRA IRS Currency forwards Cross Currency Swaps Currency options (if MCB is buyer) /structured products

1% 5% 5% 5% 2%

6. These limits shall be processed in line with the instructions contained in section 3.2 of the handbook. 7. Per Party Exposure limits (for Prudential Regulations Compliance) for the above products shall be determined in line with the instructions contained in Prudential Regulations. 6.9.4 Credit Exposure (Foreign Currency Trade Finance Products) Trade finance products where exposure is created in FCY and are secured by securities denominated/priced in PKR are exposed to credit risk due to movement of exchange rate. e.g. letters of credit, standby letters of credit, import bill acceptances, trade finance loans (FCIF, FCEF FDBP). To manage credit risk stated above following procedure shall be adopted. 1. Branches shall report Transaction & Client wise exposure (stated in FCY and equivalent PKR) on monthly basis to CRC of their area. 2. CRC shall revalue the exposure by using revaluation rates of the month-end communicated by Treasury Operation on each month-end. 3. On the basis of revalued exposure amount CRC shall determine adequacy of the securities and advise to relationship to cover up the shortfall if any. 6.9.5 Credit Exposure created due to change in the value of security Lending facilities secured by price sensitive assets like, deposits denominated in a currency different from the currency of facility, fixed income facilities, stocks or any other financial instrument sensitive to price movement. E.g. advances against FCY deposits, loans secured by fixed income securities like T-bills, PIBs and TFC. To manage credit risk (except booked by Treasury & FX Group) stated above following procedure shall be adopted.

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1. Branches shall report Transaction /Client wise exposure, number of units of security, currency of security on monthly basis to CRC of their area. 2. CRC shall request FIPS & MRM Division for provision of revaluation rates and revalue the securities by using revaluation rates on each month-end. 3. On the basis of re-valued amount of securities CRC shall determine adequacy of the securities and advise to the relationship to cover up the shortfall if any.

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Credit Handbook

Section 6

Appendices

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Appendix I to Chapter 6.3

Cases eligible for relaxation under Prudential Regulations

1. For bid bonds issued on behalf of local consultancy firms bidding for international contracts where the consultancy fees are to be received in foreign exchange, and including Bid Bonds issued on behalf of all contractors of goods and services bidding against International Tenders. For issuance of performance bonds on behalf of local construction companies / contractors of goods and services bidding for international tenders. Provided that the liability of the bank / DFI will be on reducing balance basis after taking into account progressive billing certified by the beneficiary/project owner and payment received against these bills. For issuance of guarantees on behalf of local construction companies/contractors of goods and services bidding for international tenders in respect of mobilization advance. (i) Guarantees issued should contain clause that the mobilization advance and other proceeds under the contract shall be routed by the beneficiary/project owner through the account of the contractors maintained with the guaranteeing bank / DFI.

2.

3.

(ii) At the time of issuing such guarantee the Construction Company/contractor shall sign an agreement with the bank / DFI that cash proceeds out of mobilization advance will be released as per satisfaction of the bank / DFI about the progress of the contract. 4. While issuing guarantees to the exporters of cotton in terms of F.E. Circular No. 77 dated December 4, 1988, banks / DFIs may settle the type and quantum of security with their customers. Issue of performance bonds/bid bonds and guarantees issued for mobilization advances on behalf of the manufacturers of engineering goods. The term engineering goods shall have the same meanings as are given to locally manufactured machinery in State Bank of Pakistan scheme for financing locally manufactured machinery. Such condition may, however, not be necessary in case of guarantees issued by the International Banks.

5.

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Appendix I to Chapter 6.4

MCB BANK LTD

WEEKLY STATEMENT OF FINANCES TO COTTON GINNERS AS ON .

