Prudential Regulations for Small &

Medium Enterprises

AMER ABBAS
Chapter No: 01 Prudential
Regulations – General for
Small & Medium Enterprise
Financing
 SME R-1: SME SPECIFIC CREDIT POLICY

❑ Banks & DFIs shall prepare a comprehensive SME Specific Credit Policy duly approved by their
Board of Directors. The Credit Policy shall give special mention to Small Enterprises (SE)
financing keeping in view their specific characteristics and business conditions. The Credit Policy
shall, inter alia, cover following for SME financing:
i. Clearly laid down procedures on loan administration, disbursement, monitoring, and
recovery mechanism.
ii. Specification of main functions, major responsibilities of various staff positions, as well as
their powers/ authority relating to approval/sanctioning of financing limits.
iii. For loan size of up to Rs 2 million, it will be at the discretion of the banks & DFIs to obtain
the insurance cover of the hypothecated stock/ other securities keeping in view the credit-
worthiness, past experience and financial strength of the prospective borrower.
 SME R-1: SME SPECIFIC CREDIT POLICY
However, if a bank/DFI decides to obtain an insurance cover, then it will not force to the respective
borrower for arranging the same from an insurance company of the bank’s/ DFI’s choice.
iv. Banks & DFIs are encouraged to adopt program based lending. The Chief Executive Officer of the
bank/ DFI concerned will approve conventional/ Shariah-compliant program-based products on
recommendation of the respective committee. Such programs may carry objective/ quantitative
parameters for eligibility of borrowers, besides standardization and simplification of loan
documents required from the borrowers under the subject Program.
v. Banks & DFIs shall adopt standardized and simplified loan application forms circulated by PBA.
vi. The policy shall cover different aspects related to financing against pledge of stock under
electronic warehouse receipt (EWR) including list of eligible commodities, quality of collateral,
valuation, price volatility, margin, limits, tenor of loans, diversification, insurance, substitution of
collateral and managing collateral in the event of counter party default, etc.
 SME R-1: SME SPECIFIC CREDIT POLICY

In case of SE Financing, following minimum points shall be covered under banks’/ DFIs’ Credit
Policy:
❑ Clearly devised plan of the banks & DFIs regarding their frequency of visits to be made to SE
borrowers’ business sites keeping in view their human resource limitations and the amount of
exposure taken upon SEs. However, banks & DFIs shall ensure that at least one visit must be
made to SE borrowers’ sites during a year’s time.
❑ In case the finance is secured against hypothecation of stock, banks & DFIs shall obtain stock
report at least semi-annually.
SME R-2: ELECTRONIC CREDIT INFORMATION BUREAU (E-CIB) REPORT

While considering any credit proposal (including renewal, enhancement and rescheduling/

restructuring), banks & DFIs shall obtain e-CIB Report on their prospective borrower(s)

from Electronic Credit Information Bureau (e-CIB) of State Bank of Pakistan or any Credit

Information Bureau licensed and regulated by SBP. Banks & DFIs shall give due weightage

to the credit report relating to the borrower(s) and concerned group. However, they can take

exposure on defaulters keeping in view their risk management policies and criteria, provided

they properly record reasons and justifications in the approval form.

 SME R-3: PERSONAL GUARANTEE

All facilities, except those secured against liquid assets, shall be backed by personal

guarantees of the owners of SMEs. In case of limited companies, guarantees of

sponsor directors shall be obtained.

 R-4: LIMIT ON CLEAN FACILITY

Banks & DFIs can take clean exposure (facilities extended based on cash flows of an

SME secured solely against personal guarantees) of up to Rs 10 million on an SME

borrower. It may be noted that the clean exposure limit shall not include the clean

consumer financing limits (Credit Card and Personal Loans etc.) allowed to a sponsor

of the said SME under Prudential Regulations for Consumer Financing.

