Prudential Regulations Microfinance Banks

 

 

Introduction:

In Pakistan, Microfinance Banks (MFBs) play a crucial role in providing financial services to the unbanked and underserved segments of the population. To ensure the stability and sustainability of these institutions, the State Bank of Pakistan (SBP) has implemented a comprehensive set of prudential regulations. These regulations aim to promote the safety and soundness of MFBs while also ensuring that they are able to fulfill their social objectives. In this article, we will provide a summary of the key prudential regulations that Microfinance Banks in Pakistan are required to comply with.

 

Prudential Regulation R-1

Minimum Capital Requirement:

MFBs shall maintain a minimum paid up capital (net of losses) of below amounts.

Minimum Capital (Rupees)	Allowed to operate
1 Billion	Nationwide
500 million	Specific Province
400 million	Specific Region
300 million	Specific District

 

Capital Adequacy Ratio (CAR) = 15% of risk weighted assets of MFB.

 

School Supplies

 

Prudential Regulation R-2

Exposure against Contingent Liabilities

Period	Contingent Liabilities
First 3 years of operation	Not exceeding 3 times of its equity
Thereafter	Not exceeding 5 times of its equity

 

 

Prudential Regulation R-3

Maintenance of cash reserve and liquidity

Period	Contingent Liabilities	In the form of
Cash Reserve Requirement (CRR)	Not < 5% of demand and time deposits with tenor of < 1year	Current Account with SBP
Statutory Liquidity Requirement (SLR)	Not <10% of demand and time deposits with tenor of < 1year	Cash, Gold, unencumbered T Bills, PIBs and GoP Sukkuk

 

Electronics

 

Prudential Regulation R-4

Statutory Reserve

Requirement	% of annual profit after tax
Until reserve becomes equal to paid up capital	20%
Thereafter	Not < 5%

  

 

Prudential Regulation R-5

Maximum loan size

As per circular reference AC&MFD Circular No. 02 of 2020 dated August 10, 2020 limits have been revised as follows:

Category	Maximum Size	Annual Income net of business expenses
General Loans	Upto Rs.350,000	Rs.1,200,000
Housing Loans	Up to Rs.3,000,000	Rs.1,500,000
Microenterprises*	Up to Rs.3,000,000	Not mentioned

 

*Microenterprises general loans above Rs.350,000 must be up to 40% gross loan portfolio.

Computers and Tabs

Financing against Gold

Loan exposure on aggregate basis against the security of gold shall not be in excess of 50% of its gross loan portfolio.

This relaxation is available for 1 year period starting from Aug 10, 2020. Thereafter, 35% needs to be maintained within a maximum period of 1 year.

 

Prudential Regulation R-6

Maximum exposure of a borrower

As per circular reference AC&MFD Circular No. 02 of 2020 dated August 10, 2020 maximum exposure have been revised as follows:

Category	Maximum Size
General Loans	Up to Rs.350,000
Housing Loans	Up to Rs.3,000,000
Microenterprises	Up to Rs.3,000,000

 

Video Games

 

Prudential Regulation R-7

Credit Report Check

If credit facility is > Rs.30,000 MFB is required to obtain CIB report.

Prudential Regulation R-8

Classification of assets and provisioning requirement

Specific Provision

General Loans

Category	Number of days Loans (principal/mark-up) is overdue	Provisioning Requirement
Other Assets Especially Mentioned (OAEM)	30 days or more but less than 60 days	NIL
Substandard	60 days or more but less than 90 days	25% of *outstanding principal
Doubtful	90 days or more but less than 180 days	50% of *outstanding principal
Loss	180 days or more	100% of *outstanding principal

 *outstanding principal shall be net of cash collaterals and gold that can be realized without recourse to a court of law.

As per circular reference AC&MFD Circular No. 02 of 2020 dated August 10, 2020 specific provisions have been updated as follows:

Housing Loans

Category	Number of days Loans (principal/mark-up) is overdue	Treatment of Income	Provisioning Requirement
Other Assets Especially Mentioned (OAEM)	90 days or more but less than 180 days	NIL	NIL
Substandard	180 days but less than 1 year	i) Unrealized markup / income to be kept in memorandum account        ii) Unrealized markup / income already taken to income to be reversed and kept in memorandum account. Except when realized in cash.	25% of the difference of outstanding balance (net of liquid assets without recourse of court) and 75% FSV of mortgaged property.
Doubtful	1 year or more but less than 2 years	Same as above	50% of the difference of outstanding balance (net of liquid assets without recourse of court) and 75% FSV of mortgaged property.
Loss	2 years or more	Same as above	100% of the difference of outstanding balance (net of liquid assets without recourse of court) and 75% FSV of mortgaged property for 1st and 2nd year, 50% for 3rd and 4th year and 30% for 5th year. Benefit of FSV not available after 5 years from the date of classification

 

Unrealized markup up

Unrealized markup up / interest / service charges on NPL to be suspended and credited to suspense account.

