Author: Faisal Shahnawaz

KARACHI: The State Bank of Pakistan (SBP) has revised regulations related to housing loans and general loans mainly related to eligibility of borrowers.

The central bank on Wednesday issued a circular to revise Prudential Regulations for Microfinance Banks.

The SBP said that in order to align classification and provisioning requirements with enhanced loan sizes, it has been decided to revise Prudential Regulations R-5, R-8 and R-10 for MFBs as under;

Regulation R-5: Maximum Loan Size and Eligibility of Borrowers

Maximum loan sizes and borrowers’ income eligibility criteria shall be as under;

General Loans (Other than housing loans): The maximum size for general loans shall be up to Rs. 350,000/- to a poor person with annual income (net of business expenses) up to Rs. 1,200,000/-.

Housing Loans: The maximum size for housing loans shall be up to Rs. 3,000,000/- to a single borrower with annual income (net of business expenses) up to Rs. 1,500,000/-. Further, MFBs shall ensure to implement the following requirements:

(a) General Instructions

i) MFBs shall 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.

ii) The sanctioned financing limit, assessed on the basis of repayment capacity of the borrower, value of land/plot and cost of construction on it etc. shall be disbursed in tranches.

iii) The amount disbursed for purchase of plot must not exceed the 90 per cent of the market value/cost of land/plot and 50 per cent of the financing limit. The remaining amount shall be disbursed for construction there-upon.

iv) MFBs will take a realistic construction schedule from the borrowers before allowing initial disbursement. For construction-only cases, the sanctioned financing shall also be released in tranches commensurate with the stage of construction.

v) In case of cost overrun, MFBs may entertain the customer for additional finance for completion of house, keeping in view the Debt Burden Ratio (DBR) and cushion in overall Loan-to-Value (LTV) ratio.

(b) Permission from Relevant Authorities

The MFBs shall not disburse housing finance unless ensured that prior permissions/clearances for construction/purchase of property from relevant authorities are available.

(c) Creation of Mortgage

The plot/house/flat financed by the MFBs shall be mortgaged in MFBs’ favour by way of equitable or registered mortgage.

(d) Loan to Value (LTV) Ratio

Loan to Value Ratio should not exceed 90 per cent.

(e) Risk Management and Internal Control Systems

Risk management framework, duly approved by the Board of Directors of MFBs, should appropriately cover housing finance. MFBs shall ensure strict compliance with their internal policies and procedures and those prescribed by SBP from time to time.

 (f) Information Disclosure

MFBs shall clearly disclose all the important terms & conditions, fees, charges and penalties etc., which should, inter-alia, include annualized percentage rate, pre-payment penalties and the conditions under which they apply.

For the purpose of this regulation, Annualized Percentage Rate means as follows:

Mark-up for the period	X	365	x	100
Average outstanding principal amount during the period	No. of days

(g) Development of Financing Documentation

The MFBs shall prepare standardized set of financing and recourse documents, duly cleared by their legal counsels, comprising of financing agreement, application form and the other requisite supplementary documents.

(h) Title Documents

MFBs shall obtain all title and ownership related property documents from customers which should be clear and free from all encumbrances/legal charges and get these documents vetted by their legal department/advisor(s). MFBs shall provide a signed copy of the list of all title and property documents to the borrowers.

(i) Verification of Property-related Documents

MFBs shall verify necessary information provided in the application form. Accordingly, all title and other legal documents provided with application form shall be verified directly from the relevant issuing authorities. All the documents shall be kept in safe custody meeting all procedures/requirements.

(j) Property Assessment

MFBs shall ensure that a proper property valuation is done by their internal resources. However, properties valuing above Rs. 3.0 million shall be subject to assessment by valuator on approved panel of Pakistan Banks’ Association.

(k) Insurance/Takaful

MFBs may obtain insurance/takaful coverage of the housing unit financed through a reputable insurance/takaful company to sufficiently cover their risk.

(l) Monitoring of Market Conditions

The management of MFBs shall put in place a mechanism to monitor conditions in housing finance market at least on half-yearly basis to ensure that their policies are aligned with the current market conditions.

