Financial institutions’ laws and regulation s

{Financial institutions’ laws and regulations

Major laws of depository and non-depository financial institutions

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Presented by:Raasti Shabbir 1186Arzoo 1184Aneela Arshad 1227Abid Ali 1188

MAJOR BANK LAWS AND REGULATIONS

Definition Bank regulations are a form of

government regulation which subject banks to certain requirements, restrictions and guidelines. This regulatory structure creates transparency between banking institutions and the individuals and corporations with whom they conduct business, among other things.

Introduction

Prudential—to reduce the level of risk to which bank creditors are exposed (i.e. to protect depositors)

Systemic risk reduction—to reduce the risk of disruption resulting from adverse trading conditions for banks causing multiple or major bank failures

Avoid misuse of banks—to reduce the risk of banks being used for criminal purposes, e.g. laundering the proceeds of crime

To protect banking confidentiality Credit allocation—to direct credit to favored

sectors It may also include rules about treating customers

fairly and having corporate social responsibility(CSR)

Objectives Of Bank Regulations

Minimum Requirements Requirements are imposed on banks in order to

promote the objectives of the regulator. The most important minimum requirement in banking regulation is maintaining minimum capital ratios. Supervisory Review

Banks are required to be issued with a bank license by the regulator in order to carry on business as a bank. Market Discipline

The regulator requires banks to publicly disclose financial and other information.

General Principles Of Bank Regulation

Instruments And Requirements Of Bank Regulation Capital requirement

The capital requirement sets a framework on how banks must handle their capital in relation to their assets.

Reserve requirement The reserve requirement sets the minimum reserves

each bank must hold to demand deposits and banknotes.

Corporate governance Corporate governance requirements are intended to

encourage the bank to be well managed, and is an indirect way of achieving other objectives.

Principles Of Bank Regulation

Financial reporting and disclosure requirements

Among the most important regulations that are placed on banking institutions is the requirement for disclosure of the bank's finances. Particularly for banks that trade on the public market.

Credit rating requirement Banks may be required to obtain and maintain a

current credit rating from an approved credit rating agency, and to disclose it to investors and prospective investors. Also, banks may be required to maintain a minimum credit rating.

Principles Of Bank Regulation

Large exposures restrictions Banks may be restricted from having imprudently large

exposures to individual counterparties or groups of connected counterparties.

Activity and affiliation restrictions a pervasive regulatory scheme for the public offering of

securities for generally prohibiting commercial banks from underwriting and dealing in those securities. It prohibits affiliations between banks and securities firms , eliminating the possibility that companies owning banks would be permitted to take ownership or controlling interest in insurance companies, manufacturing companies, real estate companies, securities firms, or any other non-banking company.

Principles Of Bank Regulation

Too Big To Fail and Moral Hazard

Among the reasons for maintaining close regulation of banking institutions is the concern over the global repercussions that could result from a bank's failure; the idea that these bulge bracket banks are "too big to fail". The objective of federal agencies is to avoid situations in which the government must decide whether to support a struggling bank or to let it fail.

Principles Of Bank Regulation

BANKING LAWS AND REGULATIONS IN PAKISTAN

ARZOO 1184

The central bank of Pakistan i-e State Bank of Pakistan (SBP) is considered the banking regulatory authority that formulates and enacts laws for all depository financial institutions or commercial banks.

Banking Regulatory Authority:

Forms of business which banks may engage in

No bank shall carry on any business other than banking business and the permissible activities, allowed by SBP.

Restrictions on carrying on of trade Except as may be specifically authorized by the State

Bank, no bank shall engage, in wholesale or retail trade, including export and import trade.

Advertisement for deposits No person, other than a bank shall issue or publish

or otherwise facilitate any person to issue or publish an advertisement for deposits.

Business Of Banks

Requirements of business according to Shariah principles

A bank may carry on shariah compliant business through the establishment of a branch ; or through the establishment of a subsidiary

Report of Shariah adviser Where a Shariah adviser is appointed by a bank, a

report by the Shariah adviser shall accompany the annual audited financial statements of the bank.

