SECURITIES AND EXCHANGE
COMMISSION OF PAKISTAN
SPECIALIZED COMPANIES DIVISION NBFC DEPARTMENT
*******
SECP/NBFC(1)/(R)/2005 Islamabad, January 09, 2006
CIRCULAR NO. 1
OF 2006
PRUDENTIAL REGULATIONS FOR
CONSUMER FINANCING FOR NON-
BANKING FINANCE COMPANIES
(“NBFCs”)
The Securities and Exchange
Commission of Pakistan (SECP), in exercise of powers conferred under section
282 D of the Companies Ordinance, 1984 (the “Ordinance”) hereby directs all
Non-Banking Finance Companies licensed to undertake the business of Investment
Finance Services, Leasing, Housing Finance Services, and Discounting Services
to conduct their consumer finance business in conformity with the directions /
regulations enclosed herewith as ‘Prudential Regulations for Consumer
Financing’ (the “Regulations”). These Regulations shall be effective from
January 09, 2006.
The objective behind the issuance of
these Regulations is to expand the product range of these NBFCs. NBFCs engaged
in Investment Finance Services, Leasing, Housing Finance Services and Discounting
are advised to ensure circulation of these Regulations among all their officers
/ branches for meticulous compliance in both letter and spirit. Any violations
or circumvention of these Regulations shall be dealt with under the provisions
of the Ordinance.
In case of clarifications, please contact the
following:
Shoaib
A. Qureshi
Director
(NBFC)
Direct:
051-9212050
Exchange:
9207091 Ext: 310
E-mail:
shoaib.qureshi@secp.gov.pk
These Regulations have also been
placed on SECP’s Website www.secp.gov.pk for information of the concerned quarters and general public.
Kindly acknowledge receipt.
(Salman Ali Shaikh) Commissioner
Distribution:
1. Chief
Executives of all Investment Banks, Leasing Companies, Housing Finance
Companies, Discount Houses
2. The
Chairman, Investment Banks Association of Pakistan
3. The
Chairman, Leasing Association of Pakistan
4. The
President, Institute of Chartered Accountants of Pakistan
5. The
President, Institute of Cost and Management Accountants of Pakistan
6. All
Divisions of SEC
7. Media
Consultant, SECP
8. IT
Department, SECP for placement on website
PRUDENTIAL REGULATIONS FOR CONSUMER FINANCING
Issued
on January 9, 2006
Non-Banking Finance
Companies Department
Specialized Companies Division
Securities & Exchange
Commission of Pakistan
C
O N T E N T
S
Part
– A
|
Definitions
|
3
|
Part
– B
|
Minimum
Requirements For Consumer Financing
|
5
|
Part
– C
|
Regulations
For Consumer Financing
|
7
|
Regulation – 1
|
Facilities To Related Persons
|
7
|
Regulation - 2
|
Limit On Exposure Against Total Consumer
Financing
|
7
|
Regulation - 3
|
Total Financing Facilities To Be
Commensurate With The Income
|
7
|
Regulation - 4
|
General Reserve Against Consumer Finance
|
7
|
Regulation - 5
|
Bar On Transfer Of Facilities From One Category To
Another To Avoid
Classification
|
7
|
Regulation - 6
|
Margin Requirements
|
8
|
Part
– D
|
Regulations
For Credit Cards
|
9
|
Regulation - 1
|
Safe Custody
|
9
|
Regulation - 2
|
Statement Of Accounts
|
9
|
Regulation – 3
|
Unauthorized / Wrong Transactions
|
9
|
Regulation – 4
|
Partial Payment By Card Holder
|
9
|
Regulation – 5
|
Due Date For Payment
|
9
|
Regulation – 6
|
Maximum Card Limit
|
9
|
Regulation – 7
|
Classification & Provisioning
|
10
|
Part
– E
|
Regulations
For Personal Loans
|
11
|
Regulation - 1
|
Per Party Limit
|
11
|
Regulation - 2
|
Hypothecation
|
11
|
Regulation – 3
|
Maximum Tenor Of Loan
|
11
|
Regulation – 4
|
Minimum Repayment
|
11
|
Regulation – 5
|
Classification & Provisioning
|
12
|
PART – A
D
E F I N I T
I O N S
Definitions. In
these regulations, unless there is anything repugnant in the subject or
context:
1.
Borrower means
an individual to whom a NBFC has allowed any consumer financing during the
course of business.
2.
