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Consumer finance by Ahmed Baig


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Its preliminary Intro for prudential regulation

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Consumer finance by Ahmed Baig

  1. 1. Mirza Ahmed Baig <ul><li>2432 – 110 – 014 </li></ul><ul><li>Subject </li></ul><ul><li>‘ Banking Operations’ </li></ul><ul><li>Submitted to </li></ul><ul><li>Mr. Muhamad Fahad </li></ul>
  2. 2. Prudential Regulation w.e.f. July 1,1992
  3. 3. Purpose of Prudential Regulation <ul><li>Prudential Regulations have been issued by State Bank of Pakistan to put in place a prudent regulatory framework for ensuring safety and soundness of the financial system besides protecting the interests of users of financial services </li></ul>
  4. 4. Purpose of Prudential Regulation <ul><li>Contin… </li></ul><ul><li>To strengthen and regulate the banking business by bringing advancements in Governing bodies and banks. </li></ul><ul><li>Creating an efficient system for credit risks as well as rule abiding by the banking facilities. </li></ul>
  5. 5. How Many Areas PR are Available <ul><li>SBP has so far issued Prudential Regulations on the following areas: </li></ul><ul><ul><ul><li>Corporate / Commercial Banking (issued by Banking Policy & Regulation Department) </li></ul></ul></ul><ul><ul><ul><li>Small and Medium Enterprises Financing </li></ul></ul></ul><ul><ul><ul><li>Consumer Financing </li></ul></ul></ul><ul><ul><ul><li>Micro Finance Institutions (issued by SME & Micro Finance Department) </li></ul></ul></ul><ul><ul><ul><li>Agricultural Financing </li></ul></ul></ul>
  6. 6. Consumer Financing <ul><li>Consumer Banks provide financing for purchasing consumption goods for the use of the borrowers. </li></ul><ul><li>Consumer finance companies, sales finance companies and credit unions are the some of the popular forms of consumer banks. </li></ul>
  7. 7. Charactertics of Consumer Financing <ul><li>Safety: The banker must be careful and ensure that his depositors money is advanced to safe hands where the risk of loss does not exist. </li></ul><ul><li>Character: Which goes to the honesty and sincerity of the borrower and whether the loan is for a good purpose. </li></ul>
  8. 8. Charactertics (Contin..) <ul><li>Capacity: whether the borrower has a legal standing necessary to sign a vaild loan contract. </li></ul><ul><li>Cash: which focuses on the borrower estimated capacity to generate sufficient income or cash flow to repay the loan. </li></ul><ul><li>Collateral: whether the borrower has assets or other items of value that can be pledged to help secure the loan. </li></ul>
  9. 9. Charactertics (Contin..) <ul><li>Conditions: or the broader environment of the industry and the economy in which the borrower operates that could adversely affect loan repayment. </li></ul><ul><li>Control: Which refers to wether or not the borrower’s application meets the loan quality standard imposed by the PR authorities. </li></ul>
  10. 10. What Makes a Good Loan? <ul><li>Is the borrower creditworthy? </li></ul><ul><li>Can the loan agreement be properly structured and documented . </li></ul><ul><li>Can the bank perfect its claim against the asset or earnings of the customers so that in the event of default, bank funds can be recovered rapidly at low cost and with low risk? </li></ul>
  11. 11. Outside Sources of Information Used in Loan Analysis <ul><li>Local or regional Bureaus </li></ul><ul><li>Customer financial statements </li></ul><ul><li>Experience of other lenders with this customers </li></ul>
  12. 12. Prudential Regulation For consumer Financing <ul><li>Facilities to related Person </li></ul><ul><li>The Banks/DFIs shall ensure that the araisal standard are not compromised in sch case and market rated are used for these persons. The facilities extended to the employees of the banks/DFIs as a part of their compensation package under Employees Service Rules shall not fall in this category. </li></ul>
  13. 13. Utilization of clean loan for Initial Public Offerings <ul><li>At the time of sanction of a claean consumer loan/credit line , the bank/DFIs should be obtain an undertaking from the client, that the drawings from the loan account will not be used for subscription in an IPO. </li></ul><ul><li>The bank/DFIs should introduce an internal system. whereby no cheque,draft or payment instruction will be made for an IPO subscription account from a clean personal loan/ credit line account </li></ul>
  14. 14. Limit On Exposure Against total Consumer Financing <ul><li>Banks/DFIs shall ensure that the aggregate exposure under all consumer financing facilities at the end of 1 st year of the start of their consumer financing does not exceed 2 times and 4 times of their equity respectively </li></ul>
  15. 15. Percentage of classified Consumer Financing to total consumer financing Maximum Limits a) Below 3% B )Below 5% c) Below 10% d) Below and avove 10% 10 times of the equity 6 times of the equity 4 times of the equity 2 times of the equity
  16. 16. Total Financing Facilities To Be Commensurate With The Income <ul><li>Extending financing facilities to their customers the banks DFIs shoulf be ensure that the total installemenet of the loans extended by the financial istitute is commensurate with the monthly income and repayement capacity fo the borrower. </li></ul><ul><li>This measure will be helpful to bank/DFIs the borrower evaluations oif credit worthiniess to ensure the banks portfolio under consumer finance fulfill the prudential regulation issued by the SBP </li></ul>
  17. 17. General Reserve Against Consumer Finance <ul><li>The bank/DFIs shall maintain a general reserve at least equivalent to 1.5% of the consumer portfolio which is fullu secured and 5% of the consumer portfolio which is unsecured to protect them the risk associated with the economic cyclical nature of the business </li></ul>
  18. 18. Not transfer Loan From One Category to Another Category <ul><li>The Bank/DFIs Shall not transfer any loan or facility to be classified, from one category of consumer finance to another, to avoid classification. </li></ul>
  19. 19. Margin Requirements <ul><li>Banks/DFI are free to determine the margin requirement on consumer facilities provided by then to their clients taking into account the risk profile of the borrower in order to secure their interest. </li></ul><ul><li>However, the relaxation shall not be apply in case of items, import of which are banned by the Government. </li></ul>
  20. 20. Conclusion <ul><li>Consumer Banks provide financing for purchasing consumption goods for the use of the borrowers. </li></ul><ul><li>When the Bank sanction the loan.they should be used CAMELS Rating ka matlab hota hai </li></ul><ul><li>Capital Adequacy </li></ul><ul><li>Asset Quality </li></ul><ul><li>Management Quality </li></ul><ul><li>Earning record </li></ul><ul><li>Liquidity position </li></ul><ul><li>Sensitivity to market risk (If Bank only analyze this only then the risk gets real Low) </li></ul>
  21. 21. Conclusion <ul><li>Also check the borrower character or worthiness </li></ul><ul><li>Check Financial Record </li></ul><ul><li>Check CIB report </li></ul><ul><li>Follows the SBP Prudential Regulation </li></ul>
  22. 22. Support that helped me make this Thanking in Anticipation. .