Checks directed to prevent clean loans being used for IPOs

The State Bank of Pakistan on Wednesday advised banks & DFIs to institute necessary checks, so that clean loans are not used for subscribing to Initial Public Offerings (IPOs). Para 1A(b) of Regulation R-6 of Prudential Regulations for Corporate and Commercial Banking, issued vide BPD circular No 35 of 2003 is to prevent utilisation of clean loans for subscription in IPO.
However, some cases have been identified by SBP in its regular inspections, where clean-unsecured consumer loans were utilised for subscription in IPO.
While State Bank''s intent in this respect is not to create any undue hindrance in smooth flow of consumer financing to borrowers, banks & DFIs are, however, advised to institute necessary checks, so that clean loans are not used for subscription in IPO.
In this connection, SBP in a circular to banks & DFIs, suggested two minimum requirements:
a) At time of sanction of a clean consumer loan/credit line, banks & DFIs should obtain an undertaking from client, that drawings from loan account will not be used for subscription in an IPO.
b) The banks should introduce an internal system, whereby, no cheques, drafts and/or payment instructions will be made for an IPO subscription account from a clean personal loan/ credit line account.
Other instructions on the subject will remain unchanged.