 R-5: PROPER UTILIZATION OF LOAN
Banks & DFIs shall ensure that loan has been utilized for the same purposes as specified in the Loan
Application Form. In case of financing to medium enterprises, banks & DFIs shall develop and
implement an appropriate system for monitoring utilization of loans. Such system may include
obtaining stock reports/ position of current assets in case of Working Capital Loans; and supporting
documents in case of Term Loans.
With regard to small enterprise financing, banks & DFIs shall adopt the following measures:
i. In case of working capital/ revolving credits, banks & DFIs will obtain a declaration from
the borrowing SE stating that it has utilized the loan proceeds for the intended purpose
only.
ii. In the case of fixed assets/ project financing, banks & DFIs will adopt the same process as
mentioned above in the case of medium enterprise financing.
 R-6: RESTRICTION ON FACILITIES TO RELATED PARTIES

Banks & DFIs shall not take any exposure on an SME in which any of its directors, major

shareholders holding 5% or more of the share capital of the bank/ DFI or its Chief Executive, or an

Employee or any family member of these persons is interested, except as specified in section 24 of

the BCO, 1962. In this regard, it will, however, suffice if banks & DFIs obtain an undertaking from

the small enterprise stating that there is no existence of any interest between the borrower and the

above-mentioned related parties.

R-7: TRANSLATION OF LOAN DOCUMENTS INTO URDU LANGUAGE

To facilitate SMEs in better understanding important terms and conditions of loans, banks & DFIs

shall translate and make available Loan Application Form and other related documents, except

charge documents, in Urdu as well. Further, banks & DFIs will also provide information on

important terms with brief explanation of each term for convenience and better understanding of

the borrowers.
 R-8: SECURITIES AND MARGIN REQUIREMENTS

i. Subject to the relaxation for clean facilities up to Rs. 10 million for SEs and MEs, all facilities over

and above this limit shall be appropriately secured as per satisfaction of the banks & DFIs.

ii. Banks & DFIs are free to determine the margin requirements on securities against facilities

provided by them to their clients taking into account the risk profile of the borrower(s) in order to

secure their interests. However, this relaxation shall not apply in case of items, imports of which

are banned by the Government. Banks & DFIs are advised not to open import letter of credit for

banned items in any case till such time the lifting of ban on any such item is notified by the State