Consumer
Financing means any financing allowed to individuals for meeting their
personal, family or household needs. The facilities categorized as Consumer
Financing are given as under:
a.
Credit Cards mean
cards which allow a customer to make payments on credit. Supplementary credit
cards shall be considered part of the principal borrower for the purposes of
these regulations. The regulations for credit cards shall also be applicable on
charge cards, debit cards, stored value cards and BTF (Balance Transfer
Facility).
b.
Personal Loans mean
the loans to individuals for the payment of goods, services and expenses.
3.
Documents
include vouchers, cheques, bills, pay-orders, promissory notes, securities for
leases / advances and claims by or against the NBFC or other papers supporting
entries in the books of a NBFC.
4.
Equity of the
NBFC means equity as defined in the Non-Banking Finance Companies
(Establishment & Regulation) Rules, 2003.
5.
Financial
Institutions includes:
a.
Company or an institution whether established under any
special enactment and operating within or outside Pakistan which transacts the
business of banking or any associated or ancillary business through its
branches;
b.
A modaraba, leasing company, investment bank, venture
capital company, financing company, housing finance company, a non-banking
finance company and a bank or any institution duly licensed by State Bank of
Pakistan;
c.
Such other institution or companies authorized by law
to undertake any similar business, as the Federal Government may, by
notification in the official Gazette, specify for the purpose.
6.
Liquid Assets
are the assets which are readily convertible into cash without recourse to a
court of law and mean encashment / realizable value of government securities,
bank deposits, shares of listed companies which are actively traded on the
stock exchange, NIT Units, certificates of mutual funds, Certificates of
Investment (COIs)/Certificates of Deposits (CODs) issued by DFIs / NBFCs and
Certificates of Musharika (COMs) issued by Modarabas rated at least ‘A’ by a
credit rating agency registered with the SEC, listed TFCs and Commercial Papers
rated at least ‘A’ by a credit rating agency registered with the SECP, National
Saving Scheme securities and units of open ended schemes for which a duly
licensed asset management company quotes daily offer and bid rates. These
assets with appropriate margins should be in possession of the NBFCs with
perfected lien. Guarantees issued by NBFCs / DFIs / Banks rated at least ‘A’ by
a credit rating agency registered with the SECP, when received as collateral by
NBFCs will be treated at par with liquid assets whereas, for guarantees issued
by foreign banks, the issuing bank’s rating, assigned either by Standard &
Poors, Moody’s or Fitch-Ibca, should be ‘A’ and above or equivalent. These
assets with appropriate margins should be in possession of the NBFCs with
perfected lien.
7.
NBFC means
Non-Banking Finance Company and includes a Modaraba, Leasing Company, Housing
Finance Company, Investment Bank, Discount House, Asset Management Company and
a Venture Capital Company or any other entity notified by the Securities &
Exchange Commission of Pakistan from time to time.
8.
Secured means
exposure backed by tangible security with appropriate margins (in cases where
margin has been prescribed by SECP, appropriate margin shall at least be equal
to the prescribed margin). Exposure without any tangible security is defined as
clean.
9.
Tangible
Security means liquid assets (as defined in these Prudential Regulations),
mortgage of land and building, hypothecation or charge on vehicle, but does not
include hypothecation of household goods, etc.
PART – B
MINIMUM REQUIREMENTS FOR CONSUMER FINANCING
Apart from the specific regulations given under each mode of
financing separately, general requirements laid down here should also be
followed while undertaking consumer financing. It may be noted that these are
the minimum requirements and should not in any way be construed to restrict the
role of the management of the NBFCs to further strengthen the risk management
processes through establishing comprehensive credit risk management systems
appropriate to their type, scope, sophistication and scale of operations. The
Board of Directors of the NBFCs are required to establish policies, procedures
and practices to define risks, stipulate responsibilities, specify security
requirements, design internal controls and then ensure strict compliance with
them.
PRE-OPERATIONS:
Before embarking upon or undertaking consumer financing, the
NBFCs shall implement / follow the guidelines given below.
1.
NBFCs shall establish separate Risk Management function
for the purpose of consumer financing, which
will be suitably staffed by personnel having sufficient expertise and
experience in the field of consumer finance / business.
2.
The NBFCs shall prepare comprehensive consumer credit
policy duly approved by their Board of Directors which shall interalia cover
loan administration, including documentation, disbursement and appropriate
monitoring mechanism. The policy shall explicitly specify the functions,
responsibilities and various staff positions’ powers / authority relating to
approval / sanction of consumer financing facility.
