credit operational manual.pdf

7/27/2019 Credit Operational Manual.pdf

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CREDITS

(OPERATIONS MANUAL)


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- Credits Operations Manual

- Procedure

- Facility Guidelines

- Security Guidelines

- Watch list


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CREDIT OPERATIONAL MANUAL

CHAPTER 1

INTRODUCTION TO MANUAL

OVERVIEW

The most significant Asset on the Balance sheet of a Bank is its Loans & Advances. The profitability of a Bank

primarily depends upon return from its Advance therefore the quality credit portfolio is of utmost importance for

success of every Bank.

The quality of Financing/Credits depends upon the following factors:

a) The health of the credit portfolio, i.e. the liquidity or recoverability of financing.

b) The diversity of credit portfolio; ensuring an appropriately spread risk instead of being concentrated

in a particular segment, area or credit term (period of commitment).

c) The predominant risk profile of the borrowers, emerging from individual risk assessments.

d) Adequacy of provision for financing that may be doubtful of recovery.

e) The quality of the guiding policies and systems/procedures on which the credit decisions and themanagement of credit relationships are based.

f) The expertise and attitude of the credit managers, decision makers, administrators and controllers

within the organization.

Given the fast changing, dynamic global economy and the increasing pressure of globalization, liberalization,consolidation and dis-intermediation, it is essential that banks have robust credit risk management policies andprocedures that are sensitive and responsive to these changes.

Risk is inherent in all aspects of a commercial operation; however for Banks and financial institutions, credit risk isan essential factor that needs to be managed. Credit risk is the possibility that a borrower or counter party will failto meet its obligations in accordance with agreed terms. Credit risk, therefore, arises from the banks dealings withor lending to corporate, individuals, and other banks or financial institutions.

Credit risk management needs to be a robust process that enables banks to proactively manage loanportfolios in order to minimize losses and earn an acceptable level of return for shareholders.

OBJECTIVE OF THE MANUAL

The Manual has been developed with the prime objective to provide directional guidelines to all credit relatedstakeholders that will improve the risk management culture, and assist in the ongoing improvement of the creditfunction at BAL while achieving excellence of services to our customers.Key objectives of the manual on credit have been summarized as follows:-

1 To ensure that effective prudent practices are followed which will contribute towards the achievement of


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3. All marketing and business Initiatives should be compatible in substance and structure with the policy

documents.

4. Credit decisions are explicit and clear;

5. To ensure quality credit portfolio of the bank and to maintain the quality and corrective measures if any

required to be taken on timely basis.

6. Providing guidelines procedure applicable on various credit related products incorporated transparency

and accountability/

7. The manual serves as a tool for training of the existing and new staff so that each officer has a better

understanding of the credit function in line with banks policy & procedures.

8. Credit decisions are in line with the banks goals, mission and the Bank-wide strategy set by the Board of

Directors.

9. Business decisions optimize the risk-return trade-off;

SCOPE

This Policy document is specifically directed towards the processing of Credit Operations; however it does notdocument detailed procedural and operational matters.

It sets out the BAL's supervisory policies and practices, the minimum standards are expected to attain in orderto satisfy the requirements of the Banking Ordinance and recommendations on best practices that BAL staffshould aim to achieve. It is intended mainly for the reference of staff, their auditors and advisors and the BALssupervisory staff.

This Manual covers only selected parts of the Banking Ordinance and regulatory requirement. Further, it is notpossible in a publication of this type to cover all of the ground and provide guidance for all eventualities. BALManagers and their officers remain ultimately responsible for complying with applicable law by continuingconsulting the relevant laws and taking appropriate legal advice to ensure compliance with the standardsexpected of them.

MAINTENANCE OF MANUAL

The creation and updating of the documents shall be initiated and processed by all stakeholders involve in theprocess i.e. review, recommending and approval authorities.

The maintenance of the manual covers the following aspects: Creation, updates & modifications.

review & approval

Custody Distribution and mode of distribution.

Creation: Concerned Group head will be responsible to ensure creation of all related policy, proceduredocuments & systems and will be put forth for other reviews by other stakeholders for subsequent approvalfrom concern.


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OTHER AMENDMENTS

In order to ensure systematic and coordinated approach to update the document, Queries regarding Manual or

suggestions for additions and changes or improvement shall be submitted form concerned group and /or canbe addressed for the attention of the Policy and Procedures Department.

UPDATES AND REVIEW

This manual and bank processes are not static in nature. While the broad processes defined in the manualmay remain the same, the procedures to execute the processes may require amendment from time to time inresponse to changes in the regulatory, economic and legal scenario in the country and the bankingenvironment and therefore will be a separate document. In addition review of the Bank policy and procedure

shall be the responsibility of the concerned as per the SBP & Bank internal control policy.Updating Standard formats: documents/reports formats or correspondence letter for internal or external usesuch as reports, reminders shall be reviewed by Banks Audit, Compliance, Risk and legal division. Financialentries shall be reviewed and approved by Finance Group before its submission to CMC approval.

FREQUENCY FOR REVIEW

Updating of this Manual will be ongoing basis .However Manual will be reviewed in its entirety after three yearsor in accordance with SBP guidelines, changes considered essential may be implemented with immediate

effect & would be included post facto as an amendment following the review.

Modifications - Change requests in the manual can originate from any of the following:

a) Concerned Group Head

b) Other stakeholders involve in the process

c) Group head Technology & Operations

d) Audit, Risk & Compliance

e) Senior management at BAL

Once the changes are approved, the same can be recorded as an amendment. A separate section & date wiselog of all amendments will be maintained.

a) Custody & Distribution: The manual is the property of the bank and it should not be shown to, or itscontents discussed with anyone who is not in the employment of the organization unless specificallyauthorized by the System, Policy and Procedure Department. Photocopying or reproducing of thecontents for other than bank use is prohibited.

The Credit Group and SP&P - Technology and Operation Group is responsible to ensure distribution andmaintain the distribution history which provides a permanent record of copies of the manuals issued toparticular staff members/stakeholders including all segments.

GOVERNING RULES & REGULATIONS

SBP Prudential Regulation of Corporate/SME/ Consumer


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Partnership act

Registration act

Transfer of property act

Qanun-shahadat ordinance

Stamp act

Sale of good act

Custom act

SBP, instructions issued time to time

Basel accord

Internal control guidelines

Country trade policy Taxation and excise laws

UCP

AND OTHERS

Credit policies

FE Manual

ASSOCIATED DOCUMENTS

Internal policy & guidelines

Trade Finance Policy & Procedure

Risk management Policy & Procedure

CAD manual

Retail Banking Policy & Procedure

Credit Monitoring Policy & Procedure

Special Assets Management Policy & Procedure

Other Business Group other then mentioned above SOC

Schedule of discretionary powers of segments/centralized departments/ branches

Automated reports manual

CHAPTER 2

CREDIT ROLE & KEY PERFORMANCE INDICATORS (KPI)

ROLE OF CREDIT

The role of credit is the back bone of bank and quality of a banks assets determines it profitability andsustainability over the period of time. Like every business entity financial institutions strive to maximize the riskadjusted returns.


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and control credit exposures and maintain credit file.

2. Credit Analysts of Credit Group Head office reviews all CLPs recommended by Area/Region relevant

authorities for Credit Group or CCC approval.

3. Credit Administration Department (CAD) prepares documentation, reviews, processes operationalactivities and maintains credit related security and charge documentation. However, in certainbranches where CAD is not centralized, relationship officers have been posted along with credit officers.

In such situations, these persons shall perform all credit related roles i.e., customer relationship,credit review/ disbursement and credit administration.

4. In addition, Special Assets Management Group (SAMG) is responsible for recovery of credits that

are having been classified and transferred to SAMG.


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STRUCTURE OF CREDIT GROUP - HEADOFFICE

Credit Group has the following organizational structure:

RESPONSIBILITIES OF GROUP HEAD CREDIT

To ensure sound asset quality and a conservative credit culture throughout the lending and treasurytrading/underwriting activities of the bank while ensuring the credit approval process is responsive to customerneeds and credit losses and collection costs are minimized. To provide an independent, third partyassessment/approval of credit and business risks of the bank, and serve on the Banks Asset and LiabilityManagement committee.