Rupees In Million
Name of borrowers and branch Cash Finance Limit amount Amount o/s Stocks under pledge Cotton bales Nos Value Phutti Kgs Valu e Total value of stock Stuck -up Amou nt Grower Finance Limit sanct ioned Amount o/s Stuckup Amount Remarks (mention also other FB & NFB o/s if Any)

TOTAL THIS WEEK : TOTAL THIS WEEK : (Note:- Only Finance against cotton to be reported in this statement)

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MCB Bank Limited TEXTILE FINANCING FORMULA FOR WC / CF LIMIT

(MILL 14,400 SPINDLES - Data used is illustrative) a) b) c) d) e) f) Production per Spindle/Shift. (Oz). Production per Spindle/day (Oz), basis of Shifts/Day Production for 14400(Lbs.) Spindle per day. Annual Production, 348 days (Lbs.). Add: 15% wastage (Lbs.). i) ii) g) i) ii) Total Cotton Requirement (Lbs.). No. of Bales (Approx. 370 Lbs. per Bales). Value of 1 year's consumption, Cost @PKR3000/= Per 40 Kg. (say) Value of 6 month's consumption iii) Limit at 15% Margin 305 152 130 381 190 162 3 on 8 24 21600 7516800 1326494 8843294 23901 101578 10 30 27000 9396000 1658118 11054118 29876 126973

Credit Handbook
Appendix II to Chapter 6.4

(PKR in Millions)

12 36 32400 11275200 1989741 13264941 35851 152368 457 229 194

Remarks ax3 ('b' 14,400) 16 c 348 f(i) 0.15 d/0.85 f(i) / 370 f(ii) 4.25 {f(iii) 3000) 1,000,000} g(i) 2 g (ii) 0.85

iii) Converted in Maunds of 40 Kgs.

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Appendix II to Chapter 6.4

Formula for calculating limit for mills with different spindleage than above: Formula: Limit for Mill with 14,400 spindles x number. of spindles in operation for the mill in question. Example # 1 Limit for Mills with 12,480 spindles = 8Oz consumption per spindles = Example # 2 130M 14,400 12,480 = Rs.113M

a) Limit for Mills with 17,700 spindles =10Oz consumption per spindles = 162M 14,400 17,700 = Rs.199M

b) Limit for Mills with 17,700 spindles =10.5Oz consumption per spindles = 162M

14,400

17,700

10.5

10

Rs.209M

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MCB Bank Limited

Credit Handbook
Appendix I to Chapter 6.6

CREDIT PROPOSAL CUM APPROVAL OF FINANCE

For Business Purposes cash/ near cash collateralized financing only CREDIT PROPOSAL FROM BRANCH
Date:___________ Branch Region Circle Name of Borrower Borrower's Address Existing Rating UER Details Branch Code Borrower's Constitution Account No. Type

EXISTING MCB FACILITIES (If any) IN PKR

NATURE LIMIT O/S EXPIRY SECURITY

PRESENT PROPOSAL IN PKR

NATURE LIMIT MARK UP MARGIN EXPIRY

TOTAL DETAILS OF DEPOSITS WITH MCB PKR Current A/c TOTAL TDR PLS Sav. A/c OTHERS PKR

SECURITY OFFERED (TDRs / SSCs / DSCs etc.)

TYPE FACE VALUE DATE OF ISSUE DATE OF MATURITY PRESENT ENCASHMENT VALUE ISSUING BANK OFFICE & BRANCH NAME OF DEPOSITER / CERTIFICATE HOLDER

TOTAL

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Appendix I to Chapter 6.6

BRANCH RECOMMENDATION / SIGNOFF

Credit Incharge/BM

________________

_________________
Regional Manager

General Manager

________________ _____________

Business Head

_____________
Group Head

APPROVAL / REGRETTAL FROM CREDIT REVIEW AUTHORITY

APPROVAL / REGRETTAL (Amount in PKR)
NATURE LIMIT MARKU P SECURITY & ITS FACE VALUE PRESENT ENCASHMENT VALUE MARGIN EXPIRY

Total

New Rating: Decision: __________________

(Approval / regrettel)

Next review date:____________________

(within next 12 months)

Special Conditions (if any): ___________________________________________________________________________________ ___________________________________________________________________________________

_____________

Processed By

_________________

Reviewed & Recommended By

_____________

Approved By

Date:

Date:

Date:

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Credit Handbook Section 7 Lending Operations In Sri Lanka

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Section 7: Lending Operations in Sri Lanka