Shariah Board The Central Board of Directors established by State

Bank of Pakistan Act, 1956 may establish a Shariah Board to enable the State Bank to seek views on Shariah matters.

Banking Business Based On Shariah Principles

Prior approval of State Bank for acquisition of substantial interest in a bank

A bank shall obtain the prior approval of the State Bank for it to acquire the business ,for its amalgamation, consolidation or merger with another bank; and For it to enter into any agreement with another company.

Board of Directors and Audit Committee Every domestic bank shall have a Board of Directors consisting

of not less than seven members who shall be elected by the general meeting of the shareholders. The responsibilities of the Board of Directors shall include the over-seeing of the management of the affairs of the bank.

Liability of directors, chief executive and officers In addition to any liability imposed by SBP, any director, chief

executive or officer of a bank shall be liable for any loss or damage sustained by the bank

Ownership, Control And Management Of Banks

Responsibility of State Bank and prudential requirements

It shall be the responsibility and duty of the State Bank to continuously monitor the performance of every bank so as to ensure that the bank is complying with all applicable requirements, standards and regulations.

Requirements relating to minimum paid-up capital and reserves

No bank shall commence business unless it has such minimum paid-up capital as may be specified in the regulations made by the State Bank

Reserve Fund. Every bank shall maintain a reserve fund.

Financial and Operational Requirements Of Banks

Payment of dividends and transfers No domestic bank shall pay any dividend on its

shares until all capitalized expenses (including preliminary expenses and other items of expenditure not represented by tangible assets) have been completely written off.

Cash Reserve Every bank shall maintain with the State Bank a

balance the amount of which shall not at the close of business on any day is less than such proportion of demand liabilities and time liabilities of such bank in Pakistan as may be specified in the regulations made by the State Bank.

Maintenance of liquid assets The State Bank may specify in regulations made by

the State Bank that a bank shall hold such minimum, or minimum average, amount of liquid assets in Pakistan at all times or over such period of time, as may be set out in the regulations

BANKING LAWS AND REGULATIONS IN PAKISTAN (continued)

ANEELA ARSHAD

1227

Restrictions on acquisitions of immovable property by banks

A bank shall not purchase or acquire any immovable property or any right therein except As may be authorized in writing by the State Bank.

Bank Holidays The State Bank may, at any time by notice in the

Gazette, declare any day or days to be a holiday for all banks.

No bank shall do any business with the public on any day declared a holiday for such bank

Establishment of correspondent banking relationship

A bank may establish a correspondent banking relationship with any other bank or financial institution outside Pakistan

Financial and Operational Requirements Of Banks(contd)

Restriction on investments by domestic banks in other enterprises

A domestic bank shall not acquire or hold shares of, any enterprise to a value of five percentum or more, unless the approval of the State Bank

Credit facilities and limits A bank shall not:– Grant credit facilities if the aggregate amount of such

credit facilities exceeds such amount of its capital funds as the State Bank may specify in the regulations made it;

Grant substantial loans which in the aggregate of its total credit facilities

Records of transactions and commitments A bank shall keep on file the relevant documents and

records for each one of its transactions and commitments, in such form as shall render the documents admissible as evidence in court and until the prescription of the rights under those transactions and commitments.

Maintenance of Accounts and Records Every bank shall maintain at all times accounts and

records, and prepare periodic financial statements, adequate to reflect its operations and financial conditions, in such form and manner as may be specified in regulations made by the State Bank.

Preparation of Financial Statements Except as may be authorized by the State Bank, at

the expiration of each financial year, every bank shall prepare with reference to that year, financial statements in respect of the financial year.

“Financial statements” include the balance sheet, profit and loss accounts, statement of changes in equity, cash flow statement and notes to the accounts.