GH

Credit

Regional HeadNorth

Retail & Middle

Market

Regional HeadSouth

Retail & Middle

Market

Regional ManagerCorporate and

International

Operations

RHQuality Assurance

Area Credit

Managers

Area Credit

Managers

Area Credit

Managers

Officer

CreditOfficers

CreditOfficers

CreditOfficers


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Ensure training of credit staff across the bank. Organize portfolio reviews focusing on quality assessment, risk profiles and industry concentrations etc. Manage systems established to identify significant portfolio indicators, problem credits, and relevant level of

provisioning required etc.

RESPONSIBILITIES OF REGIONAL HEAD CREDIT

Purpose of Job

To establish, implement, monitor, and all policies, risk acceptance criteria, verification requirements relating tocredit risk and to manage the credit requirements of assigned Areas and supervise the overall Credit portfolio,Credit Strategy, and rewards emanating from Risk Assets underwritten. Support GH credit in disposal of his duties

mentioned above.

Primary Duties and Responsibilities

1. To review Credit Line Recommendations of allocated branches and Area Committees to ensure conformitywith Banks policy & to identify potential credit problems/deviations.

2. To ensure that banks credit policy and all regulatory requirements are being followed at the time ofsanction/renewal. Suggest, complement and help in devising and improving policy and operational aspectsconcerning security documentation and related concerns of branches/areas.

3. To provide an ongoing assessment of credit risks in the product and portfolio strategies.

4. To advise credit and loan personnel on the Banks overall lending policy, keeping in mind significant markettrends.

5. To recommend credit limits and authorizes credit risk exposures up to allocated limits of authority;Approves/Recommends deviations as per authorization limit.

6. To develop credit risk acceptance criteria, credit risk management strategies, approval and verificationprocesses in line with the banks overall business strategies.

7. To recommend and implement policy change for existing and new products based on transactional behaviorand feedback from frontend teams vis--vis the credit risk acceptance levels.

8. To ensure adherence to Internal Credit Risk Management Guidelines and external regulatory requirements byother units involved in credit processing and execution of transactions.

9. To prepare Credit bulletins and policies to provide line managers clarity on their roles, responsibilities in thecredit management process; updates on changes in guidelines.

10. To facilitate approval of appointments of external agencies (e.g. evaluators and surveyors).

11. To maintain close watch on assigned Branches/Areas complex accounts with large lines of credit. If and whenneeded, liaises with the Branches to structure credit limits in line with requirements.


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ROLE OF REGIONAL HEAD (QUALITY ASSURANCE DEPARTMENT)

- To maintain uniformity in Credit Memorandum with respect to presentation, contents and synchronization inexpiry review dates etc.

- To maintain uniform policy for approval, extension for adjustment purpose and refusal (Only for seasonalfinancing)

- To review sanction advices, status of eCLP/eSanctions- To identify anomalies, variations to concerned credit officer/regional head and gist of these anomalies to be

sent to Group Head on fortnightly basis- Deviations from credit policy to be noted/highlighted and reported to the Senior Management for necessary

ratifications and /or explanations

- Identify deviations from credit policy to senior Management for ratification/corrective action

ROLE OF AREA MANAGER-CREDIT

Area Managers are responsible to monitor quality of credit portfolio of their respective areas. They have jointapproval authority with Area Managers Business Line upto a certain level as approved by the competentauthority (See Discretionary Powers). Besides, they recommend cases to the higher approval authority for allthose cases which are beyond their own discretionary powers. They conduct frequent reviews of the portfolio oftheir areas and keep a close eye on the deteriorating credits and liaise with the Area Managers-Business line toimprove the quality of their portfolio.

ROLE OF CREDIT OFFICER/ RELATIONSHIP MANAGER

Purpose of JobThis role is primarily responsible for assisting the Area Managers/Regional Heads to evaluate credit risk oflending proposals in recommending/rejecting for initiation, renewal or enhancement (cancellation/amendments)of credit extended to the customer by helping in conducting detailed analysis of credit, financial risks, industryand security etc. Facilities approval of appointments of external agencies to aid credit administration functions.

Primary Duties and Responsibilities

1. Evaluating Credit proposal by analyzing financial risk profile, CIIRS Risk Ratings (Obligor & facility) repaymentcapability, security adequacy and industry position, conducts preliminary analysis and provides observationsprior to the detailed analysis to be undertaken by the Regional Head.

2. Ensures that credit facilities have been properly structured and no violation of internal or external (SBP)regulatios/policies

3. Prepares detailed notes of recommendation for approval, rejection or amendments based on risk analysiswhile using ECLP the same shall be generated through the system

4. Conducts external environment analysis to understand its impact on credit portfolio

5. Gathers data to ensure availability of all information needed for effective credit decisions


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Corporate & Investment Banking Group (CIBG)

Corporate & Investment Banking Group captures its market share by offering a wide range of products to its

corporate clients at competitive terms. The clients include multinational companies and medium to large corporateclients in the public and private sector.

Corporate & Investment Banking Group of BAL either leads or participates in major transactions which includeSyndicated Loans, Structured Finance, Leveraged Buyouts, Project Finance, Term Finance Certificates, EquityUnderwriting, Initial Public Offerings, Independent Advice, Mergers & Acquisitions, Corporate Restructuring andother products and financing to major Corporate customers.

Corporate & Investment Banking Group is authorized to approve the credit proposals and limits within approveddelegated (time to time) limits exceeding its powers will be elevated to CCC and BCFHRC respectively forapproval. CIBG has the following approval levels:

Level Joint Approving Authority

I Area Manager -Credit Area Manager-CIBG (South/North/Central)II Regional Head-Credit Regional Manager-CIBG (South/North/Central)

III Group Head-Credit Group Head-CIBG (South/North/Central)IV Central Credit Committee (North/South)V Board of Directors (BCFHRC)

For detailed discretionary powers of CIBG, see attachment (Annexure -C, D, E)


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Retail & Midd le Market Group (RMMG)

All the commercial and small & medium enterprises entities in both public and private sectors have been taggedwith Retail & Middle Group. Limits up-to Rs.300Mn have been tagged with RMM Group. However, CIBG & RMMGhave mutually agreed to interchange some of the relationships which may relate to one group in view of itsexposure with the bank but will be parked with the other group parking of account should be in context of branchi.e. those Corporate accounts which are parked at RMMG Branch would pass their ownership completely toRMMG. Upon parking the account will become responsibility of the Group in whose Branch it is parked/ located.

Approval levels of Retail & Middle Market Group are as follows:

Level Joint Approving AuthorityI Area Manager-Credit Area Manager-RMM (South/North/Central)

Level I


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For detailed discretionary powers, please refer Circular Ref CG/AA/ dated 10.05.2010 (attached)

Consumer Banking Group

This business group is responsible to market consumer related products. The group formulates its risk policy andoperational procedures in line with the parameters defined by SBP in the prudential regulations for consumers.Consumer Banking Group of Bank Alfalah Ltd. offers products such as credit cards, vehicle loans, home financeetc. For more details please refer to the Consumer Credit manual. Approval authorities are CIBG & RMM


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Islamic Banking Group/ CIBG & RMM

Islamic Banking Group of BAL is offering Shariah compliant products and services to its customers which include

corporate, commercial and small & medium size enterprises entities. All the regulatory requirements of SBP aremeticulously complied with while offering financing and investing activities. The group is endeavoring to offerinnovative products at competitive terms to meet varied business and individual requirements of the customers. Allthe products presently being offered have been duly approved by the Shariah Advisor wherein detailed guidelineshave been provided to facilitate branches. Approval authorities are CIBG & RMM

International Business

Bank Alfalah Ltd has its overseas branches in Afghanistan and Bangladesh to cater to the financing needs of

commercial and corporate customers. These branches work in line with the regulatory requirements of the centralbanks of their respective countries. Bank has a wholesale banking at banking hub in the Kingdom of Bahrain.There is a representative office in UAE where bank is providing its services to Pak expats living in UAE throughthis office. The staff housed in UAE refers the business to BAL Pakistan and BAL Bahrain. Approval authorities areCIBG & RMM

Rural Finance Division (RFD)

Government emphasizes on the importance of agriculture sector of the country therefore banks encourage

financing to this sector. Bank Alfalah Ltd. has a specialized unit to evaluate the requirements of agricultural sectorunder the name of ALFALAH RURAL FINANCE which covers the entire spectrum of farming, that is, fromproviding short, medium and long-term finances for the production and development of crops and non-crop itemsand for packing, grading, processing, marketing and export of these items. ALFALAH RURAL FINANCE has aseparate policy which encompasses entire rural financing operations of the Bank in Pakistan with no restriction onterritorial jurisdiction. The division keeps itself abreast of all the latest State Bank of Pakistans regulations andlocal laws and updates its policies accordingly.