7.1 7.2 7.3 7.4 Introduction Regulatory Requirements Bank Financing Security Offered

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7.1 Introduction

Credit Handbook

MCBs foreign operation is restricted to only one country, Sri-Lanka. The financial market of Sri-Lanka has some particular features that are common to that market only and have wide spread usage while the same are not in practice in Pakistan. This Chapter will identify and discuss the differentiating factors of Sri-Lankan financial market, pertaining to banking sector. It is therefore understood that factors / facilities not mentioned are common to Pakistan and Sri-Lankan market. These differentiating factors can be categorized into three categories as follows: a) Regulatory requirements b) Bank facilities c) Security structuring 7.2 Regulatory Requirements

Financial Institutions in Sri-Lanka are regulated by central bank namely Central Bank of Sri-Lanka The central bank has not provided any set of formal guidelines for financing, however, per party limit is restricted to 30% of the banks paid-up capital, which can either be funded or non-funded or both, subject to condition that total of all borrowers enjoying facilities over 15% of paid-up capital each, should not exceed 50% of the advances portfolio. Exposure covered against cash or financial guarantees of other banks is excluded from the exposure. Being an interest based system, there is no restriction of charging interest on interest i.e. interest can be capitalized after due date and may carry penal interest rate. Process of loan classification is in accordance with the Banking Act of 1988 and is summarized as below (detailed process is attached as Appendix I): a) Account is termed as non-performing after 3 months; if it has remained static and in excess of approved limits (in case of OD) and when principal / interest has been in arrears for that period. b) Account is classified as Sub-Standard if repayment of principal / interest is in arrears for more than 6 months but less than 12 months. c) Account is classified as Doubtful if credit facilities are in arrears for 12 to 18 months d) Account is classified as Loss account if credit facilities are in arrears for over 18 months

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Some the facilities not practiced in Pakistan are summarized below: Overdraft (OD) OD facility is equivalent of Running Finance facility in Pakistan. The main purpose of this facility is to meet day-to-day working capital requirements of the client. Modus operandi is exactly the same as of RF facility, except that interest can be capitalized at maturity date. Cheque Purchase Discount Facility Cheque Purchase Discounting Facility (CPDF) is utilized for purchase of receivables in the form of post-dated cheques. These cheques represent payment to the seller for any underlying business activity and are drawn on the buyer / cash cheques. The tenor of the cheques may vary according to the agreed credit period and is in the range of 30-120 days. Under CPDF, these cheques are presented to the bank by the seller, which in turn are purchased / discounted and proceeds credited to companys (seller) account. Cheque discount liability is maintained in a separate account (similar to OD) and the interest calculated on the daily balances and debited to the current account on the end of the month. Each discounted cheque on the due date is presented for collection and the cheque discount liability is reduced by the value of the cheque. In the event of a discounted cheque being returned unpaid, this would be recovered from the current account. In order to safeguard Banks interest; an indemnity is also obtained from the client to the effect that in case any discounted cheque is dishonoured, they will make the payment good, immediately. Short Term Loan Short-term Loan (STL) is extended predominantly to facilitate the retirement of import documents and in exceptional cases, is also allowed to accommodate local purchases of the client exclusively against sale invoices. STL facility is disbursed in tranches and each tranche is usually valid for 30-120 days depending on the customers credit requirement. These loans are also extended for a fixed short time period. An account is created for each STL. Interest is calculated on the daily balance and debited to the current account on month end. At the end of the STL maturity, STL is recovered in full by debiting the current account. 7.4 Security Offered

Clean lending Lending to large business conglomerates is mostly based on their cashflows and group support. Companies do ask for clean facilities and banks tend to oblige as

