Page 42 - PakAccountant-April_June-2017

Signature Qualification CA that Empowers to Lead PAKISTAN in normal course of events, such as loan insurance or collaterals such as cash, C. Exposure (Net open position) on social guarantee, mortgage of property, etc. account of derivative transactions 5. Remuneration: Profitability on loan product keeping in view the reward and (Forward, Futures, Options, Swaps). risk relationship. Prudential Regulations These principles normally called canons of lending and applied to reduce the risk Central Bank of each country has the involved in lending and could be expressed in following mnemonics: responsibility to issue guidelines and ▪ 5 Cs (Character; Capacity; Capital; Conditions; Collateral) regulations that deals exposures with the aim to assist banks and financial ▪ Parts (Purpose; Amount; Repayment; Term; Security) institutions in better addressing their ▪ Camels (Capital; Asset quality; Management; Earnings; Liquidity; System) unique risk factors and dynamic ▪ Campari (Character; Ability; Margin; Purpose; Amount; Repayment; Insurance environment by giving more discretion in [Security]) business decisions. ▪ Parsers (Person [Character, Capacity, Commitment]; Amount; Repayment; Security; Expediency; Remuneration; Services) In Pakistan, State Bank of Pakistan (SBP) issued these regulations that describe minimum prudential benchmarks in critical 1.2 Type of Credit Facilities Bank can Provide to Borrower risk areas to balance the considerations of Banks normally offer credit facility both on standalone basis as well as in financial stability of banks/Development syndication with other financial institutions. Exposures, both fund-based and non- Finance Institution (DFIs) vis-à-vis diversity funded facilities are offered for short and long tenures through standard products and innovation. To date, the following listed as under: regulations have been issued to regulate the facilities: A-1. Fund Based Facilities ▪ PR for Agriculture Financing General Facilities ▪ PR for Corporate/Commercial Banking ▪ Running Finance (RF) – secured (against collateral) and clean (against personal ▪ PR for Small and Medium Enterprise security/guarantee) (SME) Financing ▪ Cash Finance (CF) – facility provided against pledge of goods ▪ PR for Consumer Financing ▪ Term Finance (TF) – repayment of loan in installments ▪ PR for Micro Finance Banks ▪ Lease Finance (LF) – hire purchase or project finance ▪ Consumer Credit (CC) – auto finance, personal loan, house finance Moreover, detailed guidelines are available ▪ Credit facilities extended through Corporate Cards on Project Finance, Export Finance Scheme ▪ Local Bills Purchased (LBP) and Islamic Finance. ▪ Local Bills Discounted (LBD) 2. Collateral/Securities for Import Facilities Advances ▪ Finance Against Imported Merchandise (FIM) Exposure without any security or collateral ▪ Finance Against Trust Receipt (FATR) is treated as clean and the central bank normally restrict a cap (in Pakistan, it is of Rs. 2.0 million) and above which clean Export Facilities exposure is not allowed. However, finance ▪ Finance under Foreign Currency (F.E. 25) Deposit Scheme extended from the date of opening of ▪ Finance Against Packing Credit (FAPC) Letter of Credit (LC) till receipt of title ▪ Export Refinance (ERF-I & II) documents to goods and Financing ▪ Finance Against Foreign Bills (FAFB) Against Trust Receipt Facility (FATR) are general exceptions and banks may decide ▪ Foreign Bills Purchased (FBP) its own about collaterals. ▪ Foreign Bills Discounted (FBD) We may categorise the collateral into two A-2. Non-Funded Facilities parts: ▪ Guarantees, including Bid Bonds, Performance Bonds, Advance Payment ▪ Primary collateral: comprises movable Guarantees, Financial Guarantees, etc. and immoveable assets acquired with ▪ Standby Letters of Credit bank’s financing i.e. hypothecation and ▪ Letters of Credit – Usance pledge of stocks in case of Running Finance (RF) and Cash Finance (CF). ▪ Letters of Credit – Sight ▪ Secondary collateral: over and above ▪ Underwriting primary collateral and it serves the purpose of additional security. B. Subscription to or investment in shares, Participation Term Certificates, Term Finance Certificates, Sukuk or any other Commercial Paper by whatever name In practice, advances given as Clean called issued or guaranteed by the persons. is made against Promissory Notes or 40 The Pakistan Accountant April-June 2017