State Bank's move to tighten credit rules on 11th February, 2009 is likely to affect almost all categories of borrowers in various degrees. For the corporate sector and other business concerns, Prudential Regulations have been amended to enhance risk management by involving chartered accountants to check the business activities of small and big corporate borrowers.
Banks and DFIs have been instructed to obtain a copy of financial statements duly audited by a practicing Chartered Accountant, relating to the business of every borrower which is a listed company or where the exposure of a bank or DFI exceeds Rs 10 million, for analysis and record.
However, if the borrower is a public limited company and exposure exceeds Rs 500 million, banks and DFIs would obtain the financial statements duly audited by a firm of Chartered Accountants which has received a satisfactory rating under the Quality Control Review (QCR) Programme of the Institute of Chartered Accountants of Pakistan. Banks/DFIs may waive the requirement of obtaining copy of financial statements when the exposure net of liquid assets does not exceed the limit of Rs 10 million. Further, financial statements signed by the borrower will suffice where the exposure is fully secured by liquid assets. In order to facilitate adjustment to the new rules, compliance with the new instructions has been mandated only after December 31, 2009.
The facility of consumer financing has also been properly streamlined and made somewhat more stringent. At the time of granting facility under various modes of consumer financing, banks and DFIs will obtain a written declaration from the borrower divulging details of various facilities already obtained from the financial institutions as well as a consumer credit report from the Credit Information Bureau of the State Bank.
Besides, while determining the credit worthiness and repayment capacity of the prospective borrowers, the banks and DFIs will ensure that the total monthly amortisation payments of consumer loans do not exceed 50 percent of the net disposable income of the prospective borrower. Also, a bank or a DFI may issue credit card to one person with a maximum unsecured limit not exceeding Rs 1,000,000, subject to mandatory credit check and prescribed debt burden and condition that total unsecured credit card limits availed by that person from all banks and DFIs do not exceed Rs 1,000,000.
Although some of the borrowers may resent the above guidelines, terming them unjustified, but we feel that most of the conditions prescribed under the new rules fall under the category of precautionary measures and needed to be followed in any case even without the instructions from the State Bank. For instance, to obtain a copy of financial statement from a corporate borrower duly certified by a well recognised firm of chartered accountants is not only essential to determine credit worthiness of a borrower but also his capacity to repay the loan.
It is thus important for a lending institution to keep abreast with the financial position of a borrower and analyse the balance sheets of business firms availing financing facilities from a lending institution even in ordinary conditions. The streamlining the rules governing consumer finance was crucial due to increasing recovery problems and painful stories appearing in the media about the plight of consumers availing such finance. There were many cases where the households had got loans way beyond their repayment capacity and got into trouble.
The new instructions linking the limits of loans to the net disposable income of the prospective borrowers and prescribing an investigative process to track down the total debt burden of a party could definitely help both the banks and genuine borrowers to build a healthier and more durable relationship. However, the limit of Rs 1,000,000 appears to be low for exceptionally rich and reliable clients, especially for their visits abroad.
The instructions of the State Bank would also provide a handy excuse to the banks/DFIs to refuse credit to the unwanted parties, who are otherwise powerful and well connected, on the pretext of revised Prudential Regulations. As everybody knows, financial institutions deal with other parties' money and need to be very selective in their lending activities to keep the level of non-performing loans as low as possible. In fact, in our environment, there was no need in the first place to encourage consumer financing because of low incomes and dismal saving levels and the tendency of the households to generally spend beyond their means due to social pressures.
At the present time, the country definitely needs to save more to sustain a higher level of investment to promote growth and employment. Any way, the basic objective of State Bank's fresh instructions appears to be to ensure the flow of credit for both investment and consumption purposes to more genuine and deserving borrowers. The effort, therefore, could lead to better utilisation of credit facilities and indirectly reduce the level of NPLs in the long run.