The division does not have approving authority of its own but all the financing proposals falling under ruralfinancing are routed through RFD. The division sends the financing proposal to an appropriate approval authority

level along with its recommendations in compliance with SBP regulations for Agriculture financing.

For details please refer BAL Rural Finance Manual

Special Asset Management Division

SAM Division shall carry prime responsibilities for handles assets which have been classified, after the cases havebeen transferred to SAM. SAM will be responsible for legal matters other negotiation with borrowers for out of courtsettlement. SAMG Manual in this regard shall be referred.

Key Performance Indicators (KPI)

a. Portfolio limits

Bank credit plan shall ensure that the aggregate Credit exposures shall not, at any point in time, exceed the


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justifications for doing in the approval form shall be maintained and will meet the requirements of related SBPPrudential and other Regulations.

b. Minimum conditi ons for enhancing Business Portfolio and compliance of Credit Policyinstructions

While considering proposals for any customer requests/extending further services (including renewal establishingrelationships, banks shall comply with AML/KYC polices specially analyzing customers transaction turn over, billpayment history & behavior verified through other bank statement, utility bills, credit card bills etc.

Call back to the given references as declare by the customer on the relationship forms/request forms or mayrefer the prospective customer to the related Associations for obtaining information about its characterespecially in those circumstances where no information is available from CIB of State Bank of Pakistan.

c. Key Ingredients To Trigger Growth

i. product development and differentiation,ii. innovation and business process reengineering,iii. micro-planning, marketing, prudent pricing, customization,iv. technological up gradation,v. home / electronic / mobile banking,vi. cost reduction

d. i. To Help customer to Understand How Our Financial Products And Services Work By:

I. Giving information relevant to customers in any one or more of the following languages: Urdu,English or may be in the appropriate local language.

II. Ensuring that Bank advertising and promotional literature is clear and not misleading.III. Ensuring that Customers are given clear information about Bank products and services, the terms

and conditions and the interest rates/service charges, which apply to them.

IV. Giving them information on what are the benefits to the customers, how they can avail of thebenefits, what are their financial implications and whom they can contact for addressing queriesand how.

ii. To Help Customers Use Account Or Service By:

I. Providing regular appropriate updates.II. Keeping informed about changes in the interest rates, charges or terms and conditions.

iii. To Deal Quickly And Sympathetically With Things That Go Wrong By:

I. Correcting mistakes promptly and canceling any bank charges apply due to Bank mistake.II. Handling complaints promptly.

III. Telling customer how to take complaint forward if still not satisfiedIV. Providing suitable alternative avenues to alleviate problems arising out of technological failures.

C f C f


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CHAPTER 3

TYPES OF CUSTOMERS & EXPOSURE LIMIT

The customers with exposure size of 150 million or above are defined as corporate and those with exposure size of75 million and above as commercial customers. SME exposure is defined as funded and unfunded facility of up toRs. 75 million given to a customer for business or commercial purposes.

Corporate customer is defined as a counterparty / borrower having a turnover of Rs 600 million or above or theexposure size is at least Rs 150 million and above.

SME Customers

SME customer is defined as a counterparty / borrower having a turnover below Rs. 300 million or having anexposure of upto Rs 75 million, except consumer / retail exposure.

Additionally the bank has consumer exposures in the form of retail portfolio. The retail portfolio includes exposuresto individuals. The retail exposures are segregated according to various products.

CATERGORIES OF BORROWERS

While extending credit it is important that the corporate status/structure of the customer should be clearlyestablished. The corporate status/structure of the borrower determines what security/collateral and documentationis required to secure the finances.

Borrowers have been segregated into various categories, as per SBP Classification, on a "Constitution Type"basis, as follows:

INDIVIDUAL

i) Bank employees & other banks employeesii) Government employeesiii) Autonomous bodies' employeesiv) Private sector corporationsv) Others

PRIVATE SECTOR

i) Sole proprietorship

ii) Partnershipiii) Private limited/Public limited (listed & unlisted)iv) Joint venturev) Trust & Nonprofit Organizationsvi) Others

PUBLIC SECTOR


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(i) Sole Proprietorship

In the eyes of law, the proprietorship concern and the proprietor himself are indistinguishable.

However, as per the entity concept of accountancy the operations of the proprietorship concern and theaccounts of the proprietor himself are kept separate.

Accordingly the balance sheet of a proprietorship firm shows the amount of capi tal contributed by theowner as a liability i.e. the business owes this amount to the owner. This amount is shown as an asset(investment) in the personal balance sheet of the owner. As lenders, we are concerned with bothaspects i.e. the accounting aspect for financial appraisal and the legal aspect for recovery. Since thebusiness liabilities and the personal liabilities of a proprietorship firm cannot be separated ordemarcated, personal guarantee from a proprietor is not necessary as he is already liable in the eyesof law to the extent of his personal assets also.

There is no formal procedure for the formation of proprietorship concern. However, a declarationevidencing the proprietors name etc. should be obtained on firms letterhead. The concern shouldpreferably be registered with trade associations/bodies and NTN should be obtained, if applicable. Theaccount opening and lending documents stipulated by the Bank should be signed by the sole proprietor and thefirms stamp should be affixed.

(ii) Partnership/Firm

Partnership is a contract between two or more persons to carry on a business for the purpose ofsharing of profits. Partnership is governed by the Partnership Act 1932. The members of thepartnership are called individual Partners. Entity formed by such association is known as Partnershipor Firm. The capital of a partnership is provided by the partners who are jointly and severally liable forthe liabilities of the firm. The rules of the partnership concern are laid down in a document calledPartnership Deed. The partnership deed needs to be examined carefully to ascertain the following:

1. The object/purpose of the partnership2. The partners and their rights, liabilities, and restrictions (if any) to operate the bank account or

borrow, and3. The conditions relating to continuation or dissolution of the partnership in case of retirement, deathor insolvency of a partner

In a partnership account, the establishment of which is evidenced by a partnership deed/preprinted partnershipformat, the signing and delegation powers of those partners authorized to operate the account including power tooverdraw must be clearly established through the same. Unless provision is made to the contrary in the deed /partnership format, any document acknowledging the Bank's charge over a specific security must be signed andexecuted by all the partners.Where the partnership is fixed for a definite period, the expiry date must be clearly diarized. Any facility obtained

must be repaid before the expiry date.Where there is a change in partners, the operations on the old partnership account should be stopped. Uponacknowledgment of the old debt, the liability should be transferred to a new partnership account and operations onthe account permitted after obtaining fresh account opening documentation (AOD).

(iii) Private Limited Company/Public Limited Company


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A Company has a number of legal features and characterist ics, as defined in the Ordinance. Some ofthe important characteristics relevant to topic are discussed below:

a) A Company is a legal person, which status it attains as soon it is incorporated under the Ordinance.Following incorporation, it becomes capable of purchasing and disposing of property, entering intocontracts, suing or being sued etc. in its own name; and capable of performing all the functionswhich a Company is authorized to perform, though the functions are performed through itsmanagement.

b) A Company has an existence which is separate, independent and distinct from itsshareholder/members, as well as from the management.

c) A Company has the privilege of limiting personal liability of its shareholders /members for thebusiness debts/obligations.

d) A Company having a separate personality from its shareholders /members is itself bound for itsdebts and obligations; and the shareholders/members are liable for the Companysdebts/obligations only in case of a Companys winding up; and that also to the extent of;

i. Amount of value of the shares respectively held by the shareholders , in case of a Companylimited by shares; and

ii. To the extent of such amount as the members may respectively undertake vide theMemorandum of Association to contribute to the assets of the Company, in case of aCompany limited by guarantee.

e) A Company has a perpetual succession. Its existence is independent of existence of its membersand directors i.e. the company shall remain, unless wound up.

Laws Governing Companies in PakistanCompanies Ordinance, 1984 and the Securities Exchange Commission of Pakistan Act, 1997 are thebasic laws governing companies in Pakistan. The Ordinance provides basic principles and proceduresof the Company law, whereas, the Act provides regulatory and monitoring principles of the CompanyLaw.

