MONEY AND BANKING

To : IFFAT ZEHRA
ASSIGNMENT: ANALYSIS OF PRUDENTIAL REGULATIONS
FOR CORPORATE /
COMMERCIAL BANKING
BY: FARYAL ARIF
0911184
BBA 4C
REGULATION (R-1)
LIMIT ON EXPOSURE TO A SINGLE PERSON/GROUP

Exposures are financing facilities such as renewal and enhancements. Banks/DFIs are
required to follow Annexure-1 for the purpose of this regulation. A Banks/DFI’s equity
(audited in last financial statements) can only provide unto 30% of total outstanding
exposure (fund based and non fund based) to any single person, on the condition that the
maximum outstanding against fund based exposure doesn’t exceed 20% of Banks/DFI’s
equity.
The same is the case for a group apart from the percentage difference that is it should not
exceed 50% of Banks/DFI’s equity on the condition that the maximum outstanding
against fund based exposure doesn’t exceed 35% of Banks/DFI’s equity.
If the entities are owned by the same group then the group will cover both the corporate
entitities AND SMEs(small and medium enterprises).

REGULATIONS (R-2)
LIMIT ON EXPOSURE AGAINST CONTINGENT LIABILITIES

Contingent liabilities are liabilities that may or may not be incurred by an entity
depending on the outcome of a future event such as a court case or destruction by flood.
Contingent liabilities could also be a current obligation originating from past events but it
is not recognized because it is not likely that an overflow of resources sustaining
economic benefits will resolve the obligation OR that sufficient reliability is needed to
measure the amount of obligation. This also includes letters of credit, letters of guarantee,
bid bonds/performance bonds, advance payment guarantees and underwriting
commitments.

REGULATIONS (R-3)
MINIMUM CONDTIONS FOR TAKING EXPOSURE.

When considering any proposals relating exposures, importance should be given to

borrowers/groups credit report from CIB (Credit Information Bureau). If Banks/DFIs
take exposure on defaulters then strict reasons, justifications and risk taking abilities
should be analyzed and shown on an approval form. CIB report is only required for those
exposures exceeding Rs.500, 000/-
Financial Statements (by practicing Chartered Accountants and properly audited) of
borrowers (Limited Co or where exposure of a Banks/DFIs exceeds Rs 10 million)
should be obtained, as a rule, to record and analyze. Signature of borrowers on Financial
Statements would suffice. For exposures less than Rs 10 million, financial statements
carry might not be important or needed.
LAF (loan application form) and Borrowers Basic Fact Sheet (with the signature of
Borrower) are required for approval or provision of any exposures by Banks/DFIs.
REGULATION 4 (R-4)
LIMIT ON EXPOSURE AGAINST UNSECURED FINANCING FACILTIES

If the financial facility is not secured then ONLY Rs 500, 000/- is allowed by Banks/DFIs
to any one person. Unsecured financial facility/those with persona; guarantees are known
as clean financial facility in this regulation. Written declaration is to be provided that the
borrower is not exceeding the aggregate sum of Rs. 500, 000/- by also going to other
banks for such facilities.
Facilities provided to finance the export of commodities eligible under Export Finance
Scheme, Financing covered by the guarantee of Pakistan Export Finance Guarantee
Agency ,Loans / advances given to the employees of the banks / DFIs in accordance with
their entitlement / staff loan policy shall be excluded / exempted from the per
party limit of Rs 500,000/- on the clean facilities.
Banks/DFIs should be aware that they are keeping their equity in mind against all their
facilities provided. Investments of Banks/DFIs in subordinated/unsecured TCFs by other
banks to raise Tier-II-Capital will be exempted from the aggregated exposure limit.

REGULATION (M-1)
KNOW YOUR CUSTOMER

To avoid any sort of crime in financing, knowing your customer (KYC) is very
important.
Minimum guidelines:
• KYC policies and rules should be written/approved by the respective heads.
• Determine the true identity of every prospective customer.(Documents at
Annexure VIII must be filled/obtained)
• CNICs should be verified (before opening an A/C)
(Also costs of verification should not fall upon the A/C holders)
• Branch manager needs to authenticate a) true identity b) real party in interest
• Banks/DFIs need to ensure that A/Cs should not be opened in personal names of
Govt officials instead of Govt accounts.
• Banks/DFIs need to update, refresh the ongoing process of knowing your
customer through MIS, training, CNIC records etcs.
• Banks/DFIs should focus on the high risk customers who are more capable of not
paying back.
• For customers/clients whose accounts are dormant and an attested copy of
Account holder’s Computerized National Identity Card (CNIC) is not available in
Bank/DFI’s record, banks/DFIs shall not allow operation in such accounts.
• For all other bank clients/customers including depositors & borrowers,
banks/DFIs shall obtain the attested copies of CNICs by June 30, 2009 to avoid
discontinuation.
• Banks/DFIs are encouraged to carry on public campaign through print/ electronic
 media individually as well as through Pakistan Banks’ Association for creating
Public awareness on requirement of CNIC for banking purposes.
• Undertake customer due diligence measures conducting transactions above an
appropriate limit to be prescribed by the banks / DFIs themselves.
• State Bank of Pakistan, during the course of inspection, would particularly check
the efficacy of the KYC system put in place by the banks / DFI.

REGULATION (O-2)
WINDOW DRESSING

Specious (but usually legal) manipulation of a firm's accounting data to make its financial
statements look better than they actually are. Banks should not get involved in such
practices in order to keep a fair and just environment. Special importance shall be taken
in showing their deposits, MCR, non-performing loans/assets, provisioning, profit, inter-
branch and inter-bank accounts, etc.

REGULATION (G-1)
CORPORATE GOVERNANCE / BOARD
OF DIRECTORS AND MANAGEMENT

The