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there is no regulatory requirement against it. Security documentation involved is companys own guarantee and D.P. note or in some cases (where companys cashflows are not strong) covered by corporate guarantee of one of the group companies. Facilities are termed as clean as no charge is registered on companys assets with SECP. Such clean facilities are mostly demanded by the top tier corporate names in the Sri-Lankan market. Property mortgage Collateral in shape of mortgage of property is considered as one of the better securities that can be offered against facilities. Mortgage is registered with the land registry office for the principal amount while the mortgage documentation allows recovering any outstanding interest from the sale of same property. In case the mortgaged property is in the name of borrower and the mortgage amount is above SLR 5.00 mn; bank can execute parate execution and can therefore on its own option, without recourse to a court, take over the possession and management of the mortgaged property, cause it to be sold and issue a certificate conveying title in the property to the purchaser. However, in case of third party mortgage, bank has to initiate legal proceedings for disposal of property. Pledge of goods Financing against pledge of goods is carried out by most local banks but on a limited scale, however, concept of effective pledge is not followed. In most cases, pledged goods are retained in the warehouse of the customer (either owned or rented by the client) and concept of dual control is adopted for the control of pledge goods. Third party involvement of banks nominated supervisors (muccadam) for safe custody of pledged goods is not available to banks. Local banks are also engaged in "pawning" (financing against pledge of gold and jewellery) which has not been offered by MCB in Pakistan. In the case of pawning, as the items involved can be held in bank's safe deposits and vaults; pledged jewellery is in the possession of the bank only. In case of commodity financing, as well as other goods under pledge, these are held at customer's warehouse which may also contain goods that belong to the borrower and are not pledged to the bank. Accordingly, local practice is to have a dual control over pledged goods to safe guard bank's interest without arrangement of Muccadam. Procedure followed for pledge financing is as follows:

Pledge is allowed for import financing and \or local purchases of stocks. Pledgor provides a list of goods along with costs (to be verified at banks discretion). Bank allows financing against value of the goods pledged with margin as per its discretion.

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Funds are released at the time of retirement of import goods or release of pay order for local goods, against pledge agreement Pledged goods are insured against all major risks A key register is maintained to ensure proper control over locks and to monitor movement of keys used to secure stores. The customer is free to redeem the goods at any time within the stipulated period and partial deliveries permitted based on payments made. The bank must ensure that at all times the value of pledged goods is in excess of the loan outstanding. Client submits monthly stock statements and physical verification of stocks carried out quarterly.

Negative Pledge A negative pledge is a provision in a contract which prohibits a party to the contract from creating any security interest over certain property specified in the provision. Negative pledge often appears in security documents, where they operate to prohibit the person/legal entity who is granting the security interest from creating any other security interests over the same property, which might compete with (or rank pari passu with) the security of the first secured creditor under the security document in which the negative pledge appears. Although not so common in Pakistan, financing against negative pledge is common in Sri-Lanka. Companies enjoying credit facilities against such covenant does provide total borrowings with other banks in the stock report for lenders comfort. Cheque purchase / Discount Cheque purchase discount facility (CPDF) is one of the most commonly offered facilities by all banks. The facility offers to purchase / discount companys trade receivables that are in the form of cheques and makes funding available to customer immediately for bridging its working capital requirements. Normally the tenor of these cheques is for 90 days. Cheques are presented in clearing / collection on maturity and CPDF is adjusted from the proceeds. Legal recourse against default in payment of these cheques is through civil courts. In view of the risk of default, such facility is offered by MCB to customers with immaculate track record with MCB and whose percentage of returned cheques is generally around 5%. In exceptional circumstances / peak seasons this return %age may reach up to 10%, but is replaced immediately by fresh cheques. Hypothecation of Stocks: Most of the working capital funded lines are allowed against stock mortgage registered with the Land Registry. There are different land registries for different areas of Sri-Lanka. As per "mortgage act", if the mortgage bond, either movable or immovable, is not registered in the land registry it cannot take legal effect. The

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mortgages for limited companies and other entities like partnerships and proprietorships are also registered with the land registry. The registration of movables at the land registry does not give a ranking like first charge, second charge. This only applies to limited companies where the registration at SECP gives a priority to the particular charge. Leasing: In the absence of any local manufacturer of vehicles, bulk of the countrys requirement of vehicles is met through import of re-conditioned cars and remaining through brand new vehicles. Leasing business is very competitive and therefore keeping in view the market requirement, leasing of second hand, un-registered vehicles is allowed at Nil margin.

587