Types of Companies

Generally, companies can be categorized as follows:

a. Company limited by Guarantee CO1984

b. Company limited by Shares

Companies limited by Shares have further two types, (i) Public Limited Companies (ii) Private LimitedCompanies.

i) Public Limited Company

ii) Private Limited Companies

A Private Limited Company means a Company with limited liabil ity (by shares) which prohibits invitation


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shall nominate an alternate nominee director to act as nominee director in case of non-availability ofnominee director.

Extent of Liability of DirectorsDirectors are shareholders representative and are not liable for the debts /obligations of the company.Banks obtain personal guarantees of directors of companies for finances allowed to the companies,especially in case of Private Limited Companies, so that if companies fail to repay the finances, thesame can be recovered from the personal assets of their directors.Documents required at the time of establishing banking relationship with a Company

The validity of any act of a company is dependent upon firstly, whether it is within the powers of thecompany, as provided in the Memorandum of Association (MOA) thereof (or in the Ordinance); andsecondly whether the act has been performed by the management of the company in accordance with

the rules and regulations provided in the Articles of Association (AOA) (or in the Ordinance).Consequently, any act of a company contrary to the said aspects would be invalid.

S # Acco unt Nature Documents Required

1 Individuals/SoleProprietorship

Attested photocopy of CNICProprietorship declarationTrade body Association Letter/NTN, if applicable (for SoleProprietorship only)

2 Partnership/Firm Attested photocopies of CNICs of all partnersAttested copy of Partnership Deed duly signed by al lpartners of the firm

Attested copy of Registration Certif icate with Registrar ofFirms. (In case if partnership is registered)Partners resolution to borrow

3 Societies/NGOs/ Clubsetc.

Certified copy of Certificate of RegistrationCertified copy of By-laws/Rules & RegulationsResolution of the Governing Body/Executive Committee for

opening of account authorizing the person(s) to operate theaccount and attested copy of the identity card of theauthorized person(s)Legal opinion regarding finance

4 Trust Attested copy of Certificate of Registration (whereapplicable)

Attested copies of NIC of al l the trusteesCertified copies of Instrument of Trust/Trust DeedLegal opinion regarding finance

5 Government Bodies Attested copies NICs of authorized signatoriesCertified copy of By-laws/Rules & RegulationsResolution of the Governing Body/Executive Committee foropening of account authorizing the person(s) to operate theaccount and attested copy of the identity card of theauthorized person(s)Legal opinion regarding finance


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Attested copies of CNICs of al l di rectors -

Documents Required

i. Memorandum of Association (MOA)

MOA is the constitution of a company. It defines objectives and purposes for which the company hasbeen formed. It also provides basic information about the company i.e. Name, RegisteredOffice/Address etc; information as to liability of the members; the amount of share capital with whichthe company proposes to be registered, and the division thereof into shares of a fixed amount etc,MOA should be carefully examined as to any restrictive clause i.e. whether it places any restrictions onthe actions of the company.

ii. Articles of Association (AOA)

AOA are bye-laws for the working and general administration of a company. It provides the powers andduties of the Directors and Officers of a company. The AOA should be examined to establish how, bywhom; and to what extent the borrowing powers of a company would be exercised. Generally, AOA ofcompanies allow the directors to exercise borrowing powers. However, it must be ensured that thedirectors may exercise the powers without any restriction.

iii. Board Resolution (BR)

Generally, all the powers of a company are exercised by its directors, except as provided in the Ordinance or AOAof a company. However, as regards the borrowing powers of a company, the Ordinance specifically provides videSection 196 that the directors of a company shall exercise the said powers on behalf of the company by means ofa Resolution passed at their meeting. It is therefore, necessary that whenever a Company requests a financialfacility, a copy of the Board Resolution be obtained in this regard, duly attested by Company Secretary/Director(s).Similarly, on each renewal/enhancement of the facility (ies), a fresh Board Resolution should be obtained to coverthe aspect of renewal/enhancement.

The Board Resolution should preferably be specific as to bank name, nature and amount of facility (ies), aspect ofrenewal/enhancement, and nature of securities; and should specify the companys representatives, who wouldsign/execute the document. In addition, a BR must confirm that the minutes of the relative meeting of the Directorshave been entered in the Minutes Book of the Company.

(iv) JOINT VENTURE

A Joint Venture is an association among two or more firms/companies to share jointly the profits or loss of acommercial business or businesses. The association is restricted to the relationship among the firms/companies.

Evidence of association can be substantiated in any manner of attestation. A joint venture agreement regulates theentitlements and obligations of the participant firms / companies and distribution of profit and loss.

Usually such entities are established for carrying out a specific project or contract. The authorities vested with theparties to the venture to enter into a partnership should be carefully examined. Also usual precautions applicable topartnership accounts regarding authority to operate and overdraw accounts, create security etc. will apply on these

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Introduction

The Credit Proposal process is a highly crucial activity in the credit cycle. The concerned branches/Businessgroups marketing staff, normally the Credit Officer / Relationship or Account Manager or Branch Manager, asappropriate, builds on the various strands of credit information collected on a potential / existing customer andgathers further specific information, such as security details and documentation. The information is compiled in astandard format, suitable for competent sanctioning authority to take necessary credit decisions and reduce risk tothe bank. To enhance customer service, it is essential that all such information is collected in an efficient andorganized manner and presented appropriately.

The RM/respective business segment authority should be the owner of the customer relationship, and must beheld responsible to ensure the accuracy of the entire credit application submitted for approval. RMs must be

familiar with the banks Lending Guidelines and should conduct due diligence on new borrowers, principals, andguarantors.

It is essential that RMs know their customers and conduct due diligence on new borrowers, principals, andguarantors to ensure such parties are in fact who they represent themselves to be. All banks Know Your Customer(KYC) and Money Laundering guidelines should be adhered to at all times.

Objective of Credit Proposal

The objective of a credit proposal is to provide relevant information about the customer and business in astandardized format so as to make the decision making process simple and more accurate. Therefore, informationshould be brief and relevant. It should however, contain every detail that will be helpful in approval of credit.

CREDIT INVESTIGATION

Credit investigation is an important task whether it is conducted when initializing a new credit line or before renewalof facilities. Before marketing a borrower, ideally branch/ business unit should ask the borrower to open a currentaccount. Once that account is maintained satisfactorily, only then credit lines need to be proposed. Once branch /business unit decides to market the customer, it is imperative that the credit worthiness of the prospective borroweris confirmed. There are a number of ways of investigating credit worthiness of borrower, some of them arementioned below:

Getting CIB report of the customer. Visit the customer's factory/ shop/ place of business to find out about the true state of activity done there Getting credit information about the customer from other banks Checking market reputation of the borrower from outsourcing agencies ,other customers of the bank in the

same market

Visit Report

Branch manager and / or his designated lending officer should visit the customer and discuss relevant details ofthe account and the business including clarifications on their financial statements, as required. The calling officershould make use of the visit to gather up-to-date information and strengthen bank's relationship with the customer.Details of the visit should be recorded in the customer file.


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This is a regulatory requirement of State Bank of Pakistan under Prudential Regulation which is required for allexposures as required by amendments in Prudential Regulations, Reports are to be obtained at the time ofsanction renewal and enhancement of any accommodation under Fund Based and Non-Fund Based facilities. Thepurpose of this report is to have a clear picture of total outstanding amounts of a borrower and group with its

present status from all Banks and Financial institutions. This report shall be prepared byCredit Information Bureauof the SBP on request and will be retained till receipt of next report and minimum of every 3 years and reviewconsistency

Credit Information Bureau (individual or corporate)

SBP has established a Credit Information Bureau with the purpose of making available to Banks and Non-BankingFinancial Institutions (NBFIs), on request, the exposures and overdues of borrowers with Banks and NBFIs. Thisenables the Banks and NBFIs to take into account the exposure of the borrowing enterprises or group at the time

of considering extension of Fund Based and Non-Fund Based facilities. Prudence demands that Banks and NBFIsshould not over expose themselves to any borrower or group. As per Prudential Regulation, Banks are required togive due weight age to CIB report while considering any financing proposal. The CIB report provides the followinginformation:

a. Fixed Investmentb. Working Capitalc. Letter of Creditd. Guarantees

e. Other Liabilitiesf. Fund Based unsecured liabilitiesg. Non Fund Based unsecured liabilitiesh. Over dues past 90 daysi. Over dues past 365 days

j. Remarksk. Total liabilities of associated Groupl. Over dues (90) days of associated Groupm. Over dues (365 days) of associated Group

The standard remarks appearing on the Credit Information Bureau report are as follows:

* GroupN) Non GroupX) No information at the Credit Information Bureau[ ] Reported having overdue amount for the first time and has been issued a letter to intimate within a period of

60 days to settle the overdue amount.