3.
For every type of consumer finance activity, the NBFC
shall develop a specific program. The program shall include the objective /
quantitative parameters for the eligibility of the borrower and determining the
maximum permissible limit per borrower.
4.
NBFCs shall put in place an efficient computer based
MIS for the purpose of consumer finance, which should be able to effectively
cater to the needs of consumer financing portfolio and should be flexible
enough to generate necessary information reports used by the management for
effective monitoring of the NBFC’s exposure in this segment.
a.
Reports interrelating delinquencies with various types
of customers or various attributes of the customers to enable the management to
take important policy decisions and make appropriate modifications in the
lending program.
b.
Quarterly product wise profit and loss account duly
adjusted with the provisions on account of classified accounts. These profit
and loss statements should be placed before the Board of Directors in the
immediate next Board Meeting. The branches of foreign banks in order to comply
with this condition shall place the reports before a committee comprising of
CEO / Country Manager, CFO and Head of Consumer Business.
5.
The NBFCs shall develop comprehensive recovery
procedures for the delinquent consumer loans. The recovery procedures may vary
from product to product. However, distinct and objective triggers should be
prescribed for taking pre-planned enforcement / recovery measures.
6.
The NBFCs desirous of undertaking consumer finance will
become a member of at least one Consumer Credit Information Bureau. Moreover,
the NBFCs may share information / data among themselves or subscribe to other
databases as they deem fit and appropriate.
7.
The NBFCs starting consumer financing are encouraged to
impart sufficient training on an ongoing basis to their staff to raise their
capability regarding various aspects of consumer finance.
8.
The NBFCs shall prepare standardized set of borrowing
and recourse documents (duly cleared by their legal counsels) for each type of
consumer financing.
OPERATIONS:
1.
Consumer financing, like other credit facilities, must
be subject to the NBFC’s risk management process for this particular business.
The process may include, identifying source of repayment and assessing
customers’ ability to repay, his / her
past dealings with the NBFC, the net worth and information obtained from a
Consumer Credit Information Bureau.
2.
At the time of granting facility under various modes of
consumer financing, NBFCs shall obtain a written declaration from the borrower
divulging details of various facilities already obtained from other NBFCs. The
NBFCs should carefully study the details given in the statement and allow fresh
finance / limit only after ensuring that the total exposure in relation to the repayment
capacity of the customer does not exceed the reasonable limits as laid down in
the approved policies of the NBFC. The declaration will also help NBFCs to
avoid exposure against a person having multiple facilities from different
financial institutions on the strength of an individual source of
repayment.
3.
Before allowing any facility, the NBFCs shall
preferably obtain credit report from the Consumer Credit Information Bureau of
which they are a member. The report will be given due weightage while making
credit decision.
4.
Internal audit and control function of the NBFC, apart
from other things, should be designed and strengthened so that it can
efficiently undertake an objective review of the consumer finance portfolio
from time to time to assess various risks and possible weaknesses. The internal
audit should also assess the adequacy of the internal controls and ensure that
the required policies and standards are developed and practiced. Internal audit
should also comment on the steps taken by the management to rectify the
weaknesses pointed out by them in their previous reports for reducing the level
of risk.
5.
The NBFCs shall ensure that any repayment made by the
borrower is accounted for before applying mark-up on the outstanding amount.
DISCLOSURE / ETHICS:
The NBFCs must clearly disclose, all the important terms,
conditions, fees, charges and penalties, which interalia include Annualized
Percentage Rate, prepayment penalties and the conditions under which they
apply. For ease of reference and guidance of their customers, NBFCs are
encouraged to publish brochures regarding frequently asked questions. For the
purposes of this regulation, Annualized Percentage Rate means as follows:
Mark-up paid for the period x 360
x 100
Outstanding Principal Amount No. of Days
PART – C
REGULATIONS FOR CONSUMER FINANCING
REGULATION - 1
FACILITIES TO RELATED PERSONS
The consumer finance facilities extended by NBFCs to their
employees and their family members shall be at arms length basis and on normal
terms and conditions applicable for other customers of the NBFCs. The NBFCs
shall ensure that the appraisal standards are not compromised in such cases and
market rates are used for these persons. The facilities extended to the
employees of the NBFCs as a part of their compensation package under Employees
Service Rules shall not fall in this category.