Bank of Pakistan.
 R-8: SECURITIES AND MARGIN REQUIREMENTS
iii. Banks & DFIs shall continue to observe margin restrictions on shares/ TFCs/ Sukuk as per existing
instructions under Prudential Regulations for Corporate/ Commercial Banking (R-6). Further, the
cash margin requirement of 100% on Caustic Soda (PCT heading 2815.1200) for opening Import
Letter of Credit as advised by the Federal Government and notified in terms of BPD Circular
Letter No. 5 dated 4th May 2002, shall also continue to remain applicable.
iv. iv. State Bank of Pakistan shall continue to exercise its powers for fixation/ reinstatement of
margin requirements on financing facilities being provided by banks & DFIs for various purposes
including Import Letter of Credit on a particular item(s), as and when required.
v. v. In addition to above, the restrictions prescribed under paragraph 5 of Regulation R-6 of the
Prudential Regulations for Corporate/ Commercial Banking will also be applicable in case of
financing to small and medium enterprises.
 R-9: GENERAL MEASURES
i. Banks & DFIs shall establish SME Banking oriented Research & Development (R&D) divisions/ units in
their institutions. These R&D divisions/ units shall fulfil research related needs of their institutes and
provide them support in adopting suitable SME banking and financing practices.
ii. Banks & DFIs shall put in place an efficient MIS (Management Information System) which will support
them effectively catering reporting needs of their SME financing portfolio. The system should be flexible
enough to generate necessary information and at least following reports in order to enable management,
take important policy decisions and/ or make appropriate modifications in their lending programs:
a) Delinquency reports (for 30, 60, 90, 180 & 365 days and above) on monthly basis.
b) b. Reports interrelating delinquencies with various customers and sectors types etc.
c) List of SMEs having any kind of banking relationship(s) to be divisible w.r.t. organizational structure
(proprietorships, partnerships, limited company etc.) and/ or nature of business (trading, service and
manufacturing etc.).
 R-9: GENERAL MEASURES
iii. To address and minimize grievances of SMEs and stakeholders, banks & DFIs shall put in place an
effective, simple and transparent customers’ complaints resolution and helping mechanism in their
institutes, on permanent basis.
iv. Banks & DFIs shall develop and offer customized lending products while adopting program based
lending and supply chain financing methodologies to cater specific SME financing needs of
various SME clusters. In this regard, banks & DFIs should explore mechanism for adopting
advanced delivery channels (branchless banking, tele-marketing etc.) and SME credit scoring
model etc.
v. Banks & DFIs are also encouraged to leverage database of their walk-in and permanent customers
(depositors/ account-holders) which belong to SME sector, for cross selling of financing products.
This will provide them relatively more comfort in increasing SME financing portfolio.
 R-9: GENERAL MEASURES
vi. Pricing policy of banks & DFIs that include mark-up rates (including the IRR on the loan
products), processing & documentation fee, prepayment/ late-payment penalties etc. shall be
mentioned explicitly in the loan agreements viz banks shall strictly avoid imposing any hidden
charges in addition to those explicitly stated in the loan agreement.
vii. Banks & DFIs shall take measures for capacity building of their SME banking staff in SME related
areas. In this regard, they will design and implement dedicated capacity building programs in
coordination with their own training departments. Besides, SME financing staff shall also be
nominated for training programs offered by external training institutes like NIBAF and IBP etc.
Chapter No: 02 Prudential
Regulations for Small
Enterprise Financing
 SE R-1: DEFINITION OF SMALL ENTERPRISE

Enterprise Category Criteria-Annual Sales Turnover

Small Enterprise (SE) Up to PKR 150 Million

Start-up A small enterprise up to 5 years old will

be considered as Start-up SE
 SE R-2: PER PARTY EXPOSURE LIMIT

Small Enterprise can avail exposure of up to Rs 100 million from a single bank/ DFI or from

all banks & DFIs. Banks & DFIs are allowed to deduct the liquid assets (encashment value of

bank deposits, certificates of deposit/ investment, Pakistan Investment Bonds, Treasury Bills

and National Saving Scheme Securities) held under their perfected lien for the purpose of

calculation of per party exposure limit.

 SE R-3: REQUIREMENT OF AUDITED ACCOUNTS

❑ Banks & DFIs are not required to obtain copy of audited accounts in case of lending to the
small enterprises for exposure upto Rs 15 million. However, in such cases, banks & DFIs
may ask the borrower to submit financial accounts in some form, signed by the borrower, to
help banks & DFIs assess SEs’ cash flows or carry out counter verification etc.
❑ In case of lending to small enterprises above Rs 15 million, banks & DFIs shall obtain from
the small enterprises a copy of financial statements duly audited by a practicing Chartered
Accountant or a practicing Cost and Management Accountant for analysis and record.
However, banks & DFIs may waive the requirement of obtaining audited copy of financial
statements when the exposure net of liquid assets does not exceed the limit of Rs 15
million.
SE R-4: REPAYMENT CAPACITY OF THE BORROWER AND CASH FLOW BASED LENDING

Normally, small enterprises do not maintain proper financial accounts for the satisfaction of

banks & DFIs. Their record generally contains sale/ purchase books and cash received/ paid

records in a rudimentary form. Banks & DFIs shall use relevant/ practical cash flow estimation

techniques and other proxies to assess repayment capacity of SE borrower. To supplement,

banks & DFIs are encouraged to use the available sector/ cluster specific financial models that

can capture cost structure, revenue streams and margins in the sectors. For program-based

lending, banks & DFIs may also use, as a substitute, Income Estimation Models to assess

repayment capacity of the borrowers.