Definition of overdue, default and group as per Credit Information Bureau is appended below:-

1. Overdue means any amount payable or owing by the customer to the Bank, whether by way of Principal, mark-up or to meet obligations under any instruments, which is delayed or in respect of which the maturity is pastbeyond the period agreed between the Bank and the customer by 90 days up to a maximum 364 days or whichthe bank has to per force incur to safeguard its interest or fulfill its commitment and 90 days have elapsedsince incurring such payment



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Area/Regional office on receipt of C.I.B. report shall send a photocopy of the report to business segment for theiruse and placing the same in the limit file, so that the same could be available as and when required.

Where (i) exposure is reported (ii) overdue / default or (iii) Total liabilities of associated Group as per CIB report

exceeds exposure at BAL, this indicates that borrower / its group units are availing facilities from another Bank. Insuch cases the branch / borrower should fill in the Bank-wise Details of Exposure Position, a format of which isenclosed as Annexure.

Branches are advised to avoid fund based and non-fund based facilities to defaulters of any bank unless theoverdues of the concern or its Group concerns are settled. If on receipt of CIB report, a concern does not agreewith its Group Liability / Group Units, a Letter of Group Declaration/ Changes format enclosed as Annexure may beobtained on companys letterhead, before representing to CIB through Head Office.

Private Credit Information Bureau (PCIB) Reports

For consumer credit products, wherever mandated credit checks from PCIBs shall be also undertaken. However, itmay be noted that obtaining of eCIB report is mandatory from all accountholders.

Confidentiality

CIB reports are meant for internal use and copies thereof should not be provided to third parties.

As per State Bank of Pakistans All financial institutions are advised that the CIB reports are meant for theirinternal use and copies thereof should not be provided to third parties. Furthermore, credit reports should not be

disclosed to any party without prior written approval of SBP, and (ii) they should not refer their clients to SBP but to

facilitate and properly guide them, clearly indicating to them as to which bureau viz SBPs CIB has reported their

name as defaulter, so that they can approach them accordingly.

It is mandatory to prepare Call Report twice a year and, at the time of renewal or enhancement, whichever isearlier. This is required for all exposures for any amount where borrowers having continued relationship or in

cases of renewal of facilities. The purpose is to provide the latest information about business performance anddiscuss issues and the financial arrangements and needs of the customer. This shall be prepared by It isprepared by Credit Officer after paying visit to office and factory and having discussion with the concernedExecutive(s)/ Director(s). The Credit Officer/RM, before visiting, prepares a list of objectives of call/visit and seekswritten approval of Branch Manager/Chief Manager/Segment team leader).This report shall be retained in files forthree years. Business visits are an important tool for assessing the business situation of a customer and it istherefore desirable that the customers, Site/Plant visit, are visited by credit officers/RMs not only at initiation butregularly.

Call Reports of clients should be prepared on the format enclosed as Annexure. Each Call Report is preparedafter:

Conducting site visits of the clients office and factory/mortgaged assets where the clients core businessactivities actually take place.

For Having brief discussion with the senior management / personnel of the company and its environment.



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8. Any other issue needing urgent attention.9. Comments on any issue mentioned in the last Credit Proposal.10. Regulatory and taxation changes and their impact such as General Sales Tax, Import duties etc.11. Current economic environment and its impact on the companys performance.

DIRECTORS SEARCH AND ASSETS CHARGES SEARCH (ES) REPORTS

Directors search is mandatory requirement for fresh facilities or enhancement of facilities, this report shall beprepared at least every 12 months during tenancy of the limit and It is also required at least once every two years.The purpose is to check the correct names of directors of the company and the total charges created on the Assetof the companies by other Banks / FIs. This report shall be prepared by enlisted companies or obtained fromS.E.C.P. These shall be obtained, yearly and at every renewal as well as at the time of allowing any NOC forcharges and shall be retained in the customers file as per record retention policy.

Both Directors Search & Charge Search of encumbrance of assets of limited companies (both private & public) isa public record and available on application to S.E.C.P on prescribed forms and payment of the required fee.

Form 29 / Form A of the company ordinance provides details of changes in directorship and photo copies of theseshould be obtained from customers bearing attestation of Registrar office. Obtaining of charge search report iscompulsory before allowing any fresh financing / enhancement whether Fund based or non fund based. These areprovided by S.E.C.P in chronological order in which various bank / lenders get their charge registered at S.E.C.P or

get the same released. Assets Charge reports from S.E.C.P need to be analyzed asset-wise (Fixed & current etc),Bank-wise as well to ascertaining the status/ranking of our charge. Before allowing any financing facility to limitedcompanies it should be ensured that Banks charge for the desired asset Category with S.E.C.P has beenregistered, after obtaining NOC from Senior Creditors, if applicable. Request for registration of Fresh charge isfiled on Form 10 alongwith copy of relevant security / Hypothecation agreement letter and affidavit relating todocuments / IBs submitted. Whereas, request for Modification of Pari Passu charge are filed on Form 16 alongwithrelevant supplement security agreement / letter and affidavit as per above.

Charge search shall be obligatory for all exposure in private limited companies exceeding Rs.5.000M (F.B. &/or

NFB) for cities where their services are available. Branches / Offices utilizing their services shall ensure that searchreports of approved firms are provided.

This report to be initiated for all PVT/Public Limited companies at least once for fresh facilities of Rs. 5.000 M andabove where a customer has banking relationships with other Banks/ Financial Institutions all PVT/Public ltdcompanies registered with SECP. The purpose of the report is to know charge status on customers and alsodepicts past dealings and payment behavior with other Banks.

Credit Worthiness Report

For fresh borrowers applying for credit accommodation of Rs. 1.000M and above, credit worthiness report is to beobtained from their present as well as previous bankers directly by branches as per specimen enclosed[Annexure].

The purpose of this report is to ascertain their credit worthiness and to know about their dealings and paymentbehaviour with other banks.



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Credit Proposal forms shall be prepared on prescribed form (annexure). The prescribed form and its relatedguidelines issued from time to time shall be strictly adhered to and financing shall not be allowed until and unlesscredit processing has been done on the prescribed format.

The Format of Form is enclosed as Annexure. Further, projected Cash Flow statement (for next 12 months in caseof working capital financing and update of final repayment / expiry in case of term facilities) with its assumptionsrecorded in writing and cash operating cycle of the borrower must be analyzed in case of SMEs / Corporate /Commercial customers. Efforts should be made also to identify the drives of borrowers business and its riskmitigates.

DIFFERENT TYPES OF CLP

Generally, there are two different types of CLP. Each one of them has its separate purpose. CLPs along with theirfunctions are mentioned below:

CLP for Fresh / Renewal

As the name suggests, it is used for initiation of fresh credit lines or renewal of facilities. It uses a detailed formatand is comprehensive in nature.

Short hand CLP

These CLPs are very brief and normally consist of single pager. They are used for one time transactional facilitye.g. SLC, LG, EOL etc, amendment in sanction advice, waivers, deferrals etc.

To offer better customer service, it may be necessary to override the more elaborate requirements of CLP Form incase of urgent or unforeseen needs of a regular customer. Such service can be imparted through offeringTemporary/ One off transaction. These may arise, say in an event, when a customer wants to open an L/Cimmediately to take advantage of a very good bargain or may require funds for clearing an un-foreseen taxdemand. Such approvals are taken on an exceptional basis only. In addition, under no circumstances a temporary/one off transaction is to be approved which would violate the State Bank of Pakistans Prudential Regulations for

Banks.

Temporary / one off transactions approvals may be obtained on Short Form CLP, as per the format given in CreditProposal Temporary Accommodation. The approval process for temporary/one off transaction is similar to CLPproposal.