REGULATION - 2
LIMIT ON EXPOSURE AGAINST TOTAL CONSUMER FINANCING
NBFCs shall ensure that the aggregate exposure under all
consumer financing facilities at the end of first year and second year of the
start of their consumer financing does not exceed 2 times and 4 times of their
equity respectively. For subsequent years, following limits are placed on the
total consumer financing facilities:
PERCENTAGE OF CLASSIFIED CONSUMER MAXIMUM
LIMIT
FINANCING TO TOTAL CONSUMER FINANCING
a) Below 3% 7 times of the equity
b) Below 5% 5 times of the equity
c) Below 10% 2 times of the equity
d) Upto and
above 10% 1 times of the equity
REGULATION - 3
TOTAL FINANCING FACILITIES TO BE COMMENSURATE WITH THE INCOME
While extending financing facilities to their customers, the
NBFCs should ensure that the total installment of the loans extended by the
financial institutions is commensurate with monthly income and repayment
capacity of the borrower. This measure would be in addition to NBFC’s usual
evaluations of each proposal concerning credit worthiness of the borrowers, to
ensure that the NBFC’s portfolio under consumer finance fulfills the prudential
norms and instructions issued by Securities & Exchange Commission of
Pakistan and does not impair the soundness and safety of the NBFC itself.
REGULATION - 4
GENERAL RESERVE AGAINST CONSUMER FINANCE
The NBFCs shall maintain a general reserve at least
equivalent to 1.5% of the consumer portfolio which is fully secured and 5% of
the consumer portfolio which is unsecured, to protect them from the risks
associated with the economic cyclical nature of this business. The above
reserve requirement will, however, be maintained for the performing portion of
the consumer portfolio.
REGULATION - 5
BAR ON TRANSFER OF FACILITIES FROM ONE CATEGORY TO ANOTHER TO AVOID
CLASSIFICATION
The NBFCs shall not transfer any loan or facility to be
classified, from one category of consumer finance to another, to avoid
classification.
REGULATION - 6
MARGIN REQUIREMENTS
NBFCs are free to determine the margin requirements on
consumer facilities provided by them to their clients taking into account the
risk profile of the borrower(s) in order to secure their interests.
NBFCs will continue to observe margin restrictions on shares
/ TFCs as per PR 5 and 6 of Part II of Prudential Regulations for Non-Banking
Finance Companies.
PART – D
REGULATIONS FOR CREDIT CARDS
REGULATION - 1
SAFE CUSTODY
The NBFCs should take reasonable steps to satisfy themselves
that cardholders have received the cards, whether personally or by mail. The
NBFCs should advise the card holders of the need to take reasonable steps to
keep the card safe and the PIN secret so that frauds are avoided.
REGULATION - 2
STATEMENT OF ACCOUNTS
NBFCs shall provide to the credit card holders, the
statement of account at monthly intervals, unless there has been no transaction
or no outstanding balance on the account since last statement.
REGULATION – 3
UNAUTHORIZED / WRONG TRANSACTIONS
NBFCs shall be liable for all transactions not authorized by
the credit card holders after they have been properly served with a notice that
the card has been lost / stolen. However, the NBFC’s liability shall be limited
to those amounts wrongly charged to the credit card holder’s account. In order
to mitigate the risks in this respect, the NBFCs are encouraged to take
insurance cover against wrongly charged amounts, frauds, etc.
REGULATION – 4
PARTIAL PAYMENT BY CARD HOLDER
In case the cardholders make partial payment, the NBFCs
should take into account the partial payment before charging service fee /
mark-up amount on the outstanding / billed amount so that the possibility of
charging excess amount of mark-up could be avoided.
REGULATION – 5
DUE DATE FOR PAYMENT
Due date for payment must be specifically mentioned on the
accounts statement. If fine / penalty is agreed to be charged in case the
payment is not made by the due date, it should be clearly mentioned in the
agreement.
REGULATION – 6
MAXIMUM CARD LIMIT
Maximum unsecured limit under credit card to a borrower
(supplementary cards shall be considered part of the principal borrower) shall
generally not exceed Rs.500,000/. NBFCs may, however, assign a clean limit
beyond Rs.500,000 but not in excess of Rs.1 million to their prime customers
who have extraordinary strong repayment capacity, moderate debt burden and a
clean track record. But the aggregate outstanding in this respect should not
exceed 10% of the total outstanding credit card portfolio at any point in time.
However, while availing benefit of this provision, NBFCs would place on record
well defined criteria for terms "Prime Customers" and "Moderate
Debt Burden" approved by their Board of Directors / Chief Executive.