 SE R-5: COLLATERAL VALUATION

For valuation of securities against loans up to Rs 5 million, banks & DFIs at their own

discretion may either use the services of their own evaluating staff or the services of PBA

approved evaluator. However, valuation of securities for loans above Rs 5 million shall be done

only by an evaluator on the approved panel of PBA.

 SE R-6: RECOVERY OF OUTSTANDING DUES
To facilitate the recovery efforts, banks & DFIs are allowed to undertake cash collection/ recovery at

places other than their authorized places of business as stipulated in the ‘Fair Debt Collection

Guidelines’ issued by Banking Policy and Regulations Department. However, in order to prevent

fraud and misappropriation of collected cash, adequate security and risk management measures

(including but not limited to adequate insurance cover all the time) must be in place and this process

should be appropriately documented, and audited at the bank/ DFI level. The banks & DFIs are also

encouraged to make use of mobile and wireless technologies/ devices for instant updating of cash

collection from field into their books and accounts, and sending confirmatory SMS/ alert messages to

borrowers.
SE R-7: GENERAL RESERVE AGAINST SMALL ENTERPRISE FINANCE

i. Banks & DFIs shall observe prudential guidelines given in this Regulation and at
Annexure I & II of these Regulations in the matter of classification of their SE asset
portfolio and provisioning there-against.
ii. In addition to the time-based criteria prescribed in Annexure I, subjective evaluation of
performing and non-performing credit portfolio may be made for risk assessment purpose
and, where considered necessary, any account including the performing account shall be
classified, and the category of classification determined on the basis of time based criteria
shall be further downgraded. However, classification for program-based lending shall be
done based on objective (time-based) criteria only, though banks & DFIs at their own
discretion may also classify such portfolio on subjective basis.
SE R-8: CLASSIFICATION AND PROVISIONING FOR LOANS/ ADVANCES

iii. In case of revolving/ running finance accounts, if the borrower pays mark-up regularly
without showing turn-over in the principal portion of the account, and bank/ DFI is
satisfied with this conduct and is willing to roll over the facility periodically; then such
account will not attract ‘subjective classification’ on the basis of lower/ nil activity in the
principal account. However, banks & DFIs can classify, at their discretion, such accounts
as per their own policy.
iv. Banks & DFIs can avail the benefit of Forced Sale Value (FSV) of collateral held against
loans/ advances, determined in accordance with the guidelines laid down in Annexure II,
before making any provision.
v. Party-wise details of cases, where banks & DFIs have taken the benefit of FSV shall be
maintained for verification by State Bank’s teams during their regular/ special inspection.
SE R-8: CLASSIFICATION AND PROVISIONING FOR LOANS/ ADVANCES

vi. Banks & DFIs shall review, at least on a quarterly basis, the collectability of their loans/

advances portfolio and shall properly document the evaluations so made. Shortfall in

provisioning, if any, determined, because of quarterly assessment shall be provided for

immediately in their books of accounts by the banks & DFIs on quarterly basis.

vii. In case of cash recovery, other than rescheduling/ restructuring, banks & DFIs may

reverse specific provision held against classified assets only to the extent that required

provision as determined under this Regulation is maintained.

SE R-8: CLASSIFICATION AND PROVISIONING FOR LOANS/ ADVANCES

viii. Banks & DFIs will make suitable arrangements for ensuring that FSV used for taking

benefit of provisioning is determined accurately as per guidelines contained in these PRs

and is reflective of market conditions under forced sale situations.

ix. The external auditors shall, as part of their annual audits of banks & DFIs, verify that all

requirements as stipulated above and in Annexure I & II for classification and

provisioning have been complied with. State Bank of Pakistan shall also check the

adequacy of provisioning during on-site inspection.