General Provision:

General Provision of 1% of outstanding advances (net of specific provision) is required to be maintained unless loans are secured against gold or other cash collaterals.

Prudential Regulation R-9

Rescheduling / Restructuring of loans

 

Approved BOD policy is required coving below;

• Rescheduling / Restructuring should not be meant to break the timeframe or un-warranted improvement in classified category.
• Mechanism needs to be place in order to verify genuineness of circumstances.
• Rescheduling / Restructuring loans must remain classified for 6 months (excl. grace period) or 40% or more of the outstanding principal and accrued markup are received in cash.
• If not recovered on revised maturity then directly classified as “losses”.
• Relaxation to be given due to natural calamities.

 

Prudential Regulation R-10

Charging off / Write off NPLs.

One month after loan is classified as “Loss”.

SBP has revised Prudential Regulations for microfinance bank as per circular AC&MFD circular no. 02 of 2022 as follows:

Loan Categories	Criteria for charging off NPLs
General / unsecured loans	NPLs shall be charged off 1 month after being classified as “Loss”
Housing loans / Microenterprise Loans	NPLs shall be charged off 1 month after 5 years from the date of classification of financing.

All other NPLs shall be charged off, 1 month after 3 years from the date of classification. 

Charge off means removing the loans from balance sheet.

 

Prudential Regulation R-11

Classification of Investment

Classification	Holding Period	Revaluation Impact goes to
HTM	Till maturity	Recorded at Amortized cost if impaired charge off in P&L
HFT	Dispose off within 90 days	P&L
AFS	More than 90 days	OCI

 

 Valuation:

Quoted / Un-quoted	Nature of Securities	How valuation shall be done
Quoted	Government Securities	Through PKRV rates
Quoted	TFC and Mutual Funds	Through Market Value
Un-Quoted Securities	TFC and Mutual Funds	Through Amortized Cost

 

Prudential Regulation R-12

Investments of funds

Investment to be made in	% of investment is lower of
Government Securities, “A” rated debt securities like TFC and units of mutual funds	5% of share capital (free of losses) of MFB or 10% of paid up capital of the company in which investment is to be made

 

List of terms used with full form

Short Form	Full form
MFBs	Micro Finance Banks
T Bills	Treasury Bills
PIBs	Pakistan Investment Bonds
GoP	Government of Pakistan
TFC	Term Finance Certificate
CIB	Credit Information Bureau
NPLs	Non-performing Loans
OCI	Other Comprehensive Income
HTM	Held to maturity
HFT	Held for trading
AFS	Available for sale

 

Conclusion:

In conclusion, prudential regulations are critical for the stability and sustainability of Microfinance Banks (MFBs) in Pakistan. The State Bank of Pakistan’s (SBP) comprehensive framework of regulations aims to ensure that MFBs operate safely and soundly while also fulfilling their social objectives.

By complying with these regulations, MFBs can build trust among their clients, investors, and stakeholders, which is crucial for their long-term success. It is important for MFBs to stay abreast of any changes in the regulatory environment and adapt their operations accordingly.

Overall, the implementation of prudential regulations has played a significant role in promoting the growth and development of the microfinance sector in Pakistan.

 

Reference:

 

Prudential Regulation for Micro Finance Banks Updated June 10, 2014 can be downloaded from this link https://www.sbp.org.pk/acd/2014/C3-Annex.pdf

Circulars of 2020

https://www.sbp.org.pk/acd/2020/C2.htm

https://www.sbp.org.pk/acd/2020/C1.pdf

https://www.sbp.org.pk/acd/2020/CL1.htm

https://www.sbp.org.pk/acd/2020/CL2.htm

https://www.sbp.org.pk/acd/2020/CL3.htm

https://www.sbp.org.pk/acd/2020/CL4.htm

https://www.sbp.org.pk/acd/2020/CL5.htm

https://www.sbp.org.pk/acd/2020/CL6.htm

https://www.sbp.org.pk/acd/2020/CL7.htm

 

Related articles:

Prudential Regulations – Consumer Part I

Prudential Regulations – Consumer Part II