Miscellaneous

Financing / Regulations/ Policies

 by 

State Bank of Pakistan

PRUDENTIAL REGULATIONS

FOR

CONSUMER FINANCING

(Updated on January 31, 2011)

BANKING POLICY & REGULATIONS DEPARTMENT

STATE BANK OF PAKISTAN

Disclaimer:

State Bank of Pakistan compiles a booklet of Prudential Regulations from time to time for convenience of users. Updated version of such a booklet containing amendments in the regulations made through circulars/Circular letters to date is being issued. Due care has been taken while incorporating amendments, however, errors and omission may be expected. In case of any ambiguity, users are advised to refer to the original circulars/circular letters on the relevant subject(s), which are available on SBP’s website (www.sbp.org.pk).

REGULATIONS FOR AUTO LOANS

REGULATION R-9

The vehicles to be utilized for commercial purposes shall not be covered under the Prudential Regulations for Consumer Financing. Any such financing shall ensure compliance with Prudential Regulations for Corporate/Commercial Banking or Prudential Regulations for SMEs Financing. These regulations shall only apply for financing vehicles for personal use including light commercial vehicles also used for personal purposes.

REGULATION R-10

The maximum tenure of the auto loan finance shall not exceed seven years.

REGULATION R-11

While allowing auto loans, the banks/DFIs shall ensure that the minimum down payment does not fall below 10% of the value of vehicle. Further, banks/DFIs shall extend auto loans only for the ex-factory tax paid price fixed by the car manufacturers. In other words, banks/DFIs cannot finance the premium charged by the dealers and/or investors over and above the ex-factory tax paid price of cars, fixed by the manufacturers.

REGULATION R-12

In addition to any other security arrangement on the discretion of the banks/ DFIs, the vehicles financed by the banks/DFIs shall be properly secured by way of hypothecation. Payments against the sale orders issued by the manufacturers are allowed till the time of delivery of the vehicle subject to the condition that payment will directly be made to the manufacturer/authorized dealer by the bank/ DFI and upon delivery, the vehicle will immediately be hypothecated to the bank/ DFI.

REGULATION R-13

The banks/DFIs shall ensure that the vehicle remains properly insured at all times during the tenure of the loan. However, where the bank/DFI holds 100% provision against such loan, bank/DFI, if deemed appropriate, may not obtain insurance cover for the vehicle for remaining tenure of the loan.¹

REGULATION O-6

The clause of repossession in case of default should be clearly stated in the loan agreement mentioning specific default period after which the repossession can be initiated. The repossession expenses charged to the borrower shall not be more than actual incurred by the bank/DFI. However, the maximum amount of repossession charges shall be listed in the schedule of charges provided to customers. The banks/DFIs shall develop an appropriate procedure for repossession of the vehicles and shall ensure that the procedure is strictly in accordance with law.

REGULATION O-7

A detailed repayment schedule should be provided to the borrower at the outset. Where alterations become imminent because of late payments or prepayments and the installment amount or period changes significantly, the revised schedule should be provided to the borrower at the earliest convenience of the bank/DFI but not later than 15 days of the change. Further, even in case of insignificant changes, upon the request of the customer, the bank/DFI shall provide him revised repayment schedule free of cost.

REGULATION O-8

The banks/DFIs desirous of financing the purchase of used cars shall prepare uniform guidelines for determining the value of the used vehicles. However, in no case the bank/DFI shall finance the cars older than five years.

REGULATION O-9

The banks/DFIs should ensure that a good number of authorized auto dealers are placed at their panel to eliminate the chances of collusion or other unethical practices.

REGULATION R-14

The auto loans shall be classified and provided for in the following manner:

CLASSIFICATIO	DETERMINANT	TREATMENT OF	PROVISIONS TO
N		INCOME	BE MADE*
(1)	(2)	(3)	(4)
1. Substandard.	Where mark-up/	Unrealized mark-	Provision of 25% of the
	interest or	up/interest to be kept in	difference resulting
	principal is	Memorandum Account	from the outstanding
	overdue by 90	and not to be credited to	balance of principal
	days or more from	Income Account except	less the amount of
	the due date.	when realized in cash.	liquid assets.
		Unrealized mark
		up/interest already taken
		to income account to be
		reversed and kept in
		Memorandum Account.
2. Doubtful.	Where mark-up/	As above.	Provision of 50% of the
	interest or		difference resulting
	principal is		from the outstanding
	overdue by 180		balance of principal
	days or more from		less the amount of
	the due date.		liquid assets.
3. Loss.	Where mark-up/	As above.	Provision of 100% of
	interest or		the difference resulting
	principal is		from the outstanding
	overdue by one		balance of principal
	year or more from		less the amount of
	the due date		liquid assets.