SE R-8: CLASSIFICATION AND PROVISIONING FOR LOANS/ ADVANCES
ANNEXURE-I
CLASSIFICATION DETERMINANT TREATMENT OF PROVISIONS TO BE MADE
INCOME
Where mark-up/ Unrealized mark-up/ Provision of 10% of the difference
1. OAEM (Other interest or interest to be kept in resulting from the outstanding
Assets principal is Memorandum balance of principal less the
Especially overdue by 90 Account and not to be amount of liquid assets realizable
Mentioned). days or more from credited to Income without recourse to a Court of Law
the due date. Account except when and Forced Sale Value (FSV) of
realized in cash. pledged stocks, plant & machinery
Unrealized markup/ under charge and mortgaged
interest already taken residential, commercial and
to income account to industrial properties (land &
be reversed and kept building only) to the extent
in Memorandum allowed in Annexure II.
Account.
SE R-8: CLASSIFICATION AND PROVISIONING FOR LOANS/ ADVANCES
ANNEXURE-I

CLASSIFICATION DETERMINANT TREATMENT OF PROVISIONS TO BE MADE

INCOME
Where mark-up/ As above. Provision of 25% of the difference
2. Substandard. interest or resulting from the outstanding
principal is balance of principal less the amount
overdue by 180 of liquid assets realizable without
days or more from recourse to a Court of Law and
the due date. Forced Sale Value (FSV) of pledged
stocks, plant & machinery under
charge and mortgaged residential,
commercial and industrial properties
(land & building only) to the extent
allowed in Annexure II.
SE R-8: CLASSIFICATION AND PROVISIONING FOR LOANS/ ADVANCES
ANNEXURE-I

CLASSIFICATION DETERMINANT TREATMENT OF PROVISIONS TO BE MADE

INCOME
Where mark-up/ As above. Provision of 50% of the difference
3. Doubtful. interest or principal resulting from the outstanding
is overdue by 1 balance of principal less the
year or more from amount of liquid assets realizable
the due date. without recourse to a Court of Law
and Forced Sale Value (FSV) of
pledged stocks, plant & machinery
under charge and mortgaged
residential, commercial and
industrial properties (land &
building only) to the extent allowed
in Annexure II.
SE R-8: CLASSIFICATION AND PROVISIONING FOR LOANS/ ADVANCES
ANNEXURE-I

CLASSIFICATION DETERMINAN TREATMENT OF PROVISIONS TO BE MADE

T INCOME
(a) Where mark- As above Provision of 100% of the difference
4. Loss. up/ interest or resulting from the outstanding
principal is balance of principal less the amount
overdue by 18 of liquid assets realizable without
months or more recourse to a Court of Law and
from the due date. Forced Sale Value (FSV) of
pledged stocks, plant & machinery
(b) Where Trade under charge and mortgaged
Bills (Import/ residential, commercial and
Export or Inland industrial properties (land &
Bills) are not building only) to the extent allowed
paid/ adjusted in Annexure II.
within 180 days
of the due date.
SE R-8: CLASSIFICATION AND PROVISIONING FOR LOANS/ ADVANCES
ANNEXURE-II
Banks & DFIs are allowed to take the benefit of Forced Sale Value (FSV) of pledged stocks, plant
& machinery under charge, and mortgaged residential, commercial and industrial properties held
as collateral against Non Performing Loans (NPLs) for calculating provisioning requirement as
tabulated below:
Category of Asset Forced Sale Value Benefit allowed
from the date of classification