APPRAISAL OF A CREDIT PROPOSAL

The key to sound lending is to identify measure and understand the associated risks accurately. When considering an

application for any facility, the Manager or his duly delegated lending officer should study the following:

General Considerations

The Constitution of the borrower and his nationality

For all types of borrowers be it individual firm or company the nationality of sponsors is an important element in


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ii) Bills for collection outstanding under this item should be shown under 'Goods in transit' (current assets).The same amount should also be shown under 'Trade Creditors' (current liability) as the customer isexpected to honor his obligation to his creditor.

iii) Acceptances under letters of credit outstanding under this item should be shown under 'Stocks' (currentassets) as the goods are in the physical possession of the customer. The same amount should also beshown under 'Short term debts payable' (current liability) as the bank will honor its obligations under theletter of credit.

For working capital financing request in favor of ongoing concerns, financial analysis with emphasis on liquidity,profitability and leverage aspect should be submitted with the proposal. Such aspects shall be covered by way ofanalyzing the following ratios:

- Sale growth and profitability (Net profit margin, percentage increase in sales, gross profit margin, ROE etc)

- Cash management (Cash conversion cycle with breakup)- Structural liquidity (Working capital, Current Ratio, Quick Ratio etc)- Debt equity management (Leverage Ratio, Long term debt over equity)- Asset management (ROA, Percentage increase in Assets)- Bank borrowing and debt servicing ability (Turnover ratios , interest coverage ratio etc)

For term/project financing, financial analysis should be accompanied with the projections and stress testing forthe entire tenor of the facility/project based on rational assumptions.

Guidelines for approval where Current Ratio is below 1:1

Following the changes made to Prudential Regulations R-5 by SBP, whereby banks may decide their ownminimum Current Ratio threshold, as follows for Current Ratio falling below 1:1.

Following grid mentions the various approval levels for current ratio of less than 1may be allowed based on properjustification, dully documented and held in record for SBP Auditors.

Current RatioApproving Authori ty

Up-to 0.85:1 Corporate Level - I & II

RMM Level - II

ACC IB Group

0.75:1 Corporate Level III

RMM Level III

For IBG (Group Head Credit + Group Head IBG)Below 0 75:1 Central Credit Committee



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Project Analysis

This should cover project cost analysis besides other details on the project under review. Some customersunderstate the amount required for fear that if they asked for a larger, more realistic figure the bank will refuse their

application. Others ask for more than what is actually required and use the surplus for other, less viable, projects. Technical feasibility should be required for specialized projects. Facilities to be extended must be supportedby past results and acceptable future projections to eliminate possibilities of over trading and diversion of funds forspeculative non-business purposes.

The profitability of the transaction to the Bank

The profitability of the transaction is an important element to be analyzed. The overall return from the transactioni.e. markup, commission, fee, charges, average utilization of Banks fund etc should all be considered. This

includes the level of financing, business volume, spreads, mark-up and growth prospects. Thus all transactionsshall be priced as per pricing Grid of RMD, for all CIBG customers (For R&MM it will be implemented whenintroduced)

Repayment ability

A repayment schedule should be drawn up for term finance, with the source of repayment clear from the outset. Inthe case of continuing credit facilities, cash flow forecasts are a useful guide to the turnover that can be expectedon the account.

The security offered

Every good proposition should stand on its own merits but as most entail a degree of risk, the Bank generallyseeks to obtain security at the outset before the advance is actually made. Branches should never allow theadvance to be drawn until finance and security documentation has been satisfactorily completed. The securityoffered should be perfected, should match with the nature of borrowers business, should offer appropriate marginagainst credit facilities

Group Considerations

Group consideration (as discussed earlier) should be taken into account while considering fresh approval and/orrenewal/revision/enhancement of credit facilities. A satisfactory history of group with the bank facilitates inconsidering additional financing to any allied fresh entity account and provides a comfort level. Further, crosscorporate guarantees can be obtained to secure banks exposure. A group summary sheet with pertinent detailsshould be attached with each CLP.

Prudential Regulation Checklist

The PR check list ensures that all regulatory requirements are met by the customer and there is no danger ofviolation of regulations. State Bank of Pakistans Prudential Regulation checklist is required to be filled beforesanctioning of all approvals, whether normal or one off / temporary. The Prudential Regulation ComplianceChecklist is enclosed asAnnexure


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SECTION-B

OBLIGOR RISK RATING

RISK GRADING

Risk grading system should define the risk profile of borrowers to assist in decision making, monitoring &controlling too, and pricing commensurate with the risk involved. Risk grading is a key measurement of a Banksasset quality, and as such, it is essential that grading is a robust process. All facilities/securities should beassigned a risk grade.

Where deterioration in account/business is noted, the Risk Grading shall be reassigned to a borrower immediately.Borrowers Risk Grades should be clearly stated on Credit Applications.

Refer the Risk Grading circulars and guidelines issued time to time by RMD.

Classification based on risk

Credit Initiation and Internal Rating System (CIIRS) under the current system, standard risk rating score cards areused as part of the framework to assign risk ratings to the customers. Ratings from 1 to 9 are assigned to regular



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Financial risk

- Financial condition;

- Profitability;- Capital and gearing structure;- Present and future cash flows; and- Reliability of financial statements

Other factors

- Country risk- Account conduct with bank

Definitions

For the purpose of CIIRS, rating methodology and borrower segregation is based on counterpartys exposure andturnover, whichever is higher. Definitions of Corporate, Commercial & SME customers shall be as defined/amended by SBP time to time.

Procedures for Overrides

Overrides will allow a Group to downgrade / upgrade a particular obligor or clients rating upto maximum 2 gradesand in case of Greenfield projects and GOP exposure upto a maximum of 6 grades due to non-availability ofquantitative / requisite data. The approved overrides procedures shall be exercised by the Relationship Officer /Relationship Managers upon recommendation of the Regional Manager. Further all overrides shall be conveyed to

/ cleared by the Group Head of the respective business line. Usage of overrides option should not be a frequentoccurrence. The reason for the overrides shall be documented and maintained with the rating in the followingformat:

Name of Borrower Rating as per thesystem

Assigned rating Reason foroverride

Ratingassignedby

Ratingapprovedby

Obligor ratings are independent of facilities, hence, borrowers having multiple exposures / facilities will be assignedsingle obligor rating, irrespective of any differences in the nature of each specific transaction. There are twoexceptions to this which shall be overrides to the rating system:-

- In case of country transfer risk, where the Bank may assign different borrower grades depending on whetherthe facility is denominated in local or foreign currency



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availing consumer finance like Auto, Credit card, house loans and products secured against liquid securities shouldbe rated under separate rating models introduced

Rating Approval

Final rating generated (either score based or through the use of overrides) will be validated by the limit sanctioningauthority.RMD However will have to review the rating assigned on selective basis.

Requirement of Annual Financial Statements

Every customer needs to be rated at least once a year preferably on receipt of its annual financial statementswhich in turn should commensurate with its review date. Ratings should ideally be generated only on the basis ofannual audited financial statements covering a period of 12 months. However annual management accounts for

yearend can be used in case of non-availability of audited financial statements at the time of renewal butquarterly/half yearly accounts should not be used. To address this issue, expiry/renewal of clients limits should bealigned with their financial year end so that by the time of renewal, latest annual financial statements are available.Facilities should be renewed/ allowed on the basis of financial performance of the client, which can be gauged onlyfrom financial statements.

Re-rating, Upgrading/Downgrading and Classification/Declassification:

There are a number of instances where certain events can have significant effect on customers risk profile. Suchevents call for revisiting/redoing the clients rating which can be done either through re-rating or

upgrading/downgrading. Following is the distinction between re-rating and upgrading/downgrading:

Re-rating is to be done while staying within the scope of the rating model i.e. re-visiting the inputs of modelparameters and changing them on receipt of any information pertaining to these parameters already defined in themodel. Re-rating can be done anytime during a year. It needs to be clarified here that for re-rating, onlyqualitative/judgmental data should be updated/changed and no changes should be made to financialinformation/quantitative data unless latest year end financials are available.

Upgrading/Downgrading is to be done whenever some material information having a direct bearing on

customers risk profile emerges but it is not being captured by any of the parameters already given in the ratingmodel. Upgrading/Downgrading is basically forced rating to depict the clients actual position. For instance,significant deterioration in clients financial strength shown by quarterly/half yearly financial statements, whichdoesnt fall under the models scope but can have a substantial effect on clients creditworthiness. Similarly eventssuch as owners death, change in external ratings etc also constitute the same situations that triggerdowngrading/upgrading. Upgrading/downgrading can be done using Overrides up to 3 notches by relevantauthority depending upon criticality of the event. Downgrading can be done at Area office whereas Upgradingrights are assigned to Group office only and all upgraded ratings should be verified by Credit Group.Upgrading/Downgrading can be used any time during a year as well as at the time of generating ratings.

