Prudential Regulation Consumer Financing 1/2
Summary of Prudential Regulation Consumer Financing
We have compiled summary of prudential regulation for consumer financing. Consumer financing has three main categories which are defined below;
Categories of Consumer Financing:
Cards which allow a customer to make payments on credit. These cards include supplementary cards. Corporate cards are not included in consumer financing.
This loan includes loan or financing facilities for purchase of personal vehicle.
This loan includes payment to individuals for payment of goods, services and expenses including running finances.
Prudential Regulation Consumer R-1: Consumer Financing to Directors, Major Shareholders, Employees.
Consumer financing to directors, major shareholders, employees and their family members shall be at arms’ length basis. This condition is not applicable to consumer financing allowed to employees as part of compensation package as per bank’s HR policy. Consumer financing to such staff is treated as staff financing.
Prudential Regulation Consumer R-2: Aggregate Exposure.
At the start of consumer finance the aggregate exposure should be as follows:
|Exposure at the end of||Maximum Limit|
|1st year||2 times of the equity|
|2nd year||4 times of the equity|
|% of classified consumer financing to total consumer financing||Maximum Limit|
|a) Below 3%||10 times of the equity|
|b) Below 5%||6 times of the equity|
|c) Below 10%||4 times of the equity|
|d) 10% & above||2 times of the equity|
Equity includes; Paid-up capital, Perpetual non-cumulative preference shares, Share premium, General reserves, Reserve for issue of bonus shares, Statutory reserves, Retained earnings / losses as disclosed in last audited financial statements.
For branches of foreign bank operating in Pakistan; equity means capital maintained free of losses and provisions
Prudential Regulation Consumer R-3: Credit Worthiness and Borrowing Capacity.
The banks to determine the credit worthiness and borrowing capacity of the client. Ensuring that total monthly amortization payments of consumer financing facilities should not exceed 50% of the net disposable income of the prospective borrower.
May be considering income of the spouse while calculating Debt Burden Ratio (DBR) provided consent is obtained from spouse and must be co-borrower of the facility in e-CIB.
May be waiving 50% DBR in case of credit card and personal loan if it is secured against liquid asset with minimum margin of 30%.
SBP has revised DBR from 50% to 40% via BPRD circular letter 29 of 2021.
Liquid assets are the asset that can be converted into cash without recourse to the court of law.
The banks may provide excess over limit facility (EOL) to their customer. EOL after utilization is payable in next monthly bill.
Prudential Regulation Consumer R-4: General Reserve.
General Reserve for performing portfolio (net of cash collaterals, govt. securities and gold).
|Category of financing||NPL / Gross Loans Ratio||Rate of general provision %|
|Un-secured portfolio||< = 5%||4|
|> 5% <= 10%||5|
|Secured portfolio||< = 5%||1|
|> 5% <= 10%||1.5|
Prudential Regulation Consumer R-5:
Rescheduling or restructuring of non-performing /performing
Banks should frame policy for rescheduling / restructuring of consumer financing facilities. For the purpose of rescheduling / restructuring the bank may;
- Consolidate outstanding amounts of personal loans / credit cards into one facility. The new facility shall be placed in the lowest category of classification.
- Convert revolving facility into installment based with maximum tenure of 5 years.
- Change the tenure by maximum 2 years.
Rescheduling / restructuring or transfer of any financing facility from one category to another should not be done just to avoid classification and provisioning requirement. In this regards, the bank shall ensure;
- The rescheduling / restructuring of consumer financing of any borrower should not be held more than 1 time within 12 months and 3 times during 5 year period.
- The loan amount has existed for at least 9 months before rescheduling / restructuring.
- Islamic Banks shall ensure shariah compliance in rescheduling / restructuring.
While considering rescheduling / restructuring, the condition of 50% DBR is not applicable to rescheduled / restructured loans for but new facility availed by such borrower shall be subject to 50% DBR.
The status of classification of non-performing financing facilities shall not be changed and already held provisions shall not be reversed unless borrower has paid at least 10% of rescheduled / restructured amount or six installments.
If day passed due reaches 90 days again within one year after declassification the financing facility shall be as under:
|Type of financing||Classification|
|Secured||Same category in which it was before restructuring / rescheduling|
Prudential Regulation Consumer R-6:
Classification and provisioning of receivables
Receivables on account of insurance or takaful / recovery charges against non-performing loans shall also be classified with 100% provisions maintained against.
Prudential Regulation Consumer R-7:
Banks are free to determine margin requirements according to risk profile of the borrower.
Prudential Regulation Consumer R-8:
Maximum clean limit for credit card and personal loan from all banks
Aggregate total clean exposures under credit card and personal loan from all the banks on a customer is Rs.2 million.
Overall credit card and personal loan limit both on secured and unsecured by one person from all banks in aggregate should not exceed Rs.5 million.
Please also read 2nd part on the same topic at below link.