Mortgaged residential, commercial and o 75% for first year

industrial properties (Land & building o 60% for second year
only) o 45% for third year
o 30% for fourth year, and
o 20% for fifth year
Plant & Machinery under charge o 30% for first year
o 20% for second year
o 10% for third year
Pledged stock o 40% for first, second, and third year
 SE R-9: RESTRUCTURING/ RESCHEDULING OF LOANS/ ADVANCES
The banks & DFIs may reschedule/ restructure problem loans as per their own policy duly
approved by their Board of Directors. However, the rescheduling/ restructuring of non-performing
loans shall not change the status of classification of a loan/ advance etc. unless the following
minimum conditions are met:
i. At least 10% of the outstanding loan amount is recovered in cash and the terms and conditions
of rescheduling/ restructuring are fully met for a period of at least 6 months (excluding grace
period, if any) from the date of such rescheduling/ restructuring. However, the condition of 6
Months retention period, prescribed for restructured/ rescheduled loan account to remain in the
classified category, shall not apply in case the borrower has repaid or adjusted in cash at least
35% of the total restructured loan amount (principal + mark-up), either at the time of
restructuring agreement or later-on any time before the completion of 6 Months period as
above mentioned.
 SE R-9: RESTRUCTURING/ RESCHEDULING OF LOANS/ ADVANCES

ii. Rescheduling shall not be done simply to avoid classification.

iii. While reporting to the Credit Information Bureau (e-CIB) of State Bank of Pakistan or any

Credit Information Bureau licensed and regulated by SBP, such loans/ advances may be shown

as ‘rescheduled/ restructured’ instead of ‘default’.

iv. Restructuring/ rescheduling of a loan account shall not lead to disqualification of the borrower

for fresh credit facilities or enhancement in the existing limits. Such fresh loans may be

monitored separately, and shall be subject to classification on the strength of their own specific

terms and conditions.

 SE R-9: RESTRUCTURING/ RESCHEDULING OF LOANS/ ADVANCES

v. Where a borrower subsequently defaults (either principal or mark-up) after the rescheduled/

restructured loan has been declassified by a bank/ DFI, the loan shall again be classified in the

same category it was in at the time of rescheduling/ restructuring and the unrealized markup

on such loans taken to income account shall also be reversed. However, banks & DFIs at their

discretion may further downgrade the classification, taking into account the subjective criteria.
 SE R-10: TURN-AROUND-TIME

Banks & DFIs shall not take more than 15 working days for the credit approval process (from the

date of receipt of complete information). In this respect, the following minimum points shall also

be considered:

i. The pre-approval requirements and post-approval requirements (security/ collateral

documentation etc.) shall be advised preferably in one go.

ii. The facility shall be disbursed only after security documentation is completed by the

customer.
Chapter No: 03 Prudential
Regulations for Medium
Enterprise Financing
 ME R-1: DEFINITION OF SMALL ENTERPRISE

Enterprise Category Criteria-Annual Sales Turnover

Medium Enterprise (ME) Above PKR 150 Million to PKR 800

Million
Start-up A medium enterprise up to 5 years old
will be considered as Start-up ME
ME R-2: REPAYMENT CAPACITY AND CASH FLOW BASED LENDING

1. Banks & DFIs shall specifically identify the sources of repayment and assess the
repayment capacity of the borrower on the basis of assets conversion cycle and expected
future cash flows. In order to add value, banks & DFIs are encouraged to assess conditions
prevailing in the particular sector/ industry they are lending to and its future prospects.
Banks & DFIs should be able to identify the key drivers of their borrowers’ businesses, the
key risks associated with their businesses and their risk mitigants. Banks & DFIs may also
use Income Estimation Models specially in program-based lending to assess repayment
capacity of the borrowers.
2. The rationale and parameters used to project the future cash flows shall be documented
and annexed with the cash flow analysis undertaken by banks & DFIs.
 ME R-3: PER PARTY EXPOSURE LIMIT

1. Medium Enterprise can avail financing (including leased assets) of up to Rs 500 million

from a single bank/ DFI or from all banks & DFIs.

2. Banks & DFIs are allowed to deduct the liquid assets (encashment value of bank deposits,

certificates of deposit/ investment, Pakistan Investment Bonds, Treasury Bills and National

Saving Scheme Securities) held under their perfected lien for the purpose of calculation of

per party exposure limit.