NBFCs may also allow financing under the credit card scheme
in excess of Rs.500,000/- to other customers as well, provided the excess
amount is appropriately secured by any tangible security as per PR 5 of Part II
of Prudential Regulations for Non-Banking Finance Companies. The loan secured against liquid securities
shall, however, be exempted from the above limit.
For Charge Cards, pre-set spending limits generated by
standardized systems, as is the global practice, shall be allowed.
REGULATION - 7
CLASSIFICATION AND PROVISIONING
The credit card advances shall be classified and provided
for in the following manner:
CLASSIFICATION
|
DETERMINANT
|
TREATMENT
OF INCOME
|
PROVISION
TO BE MADE *
|
(1)
|
(2)
|
(3)
|
(4)
|
Loss.
|
Where markup
/
interest or principal is
overdue
by 180 days or more from the due date.
|
Unrealized markup
/ interest to be put in
Suspense
Account and not to be credited to Income Account except when realized in
cash.
|
Provision of 100% of
the
difference resulting from the outstanding balance of principal less the
amount of liquid securities with the NBFC.
|
*This specific provision will be in addition to general
reserve maintained under Regulation 4. OF Part – C (General Reserve Against
Consumer Finance)
It is clarified that the lenders are allowed to follow more
conservative policies. Further, provisioning may be created and maintained by
the NBFC on a portfolio basis provided that the provision maintained by the
NBFC shall not be less than the level required under this Regulation.
PART - E
REGULATIONS FOR PERSONAL LOANS
REGULATION – 1
PER PARTY LIMIT
The clean limit per person for personal loans will generally
not exceed Rs.500,000/-. NBFCs may assign a clean limit beyond Rs.500,000 but
not in excess of Rs.1 million to their prime customers who have extraordinary
strong repayment capacity, moderate debt burden and a clean track record. But
aggregate outstanding in this respect should not exceed 10% of the total
outstanding personal loans at any point in time. However, while availing
benefit of this provision, NBFCs would place on record well defined criteria
for terms "Prime Customers" and "Moderate Debt Burden"
approved by their Board of Directors / Chief Executive.
NBFCs may also allow financing under Personal Loans in
excess of Rs.500,000 to other customers as well, provided the loan is
appropriately secured by any tangible security as per PR 5 of Part II of
Prudential Regulations for Non-Banking Finance Companies.
The loan secured against liquid securities shall, however,
be exempted from this limit.
REGULATION 2
HYPOTHECATION
In cases, where the loan has been extended to purchase some
durable goods / items, including personal computers and accessories thereof,
the same will be hypothecated with the NBFC besides other securities, which the
NBFC may require on its own.
REGULATION - 3
MAXIMUM TENOR OF LOAN
The maximum tenor of the loan shall not exceed 5 years.
However, this period may be extended to 7 years for loans / advances given for
educational purposes, provided that disbursement of such loans shall directly
be made by the NBFC to the educational institution and the borrower shall not
be allowed to utilize / withdraw cash directly from the NBFC under this head
for any other purpose.
REGULATION – 4
MINIMUM REPAYMENT
NBFCs shall ensure that the aggregate cumulative monthly
installments paid by the borrower must at least repay 15% of the maximum
utilization of the loan during the year.
RREGULATION – 5
CLASSIFICATION AND PROVISIONING
The personal loans shall be classified and provided for in
the following manner:
CLASSIFICATION
|
DETERMINANT
|
TREATMENT
OF INCOME
|
PROVISION
TO BE MADE *
|
(1)
|
(2)
|
(3)
|
(4)
|
1. Substandard.
|
Where markup/ interest or principal is
overdue (past due) by 90 days from the due date.
|
Unrealized markup/ interest to be put in
Suspense Account and not to be credited to
Income Account except when realized in
cash.
|
No provision is required.
|
2. Doubtful.
|
Where markup/ interest or
principal is overdue by 180 days or more
from the due date.
|
As above.
|
Provision of 50% of the principal amount
less the amount of liquid securities with the NBFC.
|
Loss.
|
Where markup/
interest or principal is overdue by one year or more from the due date.
|
As above.
|
Provision of 100% of the principal less the
amount of liquid securities with the
NBFC.
|
*This specific provision will be in addition to general
reserve maintained under Regulation 4. OF Part – C (General Reserve Against
Consumer Finance)
No comments:
Post a Comment