January 10, 2006	Tuesday	Zilhaj 9, 1426

ISLAMABAD, Jan 9: The Securities and Exchange Commission of Pakistan (SECP) on Monday issued prudential regulations for consumer finance by non-banking finance companies (NBFCs). These will come into force with immediate effect.

The aim of the new regulations is to provide new avenues to investment banks, leasing companies, housing finance companies and discount houses in order to enhance diversification and broaden their products range. The regulations include comprehensive operational guidelines and various risk management measures that have to be adopted by the NBFCs while initiating consumer financing.

Under the regulations, the board of directors of NBFCs are required to establish policies, procedures and practices to define risks, stipulate responsibilities, specify security requirements, design internal controls and then ensure strict compliance with them.

PRE-OPERATIONS: Before embarking upon or undertaking consumer financing, the NBFCs will implement the following guidelines:

The NBFCs shall establish separate risk management function for the purpose of consumer financing, which will be suitably staffed by personnel having sufficient expertise and experience in the field of consumer finance and business.

These companies shall prepare comprehensive consumer credit policy duly approved by their board of directors, which shall besides other things, cover loan administration, including documentation, disbursement and appropriate monitoring mechanism.

The policy shall explicitly specify the functions, responsibilities and various staff positions powers/authority relating to approval/sanction of consumer financing facility.

For every type of consumer finance activity, the NBFCs shall develop a specific programme. The programme shall include the objective and quantitative parameters for the eligibility of the borrower and determining the maximum permissible limit per borrower.

The NBFCs shall put in place an efficient computer-based management information system (MIS) for the purpose of consumer finance, which should be able to effectively cater to the needs of consumer financing portfolio and should be flexible enough to generate necessary information reports used by the management for effective monitoring of NBFCs’ exposure in this segment.

Reports interrelating delinquencies with various types of customers or various attributes of the customers will enable the management to take important policy decisions and make appropriate modifications in the lending programme.

Quarterly product-wise profit and loss account will be duly adjusted with the provisions on account of classified accounts. These profit and loss statements should be placed before the board of directors in the immediate next board meeting. The branches of foreign banks in order to comply with this condition shall place the reports before a committee comprising of CEO/country manager, CFO and head of consumer business.

The NBFCs shall develop comprehensive recovery procedures for the delinquent consumer loans. The recovery procedures may vary from product to product. However, distinct and objective triggers should be prescribed for taking pre-planned enforcement recovery measures.

The NBFCs desirous of undertaking consumer finance will become a member of at least one Consumer Credit Information Bureau. Moreover, the NBFCs may share information/data among themselves or subscribe to other databases as they deem fit and appropriate.

The NBFCs starting consumer financing are encouraged to impart sufficient training on an ongoing basis to their staff to raise their capability regarding various aspects of consumer finance.

The NBFCs shall prepare standardized set of borrowing and recourse documents (duly cleared by their legal counsels) for each type of consumer financing.

OPERATIONS: Consumer financing, like other credit facilities, must be subject to the NBFCs risk management process for this particular business. The process may include, identifying source of repayment and assessing customers ability to repay, his/her past dealings with an NBFC, the net worth and information obtained from a Consumer Credit Information Bureau.

At the time of granting facility under various modes of consumer financing, the NBFCs shall obtain a written declaration from the borrower divulging details of various facilities already obtained from other NBFCs. The NBFCs should carefully study the details given in the statement and allow fresh finance/limit only after ensuring that the total exposure in relation to the repayment capacity of the customer does not exceed the reasonable limits as laid down in the approved policies of the NBFC. The declaration will also help NBFCs to avoid exposure against a person having multiple facilities from different financial institutions on the strength of an individual source of repayment.

Before allowing any facility, the NBFCs shall preferably obtain credit report from the Consumer Credit Information Bureau of which they are a member. The report will be given due weightage while making credit decision.

Internal audit and control function of the NBFC, apart from other things, should be designed and strengthened so that it can efficiently undertake an objective review of the consumer finance portfolio from time to time to assess various risks and possible weaknesses. The internal audit should also assess the adequacy of the internal controls and ensure that the required policies and standards are developed and practised. Internal audit should also comment on the steps taken by the management to rectify the weaknesses pointed out by them in their previous reports for reducing the level of risk.

The NBFCs shall ensure that any repayment made by the borrower is accounted for before applying mark-up on the outstanding amount.