 ME R-4: REQUIREMENT OF AUDITED ACCOUNTS

In case of lending to medium enterprises, banks & DFIs shall obtain a copy of financial

statements duly audited by a practicing Chartered Accountant, from the medium enterprise

who is a limited company or where the exposure of a bank/ DFI exceeds Rs 10 million, for

analysis and record. Banks & DFIs may also accept a copy of financial statements duly audited

by a practicing Cost and Management Accountant in case of a borrower other than a public

company or a private company, which is a subsidiary of a public company. However, banks &

DFIs may waive the requirement of obtaining audited copy of financial statements when the

exposure net of liquid assets does not exceed the limit of Rs 10 million.
ME R-5: CLASSIFICATION AND PROVISIONING FOR ASSETS LOANS/ ADVANCES

1. Banks & & DFIs shall observe the prudential guidelines given at Annexure III & IV in the
matter of classification of their ME asset portfolio and provisioning there-against. In addition
to the time-based criteria prescribed in Annexure III, subjective evaluation of performing and
non-performing credit portfolio may be made for risk assessment purpose and, where
considered necessary, any account including the performing account shall be classified, and
the category of classification determined on the basis of time based criteria shall be further
downgraded. Such evaluation shall be carried out on the basis of credit worthiness of the
borrower, its cash flow, operation in the account, adequacy of the security inclusive of its
realizable value and documentation covering the advances. However, classification for
program-based lending shall be based on objective criteria. Nevertheless, banks & DFIs may,
at their own discretion, also classify such portfolio on subjective basis.
ME R-5: CLASSIFICATION AND PROVISIONING FOR ASSETS LOANS/ ADVANCES
ANNEXURE-III

CLASSIFICATION DETERMINANT TREATMENT OF PROVISIONS TO BE MADE

INCOME
Where mark-up/ Unrealized mark-up/ Provision of 25% of the difference
1. Substandard. interest or interest to be kept in resulting from the outstanding
principal is Memorandum balance of principal less the amount
overdue by 90 Account and not to of liquid assets realizable without
days or more from be credited to Income recourse to a Court of Law and
the due date. Account except when Forced Sale Value (FSV) of pledged
realized in cash. stocks, plant & machinery under
Unrealized markup/ charge and mortgaged residential,
interest already taken commercial and industrial properties
to income account to (land & building only) to the extent
be reversed and kept allowed in Annexure IV.
in Memorandum
Account.
ME R-5: CLASSIFICATION AND PROVISIONING FOR ASSETS LOANS/ ADVANCES
ANNEXURE-III

CLASSIFICATION DETERMINANT TREATMENT OF PROVISIONS TO BE MADE

INCOME
Where mark-up/ As above. Provision of 50% of the difference
2. Doubtful. interest or principal resulting from the outstanding
is overdue by 180 balance of principal less the
days or more from amount of liquid assets realizable
the due date. without recourse to a Court of Law
and Forced Sale Value (FSV) of
pledged stocks, plant & machinery
under charge and mortgaged
residential, commercial and
industrial properties (land &
building only) to the extent allowed
in Annexure IV.
ME R-5: CLASSIFICATION AND PROVISIONING FOR ASSETS LOANS/ ADVANCES
ANNEXURE-III

CLASSIFICATION DETERMINANT TREATMENT OF PROVISIONS TO BE MADE

INCOME
(a) Where mark- As above Provision of 100% of the difference
3. Loss. up/ interest or resulting from the outstanding
principal is balance of principal less the amount
overdue by one of liquid assets realizable without
year or more from recourse to a Court of Law and
the due date. Forced Sale Value (FSV) of
pledged stocks, plant & machinery
(b) Where Trade under charge and mortgaged
Bills (Import/ residential, commercial and
Export or Inland industrial properties (land &
Bills) are not paid/ building only) to the extent allowed
adjusted within in Annexure IV.
180 days of the
due date.
ME R-5: CLASSIFICATION AND PROVISIONING FOR ASSETS LOANS/ ADVANCES
Uniform Criteria for Determining the Value of Pledged Stock, Plant & Machinery under Charge and
Mortgaged Properties

1. Only liquid assets, pledged stock, plant & machinery under charge and residential, commercial and

industrial property having registered or equitable mortgage shall be considered for taking benefit for

provisioning, provided no NOC for creating further charge to another bank/ DFI/ NBFC has been issued by

the bank/ DFI. The aforesaid assets having pari-passu charge shall be considered on proportionate basis of

outstanding amount.