Classification/Declassification: Classification entails marking an account Watch-list, Substandard, Doubtful or Lossas per the criteria given in the banks policy. Declassification means flagging an account regular as and when theaccount reverts to normal status.

Frequency o f Ratings

All customers fresh as well as existing must be rated on CIIRS Regional / Area Manager should ensure that



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For the purpose of independence requirements regarding the CIIRS systems, the person who shall be responsiblefor rating a particular borrower in a CIIRS scoring system shall be independent from the person who reviews,approves it and the person who monitors the performance of the exposure.

Data Integrity

For Quantitative criteria data input personnel as well as approving authority must ensure that scores given are onthe basis of facts. More specifically, data pertaining to Qualitative criteria data input personnel along with theapproving authority should ensure that all the subjective information obtained is rational, reasonable andthoroughly investigated. Moreover, Regional Managers must ensure the data integrity of the ratings generated.

Furthermore, scorecard signed/ authorized (for eCLP) by the approving authority (a three page rating sheetavailable in CIIRS) must be attached with every CLP prepared, which shall be a mandatory requirement and must

be followed rigorously. As a matter of regulatory requirement it must also be ensured that all customers /borrowers, new and existing, must be rated and subsequently reported in eCIB under the Loan Detail Table Credit Rating Internally field

Classification of defaulters

As mentioned above, regular customers are assigned ratings ranging from 1 to 9, where customers rated 9 areconsidered watch list i.e. on the brink of default. However, when a customer defaults, no matter what his rating wasbefore defaulting, it is rated at 10 and above.

As per PR, doubtful accounts are rated 10, sub-standard at 11 and Loss at 12. Once an account goes into default,

it is dealt by the Special Asset Management (SAM) division. Details of which are discussed later.

RATING GRADES / STRUCTURE (FOR CORPORATE, COMMERCIAL AND SME)

There are twelve grades in the CIIRS master scale; nine for regular and three for defaulted customers. This is toensure that there is a meaningful distribution of exposures across grades with no excessive concentrations on theBanks borrower ratings. The CIIRS of corporate, commercial and SME shall be developed as per the Board ofDirectors (BoD) approved master scale, considering the risk of both types of customers.

The characteristics of the twelve grades in the master scale CIIRS are as follows:

Grade 1: An obligation rated Grade 1 has the highest rating assigned by the Bank. The borrowers capacity tomeet its financial commitment on the obligation is extremely strong.

Grade 2: An obligation rated Grade 2 differs from the highest-rated obligations only to a small degree. Theborrowers capacity to meet its financial commitment on the obligation is very strong.

Grade 3: An obligation rated Grade 3 is somewhat more susceptible to the adverse effects of changes in

circumstances and economic conditions than obligations in higher rated categories. However, the borrowerscapacity to meet its financial commitment on the obligation is still strong.

Grade 4: An obligation rated Grade 4 exhibits adequate protection parameters. However, adverse economicconditions or changing circumstances are more likely to weaken the capacity of the borrower to meet its financialcommitment on the obligation.


G d 7 A bli ti t d G d 7 tl i l bl t t d i d d t f bl


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Grade 7: An obligation rated Grade 7 currently is vulnerable to non-payment and is dependent on favorablebusiness, financial, and economic conditions for the borrower to meet its financial commitment on the obligation. Inthe event of adverse business, financial, or economic conditions, the borrower is not likely to have the capacity tomeet its financial commitment on the obligation.

Grade 8: An obligation rated Grade 8 currently is highly vulnerable to non-payment.

Grade 9: The Grade 9 rating may be used when a counterparty falls under the watch list bucket..

Grade 10 (Sub-standard): represents sub-standard loans as defined by SBP from time-to-time.

Grade 11 (Doubtful): represents doubtful loans as defined by SBP from time-to-time.

Grade 12 (Loss): represents loans classified as loss and as defined by SBP from time-to-time.

No grades need to be defined for retail portfolio as these are dealt with / managed on Pool basis.

EARMARKING

Each Credit line approved for a customer is structured to cater to its specific financing need(s) and bears a uniquerisk for the Bank. Usage by the customer of a credit line other than for the specified purpose, changes the creditrisk profile which may not have been assessed by the bank. It is therefore, not desirable to recommend, approve orcommit to a customer any credit line which has interchangeable character. Interchangeable credit lines for use bymember companies of a group or a conglomerate carry steeper risks for the Bank both from the credit as well legalstandpoints and hence are strongly discouraged.

Customer's financing needs, at times may, however, dictate to request use of an unutilized or a partially utilizedline of credit for another purpose. This may be allowed in exceptional cases through sub-allocating one credit lineto another.

At times, it may be convenient to accommodate an unanticipated/one off request from a customer for enhancementin a specific facility by sub-allocating or earmarking from another facility, without an increase in overall exposure to

the company/group.

Earmarking of facilities should, however, be treated as an exception, as excessive use of this flexibility reflectspoor facility structuring.

Earmarking can be done from a high-risk facility to a low-risk facility but not the other way round.

RULES

Earmarking can be done as follows:Credit lines carrying higher risk (funded) may be sub-allocated interchange to lower risk lines (non-funded)provided the tenor of the non funded line is either identical or less. Sub-allocation in the reverse order is notallowed. The risk to be measured by facility rating system

1. By proportionately reducing the Current Finance line, an equal amount under Pre-shipment Finance (FAPC)


5 By proportionately reducing the Usance Letter of Credit line the customer may be allowed to open Sight


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5. By proportionately reducing the Usance Letter of Credit line, the customer may be allowed to open SightLetters of Credit. However, customer is not allowed to open Usance Letter of Credit by blocking/reducing theSight Letters of Credit line.

6. Letters of Credit Lines may not be allowed for issuance of bids, performance, advance money, retention or

financial guarantees. Vice Versa is also not permitted.

Earmarking can only be from high risk to facilities of equal or lower risk.The tenor of the transaction being done through earmarking should not exceed the tenor of facility beingearmarked from.

Earmarking from a specifically approved (special transaction) is not permissible.Non-fund based facilities cannot be earmarked for fund based facilities. However, Acceptance shall not be part ofdocumentary credits and shall be given 100% weight age while arriving at exposure under Prudential Regulations

R-IThe facility being earmarked from is effective, i.e., all security or documentation is in place, or adequatedocumentation is taken for the proposed transaction. Also, all regulatory or other requirements for the transactionbeing executed should be in place.There can be no earmarking from funded term facilities.Earmarking from lower risk facility to a higher risk facility (i.e., proposed transaction) can only be allowed if theproposed transaction is secured by cash or near cash collateral.In case of a group credit, earmarking from facilities of one company to another company is not allowed, unlessspecifically allowed in the previously approved CP.No earmarking is allowed in classified accounts. One- Off limits & NOCs should also be addressed.

SECTION-C

APPROVAL

Credit Granting:

It is extremely important that Credit line Proposal (CLP) is prepared on standard format (annexure attached) andeach person preparing and recommending/approving the proposal clearly states his recommendations and

reasons for approving or disapproving a credit proposal

Approval of facilities

As per the new restructuring in R&MM, proposals initiated at branch level will be approved by Level-I (AreaManager-Business line and Area Manager-Credit).Where the amount of financing required exceeds the powers ofLevel-I then the same will be elevated at an appropriate higher approving level as per discretionary powers.Similarly, corporate cases will also follow approval guidelines as mentioned in their respective discretionarypowers. The discretionary powers have been given at various levels involving approval by Business side togetherwith approval of Credit Group (AM/RH/GH etc.) to ensure qualitative decision, impartiality and effective control over

credit lending. It is also pertinent to mention here that all proposals elevated to the level of CCC are to be routedthrough RMD so that CCC can deliberate upon RMDs recommendations also.Internal Rating Grades in addition to exposure amounts have been incorporated in Discretionary powers matrix toensure that high risks clients are approved at a higher level only. Moreover the new discretionary powers ensurethat credit decisions are not taken by business side alone; rather these are jointly taken by business and creditpersonnel Rating based discretionary grid shall be applicable for all CLPs that is both renewal & fresh facilities



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Note:

The Bank shall preferably finance trade-related businesses in order to derive maximum yield in addition to the

mark-up e.g. Commissions on L/Cs, L/Gs, Exchange earnings etc. Name Lending should not be undertaken inany case.For completing the Credit Line Proposal, the Credit / Branch Managers will add value by highlighting the strengthsand weaknesses of the advance.