Microenterprise Loans:

The maximum size for microenterprise loans shall be up to Rs. 3,000,000/- to a single project or business. The MFBs shall extend the microenterprise loans only in the name of micro entrepreneurs to ensure traceability and reduce the incidence of multiple borrowing. However, the aggregate exposure against the microenterprise loans in excess of ceiling prescribed for general loans shall not exceed 40 per cent of the MFB’s gross loan portfolio.

Pre-requisites for Undertaking Microenterprise Lending:

Only those MFBs that are fully compliant with Minimum Capital Requirement (MCR) and Capital Adequacy Ratio (CAR) shall be eligible to undertake microenterprise lending.

i) MFBs interested to extend microenterprise loans exceeding ceiling prescribed for general loans shall develop related institutional capacity (products, credit risk management and monitoring system, trainings etc.) and submit detailed business plan of microenterprise lending to SBP for seeking necessary approval for pilot program. The SBP shall inter-alia evaluate the plan along with operational/financial performance, funding plan, supervisory assessment, and credit rating of the MFB, and accordingly grant permission for launching pilot program to the applicant MFB.

ii) During the pilot phase MFBs will have to ensure that their aggregate exposure against the microenterprise loans in excess of ceiling prescribed for general loans shall not exceed 20 per cent of the gross loan portfolio. The final approval for undertaking microenterprise lending on full/commercial scale shall be granted subject to satisfactory evaluation of pilot program.

iii) The enhanced loan size (up to Rs. 1,000,000/- and Rs. 3,000,000/- respectively) will be allowed to those MFBs which have graduated from pilot microenterprise lending programs (up to Rs. 500,000/- and Rs. 1,000,000/- respectively) to commercial scale. However, prior to extending microenterprise loans exceeding Rs. 500,000/- and Rs. 1,000,000/-, MFBs shall apply to Agricultural Credit & Microfinance Department, SBP for approval. SBP shall grant approval for pilot/commercial launch based on satisfactory assessment of the capital position and readiness level of the applicant MFB.

Miscellaneous

(a) Income Eligibility Assessment for General & Housing Loans:

While assessing income eligibility on individual borrowers (including salaried persons) for housing & general loans, MFBs shall ensure that the total installment of the financing facilities extended by the financial institutions is commensurate with monthly income and repayment capacity of the borrowers, such that total monthly amortization payments of financing facilities should not exceed 50 per cent of the net disposable income of the prospective borrowers. These measures would be in addition to MFBs’ usual evaluations of each proposal concerning credit worthiness of the borrowers, to ensure that their portfolio fulfills the prudential norms, instructions issued by the State Bank of Pakistan and does not impair the soundness and safety of the MFB itself.

(b) Consumption Financing against the Security of Gold:

In line with SBP’s instructions issued vide AC&MFD Circular No. 02 of 2015 (Annexure I, Para-2), MFBs may also extend loans against gold collateral for consumption purposes categorized as domestic needs/emergency loans. However, MFB’s aggregate loan exposure against the security of gold shall not exceed 35 per cent of its gross loan portfolio.

(c) Asset Liability Mismatches

MFBs shall prudently manage the maturity mismatches arising out of their housing and other long term financing portfolios by raising long-term funds for on-lending and vice versa.

Regulation R-8: Classification of Assets and Provisioning Requirements

A. Specific Provisioning:

The outstanding principal and mark-up of the loans and advances, payments against which are overdue, shall be classified as Non- Performing Loans (NPLs) as prescribed below:

Loan Categories	Time based Criteria for Classification of Assets and Provisioning Requirements
General Loans	Annexure I-1
Housing Loans	Annexure I-2
Microenterprise Loans	Annexure I-3 & I-4

B. General Provisioning:

MFBs shall maintain a General Provision equivalent to 1.0 per cent of the net outstanding loans/advances. However, where the loans/advance have been secured against gold and/or other liquid assets, the general provisioning against outstanding amount net of such security shall be required.