2. Hypothecated assets and assets with second charge & floating charge shall not be considered for taking the

benefit for provisioning.

ME R-5: CLASSIFICATION AND PROVISIONING FOR ASSETS LOANS/ ADVANCES
ANNEXURE-IV
Banks & DFIs are allowed to take the benefit of Forced Sale Value (FSV) of pledged stocks, plant
& machinery under charge, and mortgaged residential, commercial and industrial properties held
as collateral against Non Performing Loans (NPLs) for calculating provisioning requirement as
tabulated below:
Category of Asset Forced Sale Value Benefit allowed
from the date of classification

Mortgaged residential, commercial and o 75% for first year

industrial properties (Land & building o 60% for second year
only) o 45% for third year
o 30% for fourth year, and
o 20% for fifth year
Plant & Machinery under charge o 30% for first year
o 20% for second year
o 10% for third year
Pledged stock o 40% for first, second, and third year
ME R-5: CLASSIFICATION AND PROVISIONING FOR ASSETS LOANS/ ADVANCES

Rescheduling/ Restructuring
The rescheduling/ restructuring of non-performing loans shall not change the status of classification
of a loan/ advance etc. unless the terms and conditions of rescheduling/ restructuring are fully met
for a period of at least one year (excluding grace period, if any) from the date of such rescheduling/
restructuring and at least 10% of the outstanding amount is recovered in cash. However, the
condition of one year retention period, prescribed for restructured/ rescheduled loan account to
remain in the classified category, shall not apply in case the borrower has repaid or adjusted in cash
at least 35% of the total restructured loan amount (principal + mark-up), either at the time of
restructuring agreement or later-on any time before the completion of one year period as above
mentioned. Further, banks & DFIs may credit their income account to the extent of cash recovery
made against accrued markup on the restructured/ rescheduled loans.
ME R-5: CLASSIFICATION AND PROVISIONING FOR ASSETS LOANS/ ADVANCES

Timing of Creating Provisions

Banks & DFIs shall review, at least on a quarterly 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 on quarterly basis.

ME R-5: CLASSIFICATION AND PROVISIONING FOR ASSETS LOANS/ ADVANCES

Reversal of Provision
In case of cash recovery, other than rescheduling/ restructuring, banks & DFIs may reverse
specific provision held against classified assets only to the extent that required provision as
determined under this Regulation is maintained. While calculating the remaining provision
required to be held after cash recovery and reversal of provision there-against, banks & DFIs
shall still enjoy the benefit of netting-off the amount of liquid assets and FSV of collateral from
the outstanding amount, as described in this regulation. Further, the provision made on the
advice of State Bank of Pakistan except where cash recovery is made shall not be reversed
without prior approval of State Bank of Pakistan.
ME R-5: CLASSIFICATION AND PROVISIONING FOR ASSETS LOANS/ ADVANCES

Verification by the Auditors

The external auditors shall verify as part of their annual audits of banks & DFIs that all

requirements as stipulated above and Annexure III & IV for classification and provisioning for

assets have been complied with. State Bank of Pakistan shall also check the adequacy of

provisioning during on-site inspection.

 ME R-6: TURN-AROUND-TIME

Banks & DFIs shall not take more than 25 working days for the credit approval process (from

the date of receipt of complete information). In this respect, the following minimum points shall

also be considered:

I. The pre-approval requirements and post-approval requirements (security/ collateral

documentation etc.) shall be advised preferably in one go.

II. The facility shall be disbursed only after the customer completes security documentation.