The competent authority's decision whether "approval or rejection" will duly be conveyed to the branch. A copy ofthe sanctioned advice with the notation Approved or Declined by (Sanctioning Authority) on (Date) and signed bythe Competent Authority will be sent to the branch. If further information/clarification on any proposal is required bythe Competent Authority, it will take up the matter with the concerned branch and will consider the proposal further

on receipt of their reply. For Politically exposed persons special approval are required.

Sanction Advice

When a regular facility is granted for whatever period, the sanction advice will be prepared/ generated by theapproving authority, original sent to the concerned branch, which upon receipt should file the original advice in therespective customer file. In eCLP module the Sanction/Advices can be automatically generated, such S/Advicesalso contain specifics as well as general conditions. After ensuring their correctness signing authority may issuesuch sanction advices.

The following instances warrant issuance of a sanction advice:

i. When a facility is granted on a regular basis.

ii. When OTTF is granted on accounts on which no regular facilities are in place. Examples of OTTFs are, OTTL/C, Guarantee, FTR, FIM, FBP and TOD.

Sanction Advice need not be prepared, when excesses are permitted on accounts having regular facilities. Thisconcession is granted as it is found administratively inconvenient to prepare Sanction Advice in such cases in viewof the large volume involved and the need for confirmation of approval to the branch can be satisfied by a returnmemorandum only. Also no limit maintenance need be passed in these cases. The transaction should reflect asexcess in the EOL Reports. The period of excess allowed should be diarized for follow-up.

The sanctioning authority in the Business Group approving the credit proposal shall issue approval of Finance forcredit Proposals approved under their respective Discretionary power. All Approvals of Finance should be issuedunder joint signature. All Approval of Finance shall be addressed to concerned branches, with a copy endorsed toeach of the relevant Area /regional offices, Group Head Operations and Head of Credit Administration. Allsignatories of CLPs, Sanction advices should necessarily mention their Name and Designation.

The credit proposals forwarded by business groups should be critically appraised by the Area Managers/Regional


Area/Regional Manager should ensure that renewal proposals are received from branches at least 6 weeks before


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Area/Regional Manager should ensure that renewal proposals are received from branches, at least 6 weeks beforethe expiry date.

All approved limits will only be available for drawdown for 60-days from the approval date. Fresh revalidation will

be required where the limit has been exceeded. This should also be incorporated in the offer letter.

Note: RMD has automated the entire process of CLP movement. RMD has also developed a separate module forSanction Advices, which contains General as well Specific conditions. Now Sanction Advices can be automaticallygenerated from eCLP which is to be issued after detail scrutiny.

Offer / Facility Letter

Having received the "Sanction Advice" the concerned branch will ask the respective CAC department to preparethe Offer Letter in accordance with the terms and conditions of the "Sanction". Once the offer letter is received bythe branch, the offer Letter will be signed by the Branch / Credit Manager on behalf of the Bank and dispatched tothe customer for his acceptance. This acceptance must manifest itself in the form of signatures by the authorizedsignatories of the customer.

Facilities Declined

In the instance of credit facilities being declined by Area Managers, Regional Heads or CCC for that matter, thedeclined CLPs should be kept on record. Both at Area and Regional level, the data on declined proposals shouldbe gathered.

Post Facto Approval

Post Fact or alternatively known as As Done credit approvals are usually not acceptable. Post Fact creditapprovals are required when initial approval is not obtained from competent authority by the field officers (creditofficers/relationship managers or branch managers) before the incidental drawings such as when:1. A debit balance has arisen for which a facility has not been arranged;2. Drawings exceed existing limits; and,3. Forced Finance occurs such as when imported goods / machinery are cleared and funds are not paid by the

importer or due to non-timely retirement of Export Refinance.

Post Fact credit approvals, should be discouraged and treated as exceptions and, where necessary, should beinitiated simultaneously, but not later than 3 days of the event.

Common causes that result in unauthorized exposures are:

1. Clients needs have not been properly assessed by both client and the banker.2. Clients' lack of understanding of their business requirements or lack of familiarity with the Bank's policies and

procedural requirements.

3. Diversion of funds or changing cash cycle.

Should the excesses be recurring in nature, the account should be reviewed for proper structuring of facilities.

DEFERRAL POLICY


The maximum tenor for all deferrals will not exceed prescribed time line (Presently approved by BOD Annexure


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The maximum tenor for all deferrals will not exceed prescribed time line (Presently approved by BOD Annexureattached which may be amended time to time) i.e. maximum 90 days. Deviation to this rule will require approvalfrom Group Head - Credit.

The following guidelines will be observed for allowing deferrals:

The customer has proven positive track record with BAL in case of existing customer or has an excellentmarket reputation. However deferral to new customers is to be allowed in very exceptional cases

The need for awarding deferral should be justified and substantiated Deferral for critical documents should only be given in exceptional circumstances only with the

recommendation of Business Group by the Group Head credit. Business Head will be responsible forperfecting the security within the deferral period.

The deferral does not jeopardize the rights and remedies available to the bank and Banks security position

is not weakened Deferral shall only be allowed on the basis of justifiable reasons. Should not be allowed to customers with CRR of 7 & higher. Fourth deferral should not be allowed and if account is not regularized after third deferral then limits should

be blocked for fresh disbursement. The higher level deferral should include days that have already been allowed by Lower level.

It will ultimately be the responsibility of business units to complete documentation within deferral time allowed.In an effort to make the perfection of documentation and issuance of DAC more business friendly, it is suggested

to segregate the required security documentation into 3 broad categories i.e. Crucial Documents, Semi CrucialDocuments and Non-Crucial Documents.

Deferral of Crucial Documents:

As a rule, deferral of crucial documents will not be allowed. However, only in exceptional cases deferral of crucialdocuments will be approved by Group Head Credit on the recommendation of Group Head of respective businessline. (Ref. Annexure-A).In case of any other support document not specifically included in the lists above andbusiness considers that there is a genuine requirement to defer the document. They can seek approval fromDeferral approval authority as per matrix.

Deferral of Semi Crucial Documents:

Respective Regional Manager (RMM Credits) may allow deferral up to 30 days for the semi crucial documents. Onthe recommendations of the Regional Manager (dealing credits) of respective business line, deferral for amaximum period of 60 days for the semi crucial documents by Regional Head (Credit Group) may be allowed asmentioned under proposed matrix (Ref. Annexure B). Approval from GH, Credit is necessary for deferral exceeding60 days.

Deferral of Non-Crucial Documents:

Regional Managers (business lines dealing credits), can also approve a deferral of any Non-Crucial document for amaximum period of 30 days enabling the CAC to issue (conditional) DAC, if the DAC is withheld due to absence /imperfection of any particular document categorized under non crucial document. Deferral for a maximum period of60 days for the non crucial documents by Regional Head (Credit Group) may be allowed as mentioned under



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Extension beyond period or over 90 days (only in exceptional cases with proper justification) will require approvalof CCC.

Note:

It will be the responsibility of Relationship Manager / Credit Manager of respective business line (Retail and MiddleManagement (RMM), Corporate, IBG) to make sure that the required documents are perfected within the originallyapproved deferred period. Extension in deferral period must be discouraged, unless there are compelling reasonsfor such requests. Monthly Deferral Reports to be submitted by business units to their Regional Manager (dealingcredits) and Group Head.

Waivers:

The waiver of any document required with Credit Facility Application Form / CLP or otherwise essential to thegranting of credit facility will require approval in the following manner:

1) Crucial: - Group Head - Credit2) Semi Crucial: - Regional Head (Credit Group) or as per Policy.3) Non Crucial: - Regional Head (Credit Group) / Regional Manager of the respective line Management

(dealing credits) or as per policy from time to time to be advised by GH, Credit.

All waivers have to be properly justified by Relationship Manager / Credit Manager/Area Manager.

Maintenance:

The monitoring of all outstanding deferrals and other documentation discrepancies will be the responsibility ofRegional CAC, which will maintain a monthly follow up with the respective B