KARACHI, Aug 25: The State Bank said on Wednesday each bank and Development Finance Institution (DFI) was supposed to have minimum paid-up capital of Rs1.5 billion by December 2004 and of Rs2 billion by December 2005.
The central bank said in a circular issued to banks and DFIs that those who fail to meet this standard "shall not be allowed to undertake a full range of financial services." At present the minimum paid-up capital requirement for a bank or DFI is Rs1 billion.
The circular issued by Banking Supervision Department said that the banks not meeting the above standard would be classified as non-scheduled banks from January 1, 2006. Such banks would not be allowed to raise deposits from individuals from January 1, 2006 if they remain short of more than 25 per cent in meeting the paid-up capital requirement even after having been de-scheduled.
"Such banks will shall only be permitted to operate in inter-bank market; make investments in government securities and finance import/ export business within such limits as may be specified by the State Bank on case to case basis."
The circular said that a bank so de-scheduled may be allowed to accept deposits from corporate or institutional depositors "only up to the limit of total deposits mobilized by it as on December 31, 2004 or total outstanding deposits as on June 30, 2004 - whichever is lower."
The above instructions will become effective from Dec 31, 2004. The SBP has asked banks and DFIs to increase capital to strengthen their capital base and to align regulatory capital requirement "with the internationally accepted standards."
The central bank has sent to all banks and DFIs a set of guidelines - spread over 30 pages - to let them know how they should make credit risk-based calculation of minimum paid-up capital requirements.
It has also asked them to start reporting to it their capital positions on a given format from the quarter ending on December 31, 2004. The guidelines say that the minimum paid-up capital should be net of losses.
They further say that for the purpose of capital adequacy framework banks and DFIs shall classify their entire capital into three tiers. The first tier capital shall consist of highest quality capital i.e. (i) fully-paid capital or capital deposited with SBP (in case of foreign banks), (ii) balance in share premium account, (iii) reserve for bonus shares, (iv) general reserves; and (v) un-appropriated or un-remitted profits (in case of foreign banks).
The second tier of capital will include (i) general provisions or general reserves for loan losses, (ii) revaluation charges, (iii) exchange translation reserves, (iv) undisclosed reserves; and (v) sub-ordinated debt. The third tier capital consisting of short-term sub-ordinated debt would be solely for the purpose of meeting a proportion of the capital requirements for market risk.