 Reference: http://www.sbp.org.pk/publications/prudential/PRs-Consumer.pdf

REGULATIONS FOR HOUSING FINANCE

REGULATION R-15

Banks/DFIs shall determine the housing finance limit, both in urban and rural areas, in accordance with their internal credit policy, credit worthiness and loan repayment capacity of the borrowers. At the same time, while determining the credit worthiness and repayment capacity of the prospective borrower, banks/DFIs shall ensure that the total monthly amortization payments of consumer loans, inclusive of housing loan, should not exceed 50% of the net disposable income of the prospective borrower.

Banks/DFIs will not allow housing finance purely for the purchase of land/plots; rather, such financing would be extended for the purchase of land/plot and construction on it. Accordingly, the sanctioned loan limit, assessed on the basis of repayment capacity of the borrower, value of land/plot and cost of construction on it etc., should be disbursed in tranches, i.e. up to a maximum of 50% of the loan limit can be disbursed for the purchase of land/plot, and the remaining amount be disbursed for construction there-upon. Further, the lending bank/DFI will take a realistic construction schedule from the borrower before allowing disbursement of the initial loan limit for the purchase of land/plot.

Banks/DFIs may allow housing finance facility for construction of houses against the security of land/plot already owned by their customers. However, the lending bank/DFI will ensure that the loan amount is utilized strictly for the construction purpose and loan is disbursed in tranches as per construction schedule.

Loans against the security of existing land/plot, or for the purchase of new piece of land/plot, for commercial and industrial purposes may be allowed. But such loans will be treated as Commercial Loans, which will be covered either under Prudential Regulations for Corporate/Commercial Banking or Prudential Regulations for SMEs Financing.

Banks/DFIs may allow Housing Loans in the rural areas provided all relevant guidelines/regulations on the subject are complied with by them.

REGULATION R-16

The housing finance facility shall be provided at a maximum debt-equity ratio of 85:15.

REGULATION R-17

Banks/DFIs may extend mortgage loans for housing upto any tenure defined in the bank’s/DFI’s duly approved credit policy and keeping in view the maturities profile of their assets & liabilities.¹

REGULATION R-18

The house financed by the bank/DFI shall be mortgaged in bank’s/DFI’s favour by way of equitable or registered mortgage.

REGULATION R-19

Banks/DFIs shall either engage professional expertise or arrange sufficient training for their concerned officials to evaluate the property, assess the genuineness and integrity of the title documents, etc.

It may, however, be noted that the requirement of full-scope and desk-top evaluation, as required under R-8 and R-11 of Prudential Regulations for Corporate/Commercial Banking and SMEs Financing respectively, will not be applicable on housing finance.

REGULATION R-20

The bank’s/DFI’s management should put in place a mechanism to monitor conditions in the real estate market (or other product market) at least on quarterly basis to ensure that its policies are aligned to current market conditions.

REGULATION R-21

Banks/DFIs are encouraged to develop floating rate products for extending housing finance, thereby managing interest rate risk to avoid its adverse effects. Banks /DFIs are also encouraged to develop in-house system to stress test their housing portfolio against adverse movements in interest rates as also maturity mismatches.

REGULATION R-22 

The mortgage loans shall be classified and provided for in the following manner:

CLASSIFICATION	DETERMINANT	TREATMENT OF INCOME		PROVISIONS TO
				BE MADE*
(1)	(2)	(3)			(4)
1. Substandard	Where mark-	Unrealized mark-up/interest	Provision  of  25%  of  the
	up/ interest or	to be kept in Memorandum	difference resulting from the
	principal is	Account and not to be	outstanding		balance		of
	overdue by 90	credited to Income Account	principal less the amount of
	days or more	except when realized in cash.	liquid	assets		realizable
	from the due	Unrealized mark up/interest	without recourse to a Court
	date.	already taken to income	of  Law  and  Forced  Sale
		account to be reversed and	Value	(FSV)	of	mortgaged
		kept in Memorandum	properties to the extent of
		Account.	50% of such FSV.
2. Doubtful	Where mark-	As above.	Provision  of  50%  of  the
	up/ interest or		difference resulting from the
	principal is		outstanding		balance		of
	overdue by 180		principal less the amount of
	days or more		liquid	assets		realizable
	from the due		without recourse to a Court
	date.		of  Law  and  Forced  Sale
			Value	(FSV)	of	mortgaged
			properties to the extent of
			50% of such FSV.

1. Loss	Where mark-	As above.	Provision  of  100%  of  the
	up/ interest or		difference resulting from the
	principal is		outstanding		balance		of
	overdue by one		principal less the amount of
	year or more		liquid	assets		realizable
	from the due		without recourse to a Court
	date		of  Law  and  Forced  Sale
			Value	(FSV)	of	mortgaged
			properties to the extent of
			50% of such FSV for first and
			second year and 40% of FSV
			for third year from the date
			of  classification.			Benefit  of
			FSV against NPLs shall not
			be  available  after  3  years
			from	the		date	of
			classification			of	loan.
			However, the 40% benefit of
			FSV of land (open plot and
			separate valuation of land if
			building is constructed) shall
			be available for four years
			from	the		date	of
			classification of loan.

 Reference: http://www.sbp.org.pk/publications/prudential/PRs-Consumer.pdf