Reporting

Inspection The State Bank shall, from time to time and at

intervals it deems appropriate, examine, the books or other documents, accounts and transactions of each bank and of any office outside Pakistan of a domestic bank.

The inspection shall be carried out by such officer of the State Bank as the State Bank may authorize who in this Part is referred to as “inspecting officer”.

Inspection report The State Bank shall prepare an inspection report on

the financial condition, risk management and internal control, of the bank and identify the significant weaknesses in the bank that need to be addressed.

Inspection

The financial statements prepared shall be audited by a person who is duly qualified, under the Chartered Accountants Ordinance,1961, or any other law for the time being in force, to be an auditor and whose name appears on the panel of auditors maintained by the State Bank as persons to be suitable auditors for banks.

The panel of auditors so maintained by the State Bank may classify auditors in different categories for different banks taking into account the scope, complexity and size of the operations of the banks.

Auditing

LAWS FOR NON-DEPOSITORY FINANCIAL INSTITUTIONS

ABID ALI 1188

Limit on NBFC’s exposure to a single person The total outstanding exposure by a NBFC to any single

person shall not at any point in time exceed 30% of the NBFC’s equity, subject to the condition that the maximum outstanding against fund based exposure does not exceed20% of the NBFC’s equity.

The total outstanding exposure by a NBFC to any group shall not exceed 50% of the NBFC’s equity, subject to the condition that the maximum outstanding against fund-based exposure does not exceed35% of the NBFC’s equity.

Minimum conditions for grant of financing facilities

When considering proposals for fund/non-fund based facility exceeding one million rupees, NBFCs should give due weightage to credit report relating to the borrower and his group obtained from Credit Information Bureau of the State Bank of Pakistan.If the credit report indicates over-exposure/default, the facilities shall be extended only after recording reasons to do so.

Corporate Borrowers

Regulations for Housing Finance for individuals

The maximum per party limit in respect of housing finance by the NBFCs will be Rs. 7.5 million.

NBFCs are free to extend mortgage loans for housing, for a period not exceeding twenty years (In case of facilities granted by House Building Finance Corporation the said period may be extended upto twenty five years). NBFCs should be mindful of their adequate asset liability matching.

The housing finance facility shall be provided at a maximum Loan to Value ratio of 85:100 (85%).

The housing finance facility shall be provided at a maximum of Income to installment ratio of 3:1.

Individuals Borrowers

Limit on NBFC’s exposure against liabilities

Liabilities, excluding contingent liabilities and security deposits, of NBFC shall not exceed seven times of its equity for the first two years of its operations. In the subsequent years, the liabilities shall not exceed ten times of the equity of the NBFC.

Creation and building up of reserve Every NBFC shall create reserve fund to which shall

be credited: an amount not less than 20% of its after tax profits

till such time the reserve fund equals the amount of the paid up capital; and

Thereafter a sum not less than 5% of its after tax profits.

Operations of NBFCs:

Return on deposits. – Every NBFI shall provide return on deposits

which may be different for different volumes and maturities of deposits provided that uniformity is observed within each category but deposits of listed companies, financial institutions, recognized charitable trusts and statutory bodies shall, however, be exempt.

Deposit Insurance. – When deposit insurance arrangements are in

place, every NBFC shall arrange full insurance cover for its deposits/COIs etc. upto Rs. 100,000/.

Operations of NBFCs:

1.Internal audit. - Every NBFC shall have an Internal Audit Department whose head shall report to the board of directors directly and shall, inter alia, be responsible for compliance with these guidelines and for establishing an effective means of testing, checking and compliance with the policy and procedures established by it.

2. Submission of statistical returns. - Every NBFC shall submit such periodical statements, information or reports in such forms and manner and within such time as may be prescribed by the Commission from time to time.

3. Code of conduct. - Every NBFC shall acquire and maintain membership of an association constituted in consultation with the Commission and NBFCs shall follow the code of conduct prescribed by the said association(s).

Controlling and auditing:

Gratitude…….