C. General Instructions for Classification / Provisioning of all loan categories:

(a) Watch list

MFBs shall maintain a watch list of all overdue accounts before they are classified in terms of objective (time-based) criteria. However, such accounts may not be treated as NPLs for the purpose of classification / provisioning.

(b) Government Guaranteed Loans

Classified loans/ advances that have been guaranteed by the Government would not require provisioning to the extent of guaranteed portion. However, markup/ interest on such accounts would be taken to Memorandum Account instead of Income Account.

(c) Subjective Classification

i) In addition to the time-based criteria prescribed in this regulation, subjective evaluation of performing and non-performing credit portfolio may be made for risk assessment purposes and, where necessary, any account including the performing account can be classified. In this case, the category of classification determined on the basis of time based criteria can be further downgraded.

ii) Classification for program-based lending shall be based on objective (time-based) criteria only, though MFBs, at their own discretion, may also classify such portfolio on subjective basis.

iii) To strengthen subjective classification, MFBs may consider financial standing of guarantors.

(d) Reversal of Specific Provisions

In case of recovery against classified loan, other than rescheduling / restructuring under R-9 of PRs for MFBs, MFBs may reverse/adjust specific provision held against classified assets.

(e) Quarterly Review

MFBs 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, shall be provided for immediately.

(f) Benefit of Forced Sale Value:

MFBs can avail the benefit of Forced Sale Value (FSV) of collateral held against loans / advances as under:

i) Profit arising from availing the benefit of FSV shall not be available for the payment of cash or stock dividend.

ii) The heads of Credit and Risk of respective MFBs shall ensure that FSV used for taking benefit of provisioning is determined accurately and is reflective of market conditions under forced sale situations.

iii) Borrower-wise details of such cases shall be maintained for verification by SBP. In case of misuse of this facility, SBP may also withdraw the benefit of FSV from the concerned MFB.

(g) Responsibility of the External Auditors

The external auditors shall, as part of their annual audits of MFBs, verify that all requirements, as stipulated in this regulation for classification and provisioning, have been complied with.

Regulation R-10: Charging-off Non-Performing Loans (NPLs)

The intent of ‘charge-off’ is to clear the balance sheet of MFBs, and this shall in no way extinguish the MFBs’ right of recovery of such loans. NPLs shall be charged off as prescribed below:

Loan Categories	Criteria for Charging Off NPLs
General/Unsecured Loans	NPLs shall be charged off, one month after being classified as “Loss.”
Housing Loans	NPLs shall be charged off, one month after 05 years from the date of classification of financing.
Microenterprise Loans	NPLs secured against Mortgaged residential, commercial and industrial properties (Land & building only) shall be charged off, one month after 05 years from the date of classification. All other NPLs shall be charged off, one month after 03 years from the date of classification.

Note: Charge-off means reducing the value of the loans in ‘loss’ category to zero through offsetting the provisions, thus, removing such loans from the balance sheet.

4. Definitions. To add clarity, following terms have been defined:

(a) Housing Finance means financing provided to individuals for the construction, purchase of residential house/apartment and for purchase of plot and construction thereupon. Financing availed for the purpose of making improvements in house/apartment shall also fall under this category.

(b) Mortgage means transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan or finance.

(c) Liquid Assets means assets which are readily convertible into cash without recourse to a court of law and mean encashment/realizable value of government securities, bank deposits, gold ornaments, gold bullion, certificates of deposit, shares of listed companies which are actively traded on the stock exchange, NIT Units, certificates of mutual funds, certificates of investment (COIs) issued by DFIs/NBFCs rated at least ‘A’ by a credit rating agency on the approved panel of SBP, listed TFCs rated at least ‘A’ by a credit rating agency on the approved panel of SBP and certificates of asset management companies for which there is a book maker quoting daily offer and bid rates and there is active secondary market trading. These assets with appropriate margins should be in possession of the MFBs with perfected lien.

(d) Secured means exposure backed by liquid assets, pledged stock, mortgage of land, plant, building, machinery or any other fixed assets, hypothecation of stock (inventory), trust receipt, assignment of receivable, lease rentals, and contract receivables but does not include hypothecation of household goods.